##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-27241
 KEYNOTE SYSTEMS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-3226488(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 777 Mariners Island Blvd., San Mateo, CA
    
    94404(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (650) 403-2400
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
  Class
    
    Shares outstanding as of May 2, 2008Common Stock, $.001 par value
    
    13,813,086




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##### 



KEYNOTE SYSTEMS, INC.
 PagePART I-FINANCIAL INFORMATIONItem 1. Unaudited Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    38Item 4. Controls and Procedures
    
    
    39PART II-OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    39Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    47Item 3. Defaults Upon Senior Securities
    
    
    47Item 4. Submission of Matters to a Vote of Security Holders
    
    
    47Item 5. Other Information
    
    
    48Item 6. Exhibits
    
    
    49Signatures
    
    
    50EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Unaudited Financial Statements.
 KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
Index to Unaudited Condensed Consolidated Financial Statements
 PageCondensed Consolidated Balance Sheets as of March 31, 2008 and September 30, 2007
    
    
    4Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2008 and 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2008 and 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7
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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 March 31,
    
    
    September 30,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    37,576
    
    
    $
    42,875Short-term investments
    
    
    17,528
    
    
    
    65,060Total cash, cash equivalents, and short-term investments
    
    
    55,104
    
    
    
    107,935Accounts receivable, less allowance for doubtful
accounts and billing adjustment of $286 and $284 as of
March 31, 2008 and September 30, 2007, respectively
    
    
    7,552
    
    
    
    5,988Prepaids, deferred costs and other current assets
    
    
    3,516
    
    
    
    2,703Inventories
    
    
    1,463
    
    
    
    1,059Deferred tax assets
    
    
    4,068
    
    
    
    3,922Total current assets
    
    
    71,703
    
    
    
    121,607Deferred costs and other long term assets
    
    
    1,907
    
    
    
    1,301Property and equipment, net
    
    
    35,778
    
    
    
    35,480Goodwill
    
    
    67,357
    
    
    
    63,129Identifiable intangible assets, net
    
    
    6,817
    
    
    
    7,963Total assets
    
    $
    183,562
    
    
    $
    229,480LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,590
    
    
    $
    2,285Accrued expenses
    
    
    12,423
    
    
    
    11,656Current portion of capital lease obligation
    
    
    19
    
    
    
    24Deferred revenue
    
    
    24,058
    
    
    
    19,824Total current liabilities
    
    
    38,090
    
    
    
    33,789Long-term portion of capital lease obligation
    
    
    27
    
    
    
    31Deferred rent and other long-term liabilities
    
    
    2,027
    
    
    
    292Long-term deferred revenue
    
    
    1,169
    
    
    
    2,136Long-term deferred tax liability
    
    
    1,507
    
    
    
    2,347Total liabilities
    
    
    42,820
    
    
    
    38,595Commitments and contingencies  see Note 10Stockholders equity:Common stock
    
    
    17
    
    
    
    18Treasury stock
    
    
    (38,319
    )
    
    
    (1,151
    )Additional paid-in capital
    
    
    309,061
    
    
    
    325,525Accumulated deficit
    
    
    (142,170
    )
    
    
    (140,188
    )Accumulated other comprehensive income
    
    
    12,153
    
    
    
    6,681Total stockholders equity
    
    
    140,742
    
    
    
    190,885Total liabilities and stockholders equity
    
    $
    183,562
    
    
    $
    229,480
  4




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenue:Subscription services
    
    $
    11,092
    
    
    $
    10,733
    
    
    $
    21,964
    
    
    $
    21,240Ratable licenses
    
    
    4,605
    
    
    
    3,203
    
    
    
    8,607
    
    
    
    5,409Professional services
    
    
    1,937
    
    
    
    2,778
    
    
    
    4,783
    
    
    
    5,880Total revenue, net
    
    
    17,634
    
    
    
    16,714
    
    
    
    35,354
    
    
    
    32,529Costs and expensesCosts of revenueDirect costs of subscription services
    
    
    2,225
    
    
    
    2,110
    
    
    
    4,336
    
    
    
    4,168Direct costs of ratable licenses
    
    
    1,111
    
    
    
    730
    
    
    
    2,714
    
    
    
    1,813Direct costs of professional services
    
    
    1,794
    
    
    
    2,207
    
    
    
    3,599
    
    
    
    4,330Development
    
    
    3,160
    
    
    
    2,877
    
    
    
    6,293
    
    
    
    5,749Operations
    
    
    2,024
    
    
    
    1,948
    
    
    
    4,027
    
    
    
    3,790Amortization of intangible assets  software
    
    
    211
    
    
    
    187
    
    
    
    416
    
    
    
    370Total costs of revenue
    
    
    10,525
    
    
    
    10,059
    
    
    
    21,385
    
    
    
    20,220Sales and marketing
    
    
    6,529
    
    
    
    5,037
    
    
    
    12,296
    
    
    
    9,666General and administrative
    
    
    2,501
    
    
    
    2,378
    
    
    
    4,988
    
    
    
    4,757Excess occupancy income
    
    
    (309
    )
    
    
    (21
    )
    
    
    (590
    )
    
    
    (48
    )Amortization of intangible assets  other
    
    
    542
    
    
    
    573
    
    
    
    1,079
    
    
    
    1,149Total costs and expenses
    
    
    19,788
    
    
    
    18,026
    
    
    
    39,158
    
    
    
    35,744Loss from operations
    
    
    (2,154
    )
    
    
    (1,312
    )
    
    
    (3,804
    )
    
    
    (3,215
    )Interest income and other, net
    
    
    881
    
    
    
    1,149
    
    
    
    2,031
    
    
    
    2,270Loss before (provision for) benefit from income taxes
    
    
    (1,273
    )
    
    
    (163
    )
    
    
    (1,773
    )
    
    
    (945
    )(Provision for) benefit from income taxes
    
    
    (45
    )
    
    
    193
    
    
    
    (289
    )
    
    
    1,239Net (loss) income
    
    $
    (1,318
    )
    
    $
    30
    
    
    $
    (2,062
    )
    
    $
    294Net (loss) income per share:Basic
    
    $
    (0.08
    )
    
    $
    0.00
    
    
    $
    (0.12
    )
    
    $
    0.02Diluted
    
    $
    (0.08
    )
    
    $
    0.00
    
    
    $
    (0.12
    )
    
    $
    0.02Shares used in computing basic and
diluted net (loss) income per share:Basic
    
    
    16,130
    
    
    
    17,284
    
    
    
    17,180
    
    
    
    17,199Diluted
    
    
    16,130
    
    
    
    17,986
    
    
    
    17,180
    
    
    
    17,827
  5




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedMarch 31,2008
    
    
    2007Cash flows from operating activities:Net (loss) income
    
    $
    (2,062
    )
    
    $
    294Adjustments to reconcile net (loss) income
to net cash provided by operating activities:Depreciation and amortization
    
    
    2,559
    
    
    
    2,179Stock-based compensation
    
    
    2,260
    
    
    
    1,924Impairment of short-term investment
    
    
    98
    
    
    
    Charges to bad debt and billing adjustment reserves
    
    
    98
    
    
    
    148Accretion of debt investment discount
    
    
    (437
    )
    
    
    (354
    )Amortization of identifiable intangible assets
    
    
    1,495
    
    
    
    1,519Deferred tax assets and liabilities, net
    
    
    
    
    
    
    (887
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,548
    )
    
    
    1,034Inventories
    
    
    (271
    )
    
    
    (237
    )Prepaids, deferred costs and other assets
    
    
    (990
    )
    
    
    (1,702
    )Accounts payable and accrued expenses
    
    
    29
    
    
    
    (907
    )Deferred revenue
    
    
    1,626
    
    
    
    8,516Net cash provided by operating activities
    
    
    2,857
    
    
    
    11,527Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,385
    )
    
    
    (2,087
    )Purchase of businesses and assets, net
    
    
    
    
    
    
    (307
    )Earnout payment for acquisition of business
    
    
    
    
    
    
    (10,587
    )Sales of short-term investments
    
    
    71,076
    
    
    
    28,190Purchases of short-term investments
    
    
    (23,101
    )
    
    
    (32,124
    )Net cash provided by (used in) investing activities
    
    
    45,590
    
    
    
    (16,915
    )Cash flows from financing activities:Repayment of credit facilities
    
    
    (15
    )
    
    
    (23
    )Proceeds from issuance of common stock and exercise of stock options
    
    
    3,072
    
    
    
    3,291Repurchase of outstanding common stock
    
    
    (58,971
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (55,914
    )
    
    
    3,268Effect of exchange rate changes on cash and cash equivalents
    
    
    2,168
    
    
    
    199Net change in cash and cash equivalents
    
    
    (5,299
    )
    
    
    (1,921
    )Cash and cash equivalents at beginning of the period
    
    
    42,875
    
    
    
    45,662Cash and cash equivalents at end of the period
    
    $
    37,576
    
    
    $
    43,741Supplemental cash flow disclosure:Income taxes paid (net of refunds)
    
    $
    542
    
    
    $
    215Noncash operating and investing activities:Acquisition of property, equipment and software on account
    
    $
    429
    
    
    $
    178Retirement of treasury stock
    
    $
    21,760
    
    
    $
    21,150
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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (1) Basis of Presentation
     Recently Adopted Accounting Pronouncements
   7




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Stock Based Compensation
      Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock Option Under
Equity Incentive Plan:Volatility
    
    
    34.9 - 35.6
    %
    
    
    25.7 - 30.5
    %
    
    
    30.0 - 35.6
    %
    
    
    25.7 - 30.5
    %Risk free interest rate
    
    
    2.5
    %
    
    
    4.7
    %
    
    
    2.5 - 4.0
    %
    
    
    4.7
    %Expected life (in years)
    
    
    3.4 - 5.5
    
    
    
    2.4 - 4.9
    
    
    
    3.4 - 5.5
    
    
    
    2.4 - 4.9Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase
Plan:Volatility
    
    
    40.1
    %
    
    
    25.0
    %
    
    
    32.3
    %
    
    
    26.0
    %Risk free interest rate
    
    
    2.1
    
    
    
    5.1
    %
    
    
    3.4
    
    
    
    5.1
    %Expected life (in years)
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 8




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##### Table of Contents



AverageWeighted
    
    Remaining
    
    AggregateAverage
    
    Contractual
    
    IntrinsicShares
    
    Exercise Price
    
    Term (years)
    
    ValueOutstanding at September 30, 2007
    
    
    5,723
    
    
    $
    14.21
    
    
    
    6.8
    
    
    $
    15,482Granted
    
    
    657
    
    
    $
    13.68Exercised
    
    
    (303
    )
    
    $
    8.14Forfeited or canceled
    
    
    (41
    )
    
    $
    12.86Expired
    
    
    (3
    )
    
    $
    12.61Outstanding at March 31, 2008
    
    
    6,033
    
    
    $
    14.46
    
    
    
    6.7
    
    
    $
    5,949Exercisable at March 31, 2008
    
    
    3,786
    
    
    $
    15.75
    
    
    
    5.6
    
    
    
    4,848
   Excess Occupancy Income
  Fiscal years:
    
    
    2008 (remaining  six months)

    
    $
    1,2162009
    
    
    
    2,2832010
    
    
    
    1,8052011
    
    
    
    1,6862012
    
    
    
    1,408Thereafter
    
    
    
    306Total future minimum rents receivable
    
    
    
    
    
    $
    8,704
 (2) Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists.The Company considers a
customer signed quote, contract, or equivalent document to be evidence
of an arrangement.
    
    Delivery of the product or service. For subscription services,
delivery is considered to occur when the customer has been provided
with access to the subscription services. The Companys subscription
services are generally delivered on a consistent basis over the period
of the subscription. For professional services, delivery is considered
to occur when the services or milestones are completed. For ratable
licenses, delivery occurs when all elements of the arrangement have
either been delivered or accepted, if acceptance language exists.
 9




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##### Table of Contents




    
    Fee is fixed and determinable.The Company considers the fee to be
fixed or determinable if the fee is not subject to refund or
adjustment and payment terms are standard.
    
    Collection is deemed reasonably assured.Collection is deemed
reasonably assured if it is expected that the customer will be able to
pay amounts under the arrangement as payments become due. If it is
determined that collection is not reasonably assured, then revenue is
deferred and recognized upon cash collection.
  Subscription Services Revenue:
     Ratable Licenses Revenue:
   10




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##### Table of Contents



Professional Services Revenue:
  Deferred Revenue:
 Deferred Costs:
 (3) Comprehensive Income and Foreign Currency Translation
   11




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (1,318
    )
    
    $
    30
    
    
    $
    (2,062
    )
    
    $
    294Net unrealized gain
on available-for-sale
investments
    
    
    44
    
    
    
    54
    
    
    
    54
    
    
    
    113Foreign Currency
translation gain
    
    
    4,191
    
    
    
    501
    
    
    
    5,418
    
    
    
    1,678Comprehensive income
    
    $
    2,917
    
    
    $
    585
    
    
    $
    3,410
    
    
    $
    2,085
  (4) Financial Instruments and Concentration of Risk
    (5) Cash, Cash Equivalents, and Short-Term Investments
    12




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    33,464
    
    
    $
    
    
    
    $
    
    
    
    $
    33,464Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Money market mutual
funds
    
    
    4,112
    
    
    
    
    
    
    
    
    
    
    
    4,112Total
    
    $
    37,576
    
    
    $
    
    
    
    $
    
    
    
    $
    37,576
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueFNMA and FHLMC securities
    
    $
    3,503
    
    
    $
    10
    
    
    $
    
    
    
    $
    3,513Corporate bonds and
commercial paper
    
    
    13,981
    
    
    
    34
    
    
    
    
    
    
    
    14,015Total
    
    $
    17,484
    
    
    $
    44
    
    
    $
    
    
    
    $
    17,528
  EstimatedAmortized
    
    MarketCost
    
    ValueMature in one year or less
    
    $
    17,484
    
    
    $
    17,528
  (6) Inventories
  (7) Goodwill and Identifiable Intangible Assets
 :
 Balance at September 30, 2007
    
    $
    63,129Translation adjustments
    
    
    4,228Balance at March 31, 2008
    
    $
    67,357
 13




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##### Table of Contents



Technology
    
    
    TechnologyBased-
    
    
    Based-
    
    
    CustomerSoftware
    
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    TotalAs of March 31,
2008:Gross carrying value
    
    $
    4,494
    
    
    $
    11,845
    
    
    $
    10,121
    
    
    $
    1,166
    
    
    $
    103
    
    
    $
    308
    
    
    $
    28,037Accumulated
amortization
    
    
    (1,654
    )
    
    
    (11,436
    )
    
    
    (7,418
    )
    
    
    (560
    )
    
    
    (38
    )
    
    
    (114
    )
    
    
    (21,220
    )Net carrying value
at March 31, 2008
    
    $
    2,840
    
    
    $
    409
    
    
    $
    2,703
    
    
    $
    606
    
    
    $
    65
    
    
    $
    194
    
    
    $
    6,817As of September 30,
2007:Gross carrying value
    
    $
    4,449
    
    
    $
    11,845
    
    
    $
    9,845
    
    
    $
    1,178
    
    
    $
    93
    
    
    $
    278
    
    
    $
    27,688Accumulated
amortization
    
    
    (1,238
    )
    
    
    (11,072
    )
    
    
    (6,803
    )
    
    
    (509
    )
    
    
    (26
    )
    
    
    (77
    )
    
    
    (19,725
    )Net carrying value
at September 30,
2007
    
    $
    3,211
    
    
    $
    773
    
    
    $
    3,042
    
    
    $
    669
    
    
    $
    67
    
    
    $
    201
    
    
    $
    7,963
   TotalRemaining six months of 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,4582009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,9062010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,4542011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,4372012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    562Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,817Weighted-average remaining
useful lives as of March
31, 2008 (years)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.5
 (8) Net (Loss) Income Per Share
   14




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income (loss)
    
    $
    (1,318
    )
    
    $
    30
    
    
    $
    (2,062
    )
    
    $
    294Denominator:Denominator for basic net income
(loss) per share  weighted
average shares
    
    
    16,130
    
    
    
    17,284
    
    
    
    17,180
    
    
    
    17,199Incremental common shares
attributable to shares issuable
under stock option plans
    
    
    
    
    
    
    702
    
    
    
    
    
    
    
    628Denominator for diluted net income
(loss) per share  weighted
average shares
    
    
    16,130
    
    
    
    17,986
    
    
    
    17,180
    
    
    
    17,827Basic net income (loss) per share
    
    $
    (0.08
    )
    
    $
    0.00
    
    
    $
    (0.12
    )
    
    $
    0.02Diluted net income (loss) per share
    
    $
    (0.08
    )
    
    $
    0.00
    
    
    $
    (0.12
    )
    
    $
    0.02
  (9) Income Taxes
     15




---



##### Table of Contents



(10) Commitments and Contingencies
 (A) Leases
  Operating
    
    
    CapitalLeases
    
    
    LeasesFiscal year:2008 (remaining six months)
    
    $
    485
    
    
    $
    132009
    
    
    890
    
    
    
    192010
    
    
    831
    
    
    
    172011
    
    
    623
    
    
    
    2012
    
    
    446
    
    
    
    Thereafter
    
    
    913
    
    
    
    Total minimum lease payments
    
    $
    4,188
    
    
    
    49Less amounts representing interest
    
    
    
    
    
    
    (3
    )Present value of minimum lease payments
    
    
    
    
    
    
    46Less current portion of capital lease
obligation
    
    
    
    
    
    
    (19
    )Long-term portion of capital lease obligation
    
    
    
    
    
    $
    27
  (B) Commitments
 ,
 (C) Legal Proceedings
 In re Initial
Public Offering Securities Litigation
  16




---



##### Table of Contents



Simmonds v. JPMorgan Chase & Co.,
et al.
  (D) Warranties
  (E) Indemnification
  (11) Stock Repurchase Program
       (12) Geographic and Segment Information
  17




---



##### Table of Contents



Subscription
    
    Ratable
    
    ProfessionalServices
    
    Licenses
    
    ServicesInternet Test and Measurement:Application Perspective
    
    XDiagnostic Services
    
    XEnterprise Adapters
    
    XLoadPro
    
    X
    
    
    
    XNetMechanic
    
    XProfessional Services
    
    
    
    
    
    XRed Alert
    
    XStreaming Perspective
    
    XTest Perspective
    
    XTransaction Perspective
    
    XWebIntegrity
    
    XWeb Site Perspective
    
    XVoice Perspective
    
    XPerformance Scoreboard
    
    XMobile Test and Measurement:Mobile Device Perspective
    
    XMobile Application Perspective
    
    XSIGOS SITE
    
    
    
    XSIGOS Global Roamer
    
    XCustomer Experience
Management:WebEffective
    
    X
    
    
    
    XFinancial Services Scorecards
    
    X
    
    
    
    X
  Three Months Ended March 31,2008
    
    
    2007Internet Subscriptions
    
    $
    8,881
    
    
    $
    9,040Internet Engagements
    
    
    1,019
    
    
    
    1,333Total Internet net revenue
    
    
    9,900
    
    
    
    10,373Mobile Subscription
    
    
    1,654
    
    
    
    1,113Mobile Ratable Licenses
    
    
    4,605
    
    
    
    3,203Total Mobile net revenue
    
    
    6,259
    
    
    
    4,316CEM Subscriptions
    
    
    557
    
    
    
    580CEM Engagements
    
    
    918
    
    
    
    1,445Total CEM net revenue
    
    
    1,475
    
    
    
    2,025Total net revenue
    
    $
    17,634
    
    
    $
    16,714
 18




---



##### Table of Contents



Six Months Ended March 31,2008
    
    
    2007Internet Subscriptions
    
    $
    17,758
    
    
    $
    17,924Internet Engagements
    
    
    2,615
    
    
    
    2,830Total Internet net revenue
    
    
    20,373
    
    
    
    20,754Mobile Subscription
    
    
    2,994
    
    
    
    2,110Mobile Ratable Licenses
    
    
    8,607
    
    
    
    5,409Total Mobile net revenue
    
    
    11,601
    
    
    
    7,519CEM Subscriptions
    
    
    1,212
    
    
    
    1,206CEM Engagements
    
    
    2,168
    
    
    
    3,050Total CEM net revenue
    
    
    3,380
    
    
    
    4,256Total net revenue
    
    $
    35,354
    
    
    $
    32,529
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:United States
    
    $
    10,529
    
    
    $
    11,605
    
    
    $
    21,782
    
    
    $
    23,452Europe*
    
    
    5,889
    
    
    
    3,809
    
    
    
    11,111
    
    
    
    6,560Other*
    
    
    1,216
    
    
    
    1,300
    
    
    
    2,461
    
    
    
    2,517$
    17,634
    
    
    $
    16,714
    
    
    $
    35,354
    
    
    $
    32,529
 
 *
    
    No individual country represents more than 10% of total revenue. March 31,
    
    September 30,2008
    
    2007Long Lived Assets:United States
    
    $
    34,477
    
    
    $
    34,543Germany
    
    
    1,271
    
    
    
    905Other
    
    
    30
    
    
    
    32$
    35,778
    
    
    $
    35,480
   (13) Recently Issued Accounting Pronouncements
  19




---



##### Table of Contents



(14) Subsequent Event
 
 20




---



##### Table of Contents



Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations
   Overview
    21




---



##### Table of Contents



Critical Accounting Policies and Estimates
  
    
    Revenue recognition
    
    Allowance for doubtful accounts and billing allowance
    
    Inventories and inventory valuation
    
    Allocation of purchase price for business combinations
    
    Goodwill, identifiable intangible assets, and long-lived assets
    
    Stock-based compensation
    
    Income taxes, deferred income taxes and deferred income tax liabilities
 Revenue Recognition
  22




---



##### Table of Contents




    
    Persuasive evidence of an arrangement,
    
    Delivery of the product or service,
    
    Fee is fixed and determinable and
    
    Collection is deemed reasonably assured.
   Subscription Services Revenue :
     Ratable Licenses Revenue :
  23




---



##### Table of Contents



Professional Services Revenue:
  Deferred Revenue:
 Domestic
    
    
    International
    
    
    TotalNet deferred revenue
    
    $
    6,818
    
    
    $
    18,409
    
    
    $
    25,227Addback: unpaid deferred revenue
    
    
    2,276
    
    
    
    4,043
    
    
    
    6,319Gross deferred revenue at March 31, 2008
    
    $
    9,094
    
    
    $
    22,452
    
    
    $
    31,546Net deferred revenue
    
    $
    7,511
    
    
    $
    14,449
    
    
    $
    21,960Addback: unpaid deferred revenue
    
    
    3,085
    
    
    
    1,564
    
    
    
    4,649Gross deferred revenue at September 30, 2007
    
    $
    10,596
    
    
    $
    16,013
    
    
    $
    26,609
   Allowance for Doubtful Accounts and Billing Allowance
   24




---



##### Table of Contents



Inventories and Inventory Valuation
    Allocation of Purchase Price for Business Combinations
  Goodwill, Identifiable Intangible Assets and Long-Lived Assets
   
    
    significant changes in the manner of our use of the acquired assets or the strategy of our overall business;
    
    significant negative industry or economic trends;
 25




---



##### Table of Contents




    
    significant decline in our stock price for a sustained period; and
    
    our market capitalization relative to net book value.
    Stock-Based Compensation
  Income Taxes, Deferred Income Tax Assets and Deferred Income Tax Liabilities
     26




---



##### Table of Contents



Results of Operations
  27




---



##### Table of Contents



Three months ended
    
    Six months endedMarch 31,
    
    March 31,2008
    
    2007
    
    2008
    
    2007Net revenue:Subscription services
    
    
    62.9
    %
    
    
    64.2
    %
    
    
    62.1
    %
    
    
    65.3
    %Ratable licenses
    
    
    26.1
    %
    
    
    19.2
    %
    
    
    24.4
    %
    
    
    16.6
    %Professional services
    
    
    11.0
    %
    
    
    16.6
    %
    
    
    13.5
    %
    
    
    18.1
    %Total revenue, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Costs of revenue:Direct costs of subscription services
    
    
    12.6
    %
    
    
    12.6
    %
    
    
    12.3
    %
    
    
    12.8
    %Direct costs of ratable licenses
    
    
    6.3
    %
    
    
    4.4
    %
    
    
    7.7
    %
    
    
    5.6
    %Direct costs of professional services
    
    
    10.2
    %
    
    
    13.2
    %
    
    
    10.2
    %
    
    
    13.3
    %Development
    
    
    17.9
    %
    
    
    17.2
    %
    
    
    17.8
    %
    
    
    17.7
    %Operations
    
    
    11.5
    %
    
    
    11.7
    %
    
    
    11.4
    %
    
    
    11.7
    %Amortization of intangible assets  software
    
    
    1.2
    %
    
    
    1.1
    %
    
    
    1.2
    %
    
    
    1.1
    %Sales and marketing
    
    
    37.0
    %
    
    
    30.1
    %
    
    
    34.8
    %
    
    
    29.7
    %General and administrative
    
    
    14.2
    %
    
    
    14.2
    %
    
    
    14.1
    %
    
    
    14.6
    %Excess occupancy income
    
    
    (1.8
    )%
    
    
    (0.1
    )%
    
    
    (1.7
    )%
    
    
    (0.1
    )%Amortization of intangible assets  other
    
    
    3.1
    %
    
    
    3.4
    %
    
    
    3.0
    %
    
    
    3.5
    %Total costs and expenses
    
    
    112.2
    %
    
    
    107.8
    %
    
    
    110.8
    %
    
    
    109.9
    %Loss from operations
    
    
    (12.2
    )%
    
    
    (7.8
    )%
    
    
    (10.8
    )%
    
    
    (9.9
    )%Interest income and other, net
    
    
    5.0
    %
    
    
    6.9
    %
    
    
    5.8
    %
    
    
    7.0
    %Loss before (provision) benefit for income taxes
    
    
    (7.2
    )%
    
    
    (0.9
    )%
    
    
    (5.0
    )%
    
    
    (2.9
    )%(Provision for) benefit from income taxes
    
    
    (0.3
    )%
    
    
    1.2
    %
    
    
    (0.8
    )%
    
    
    3.8
    %Net (loss) income
    
    
    (7.5
    )%
    
    
    0.2
    %
    
    
    (5.8
    )%
    
    
    0.9
    %
 Comparison of the Three and Six Months Ended March 31, 2008 and 2007
 Revenue
 For the three months ended March 31
    

2008
    
    
    2007
    
    
    % Change(in thousands)Subscription services
    
    $
    11,092
    
    
    $
    10,733
    
    
    
    3
    %Ratable licenses
    
    
    4,605
    
    
    
    3,203
    
    
    
    44
    %Professional services
    
    
    1,937
    
    
    
    2,778
    
    
    
    (30
    )%Total revenue, net
    
    $
    17,634
    
    
    $
    16,714
    
    
    
    6
    %
 For the six months ended March 31
    
    2008
    
    
    2007
    
    
    % ChangeSubscription services
    
    $
    21,964
    
    
    $
    21,240
    
    
    
    3
    %Ratable licenses
    
    
    8,607
    
    
    
    5,409
    
    
    
    59
    %Professional services
    
    
    4,783
    
    
    
    5,880
    
    
    
    (19
    )%Total revenue, net
    
    $
    35,354
    
    
    $
    32,529
    
    
    
    9
    %
 28




---



##### Table of Contents



Subscription Services
  Ratable licenses.
 Professional Services
   Subscription
    
    Ratable
    
    ProfessionalServices
    
    Licenses
    
    ServicesInternet Test and Measurement:Application Perspective
    
    XDiagnostic Services
    
    XEnterprise Adapters
    
    XLoadPro
    
    X
    
    
    
    XNetMechanic
    
    XProfessional Services
    
    
    
    
    
    XRed Alert
    
    XStreaming Perspective
    
    XTest Perspective
    
    XTransaction Perspective
    
    XWebIntegrity
    
    XWeb Site Perspective
    
    XVoice Perspective
    
    X
 29




---



##### Table of Contents



Subscription
    
    Ratable
    
    ProfessionalServices
    
    Licenses
    
    ServicesPerformance Scoreboard
    
    XMobile Test and Measurement:Mobile Device Perspective
    
    XMobile Application Perspective
    
    XSIGOS SITE
    
    
    
    XSIGOS Global Roamer
    
    XCustomer Experience Management:WebEffective
    
    X
    
    
    
    XFinancial Services Scorecards
    
    X
    
    
    
    X
  %2008
    
    
    2007
    
    
    change(In thousands)For the Three Months Ended March 31:Internet Subscriptions
    
    $
    8,881
    
    
    $
    9,040
    
    
    
    (2)
    %Internet Engagements
    
    
    1,019
    
    
    
    1,333
    
    
    
    (24)
    %Total Internet Revenue
    
    
    9,900
    
    
    
    10,373
    
    
    
    (5)
    %Mobile Subscriptions
    
    
    1,654
    
    
    
    1,113
    
    
    
    49
    %Mobile Engagements
    
    
    4,605
    
    
    
    3,203
    
    
    
    44
    %Total Mobile Revenue
    
    
    6,259
    
    
    
    4,316
    
    
    
    45
    %CEM Subscriptions
    
    
    557
    
    
    
    580
    
    
    
    (4)
    %CEM Engagements
    
    
    918
    
    
    
    1,445
    
    
    
    (36)
    %Total CEM Revenue
    
    
    1,475
    
    
    
    2,025
    
    
    
    (27)
    %Total
Revenue, net
    
    $
    17,634
    
    
    $
    16,714
    
    
    
    6
    %For the Six Months Ended March 31:Internet Subscriptions
    
    $
    17,758
    
    
    $
    17,924
    
    
    
    (1)
    %Internet Engagements
    
    
    2,615
    
    
    
    2,830
    
    
    
    (8)
    %Total Internet Revenue
    
    
    20,373
    
    
    
    20,754
    
    
    
    (2)
    %Mobile Subscriptions
    
    
    2,994
    
    
    
    2,110
    
    
    
    42
    %Mobile Engagements
    
    
    8,607
    
    
    
    5,409
    
    
    
    60
    %Total Mobile Revenue
    
    
    11,601
    
    
    
    7,519
    
    
    
    54
    %CEM Subscriptions
    
    
    1,212
    
    
    
    1,206
    
    
    
    0
    %CEM Engagements
    
    
    2,168
    
    
    
    3,050
    
    
    
    (29)
    %Total CEM Revenue
    
    
    3,380
    
    
    
    4,256
    
    
    
    (21)
    %Total
Revenue, net
    
    $
    35,354
    
    
    $
    32,529
    
    
    
    9
    %
  30




---



##### Table of Contents



Expenses:
 Direct Costs of Subscription Services, Ratable Licenses and Professional Services
 2008
    
    2007
    
    % Change(In thousands)For the three months ended March 31:Direct costs of subscription services
    
    $
    2,225
    
    
    $
    2,110
    
    
    
    5
    %Direct costs of ratable licenses
    
    $
    1,111
    
    
    $
    730
    
    
    
    52
    %Direct costs of professional services
    
    $
    1,794
    
    
    $
    2,207
    
    
    
    (19
    )%
 2008
    
    2007
    
    % ChangeFor the six months ended March 31:Direct costs of subscription services
    
    $
    4,336
    
    
    $
    4,168
    
    
    
    4
    %Direct costs of ratable licenses
    
    $
    2,714
    
    
    $
    1,813
    
    
    
    50
    %Direct costs of professional services
    
    $
    3,599
    
    
    $
    4,330
    
    
    
    (17)
    %
 Direct Costs of Subscription Service
  31




---



##### Table of Contents



Direct Costs of Ratable Licenses.
   Direct Costs of Professional Services.
   Development
 2008
    
    2007
    
    % Change(In thousands)For the three months ended March 31:Development
    
    $
    3,160
    
    
    $
    2,877
    
    
    
    10
    %For the six months ended March 31:Development
    
    $
    6,293
    
    
    $
    5,749
    
    
    
    9
    %
  32




---



##### Table of Contents



Operations
 2008
    
    2007
    
    % Change(In thousands)For the three months ended March 31:Operations
    
    $
    2,024
    
    
    $
    1,948
    
    
    
    4
    %For the six months ended March 31:Operations
    
    $
    4,027
    
    
    $
    3,790
    
    
    
    6
    %
  Sales and Marketing
 2008
    
    2007
    
    % Change(In thousands)For the three months ended March 31:Sales and marketing
    
    $
    6,529
    
    
    $
    5,037
    
    
    
    30
    %For the six months ended March 31:Sales and marketing
    
    $
    12,296
    
    
    $
    9,666
    
    
    
    27
    %
   General and Administrative
 2008
    
    2007
    
    % Change(In thousands)For the three months ended March 31:General and administrative
    
    $
    2,501
    
    
    $
    2,378
    
    
    
    5
    %For the six months ended March 31:General and administrative
    
    $
    4,988
    
    
    $
    4,757
    
    
    
    5
    %
 33




---



##### Table of Contents



Excess Occupancy Income
 2008
    
    
    2007
    
    
    % Change(In thousands)For the three months ended March 31:Rental income
    
    $
    (643
    )
    
    $
    (294
    )
    
    
    119
    %Rental and other expenses
    
    
    334
    
    
    
    273
    
    
    
    22
    %Excess occupancy income
    
    $
    (309
    )
    
    $
    (21
    )
    
    
    1,371
    %For the six months ended March 31:Rental income
    
    $
    (1,250
    )
    
    $
    (561
    )
    
    
    123
    %Rental and other expenses
    
    
    660
    
    
    
    513
    
    
    
    29
    %Excess occupancy income
    
    $
    (590
    )
    
    $
    (48
    )
    
    
    1,129
    %
  Amortization of Identifiable Intangible Assets
 2008
    
    
    2007
    
    
    % Change(In thousands)For the three months ended March 31:Amortization of identifiable intangible assets  software
    
    $
    211
    
    
    $
    187
    
    
    
    13
    %Amortization of identifiable intangible assets  other
    
    
    542
    
    
    
    573
    
    
    
    (5)
    %Total amortization of identifiable intangible assets
    
    $
    753
    
    
    $
    760
    
    
    
    (1)
    %For the six months ended March 31:Amortization of identifiable intangible assets  software
    
    $
    416
    
    
    $
    370
    
    
    
    12
    %Amortization of identifiable intangible assets  other
    
    
    1,079
    
    
    
    1,149
    
    
    
    (6)
    %Amortization of identifiable intangible assets
    
    $
    1,495
    
    
    $
    1,519
    
    
    
    (2)
    %
 34




---



##### Table of Contents



Technology
    
    Technology
    
    CustomerBased - Software
    
    Based - Other
    
    Based
    
    Trademark
    
    Covenant
    
    Backlog
    
    TotalNet carrying value
at March 31, 2008
    
    $
    2,840
    
    
    $
    409
    
    
    $
    2,703
    
    
    $
    606
    
    
    $
    65
    
    
    $
    194
    
    
    $
    6,817
 Interest Income and Interest and Other Expenses
 2008
    
    
    2007
    
    
    % Change(In thousands)For the three months ended March 31:Interest income
    
    $
    807
    
    
    $
    1,134
    
    
    
    (29)
    %Interest expense and other
    
    
    74
    
    
    
    15
    
    
    
    393
    %Interest income, interest and other expenses, net
    
    $
    881
    
    
    $
    1,149
    
    
    
    (23)
    %For the six months ended March 31:Interest income
    
    $
    2,092
    
    
    $
    2,255
    
    
    
    (7)
    %Interest expense and other
    
    
    (61
    )
    
    
    15
    
    
    
    (507)
    %Interest income, interest and other expenses, net
    
    $
    2,031
    
    
    $
    2,270
    
    
    
    (11)
    %
  (Provision for) Benefit from Income Taxes
 2008
    
    2007
    
    % Change(In thousands)For the three months ended March 31:(Provision for) benefit from income taxes
    
    $
    (45
    )
    
    $
    193
    
    
    
    (123)
    %For the six months ended March 31:(Provision for) benefit from income taxes
    
    $
    (289
    )
    
    $
    1,239
    
    
    
    (123)
    %
  35




---



##### Table of Contents



Stock-based Compensation Expense
  Three Months Ended March 31,
    
    
    Six Months Ended March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Direct costs of ratable licenses
    
    $
    66
    
    
    $
    40
    
    
    $
    115
    
    
    $
    81Direct costs of professional services
    
    
    124
    
    
    
    128
    
    
    
    239
    
    
    
    264Development
    
    
    274
    
    
    
    209
    
    
    
    504
    
    
    
    419Operations
    
    
    178
    
    
    
    144
    
    
    
    323
    
    
    
    290Sales and marketing
    
    
    413
    
    
    
    316
    
    
    
    740
    
    
    
    596General and administrative
    
    
    105
    
    
    
    167
    
    
    
    339
    
    
    
    274Stock-based compensation expense
related to stock options and
employee stock purchase plans
    
    $
    1,160
    
    
    $
    1,004
    
    
    $
    2,260
    
    
    $
    1,924
 Liquidity and Capital Resources
 March 31,
    
    September 30,2008
    
    2007(In thousands)Cash, cash equivalents and short-term investments
    
    $
    55,104
    
    
    $
    107,935Accounts receivable, net
    
    $
    7,552
    
    
    $
    5,988Working capital
    
    $
    33,613
    
    
    $
    87,818Days sales in accounts receivable (DSO) (a)
    
    
    39
    
    
    
    35
 
 (a)
    
    DSO is calculated as: ((ending net accounts receivable) / net sales for the three months period) multiplied
by number of days in the periodThe DSOs presented in the table above reflect the three months ended March 31, 2008 and September 30, 2007. 2008
    
    2007(In thousands)For the six months ended March 31Cash provided by operating activities
    
    $
    2,857
    
    
    $
    11,527Cash provided by (used in) investing activities
    
    $
    45,590
    
    
    $
    (16,915
    )Cash provided by (used in) financing activities
    
    $
    (55,914
    )
    
    $
    3,268
 Cash, cash equivalents and short-term investments
  36




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Cash provided by operating activities
   Cash provided by investing activities
  Cash used in financing activities
   Commitments
   37




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Off Balance Sheet Arrangements
  Recently Issued Accounting Pronouncements
      
 Item 3. Quantitative and Qualitative Disclosures About Market Risks.
 Interest Rate Sensitivity.
 38




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##### Table of Contents



Foreign Currency Fluctuations and Derivative Transactions.
 
 Item 4. Controls and Procedures
 (a) Changes in Internal Controls
  (b) Evaluation
of Disclosure Controls and Procedures
   
 PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
 In re Initial Public
Offering Securities Litigation
  39




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##### Table of Contents



Simmonds v. JPMorgan Chase & Co.,
et al.
  
 Item 1A.Risk Factors
 We have incurred in the past and may in the future continue to incur losses, and we may not achieve
and thereafter sustain profitability.
  The success of our business depends on customers renewing their subscriptions for our services and
purchasing additional services as well as obtaining new customers.
   Our quarterly financial results are subject to significant fluctuations, and if our future results
are below the expectations of investors, the price of our common stock may decline.
  40




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##### Table of Contents




    
    The rate of new and renewed subscriptions to our services;
    
    The effect of any unforeseen or unplanned operating expenses;
    
    The amount and timing of any reductions by our customers in their usage of our services;
    
    Our ability to increase the number of Web sites we measure and the scope of services we
offer for our existing customers in a particular quarter;
    
    Our ability to attract and retain new customers in a quarter, particularly larger
enterprise customers;
    
    The timing and service period of orders received during a quarter;
    
    Our ability to successfully introduce new products and services to offset any
reductions in revenue from services that are not as widely used or that are
experiencing decreased demand such as our CEM services and
single-page/single-device measurements;
    
    The level of sales of our MTM products and services and timing of customer acceptance
during the period;
    
    The timing and amount of professional services revenue, which is difficult to predict
because this is dependent on the number of professional services engagements in any
given period, the size of these engagements, and our ability to continue our existing
engagements and secure new engagements from customers;
    
    Our ability to increase sales of each of our three service lines;
    
    The timing and amount of operating costs, including sales and marketing, investments
and capital expenditures relating to changes of our domestic and international
operations infrastructure; and
    
    The timing and amount, if any, of impairment charges related to potential write-down of
acquired assets in acquisitions or charges related to the amortization of intangible
assets from acquisitions.
    
    Expenses associated with our equity plans.
  Our operating results could be harmed if sales of ITM subscriptions decline.
  If our MTM services do not continue to grow as rapidly, we may not be able to grow our revenue and
our profitability could be harmed.
  Improvements to the infrastructure of the Internet and mobile networks could reduce or eliminate
demand for our ITM and MTM services.
 41




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##### Table of Contents



If we do not continually improve our services in response to technological changes, including
changes to the Internet and mobile networks, we may encounter difficulties retaining existing
customers and attracting new customers.
   We face competition that could make it difficult for us to acquire and retain customers.
       42




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A limited number of customers account for a significant portion of our revenue, and the loss of a
major customer could harm our operating results.
  Our investment in sales and marketing may not yield increased customers or revenues.
  Our business could be harmed by adverse economic conditions or reduced spending on information
technology.
  If we do not complement our direct sales force with relationships with other companies to help
market our services, we may not be able to grow our business.
   We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our
business.
  If the market does not accept our professional services, our results of operations could be harmed.
  43




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##### Table of Contents



The success of our business depends on the continued use of the Internet and mobile networks by
business and consumers for e-business and communications and if usage of these networks declines,
our operating results and working capital would be harmed.
  
    
    security concerns including the potential for fraud or theft of stored data and information
communicated over the Internet and mobile networks;
    
    inconsistent quality of service, including outages of popular Web sites and mobile networks;
    
    delay in the development or adoption of new standards;
    
    inability to integrate business applications with the Internet; and
    
    the need to operate with multiple and frequently incompatible products.
 The inability of our services to perform properly could result in loss of or delay in revenue,
injury to our reputation or other harm to our business.
   A disruption to our network infrastructure could impair our ability to serve and retain existing
customers or attract new customers
     Our measurement computers and mobile devices are located at sites that we do not own or operate,
and it could be difficult for us to maintain or repair them if they do not function properly.
 44




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##### Table of Contents



Others might bring infringement claims which could harm our business.
  Our business which includes our operating results and financial conditions will be susceptible to
additional risks associated with international operations.
  
    
    currency exchange rate fluctuations;
    
    seasonal fluctuations in purchasing patterns;
    
    unexpected changes in regulatory requirements;
    
    maintaining and servicing computer hardware in distant locations;
    
    Costs associated with repatriating funds from outside the U.S.;
    
    longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
    
    difficulties in managing and staffing international operations;
    
    potentially adverse tax consequences, including restrictions on the repatriation of earnings;
    
    the burdens of complying with a wide variety of foreign laws; and
    
    reduced protection for intellectual property rights in some countries.
  Industry consolidation may lead to stronger competition and may harm our operating results.
  45




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##### Table of Contents



We failed to maintain the adequacy of our internal controls, consequently, our ability to provide
accurate financial statements could be impaired and any failure to maintain our internal controls
and provide accurate financial statements could cause our stock price to decrease substantially.
  We may face difficulties assimilating, and may incur costs associated with, any future
acquisitions.
  
    
    difficulties in assimilating acquired personnel, operations and technologies;
    
    difficulties in managing a larger organization with geographically dispersed operations;
    
    unanticipated costs associated with the acquisition or incurring of additional unknown
liabilities;
    
    diversion of managements attention from other business concerns;
    
    entry in new businesses in which we have little direct experience;
    
    difficulties in marketing additional services to the acquired companies customer base
or to our customer base;
    
    adverse effects on existing business relationships with resellers of our services, our
customers and other business partners;
    
    the need to integrate or enhance the systems of an acquired business;
    
    impairment charges related to potential write-down of acquired assets in acquisitions;
    
    failure to realize any of the anticipated benefits of the acquisition; and
    
    use of substantial portions of our available cash or dilution in equity if stock is
used to consummate the acquisition and/or operate the acquired business.
 The market price of our common stock is volatile.
  We have anti-takeover protections that may delay or prevent a change in control that could benefit
our stockholders.
  
    
    our stockholders may take action only at a meeting and not by written consent;
    
    our Board must be given advance notice regarding stockholder-sponsored
proposals for consideration at annual meetings and for stockholder
nominations for the election of directors; and
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##### Table of Contents




    
    special meetings of our stockholders may be called only by our Board of
Directors, the Chairman of the Board, our Chief Executive Officer or our
President, not by our stockholders.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Dollar Value ofTotal
    
    
    Shares ThatTotal
    
    
    
    
    
    
    Number of Shares
    
    
    May Yet beNumber of
    
    
    Average
    
    
    Purchased as Part of
    
    
    PurchasedShares
    
    
    Price Paid
    
    
    Publicly Announced
    
    
    Under the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    Plans or Programs
    
    
    or Programs(In thousands)January 1, 2008 to
January 31, 2008
    
    
    814,589
    
    
    $
    13.75
    
    
    
    
    
    
    $
    83,619February 1, 2008 to
February 29, 2008
    
    
    1,471,355
    
    
    $
    10.80
    
    
    
    
    
    
    $
    67,727March 1, 2008 to
March 31, 2008
    
    
    1,915,336
    
    
    $
    11.52
    
    
    
    
    
    
    $
    45,662Balance as of March
31, 2008
    
    
    4,201,280
    
    
    $
    11.70
    
    
    
    
    
    
    $
    45,662
 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    We held our Annual Meeting of Stockholders on March 20, 2008. Proxies
for the meeting were solicited pursuant to Regulation 14A of the
Securities and Exchange Act.(b)
    
    The matters described below were voted on at the Annual Meeting of
Stockholders and the number of votes cast with respect to each matter
and with respect to the election of directors were as indicated:
 (1)
    
    Holders of our common stock voted to elect seven directors, each to
service until his or her successor has been elected and qualified or
until his or her earlier resignation or removal as follows:
 For
    
    Against
    
    Withheld
    
    Non-VoteUmang Gupta
    
    
    15,102,639
    
    
    
    
    
    
    
    88,773
    
    
    
    David Cowan
    
    
    15,144,748
    
    
    
    
    
    
    
    46,664
    
    
    
    Deborah Rieman
    
    
    14,986,834
    
    
    
    
    
    
    
    204,578
    
    
    
    Mohan Gyani
    
    
    14,748,663
    
    
    
    
    
    
    
    442,749
    
    
    
    Raymond L. Ocampo Jr.
    
    
    14,751,529
    
    
    
    
    
    
    
    439,883
    
    
    
    Jennifer Bolt
    
    
    15,144,464
    
    
    
    
    
    
    
    46,948
    
    
    
    Charles M. Boesenberg
    
    
    14,907,689
    
    
    
    
    
    
    
    283,723
    
    
    
    
 47




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##### Table of Contents



(2)
    
    Holders of our common stock voted to ratify the appointment of
Deloitte & Touche LLP as our auditors for the fiscal year ending
September 30, 2008.
 For
    
    Against
    
    Abstain
    
    Non-Vote15,170,904
    
    
    8,914
    
    
    
    11,593
    
    
    
    
 
 Item 5. Other Information
  48




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Item 6. Exhibits
 EXHIBIT INDEX
 Incorporated by ReferenceFiledExhibit
    
    Form
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith31.1 Certification
of Periodic Report
by Chief Executive
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X31.2 Certification
of Periodic Report
by Chief Financial
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X32.1 Certification
of Chief Executive
Officer Pursuant to
18 U.S.C. Section
1350 as Adopted
Pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X32.2 Certification
of Chief Financial
Officer Pursuant to
18 U.S.C. Section
1350 as Adopted
Pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this Quarterly Report on Form 10-Q and are not deemed
filed with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Keynote Systems, Inc. Under
the Securities Act of 1933 or the Securities Act of 1934, whether made
before or after the date hereof and irrespective of any general
incorporation language in such filings. 49




---



##### Table of Contents



SIGNATURES
  KEYNOTE SYSTEMS, INC.By:
    
    /s/ UMANG GUPTA
Umang GuptaChairman of the Board and ChiefExecutive Officer(Principal Executive Officer)By:
    
    /s/ ANDREW HAMER
Andrew HamerVice President and Chief Financial Officer(Principal Financial and AccountingOfficer)
 50




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##### Table of Contents



EXHIBIT INDEX
 Incorporated by ReferenceFiledExhibit
    
    Form
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith31.1 Certification
of Periodic Report
by Chief Executive
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X31.2 Certification
of Periodic Report
by Chief Financial
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X32.1 Certification
of Chief Executive
Officer Pursuant to
18 U.S.C. Section
1350 as Adopted
Pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X32.2 Certification
of Chief Financial
Officer Pursuant to
18 U.S.C. Section
1350 as Adopted
Pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this Quarterly Report on Form 10-Q and are not deemed
filed with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Keynote Systems, Inc. Under
the Securities Act of 1933 or the Securities Act of 1934, whether made
before or after the date hereof and irrespective of any general
incorporation language in such filings. 51