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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q


(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2003

OR

o Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Commission File Number 1-9965

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

|                                                                    |  |                                                
|------------------------------------------------------------------- |  | -----------------------------------------------
|Ohio
(State or other jurisdiction of
incorporation or organization) |  | 34-0794417
(I.R.S. Employer
Identification No.)

28775 Aurora Road, Solon, Ohio 44139
(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES ü           NO __

Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES __           NO ü

As of May 6, 2003 the Registrant had outstanding 13,331,321 Common Shares,
without par value, and 2,150,502 Class B Common Shares, without par value.

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TABLE OF CONTENTS




|                                           |                                                                                                |                                            |  |  |  |  |  | 
|------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION             
|                                           | ITEM 1. Financial Statements.                                                                 
|                                           |                                                                                                | CONSOLIDATED BALANCE SHEETS               
|                                           |                                                                                                | CONSOLIDATED STATEMENTS OF INCOME         
|                                           |                                                                                                | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                           |                                                                                                | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                           | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                                           | ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.                            
|                                           | ITEM 4. Controls and Procedures.                                                              
|PART II. OTHER INFORMATION                
|                                           | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|                                           | Item 6. Exhibits and Reports on Form 8-K.                                                     
|SIGNATURES                                
|EX-10(l) 2nd Amendment to Credit Agreement
|EX-99(a) 906 Certification                
|EX-99(b) 906 Certification                



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##### Table of Contents









PART I.  FINANCIAL INFORMATION







ITEM 1.  Financial Statements.







KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
(Unaudited)

|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |        |        |        | 
|------------------------------------------ | --------------------------------------- | -------------------------- | -------------------- | ------ | --------- | ------ | ------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                           |                                         |                            |                      |        | March 31, |        | September 30,
|                                           |                                         |                            |                      |        | 2003      |        | 2002          |        | 2002  
|                                           |                                         |                            |                      |        |           |        |               |        |       
|Assets                                     |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Current assets:                            |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           | Cash and cash equivalents               |                            | $                    | 16,361 |           |        | $             | 18,237 |        |        | $       | 21,707 |       
|                                           | Short-term investments                  |                            |                      | 27,624 |           |        |               | 26,666 |        |        |         | 28,171 |       
|                                           | Refundable income taxes                 |                            |                      | 516    |           |        |               | 5,680  |        |        |         | 954    |       
|                                           | Accounts receivable and other, net      |                            |                      | 15,371 |           |        |               | 12,864 |        |        |         | 14,140 |       
|                                           | Inventories:                            |                            |                      |        |           |        |               |        |        |        |         |        |       
|                                           |                                         | Raw materials              |                      |        | 6,657     |        |               |        | 9,489  |        |         |        | 7,184  |       
|                                           |                                         | Work in process            |                      |        | 1,669     |        |               |        | 1,838  |        |         |        | 1,066  |       
|                                           |                                         | Finished products          |                      |        | 1,674     |        |               |        | 2,278  |        |         |        | 1,862  |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           |                                         |                            | Total inventories    |        |           | 10,000 |               |        |        | 13,605 |         |        |        | 10,112 | 
|                                           | Deferred income taxes                   |                            |                      | 4,837  |           |        |               | 6,463  |        |        |         | 3,917  |       
|                                           | Prepaid expenses                        |                            |                      | 1,461  |           |        |               | 1,278  |        |        |         | 1,178  |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           |                                         |                            | Total current assets |        |           | 76,170 |               |        |        | 84,793 |         |        |        | 80,179 | 
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Property, plant and equipment, at cost     |                                         |                            | 45,275               |        |           |        | 42,346        |        |        |        | 43,171  |       
|Less-Accumulated depreciation              |                                         |                            | 30,952               |        |           |        | 28,754        |        |        |        | 29,363  |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Total property, plant and equipment, net   |                                         |                            | 14,323               |        |           |        | 13,592        |        |        |        | 13,808  |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Deferred income taxes                      |                                         |                            | 18,997               |        |           |        | 12,913        |        |        |        | 17,013  |       
|Other assets                               |                                         |                            | 10,117               |        |           |        | 9,299         |        |        |        | 9,371   |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Total assets                               |                                         | $                          | 119,607              |        |           | $      | 120,597       |        |        | $      | 120,371 |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Liabilities and Shareholders Equity       |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Current liabilities:                       |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           | Short-term debt                         |                            | $                    | 230    |           |        | $             |       |        |        | $       | 539    |       
|                                           | Accounts payable                        |                            |                      | 8,791  |           |        |               | 6,081  |        |        |         | 7,170  |       
|                                           | Accrued payroll and related expenses    |                            |                      | 3,808  |           |        |               | 2,895  |        |        |         | 4,380  |       
|                                           | Other accrued expenses                  |                            |                      | 4,515  |           |        |               | 3,768  |        |        |         | 4,335  |       
|                                           | Income taxes payable                    |                            |                      | 6,109  |           |        |               | 1,248  |        |        |         | 4,329  |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           |                                         | Total current liabilities  |                      |        | 23,453    |        |               |        | 13,992 |        |         |        | 20,753 |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Long-term debt                             |                                         |                            |                     |        |           |        | 3,000         |        |        |        |        |       
|Other long-term liabilities                |                                         |                            | 7,011                |        |           |        | 6,001         |        |        |        | 6,632   |       
|Deferred income taxes                      |                                         |                            | 375                  |        |           |        | 7             |        |        |        | 538     |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Shareholders equity:                      |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           | Paid-in-capital                         |                            |                      | 26,351 |           |        |               | 28,934 |        |        |         | 26,766 |       
|                                           | Earnings reinvested in the business     |                            |                      | 69,531 |           |        |               | 73,366 |        |        |         | 72,087 |       
|                                           | Accumulated other comprehensive income  |                            |                      | (192   | )         |        |               | (1,080 | )      |        |         | (349   | )     
|                                           | Unamortized portion of restricted stock |                            |                      | (87    | )         |        |               | (130   | )      |        |         | (108   | )     
|                                           | Common shares held in treasury, at cost |                            |                      | (6,835 | )         |        |               | (3,493 | )      |        |         | (5,948 | )     
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|                                           |                                         | Total shareholders equity |                      |        | 88,768    |        |               |        | 97,597 |        |         |        | 92,448 |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       
|Total liabilities and shareholders equity |                                         | $                          | 119,607              |        |           | $      | 120,597       |        |        | $      | 120,371 |       
|                                           |                                         |                            |                      |        |           |        |               |        |        |        |         |       

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KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except for Per Share Data)
(Unaudited)

|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------- |  | -------------------- | ------ | ------------------ |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                             |  | For the Three Months |        | For the Six Months
|                                             |  | Ended March 31,      |        | Ended March 31,   
|                                             |  | 2003                 |        | 2002               |  | 2003 |        | 2002
|                                             |  |                      |        |                    |  |      |        |     
|Net sales                                    |  | $                    | 25,952 |                    |  | $    | 22,046 |      |  | $ | 52,151 |   |  | $ | 42,470 |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Cost of goods sold                           |  |                      | 11,924 |                    |  |      | 9,818  |      |  |   | 23,481 |   |  |   | 18,999 |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Selling, general and administrative expenses |  |                      | 12,335 |                    |  |      | 11,129 |      |  |   | 24,719 |   |  |   | 21,519 |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Product development expenses                 |  |                      | 3,382  |                    |  |      | 3,433  |      |  |   | 6,592  |   |  |   | 7,009  |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Net financing income                         |  |                      | (135   | )                  |  |      | (246   | )    |  |   | (306   | ) |  |   | (512   | )
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Loss before income taxes                     |  |                      | (1,554 | )                  |  |      | (2,088 | )    |  |   | (2,335 | ) |  |   | (4,545 | )
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Income tax benefit                           |  |                      | (631   | )                  |  |      | (779   | )    |  |   | (905   | ) |  |   | (1,602 | )
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Net loss                                     |  | $                    | (923   | )                  |  | $    | (1,309 | )    |  | $ | (1,430 | ) |  | $ | (2,943 | )
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Basic loss per share                         |  | $                    | (0.06  | )                  |  | $    | (0.08  | )    |  | $ | (0.09  | ) |  | $ | (0.19  | )
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Diluted loss per share                       |  | $                    | (0.06  | )                  |  | $    | (0.08  | )    |  | $ | (0.09  | ) |  | $ | (0.19  | )
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Cash dividends per Common Share              |  | $                    | .0375  |                    |  | $    | .0375  |      |  | $ | .075   |   |  | $ | .075   |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Cash dividends per Class B
Common Share      |  | $                    | .030   |                    |  | $    | .030   |      |  | $ | .060   |   |  | $ | .060   |  
|                                             |  |                      |        |                    |  |      |        |      |  |   |        |   |  |   |        |  

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KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)

|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |        |    |  
|------------------------------------------------- | --------------------------------------------------- | ------------ | ------ | -------------------- | --- | ------------------ | ------ | ------ | ---- | ---- | ------ | ------ | --- | - | ------- | ------ | -- | -
|                                                  |                                                     |              |        | For the Three Months |     | For the Six Months
|                                                  |                                                     |              |        | Ended March 31,      |     | Ended March 31,   
|                                                  |                                                     |              |        | 2003                 |     | 2002               |        | 2003   |      | 2002
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |     
|Cash flows from operating activities:             |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  | Net loss                                            |              | $      | (923                 | )   |                    | $      | (1,309 | )    |      | $      | (1,430 | )   |   | $       | (2,943 | ) 
|                                                  | Expenses not requiring outlay of cash               |              |        | 905                  |     |                    |        | 980    |      |      |        | 2,017  |     |   |         | 1,935  |   
|                                                  | Changes in working capital                          |              |        | (1,793               | )   |                    |        | (1,788 | )    |      |        | (824   | )   |   |         | (2,812 | ) 
|                                                  | Other operating activities                          |              |        | (239                 | )   |                    |        | (632   | )    |      |        | (538   | )   |   |         | (536   | ) 
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  | Net cash used in operating activities               |              |        | (2,050               | )   |                    |        | (2,749 | )    |      |        | (775   | )   |   |         | (4,356 | ) 
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|Cash flows from investing activities:             |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  | Payments for property, plant, and equipment         |              |        | (1,387               | )   |                    |        | (789   | )    |      |        | (2,485 | )   |   |         | (1,758 | ) 
|                                                  | Purchase of investments                             |              |        | (1,062               | )   |                    |        | (38    | )    |      |        | (6,135 | )   |   |         | (6,073 | ) 
|                                                  | Sale of investments                                 |              |        | 1,210                |     |                    |        | 245    |      |      |        | 6,450  |     |   |         | 245    |   
|                                                  | Other investing activities-net                      |              |        |                     |     |                    |        | 17     |      |      |        |       |     |   |         | 21     |   
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  | Net cash used in investing activities               |              |        | (1,239               | )   |                    |        | (565   | )    |      |        | (2,170 | )   |   |         | (7,565 | ) 
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|Cash flows from financing activities:             |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  | Net decrease in short term debt                     |              |        | (343                 | )   |                    |        |       |      |      |        | (317   | )   |   |         |       |   
|                                                  | Cash dividends                                      |              |        | (564                 | )   |                    |        | (574   | )    |      |        | (1,125 | )   |   |         | (1,144 | ) 
|                                                  | Purchase of treasury stock                          |              |        |                     |     |                    |        |       |      |      |        | (2,355 | )   |   |         |       |   
|                                                  | Proceeds from employee stock purchase plans         |              |        | 866                  |     |                    |        | 1,306  |      |      |        | 931    |     |   |         | 1,360  |   
|                                                  | Other transactions-net                              |              |        |                     |     |                    |        |       |      |      |        |       |     |   |         | 67     |   
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  | Net cash provided by (used in)
financing activities |              |        | (41                  | )   |                    |        | 732    |      |      |        | (2,866 | )   |   |         | 283    |   
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|Effect of exchange rate changes on cash           |                                                     |              | 209    |                      |     |                    | (119   | )      |      |      | 465    |        |     |   | (216    | )     
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|Decrease in cash and cash equivalents             |                                                     |              | (3,121 | )                    |     |                    | (2,701 | )      |      |      | (5,346 | )      |     |   | (11,854 | )     
|Cash and cash equivalents at beginning of period  |                                                     |              | 19,482 |                      |     |                    | 20,938 |        |      |      | 21,707 |        |     |   | 30,091  |       
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|Cash and cash equivalents at end of period        |                                                     | $            | 16,361 |                      |     | $                  | 18,237 |        |      | $    | 16,361 |        |     | $ | 18,237  |       
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|Supplemental disclosures of cash flow information |                                                     |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |       
|                                                  | Cash (refunded) paid during the period for:         |              |        |                      |     |                    |        |        |      |      |        |        |     |   |         |        |   
|                                                  |                                                     | Income taxes |        | $                    | 132 |                    |        | $      | (319 | )    |        | $      | 126 |   |         | $      | (3 | )
|                                                  |                                                     | Interest     |        |                      | 37  |                    |        |        | 34   |      |        |        | 77  |   |         |        | 61 |  

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars, except per share data)




|A. |  | Management Representation
The consolidated financial statements at March 31, 2003 and 2002 and for the
three and six month periods then ended have not been examined by independent
accountants, but in the opinion of the management of Keithley Instruments,
Inc. (the Company or Keithley) all adjustments necessary to a fair
presentation of the consolidated balance sheets, consolidated statements of
income and consolidated statements of cash flows for those periods have been
included. All adjustments included are of a normal, recurring nature. The
accompanying unaudited interim consolidated financial statements should be
read together with the Companys Annual Report on Form 10-K for the year
ended September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|B. |  | Earnings Per Share Denominator
The weighted average number of shares and share equivalents used in
determining the loss per share was 15,450,720 for the quarter ended March
31, 2003, and 15,711,256 for the quarter ended March 31, 2002. The weighted
average number of shares and share equivalents used to determine the loss
per share was 15,481,573 for the six months ended March 31, 2003, and
15,673,199 for the six months ended March 31, 2002. Both Common Shares and
Class B Common Shares are included in calculating the weighted average
number of shares outstanding. Diluted share calculations are not applicable
as the Company reported losses in all period presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|C. |  | Accounting for Stock-Based Compensation
The Company has two active stock option plans and one inactive plan. The
Company also has an employee stock purchase plan. Statement of Financial
Accounting Standards No. 123, Accounting for Stock-based Compensation
(SFAS 123), defined a fair value method of accounting for stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award as
determined using an option pricing model. As provided for in SFAS 123, the
Company has elected to apply Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock-based compensation
plans, and as such, no compensation cost for the stock option and stock
purchase plans has been recognized in the Companys consolidated financial
statements, except in certain cases when stock options were granted below
the market price of the underlying stock on the date of grant. Following is
a reconciliation of net loss per weighted average share had the Company
adopted the fair value measurement provisions of SFAS 123:

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|                                                                                                                                      |             |   |                      |       |                    |   |        |       |      |   |        |       |   |   |        |       |  
|------------------------------------------------------------------------------------------------------------------------------------- | ----------- | - | -------------------- | ----- | ------------------ | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                                                      |             |   | For the Three Months |       | For the Six Months
|                                                                                                                                      |             |   | Ended March 31,      |       | Ended March 31,   
|                                                                                                                                      |             |   | 2003                 |       | 2002               |   | 2003   |       | 2002
|                                                                                                                                      |             |   |                      |       |                    |   |        |       |     
|Net loss                                                                                                                              |             | $ | (923                 | )     |                    | $ | (1,309 | )     |      | $ | (1,430 | )     |   | $ | (2,943 | )    
|Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects                            |             |   | 7                    |       |                    |   | 7      |       |      |   | 13     |       |   |   | 13     |      
|Deduct: Stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects |             |   | (723                 | )     |                    |   | (905   | )     |      |   | (1,776 | )     |   |   | (1,873 | )    
|                                                                                                                                      |             |   |                      |       |                    |   |        |       |      |   |        |       |   |   |        |      
|                                                                                                                                      |             |   |                      |       |                    |   |        |       |      |   |        |       |   |   |        |      
|Pro forma net loss                                                                                                                    |             | $ | (1,639               | )     |                    | $ | (2,207 | )     |      | $ | (3,193 | )     |   | $ | (4,803 | )    
|                                                                                                                                      |             |   |                      |       |                    |   |        |       |      |   |        |       |   |   |        |      
|                                                                                                                                      |             |   |                      |       |                    |   |        |       |      |   |        |       |   |   |        |      
|Earnings per share:                                                                                                                   |             |   |                      |       |                    |   |        |       |      |   |        |       |   |   |        |      
|                                                                                                                                      | As reported |   | $                    | (0.06 | )                  |   | $      | (0.08 | )    |   | $      | (0.09 | ) |   | $      | (0.19 | )
|                                                                                                                                      | Pro forma   |   | $                    | (0.11 | )                  |   | $      | (0.14 | )    |   | $      | (0.21 | ) |   | $      | (0.31 | )



|D. |  | Stock repurchase program
On December 11, 2000, the Company announced that its Board of Directors had
approved an open market stock repurchase program. Under the terms of the
program, the Company may purchase up to 2,000,000 Common Shares, or
approximately 13 percent of shares outstanding, over a three-year period.
The purpose of the repurchase program is to offset the dilutive effect of
stock option and stock purchase plans. Common Shares held in treasury may
be reissued in settlement of stock purchases under these plans.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company did not repurchase shares during the second quarter. The
following table summarizes the Companys stock repurchase activity for the
six months ended March 31, 2003:                                                                                                                                                                                                                                                                                                                                                               

|                 |  |                    |        |                    |  |                               |  |                    |         |  |  |  |           | 
|---------------- |  | ------------------ | ------ | ------------------ |  | ----------------------------- |  | ------------------ | ------- |  |  |  | --------- | 
|                
|                 |  |                    |        |                    |  |                               |  | Number of shares   |         |  |  | 
|                 |  | Average price paid |        | Identity of        |  | purchased as part             |  | Maximum number of 
|                 |  | per share          |        | broker-dealer used |  | of a publicly                 |  | shares that remain
|Total number of  |  | (including         |        | to effect the      |  | announced                     |  | to be purchased   
|shares purchased |  | commissions)       |        | purchases          |  | repurchase program            |  | under the program 
|                
|210,700          |  |                    | $11.18 |                    |  | Bear, Sterns
Securities Corp. |  |                    | 210,700 |  |  |  | 1,256,300 | 
|                



| |  | At March 31, 2003, 430,737 Common Shares purchased under the Companys share
repurchase programs remained in treasury at an average cost of $13.60 per
share including commissions. Also, included in the Common shares held in
treasury, at cost caption of the consolidated balance sheets are shares
repurchased to settle non-employee Directors fees deferred pursuant to the
Keithley Instruments, Inc. 1996 Outside Directors Deferred Stock Plan. The
total number of shares held in treasury at March 31, 2003 was 560,555.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|E. |  | Amendment to Credit Agreement
The Companys credit agreement was amended on March 28, 2003. The
agreement, as amended, expires March 30, 2004, and is a $10,000 debt
facility ($230 outstanding at March 31, 2003) that provides unsecured,
multi-currency revolving credit at various interest rates based on Prime or
LIBOR. Under the agreement, the Company is required to comply with various
financial ratios and covenants. The amendment modified the financial ratios
and covenants, and amended the terms of the agreement to allow all
subsidiaries of the Company to borrow under the agreement. The company is
in compliance with the amended credit agreement effective March 31, 2003.
(The amendment to the credit agreement dated March 28, 2003 is filed as
exhibit 10(l) of this quarterly report on Form 10-Q.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|F. |  | Accounting for Derivatives and Hedging Activities
In accordance with the provisions of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, all of the Companys derivative instruments are recognized on
the balance sheet at their fair value. To hedge sales, the Company
currently utilizes foreign exchange forward contracts or option contracts to
sell foreign currencies to fix the exchange rates related to near-term sales
and effectively fix the Companys cost of goods sold. Underlying hedged
transactions are recorded at hedged rates, therefore realized and unrealized
gains and losses are recorded when the hedged transactions occur. The
Company also has an interest rate swap instrument. The estimated fair value
of the swap instrument is determined through quotes from the related
financial institutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | On the date the derivative contract is entered into, the Company designates
its derivative as either a hedge of the fair value of a recognized asset or
liability (fair value hedge), as a hedge of the variability of cash flows
to be received (cash flow hedge), or as a foreign-currency cash flow hedge
(foreign currency hedge). Changes in the fair value of a derivative that
is highly effective as, and that is designated and qualifies as, a fair
value hedge, along with the gain or loss on the hedged asset or liability
that is attributable to the hedged risk are recorded in current-period
earnings. Changes in the fair value of a derivative that is highly
effective and that is designated and qualifies as a cash flow hedge are
recorded in other comprehensive income until earnings are affected by the
transaction in the underlying asset. Changes in the fair value of
derivatives that are highly effective and that qualify as foreign currency
hedges are recorded in either current period income or other comprehensive
income, depending on whether the hedge transaction is a fair value hedge or
a cash flow hedge. At March 31, 2003, the forward exchange forward
contracts were designated as cash flow hedges. The interest rate swap
instrument was determined to be an ineffective hedge and accordingly,
changes in its fair market value are recorded in the Companys records as
income or expense.
|  
|   |  | The Company documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. The Company also assesses whether
the derivatives that are used in hedging transactions are highly effective
in offsetting changes in cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge, the Company
discontinues hedge accounting prospectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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|G. |  | Comprehensive income
Comprehensive income for the three and six month periods ended March 31,
2003 and 2002 is as follows:
|-- |  | --------------------------------------------------------------------------------------------------------------------------

|                                                            |  |                      |      |                    |  |      |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------- |  | -------------------- | ---- | ------------------ |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                            |  | For the Three Months |      | For the Six Months
|                                                            |  | Ended March 31,      |      | Ended March 31,   
|                                                            |  | 2003                 |      | 2002               |  | 2003 |        | 2002
|                                                            |  |                      |      |                    |  |      |        |     
|Net loss                                                    |  | $                    | (923 | )                  |  | $    | (1,309 | )    |  | $ | (1,430 | ) |  | $ | (2,943 | )
|Unrealized gains (losses) on value of
derivative securities |  |                      | 89   |                    |  |      | 36     |      |  |   | (88    | ) |  |   | 127    |  
|Net unrealized investment losses                            |  |                      | (46  | )                  |  |      | (64    | )    |  |   | (159   | ) |  |   | (172   | )
|Foreign currency translation
adjustments                    |  |                      | 111  |                    |  |      | (139   | )    |  |   | 404    |   |  |   | (328   | )
|                                                            |  |                      |      |                    |  |      |        |      |  |   |        |   |  |   |        |  
|Comprehensive loss                                          |  | $                    | (769 | )                  |  | $    | (1,476 | )    |  | $ | (1,273 | ) |  | $ | (3,316 | )
|                                                            |  |                      |      |                    |  |      |        |      |  |   |        |   |  |   |        |  



|H. |  | Segment and Geographic Information
The Companys business is to develop test and measurement-based solutions to
verify customers product performance or aid in their product development
process. The Companys customers are engineers, technicians and scientists
in manufacturing, product development and research functions within a range
of industries. Although the Companys products vary in capability,
sophistication, use, size and price, they basically test, measure and
analyze electrical and physical properties, and in some cases RF (radio
frequency) or light. As such, the Companys management has determined that
the Company operates in a single industry segment. The operations by
geographic area are presented below. The basis for attributing revenues
from external customers to a geographic area is the location of the
customer.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|              |  |                      |        |                    |  |      |        |      |  |   |        |  |  |   |        | 
|------------- |  | -------------------- | ------ | ------------------ |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|              |  | For the Three Months |        | For the Six Months
|              |  | Ended March 31,      |        | Ended March 31,   
|              |  | 2003                 |        | 2002               |  | 2003 |        | 2002
|              |  |                      |        |                    |  |      |        |     
|Net sales:    |  |                      |        |                    |  |      |        |      |  |   |        |  |  |   |        | 
|United States |  | $                    | 7,290  |                    |  | $    | 7,989  |      |  | $ | 16,215 |  |  | $ | 15,469 | 
|Europe        |  |                      | 9,147  |                    |  |      | 8,231  |      |  |   | 17,747 |  |  |   | 16,476 | 
|Pacific Basin |  |                      | 8,801  |                    |  |      | 5,132  |      |  |   | 16,388 |  |  |   | 8,723  | 
|Other         |  |                      | 714    |                    |  |      | 694    |      |  |   | 1,801  |  |  |   | 1,802  | 
|              |  |                      |        |                    |  |      |        |      |  |   |        |  |  |   |        | 
|              |  |                      |        |                    |  |      |        |      |  |   |        |  |  |   |        | 
|              |  | $                    | 25,952 |                    |  | $    | 22,046 |      |  | $ | 52,151 |  |  | $ | 42,470 | 
|              |  |                      |        |                    |  |      |        |      |  |   |        |  |  |   |        | 

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|                   |  |              |        |                  |  |      |        |  |  |   |        | 
|------------------ |  | ------------ | ------ | ---------------- |  | ---- | ------ |  |  | - | ------ | 
|                   |  | At March 31, |        | At September 30,
|                   |  | 2003         |        | 2002             |  | 2002
|                   |  |              |        |                  |  |     
|Long-lived assets: |  |              |        |                  |  |      |        |  |  |   |        | 
|United States      |  | $            | 20,015 |                  |  | $    | 19,682 |  |  | $ | 19,197 | 
|Germany            |  |              | 3,674  |                  |  |      | 2,770  |  |  |   | 3,302  | 
|Other              |  |              | 751    |                  |  |      | 439    |  |  |   | 680    | 
|                   |  |              |        |                  |  |      |        |  |  |   |        | 
|                   |  | $            | 24,440 |                  |  | $    | 22,891 |  |  | $ | 23,179 | 
|                   |  |              |        |                  |  |      |        |  |  |   |        | 



|I. |  | Guarantors Disclosure Requirements
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(FIN 45). FIN 45 elaborates on the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees
it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Guarantee of original lease:
The Company has assigned the lease of its former office space in Reading,
Great Britain to a third party. In the event the third party defaults on
the monthly lease payments, the Company would be responsible for the
payments until the lease expires on July 14, 2009. If the third party were
to default, the maximum amount of future payments (undiscounted) the Company
would be required to make under the guarantee would be approximately $1,143
through July 14, 2009. The Company has not recorded any liability for this
item, as it is does not believe that it is probable that the third party
will default on the lease payments.                                                                                                                                                                                                                                            
|  
|   |  | Product warranties:
Generally, the Companys products are covered under a one-year warranty;
however, certain products are covered under a three-year warranty. It is
the Companys policy to accrue for all product warranties based upon
historical in-warranty repair data. In addition, the Company accrues for
specifically identified product performance issues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | A reconciliation of the estimated changes in the aggregated product warranty
liability for the is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | 9Table of Contents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                                                                                     |  |                    |       |                  |  |   |       |  
|---------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | - | ----- | -
|                                                                                                     |  | Three Months Ended |       | Six Months Ended
|                                                                                                     |  | March 31, 2003     |       | March 31, 2003  
|                                                                                                     |  |                    |       |                 
|Beginning Balance                                                                                    |  | $                  | 1,343 |                  |  | $ | 1,415 |  
|                                                                                                     |  |                    |       |                  |  |   |       |  
|Accruals for warranties issued
during the period                                                     |  |                    | 355   |                  |  |   | 720   |  
|Accruals related to pre-existing
warranties (including changes in
estimates and expiring warranties) |  |                    | (23   | )                |  |   | (231  | )
|Settlements made (in cash or in kind)
during the period                                              |  |                    | (297  | )                |  |   | (526  | )
|                                                                                                     |  |                    |       |                  |  |   |       |  
|                                                                                                     |  |                    |       |                  |  |   |       |  
|Balance at March 31, 2003                                                                            |  | $                  | 1,378 |                  |  | $ | 1,378 |  
|                                                                                                     |  |                    |       |                  |  |   |       |  







ITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations.

(In Thousands of Dollars)

Critical Accounting Policies and Estimates

Management has identified the Companys critical accounting policies. These
policies have the potential to have a significant impact on the Companys
financial statements, either because of the significance of the financial
statement item to which they relate, or because they require judgment and
estimation due to the uncertainty involved in measuring, at a specific point in
time, events which will be settled in the future.

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

Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
based on a currently-adjusted standard, which approximates actual cost on a
first-in, first-out basis. The Company periodically reviews its recorded
inventory and estimates a reserve for obsolete or slow-moving items. Such
estimates are difficult to make under current economic conditions. If actual
demand and market conditions are less favorable than those projected by
management, additional reserves may be required. If actual market conditions
are more favorable than anticipated, the Companys cost of sales will be lower
than expected in that period.

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Income taxes:
The Companys provision for income taxes and the determination of the resulting
deferred tax assets and liabilities involves a significant amount of judgment
by management. The quarterly provision for income taxes or benefits is based
upon an estimate of pretax financial accounting income or loss for the full
year in each of the jurisdictions in which the Company operates, and is
impacted by various differences between financial accounting income or loss and
taxable income or loss. Judgment is also applied in determining whether the
deferred tax assets will be realized in full or in part.

Stock compensation plans:
The Company has two active stock option plans and one inactive plan. The
Company also has an employee stock purchase plan. The Company has chosen the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-based Compensation (SFAS 123), and as such, no
compensation cost for the stock option and stock purchase plans has been
recognized in the Companys consolidated financial statements. For disclosure
purposes, the valuation of stock issued to employees requires management to
determine estimates for the expected life of the options, the expected
risk-free interest rate during the expected life of the option, the expected
volatility of the stock price over the expected life of the option, and the
expected dividend yield. These estimations are significant factors in the
valuation model and actual results could differ materially from these
estimates. Recently, the FASB indicated that it would require all companies to
expense stock options. It plans to issue an exposure draft later this year
that could become effective in 2004. Until the new Statement is issued, the
provisions of SFAS 123 remain in effect. (See Note C.)

Results of Operations

Second Quarter 2003 Compared with Second Quarter 2002

The Company reported a net loss for the second quarter of fiscal 2003 of $923,
or $0.06 per share, compared with a net loss of $1,309, or $0.08 per share, in
last years second quarter.

Net sales of $25,952 increased 18 percent from $22,046 in the prior years
second quarter. Geographically, sales were up 72 percent in the Pacific Basin
region, up 11 percent in Europe, and down 9 percent in the United States.
Sequentially, sales were flat from the first quarter of fiscal 2003.

Orders of $24,592 for the second quarter increased 9 percent from last years
second quarter orders of $22,657. Geographically, orders were up 32 percent in
the Pacific Basin, up 8 percent in Europe, and down 6 percent in the United
States. Compared to the prior years quarter, orders from semiconductor
customers increased 16 percent, wireless communications customers increased 62
percent, while orders from electronic components and subassembly manufacturers,
and research and education customers were flat. Sequentially, orders increased
7 percent from the first quarter, as a result of growth in the semiconductor
and wireless industries. Order backlog decreased $599 during the quarter to
$11,711 at March 31, 2003.

Cost of goods sold as a percentage of net sales increased to 46.0 percent from
44.5 percent in the prior years second quarter. The increase was due to
higher costs related to the lean

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manufacturing start-up and an unfavorable product mix, partially offset by
higher margins in Japan as a result of going direct and better margins in
Europe due to a weaker dollar. The effect of foreign exchange hedging
increased cost of goods sold as a percentage of sales by 0.6 points in the
current years quarter and decreased cost of goods sold as a percentage of
sales by 0.1 points in the prior year.

Selling, general and administrative expenses of $12,335 increased 11 percent
from $11,129 in last years second quarter, although decreased as a percentage
of net sales to 47.5 percent from 50.5 percent last year. The increase in
dollars is primarily due to higher costs associated with the Japanese sales
organization, costs related to the enterprise resource planning (ERP) and
customer relationship management (CRM) implementations, and higher costs
related to the U.S. sales force partially offset by savings on commissions
previously paid to representatives. Moving forward, at current sales levels we
expect costs for the U.S. sales force to be similar to the commissions we would
have paid to our representatives. The Companys Japanese sales and service
operation was profitable for the second consecutive quarter.

Product development expenses of $3,382, or 13.0 percent of net sales, decreased
less than 2 percent from $3,433, or 15.6 percent of net sales, last year.

The Company generated net financing income during the quarter of $135 versus
$246 in the prior year. Lower interest rates caused financing income to
decrease from the prior year.

The Company recorded a tax benefit for the second quarter at a 40.6 percent
rate. Last years second quarter tax benefit was recorded at a 37.3 percent
rate.

Six Months Ended March 31, 2003 Compared with Six Months Ended March 31, 2002

The net loss for the first half of fiscal 2003 was $1,430, or $0.09 per share,
compared to a net loss of $2,943, or $0.19 per share, last year.

Net sales of $52,151 increased 23 percent from $42,470 reported for the six
month period last year. Sales were up in all major geographies with the
Pacific Basin region up 88 percent, Europe up 8 percent, and the United States
up 5 percent.

Orders of $47,641 for the six months ending March 31, 2003, increased 11
percent from $42,736 last year. Geographically, orders increased 55 percent in
the Pacific Basin, increased three percent in the United States, and decreased
five percent in Europe. For the first half, semiconductor orders comprised
approximately 25 percent of the total, wireless communications, electronic
components and subassembly manufacturers, and research and education each made
up about 20 percent of the total, while optoelectronics orders made up less
than 5 percent.

Cost of goods sold as a percentage of net sales increased to 45.0 percent from
44.7 percent for the six month period last year. The increase was due to
higher costs related to the lean manufacturing start-up and an unfavorable
product mix, partially offset by higher margins in Japan as a result of going
direct and better margins in Europe due to a weaker dollar. The effect of
foreign exchange hedging on cost of goods sold was immaterial in both periods.

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Selling, general and administrative expenses of $24,719 increased 15 percent
from $21,519 in the same period last year, but decreased as a percentage of net
sales to 47.4 from 50.7. The increase in dollars was primarily due to higher
costs associated with the Japanese sales office that opened April 1, 2002,
higher costs related to the U.S. sales force including double expenses during
the first quarter as the Company paid commissions to sales representatives and
salaries to its own sales employees, and additional costs associated with the
ERP and CRM implementations.

Product development expenses for the first half of fiscal 2003 of $6,592, or
12.6 percent of sales, were down $417, or 6 percent, from $7,009, or 16.5
percent of net sales, last year. Much of the decrease was due to lower pilot
production costs and development supplies.

The Company generated net financing income during the first half of fiscal 2003
of $306 versus $512 in the prior year. Lower interest rates caused the
decrease.

The Company recorded a tax benefit for the first half of fiscal 2003 at a 38.7
percent rate. The income tax benefit included a $180 reduction of a deferred
income tax valuation allowance, which management believes is no longer
necessary. Last years effective tax benefit was recorded at a 35.3 percent
rate.

Liquidity and Capital Resources

Cash used in operations was $2,050 for the second quarter and $775 for the six
months ended March 31, 2003. Additionally, the Company used $2,485 for capital
expenditures, $1,125 to pay dividends, and $2,355 to repurchase its Common
Shares for the first half of fiscal 2003. (See Note D.) The Company received
$931 as proceeds pursuant to employee stock purchase plans for the first half
of fiscal 2003. At March 31, 2003, cash and cash equivalents totaled $16,361,
a decrease of $3,121 during the quarter and $5,346 since September 30, 2002.
Short-term investments totaled $27,624 at March 31, 2003, a decrease of $208
during the quarter and $547 since September 30, 2002. Short-term debt totaled
$230, and there was no long-term debt at March 31, 2003.

The Company expects to finance capital spending, working capital requirements
and the stock repurchase program with cash and short-term investments on hand,
and cash provided by operations. At March 31, 2003, the Company had available
unused lines of credit with domestic and foreign banks aggregating $14,770, all
of which was short term.

Outlook

The Companys management continues to believe in the long-term growth prospects
of the electronics industry. Additionally, we believe that certain
applications are opportunities for us in the short-term. While conditions
throughout the electronics industry have improved, the outlook remains hard to
predict. The Companys sales are order dependent and based on current
activity, management is estimating sales for the June quarter to range between
$23,000 and $26,000. At the low end of the sales range, we would expect a
pretax loss in the teens as a percentage of sales. At the high end of the
sales range, the loss would be expected to be in the single digits as a
percentage of sales.

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Status of Business Initiatives

On January 1, 2003, the Companys began selling its products exclusively
through its own sales force in the United States. Prior to this time, the
Company sold its products in the U.S. through sales representatives.
Management believes it is regaining the momentum lost during the transition
period, and expects the momentum will continue to build. Management
anticipates better growth over the long term in the U.S. and worldwide because
of our ability to work more closely with U.S. customers.

April 1, 2003 marked the one-year anniversary of the opening of the Companys
first Japanese sales and support office. Today the Company has three offices
and about 20 employees almost all of whom are Japanese citizens. Additionally,
the Company sells more product in Japan now than through the previous
distributor, and the operation is growing and is profitable. By working
closely with our Japanese customers, the Company has gained market share and
continues to earn design wins that not only increase our business in Japan, but
also in Taiwan, Korea and China.

The Company continued to experience higher start-up costs during the second
quarter related to its lean manufacturing initiative. However, it is seeing
some of the benefits from lean manufacturing with lower inventory levels,
higher inventory turns, and improved lead times for its customers. Management
anticipates increasing benefits and service levels as the implementation
progresses.

The Company began implementing new CRM and ERP systems to replace the previous
systems. These new systems will allow the Company to improve its business
processes and work with its customers in a more efficient and effective manner.
The Company went live with the first phase of the ERP implementation in May
2003. The remaining phases will continue through 2004.

Factors That May Affect Future Results

Statements included in the sections entitled Liquidity and Capital Resources,
Outlook and Status of Business Initiatives of Managements Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere
constitute forward-looking statements, as that term is defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements generally
include words such as anticipates, expects, believes, intends,
estimates, and similar expressions. 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. Except as otherwise required by applicable securities laws,
the Company disclaims any intention or obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.

The Company is subject to global economic and market conditions, including the
current conditions affecting the results of the Companys customers in certain
segments of the electronics industry. The current economic downturn resulted
in reduced purchasing and capital spending in many of the markets that we serve
worldwide. In particular, the communications, semiconductor and electronics
industries have been in a downward cycle characterized by

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diminished product demand and excess manufacturing capacity. Although some
segments of these industries have shown recent signs of stabilization, others,
especially in the optoelectronics segment of the communications industry,
continue to be very weak. The ultimate severity of this downturn, and how long
it will last, is unknown. Demand in our markets remains volatile so the
underlying trend is uncertain. The Companys results have been and could
continue to be adversely affected depending upon future business conditions in
these industries. The Company has been experiencing some pricing pressures
from its customers, which could reduce gross margins. In addition, orders are
cancelable by customers and consequently orders outstanding at the end of a
reporting period may not result in realized sales in the future.

The Company is managing its cost structure to reallocate resources to areas
that it feels will provide the best long-term benefit to its customers and
shareholders. A failure by the Company to reallocate expenses in a timely
manner could adversely affect the Companys future operating results. In
addition, notwithstanding such measures, a continuing decline in the economy
that adversely affects the Companys customers would likely adversely affect
the Company.

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

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

The Companys success depends to a significant degree upon the continued
service of its key executive, sales, development, marketing and operational
personnel. Although management believes the Company offers competitive
salaries and benefits, there can be no assurance that it will be successful in
retaining its existing key personnel. Failure to retain key personnel could
have a material adverse effect on the Companys results of operations.

The Companys products contain large volumes of electronic components and
subassemblies that in some cases are supplied through sole or limited source
third-party suppliers. Although the Company does not anticipate any problems
procuring supplies in the near-term, there can never be any assurance that
parts and supplies will be available in a timely manner and at reasonable
prices. Additionally, the Companys inventory is subject to risks of changes
in market demand for particular products. The resulting excess and/or obsolete
inventory could have an adverse impact on the Companys results of operations.

The Company currently has subsidiaries or sales offices located in
approximately 15 countries outside the United States, and non-U.S. sales
accounted for over two-thirds of the Companys revenue during the first half of
fiscal 2003. The Companys future results could be adversely affected by
several factors, including changes in foreign currency exchange rates,
political unrest, wars and other acts of terrorism, changes in other economic
or political conditions, trade

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protection measures, import or export licensing requirements, unexpected
changes in regulatory requirements, natural disasters, and the potential threat
of SARS.

Prior to April 1, 2002, the Company had been distributing its products in Japan
utilizing sales representatives. On that date, the Company began utilizing its
own sales force. The Companys results could be adversely affected if its new
sales and support organization in Japan does not continue to progress and
achieve growing sales. Additionally, the Companys earnings could be adversely
affected due to higher than anticipated costs to maintain the direct sales
offices.

The Company began to implement a lean manufacturing initiative in its
manufacturing facilities, which are located in Solon, Ohio. The Company
incurred start-up costs during the first half of fiscal 2003, which adversely
affected gross margins. The Companys results could be adversely affected if
it incurs additional costs that are not offset by cost efficiency improvements.
Additionally, results could be adversely affected if the Company is unable to
meet customer delivery requirements during the implementation period. The
Company expects to benefit from lean manufacturing with shorter lead times,
lower inventory levels and higher inventory turns. The Companys ability to
effectively implement lean manufacturing will determine the extent, if any, to
which these benefits are realized.

The Company pays taxes in several jurisdictions throughout the world. The
Company utilizes available tax credits and other tax planning strategies in an
effort to minimize the Companys overall tax liability. The Companys
estimated tax rate for fiscal 2003 could change from what is currently
anticipated due to changes in tax laws of various countries, changes in the
Companys overall tax planning strategy, or countries where earnings or losses
are incurred. As of March 31, 2003, the Company had established a valuation
allowance against certain deferred tax assets, and had not established
valuation allowances against other deferred tax assets based on tax strategies
planned to mitigate the risk of impairment to these assets. Accordingly, if
the Companys facts or financial results were to change thereby impacting the
likelihood of realizing the deferred tax assets, the Companys tax rate could
be adversely affected.

On January 1, 2003, the Company began to use its own employees, rather than
sales representatives, to sell its products in the United States. Management
believes it is regaining the momentum lost during the transition period, and
expects the momentum will continue to build. However, the Companys results
could continue to be adversely affected if it is unable to effectively develop
a sales organization in the United States. Additionally, this action has
raised the Companys fixed costs. During times of depressed sales, results
could be adversely affected.

Throughout fiscal 2003 and 2004, the Company will be implementing ERP and CRM
systems. The Companys results could be adversely affected if it is unable to
implement the systems without significant interruptions in accounting systems,
order entry, billing, manufacturing and other customer support functions.

The Company has several stock-based compensation plans for employees and
non-employee Directors. The Company currently adheres to the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and as
such, no compensation cost has been recognized in the Companys financial
statements for the stock option plans and the stock purchase plan. The Company
is currently monitoring the recent discussions related to anticipated
regulations regarding the accounting treatment for stock options. The Company
will comply

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with any changes in the accounting of stock options required by the Financial
Accounting Standards Board, which would result in lower earnings.







ITEM 3.  Quantitative and Qualitative Disclosure About Market Risk.

The Company is exposed to a variety of risks, including foreign currency
fluctuations, interest rate fluctuations and changes in the market value of its
short-term investments. In the normal course of business, the Company employs
established policies and procedures to manage its exposure to fluctuations in
foreign currency values and interest rates.

The Company is exposed to foreign currency exchange rate risk primarily through
transactions denominated in foreign currencies. The Company currently utilizes
foreign exchange forward contracts or option contracts to sell foreign
currencies to fix the exchange rates related to near-term sales and effectively
fix the Companys margins. Generally, these contracts have maturities of three
months or less. The Companys policy is to only enter into derivative
transactions when the Company has an identifiable exposure to risk, thus not
creating additional foreign currency exchange rate risk. In managements
opinion, a 10 percent adverse change in foreign currency exchange rates would
not have a material effect on these instruments and therefore the Companys
results of operations, financial position or cash flows.

The Company also has an interest rate swap instrument originally entered into
to mitigate the risk of interest rate changes related to long-term debt. The
agreement effectively fixes the interest rate on a notional $3,000 of variable
rate debt; however, the interest rate swap instrument was determined to be an
ineffective hedge and accordingly, changes in the fair market value of the
interest rate swap are recorded in the Companys records as income or expense.
The instrument expires September 19, 2005. In managements opinion, a 10
percent adverse change in interest rates would not have a material effect on
this instrument and therefore the Companys results of operations, financial
position or cash flows.

The Company maintains a short-term investment portfolio consisting of U.S.
government backed notes and bonds, corporate notes and bonds, and mutual funds
consisting primarily of government notes and bonds. An increase in interest
rates would decrease the value of certain of these investments. However, a 10
percent increase in interest rates would not have a material impact on the
Companys results of operations, financial position or cash flows.

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ITEM 4.  Controls and Procedures.

The Companys Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Companys disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14 within 90 days of the filing of
this Quarterly Report, have concluded that the Companys disclosure controls
and procedures were effective to ensure the timely collection, evaluation and
disclosure of information relating to the Company that would potentially be
subject to disclosure under the Securities Exchange Action of 1934, as amended,
and the rules and regulations promulgated thereunder. There were no
significant changes in the Companys internal controls or in other factors that
could significantly affect the internal controls subsequent to the date the
Company carried out its evaluation.

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PART II.  OTHER INFORMATION







Item 4.  Submission of Matters to a Vote of Security Holders.

On February 15, 2003, the registrant conducted its Annual Meeting of
Shareholders. The follow matters were brought before the shareholders for vote
at this meeting:

|    |  |                        |  |            |  |         
|--- |  | ---------------------- |  | ---------- |  | --------
|    |  | PROPOSAL               |  | FOR        |  | WITHHELD
|    |  |                        |  |            |  |         
|(a) |  | Election of Directors: |  |            |  |         
|    |  | Joseph P. Keithley     |  | 33,256,885 |  | 107,441 
|    |  | Brian R. Bachman       |  | 33,110,715 |  | 253,611 
|    |  | James B. Griswold      |  | 33,287,779 |  | 76,547  
|    |  | William J. Hudson, Jr. |  | 33,268,772 |  | 95,553  
|    |  | Dr. N. Mohan Reddy     |  | 33,104,863 |  | 259,462 
|    |  | R. Elton White         |  | 33,093,842 |  | 270,484 
|    |  | *James T. Bartlett     |  | 11,781,872 |  | 97,433  
|    |  | *Leon J. Hendrix, Jr.  |  | 11,620,516 |  | 258,790 

*Elected by holders of Common Shares only.







Item 6.  Exhibits and Reports on Form 8-K.

(a)  Exhibits. The following exhibits are filed herewith:

|        |  |                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                              
|10(l)   |  | Second Amendment to Credit Agreement                                                         
|99(a)*  |  | Certification of Joseph P. Keithley pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|99(b)*  |  | Certification of Mark J. Plush pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002     
|       
|       



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *Pursuant to Securities and Exchange Commission Release No.
34-47551, these exhibits accompany this Report, but are not deemed to be
filed as part of the Report.

|    |  |                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------
|(b) |  | Reports on Form 8-K. No reports on Form 8-K were filed during the
quarterly period ended March 31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                   |  |                                                                                                                                               |  |                                        
|------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------
|                   |  |                                                                                                                                               |  | KEITHLEY INSTRUMENTS, INC.
(Registrant)
|                  
|Date: May 13, 2003 |  | /s/  Joseph P. KeithleyJoseph P. Keithley
          Chairman, President and Chief Executive Officer
            (Principal Executive Officer)
|                  
|Date: May 13, 2003 |  | /s/  Mark J. PlushMark J. Plush
          Vice President and Chief Financial Officer
            (Principal Financial and Accounting Officer)

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I, Joseph P. Keithley, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Keithley
Instruments, Inc.;                                                                                                                                                                                                                                   
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;         
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                              



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize, and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                         



| | 6. |  | The registrants other certifying officers and I have indicated in
this report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |              |  |                                                                       |  | 
|----- |  | ------------ |  | --------------------------------------------------------------------- |  | 
|Date: |  | May 13, 2003 |  | /s/ Joseph P. KeithleyChairman, President and Chief Executive Officer

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I, Mark J. Plush, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Keithley
Instruments, Inc.;                                                                                                                                                                                                                                   
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;         
|
| | 4. |  | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                              



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize, and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | e) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                         



| | 6. |  | The registrants other certifying officers and I have indicated in
this report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |              |  |                                                             |  | 
|----- |  | ------------ |  | ----------------------------------------------------------- |  | 
|Date: |  | May 13, 2003 |  | /s/ Mark J. PlushVice President and Chief Financial Officer

22