##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2009
 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
(State or other jurisdiction of 
incorporation or organization)
    
    94-3226488
(I.R.S. Employer
Identification No.)
 777 Mariners Island Blvd., San Mateo, CA
(Address of principal executive offices)
    
    94404
(Zip Code)
 Registrants telephone number, including area code: (650) 403-2400
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if smaller reporting company)
    
    Smaller reporting company o
 o þ
  Class
    
    Shares outstanding as of August 3 , 2009Common Stock, $.001 par value
    
    14,490,566 shares




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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
    
    
    25Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risks
    
    
    43Item 4.
    
    Controls and Procedures
    
    
    43PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    44Item 1A.
    
    Risk Factors
    
    
    45Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    53Item 3.
    
    Defaults Upon Senior Securities
    
    
    53Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    53Item 5.
    
    Other Information
    
    
    53Item 6.
    
    Exhibits
    
    
    54Signatures
    
    
    55EX-31.1EX-31.2EX-32.1EX-32.2
  2




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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 June 30, 2009 and September 30, 2008
    
    4Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2009 and 2008
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2009 and 2008
    
    6Notes to Condensed Consolidated Financial Statements
    
    7
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KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 June 30,
    
    
    September 30,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    45,280
    
    
    $
    42,546Short-term investments
    
    
    10,705
    
    
    
    6,785Total cash, cash equivalents, and short-term investments
    
    
    55,985
    
    
    
    49,331Accounts receivable, less allowance for doubtful accounts of
$116 and $118, at June 30, 2009 and September 30, 2008,
respectively, and less billing allowance of $105 and $150 at
June 30, 2009 and September 30, 2008, respectively
    
    
    6,090
    
    
    
    7,316Prepaids, deferred costs and other current assets
    
    
    4,158
    
    
    
    2,909Inventories
    
    
    876
    
    
    
    1,081Deferred tax assets
    
    
    1,036
    
    
    
    1,042Total current assets
    
    
    68,145
    
    
    
    61,679Deferred costs and other long term assets
    
    
    2,433
    
    
    
    2,788Property, equipment and software, net
    
    
    34,898
    
    
    
    36,405Goodwill
    
    
    64,326
    
    
    
    64,396Identifiable intangible assets, net
    
    
    6,723
    
    
    
    8,430Deferred tax assets
    
    
    1,711
    
    
    
    2,146Total assets
    
    $
    178,236
    
    
    $
    175,844LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    586
    
    
    $
    2,505Accrued expenses
    
    
    8,227
    
    
    
    12,767Current portion of capital lease obligation
    
    
    14
    
    
    
    14Notes payable
    
    
    
    
    
    
    256Deferred revenue
    
    
    19,613
    
    
    
    19,029Total current liabilities
    
    
    28,440
    
    
    
    34,571Long-term portion of capital lease obligation
    
    
    5
    
    
    
    17Deferred rent and other long-term liabilities
    
    
    2,242
    
    
    
    2,605Long-term deferred revenue
    
    
    1,806
    
    
    
    904Long-term deferred tax liability
    
    
    297
    
    
    
    236Total liabilities
    
    
    32,790
    
    
    
    38,333Commitments and contingencies  see Note 13Stockholders equity:Common stock
    
    
    14
    
    
    
    14Additional paid-in capital
    
    
    280,983
    
    
    
    275,316Accumulated deficit
    
    
    (140,487
    )
    
    
    (143,207
    )Accumulated other comprehensive income
    
    
    4,936
    
    
    
    5,388Total stockholders equity
    
    
    145,446
    
    
    
    137,511Total liabilities and stockholders equity
    
    $
    178,236
    
    
    $
    175,844
  4




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KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenue:Subscription services
    
    $
    11,455
    
    
    $
    11,441
    
    
    $
    34,269
    
    
    $
    33,405Ratable licenses
    
    
    6,390
    
    
    
    6,426
    
    
    
    18,348
    
    
    
    15,033Professional services
    
    
    2,324
    
    
    
    2,631
    
    
    
    7,753
    
    
    
    7,414Total revenue, net
    
    
    20,169
    
    
    
    20,498
    
    
    
    60,370
    
    
    
    55,852Costs and expenses:Costs of revenueDirect costs of subscription services
    
    
    2,098
    
    
    
    2,235
    
    
    
    6,673
    
    
    
    6,571Direct costs of ratable licenses
    
    
    1,424
    
    
    
    1,526
    
    
    
    4,551
    
    
    
    4,240Direct costs of professional services
    
    
    1,293
    
    
    
    1,762
    
    
    
    4,466
    
    
    
    5,361Development
    
    
    2,863
    
    
    
    3,232
    
    
    
    9,137
    
    
    
    9,525Operations
    
    
    1,943
    
    
    
    2,270
    
    
    
    6,353
    
    
    
    6,297Amortization of intangible assets 
software
    
    
    290
    
    
    
    281
    
    
    
    866
    
    
    
    697Total costs of revenue
    
    
    9,911
    
    
    
    11,306
    
    
    
    32,046
    
    
    
    32,691Sales and marketing
    
    
    5,665
    
    
    
    6,697
    
    
    
    18,162
    
    
    
    18,993General and administrative
    
    
    2,346
    
    
    
    2,834
    
    
    
    7,717
    
    
    
    7,822Excess occupancy income
    
    
    (258
    )
    
    
    (297
    )
    
    
    (729
    )
    
    
    (887
    )Amortization of intangible assets  other
    
    
    259
    
    
    
    568
    
    
    
    791
    
    
    
    1,647Total costs and expenses
    
    
    17,923
    
    
    
    21,108
    
    
    
    57,987
    
    
    
    60,266Income (loss) from operations
    
    
    2,246
    
    
    
    (610
    )
    
    
    2,383
    
    
    
    (4,414
    )Interest income
    
    
    157
    
    
    
    463
    
    
    
    744
    
    
    
    2,555Other income (expenses)
    
    
    (53
    )
    
    
    (120
    )
    
    
    403
    
    
    
    (181
    )Income (loss) before provision for income
taxes
    
    
    2,350
    
    
    
    (267
    )
    
    
    3,530
    
    
    
    (2,040
    )Provision for income taxes
    
    
    (258
    )
    
    
    (140
    )
    
    
    (810
    )
    
    
    (429
    )Net income (loss)
    
    $
    2,092
    
    
    $
    (407
    )
    
    $
    2,720
    
    
    $
    (2,469
    )Net income (loss) per share:Basic
    
    $
    0.15
    
    
    $
    (0.03
    )
    
    $
    0.19
    
    
    $
    (0.15
    )Diluted
    
    $
    0.15
    
    
    $
    (0.03
    )
    
    $
    0.19
    
    
    $
    (0.15
    )Shares used in computing basic and diluted
net income (loss) per share:Basic
    
    
    14,378
    
    
    
    13,747
    
    
    
    14,274
    
    
    
    16,039Diluted
    
    
    14,403
    
    
    
    13,747
    
    
    
    14,321
    
    
    
    16,039
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KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedJune 302009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    2,720
    
    
    $
    (2,469
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    3,864
    
    
    
    3,808Stock-based compensation
    
    
    3,400
    
    
    
    3,386Impairment of short-term investment
    
    
    
    
    
    
    98Charges to bad debt and billing adjustment reserves
    
    
    254
    
    
    
    189Amortization (accretion) of debt investment premium (discount)
    
    
    3
    
    
    
    (423
    )Amortization of identifiable intangible assets
    
    
    1,657
    
    
    
    2,344Amortization of prepaid tax asset
    
    
    326
    
    
    
    Collection of tax credit receivable within deferred tax assets
    
    
    489
    
    
    
    Deferred tax provision
    
    
    40
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    907
    
    
    
    (1,253
    )Inventories
    
    
    198
    
    
    
    (55
    )Prepaids, deferred costs and other assets
    
    
    (1,442
    )
    
    
    (457
    )Accounts payable and accrued expenses
    
    
    (6,441
    )
    
    
    (1,246
    )Deferred revenue
    
    
    1,445
    
    
    
    457Net cash provided by operating activities
    
    
    7,420
    
    
    
    4,379Cash flows from investing activities:Purchases of
property, equipment and software
    
    
    (2,596
    )
    
    
    (3,987
    )Payment of acquisition costs for Zandan S.A.
    
    
    (170
    )
    
    
    (640
    )Maturities and sales of short-term investments
    
    
    12,364
    
    
    
    84,260Purchases of short-term investments
    
    
    (15,918
    )
    
    
    (23,101
    )Net cash provided by (used in) investing activities
    
    
    (6,320
    )
    
    
    56,532Cash flows from financing activities:Repayment of credit facilities
    
    
    (12
    )
    
    
    (21
    )Payment of notes payable
    
    
    (248
    )
    
    
    Proceeds from issuance of common stock and exercise of stock options
    
    
    2,282
    
    
    
    3,857Repurchase of outstanding common stock
    
    
    
    
    
    
    (60,070
    )Net cash provided by (used in) financing activities
    
    
    2,022
    
    
    
    (56,234
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (388
    )
    
    
    2,096Net change in cash and cash equivalents
    
    
    2,734
    
    
    
    6,773Cash and cash equivalents at beginning of the period
    
    
    42,546
    
    
    
    42,875Cash and cash equivalents at end of the period
    
    $
    45,280
    
    
    $
    49,648Supplemental cash flow disclosure:Income taxes paid (net of refunds)
    
    $
    4,276
    
    
    $
    1,068Noncash operating and investing activities:Acquisition of property, equipment and software on account
    
    $
    23
    
    
    $
    372Retirement of treasury stock
    
    $
    
    
    
    $
    61,073
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KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (1) Basis of Presentation
    Correction of Classification of Short-Term Investments
   7




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Recently Adopted Accounting Pronouncements
  Fair Value Measurements
      Recent Pronouncements
  8




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TM
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Stock Based Compensation
      Three Months Ended
    
    
    Nine Months EndedJune 30
    
    
    June 302009
    
    
    2008
    
    
    2009
    
    
    2008Stock Option Under Equity Incentive Plan:Volatility
    
    
    46.8
    %
    
    
    36.0
    %
    
    
    42.9
    %
    
    
    34.0
    %Risk free interest rate
    
    
    1.9
    %
    
    
    3.0
    %
    
    
    2.2
    %
    
    
    3.2
    %Expected life (in years)
    
    
    4.5
    
    
    
    4.3
    
    
    
    4.5
    
    
    
    4.4Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase Plan:Volatility
    
    
    58.4
    %
    
    
    40.1
    %
    
    
    53.4
    %
    
    
    34.9
    %Risk free interest rate
    
    
    0.6
    %
    
    
    2.1
    %
    
    
    1.2
    %
    
    
    3.0
    %Expected life (in years)
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueOutstanding at September 30, 2008
    
    
    5,948
    
    
    $
    14.67
    
    
    
    6.5
    
    
    $
    10,820Granted
    
    
    67
    
    
    
    10.16Exercised
    
    
    (231
    )
    
    
    7.08Forfeited or canceled
    
    
    (824
    )
    
    
    12.97Expired
    
    
    (56
    )
    
    
    36.12Outstanding at June 30, 2009
    
    
    4,904
    
    
    
    11.62
    
    
    
    5.9
    
    
    
    68Vested and expected to vest at June 30, 2009
    
    
    4,687
    
    
    
    11.60
    
    
    
    5.8
    
    
    
    67Exercisable at June 30, 2009
    
    
    3,735
    
    
    
    11.54
    
    
    
    5.3
    
    
    
    65
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Excess Occupancy Income
  Fiscal years:2009 (remaining three months)
    
    $
    6912010
    
    
    2,4952011
    
    
    2,4232012
    
    
    1,7222013
    
    
    2182014
    
    
    88Total future minimum rents receivable
    
    $
    7,637
 (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.
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
    
    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:
   12




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Professional Services Revenue:
  Deferred Revenue:
 Deferred Costs:
 (3) Other Comprehensive Income (Loss) and Foreign Currency Translation
  13




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Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    2,092
    
    
    $
    (407
    )
    
    $
    2,720
    
    
    $
    (2,469
    )Net unrealized
gain (loss) on
available-for-sale
investments
    
    
    1
    
    
    
    (36
    )
    
    
    13
    
    
    
    18Foreign currency
translation gain
(loss)
    
    
    3,518
    
    
    
    (119
    )
    
    
    (465
    )
    
    
    5,299Other comprehensive
income (loss)
    
    $
    5,611
    
    
    $
    (562
    )
    
    $
    2,268
    
    
    $
    2,848
  (4) Financial Instruments and Concentration of Risk
    (5) Fair Value Measurements
   
    
    Level 1 inputs are based on quoted prices in active markets for identical
assets or liabilities.
    
    Level 2 inputs are based on quoted prices for similar instruments in active
markets, quoted prices for identical or
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similar instruments in markets that are
not active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
    
    Level 3 inputs are generally unobservable and typically reflect managements
estimates of assumptions that market participants would use in pricing the asset
or liability. The fair values are therefore determined using model-based
techniques that include option pricing models, discounted cash flow models, and
similar techniques.
  Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssets:Cash and cash equivalents:Money market funds
    
    $
    23,373
    
    
    $
    
    
    
    $
    
    
    
    $
    23,373Short-term investments:Real estate funds
    
    
    183
    
    
    
    
    
    
    
    
    
    
    
    183Fixed term deposits
    
    
    
    
    
    
    10,522
    
    
    
    
    
    
    
    10,522Total assets measured at fair value
    
    $
    23,556
    
    
    $
    10,522
    
    
    $
    
    
    
    $
    34,078
   (6) Cash, Cash Equivalents, and Short-Term Investments
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    21,907
    
    
    $
    
    
    
    $
    
    
    
    $
    21,907Money market mutual funds
    
    
    23,373
    
    
    
    
    
    
    
    
    
    
    
    23,373Total
    
    $
    45,280
    
    
    $
    
    
    
    $
    
    
    
    $
    45,280
 15




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Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueReal estate mutual funds
    
    $
    170
    
    
    $
    13
    
    
    $
    
    
    
    $
    183Fixed term deposits
    
    
    10,522
    
    
    
    
    
    
    
    
    
    
    
    10,522Total
    
    $
    10,692
    
    
    $
    13
    
    
    $
    
    
    
    $
    10,705
  (7) Consolidated Financial Statement Details
  Prepaids, Deferred Costs and Other Current Assets
 June 30, 2009
    
    
    September 30, 2008Prepaid expenses
    
    $
    1,909
    
    
    $
    1,332Income tax receivable
    
    
    1,215
    
    
    
    Deferred costs of revenue
    
    
    703
    
    
    
    749Other assets
    
    
    277
    
    
    
    576Security deposits, advances, and interest receivable
    
    
    54
    
    
    
    252Total
    
    $
    4,158
    
    
    $
    2,909
 Property, equipment, and software
 June 30, 2009
    
    
    September 30, 2008Land and buildings
    
    $
    35,992
    
    
    $
    35,789Computer equipment and software
    
    
    28,420
    
    
    
    27,094Furniture and fixtures
    
    
    1,879
    
    
    
    1,839Leasehold and building improvements
    
    
    1,068
    
    
    
    1,170Construction in progress
    
    
    371
    
    
    
    288Total
    
    
    67,730
    
    
    
    66,180Less accumulated depreciation and amortization
    
    
    (32,832
    )
    
    
    (29,775
    )Total
    
    $
    34,898
    
    
    $
    36,405
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Deferred Costs and Other Long-Term Assets
 June 30, 2009
    
    
    September 30, 2008Prepaid tax asset
    
    $
    1,055
    
    
    $
    1,429Deferred costs of revenue
    
    
    519
    
    
    
    563Tenant rent receivable
    
    
    280
    
    
    
    312Deposits
    
    
    248
    
    
    
    162Prepaid expenses
    
    
    331
    
    
    
    322Total
    
    $
    2,433
    
    
    $
    2,788
 Accrued Expenses :
 June 30, 2009
    
    
    September 30, 2008Accrued employee compensation
    
    $
    3,284
    
    
    $
    3,476Accrued audit and professional fees
    
    
    296
    
    
    
    641Income and other taxes
    
    
    721
    
    
    
    3,635Other accrued expenses
    
    
    3,926
    
    
    
    5,015Total
    
    $
    8,227
    
    
    $
    12,767
 Notes Payable
 June 30, 2009
    
    
    September 30, 2008Notes payable
    
    $
    
    
    
    $
    256
  
 (8) Inventories
  (9) Goodwill and Identifiable Intangible Assets
 :
 Balance at September 30, 2008
    
    $
    64,396Additional goodwill for the acquisition of Zandan S.A. (Note 11)
    
    
    90Translation adjustments
    
    
    (160
    )Balance at June 30, 2009
    
    $
    64,326
 17




---



##### Table of Contents



Technology
    
    
    TechnologyBased-
    
    
    Based-
    
    
    CustomerSoftware
    
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    TotalAs of June 30, 2009Gross carrying value
    
    $
    8,017
    
    
    $
    11,844
    
    
    $
    8,108
    
    
    $
    1,391
    
    
    $
    39
    
    
    $
    116
    
    
    $
    29,515Accumulated amortization
    
    
    (2,966
    )
    
    
    (11,817
    )
    
    
    (7,249
    )
    
    
    (676
    )
    
    
    (21
    )
    
    
    (63
    )
    
    
    (22,792
    )Net carrying value at June 30, 2009
    
    $
    5,051
    
    
    $
    27
    
    
    $
    859
    
    
    $
    715
    
    
    $
    18
    
    
    $
    53
    
    
    $
    6,723As of September 30, 2008:Gross carrying value
    
    $
    8,039
    
    
    $
    11,845
    
    
    $
    8,104
    
    
    $
    1,392
    
    
    $
    39
    
    
    $
    117
    
    
    $
    29,536Accumulated amortization
    
    
    (1,790
    )
    
    
    (11,767
    )
    
    
    (6,952
    )
    
    
    (532
    )
    
    
    (16
    )
    
    
    (49
    )
    
    
    (21,106
    )Net carrying value at September 30, 2008
    
    $
    6,249
    
    
    $
    78
    
    
    $
    1,152
    
    
    $
    860
    
    
    $
    23
    
    
    $
    68
    
    
    $
    8,430
   Fiscal years:
    
    Total2009 (remaining three months)
    
    $
    6302010
    
    
    2,5082011
    
    
    2,2652012
    
    
    1,320Total
    
    $
    6,723Weighted-average remaining useful life
as of June 30, 2009 (years)
    
    
    2.8
 18




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##### Table of Contents



(10) Net Income (Loss) Per Share
   Three Months Ended
    
    
    Nine Months EndedJune 30
    
    
    June 302009
    
    
    2008
    
    
    2009
    
    
    2008NumeratorNet income (loss)
    
    $
    2,092
    
    
    $
    (407
    )
    
    $
    2,720
    
    
    $
    (2,469
    )Denominator:Denominator for basic net income
(loss) per share - weighted
average shares
    
    
    14,378
    
    
    
    13,747
    
    
    
    14,274
    
    
    
    16,039Effect of dilutive stock options
    
    
    25
    
    
    
    
    
    
    
    47
    
    
    
    Denominator for diluted net income
(loss) per share - weighted average
shares
    
    
    14,403
    
    
    
    13,747
    
    
    
    14,321
    
    
    
    16,039Basic net income (loss) per share
    
    $
    0.15
    
    
    $
    (0.03
    )
    
    $
    0.19
    
    
    $
    (0.15
    )Diluted net income (loss) per share
    
    $
    0.15
    
    
    $
    (0.03
    )
    
    $
    0.19
    
    
    $
    (0.15
    )
  (11) Acquisitions
  
 
 
 19




---



##### Table of Contents




 (12) Income Taxes
       20




---



##### Table of Contents



(13) Commitments and Contingencies
 A) Leases
  Operating
    
    
    CapitalLeases
    
    
    LeasesFiscal year:2009 (remaining three months)
    
    $
    246
    
    
    $
    42010
    
    
    912
    
    
    
    162011
    
    
    718
    
    
    
    2012
    
    
    527
    
    
    
    2013
    
    
    422
    
    
    
    Thereafter
    
    
    792
    
    
    
    Total minimum lease payments
    
    $
    3,617
    
    
    
    20Less amounts representing interest
    
    
    
    
    
    
    (1
    )Present value of minimum lease payments
    
    
    
    
    
    
    19Less current portion of capital lease obligation
    
    
    
    
    
    
    (14
    )Long-term portion of capital lease obligation
    
    
    
    
    
    $
    5
  (B) Commitments
   (C) Legal Proceedings
   21




---



##### Table of Contents



(D) Warranties
  (E) Indemnification
  (14) Geographic and Segment Information
  22




---



##### Table of Contents



Subscription
    
    
    Ratable
    
    
    ProfessionalServices
    
    
    Licenses
    
    
    ServicesInternet Test and Measurement:Application Perspective
    
    
    XDiagnostic Services
    
    
    XEnterprise Adapters
    
    
    XFinancial Industry Scorecards
    
    
    X
    
    
    
    
    
    
    
    XLoadPro
    
    
    X
    
    
    
    
    
    
    
    XNetMechanic
    
    
    XPerformance Scoreboard
    
    
    XProfessional Services
    
    
    
    
    
    
    
    
    
    
    XRed Alert
    
    
    XStreaming Perspective
    
    
    XTest Perspective
    
    
    XTransaction Perspective
    
    
    XWebEffective
    
    
    X
    
    
    
    
    
    
    
    XWeb Site Perspective
    
    
    XVoice Perspective
    
    
    X
    
    
    
    
    
    
    
    XMobile Test and Measurement:Mobile Device Perspective
    
    
    XMobile Application Perspective
    
    
    XSIGOS SITE
    
    
    
    
    
    
    XSIGOS Global Roamer
    
    
    X
  Three Months Ended June 30,2009
    
    
    2008Internet Subscriptions
    
    $
    9,403
    
    
    $
    9,529Internet Engagements
    
    
    2,324
    
    
    
    2,631Total Internet net revenue
    
    
    11,727
    
    
    
    12,160Mobile Subscription
    
    
    2,052
    
    
    
    1,912Mobile Ratable Licenses
    
    
    6,390
    
    
    
    6,426Total Mobile net revenue
    
    
    8,442
    
    
    
    8,338Total net revenue
    
    $
    20,169
    
    
    $
    20,498
 Nine Months Ended June 30,2009
    
    
    2008Internet Subscriptions
    
    $
    28,400
    
    
    $
    28,499Internet Engagements
    
    
    7,753
    
    
    
    7,414Total Internet net revenue
    
    
    36,153
    
    
    
    35,913Mobile Subscription
    
    
    5,869
    
    
    
    4,906Mobile Ratable Licenses
    
    
    18,348
    
    
    
    15,033Total Mobile net revenue
    
    
    24,217
    
    
    
    19,939Total net revenue
    
    $
    60,370
    
    
    $
    55,852
 23




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June  30,2009
    
    
    2008
    
    
    2009
    
    
    2008RevenueUnited States
    
    $
    10,969
    
    
    $
    11,241
    
    
    $
    33,949
    
    
    $
    33,023Europe*
    
    
    6,623
    
    
    
    7,844
    
    
    
    18,962
    
    
    
    18,955Other**
    
    
    2,577
    
    
    
    1,413
    
    
    
    7,459
    
    
    
    3,874Total net revenue
    
    $
    20,169
    
    
    $
    20,498
    
    
    $
    60,370
    
    
    $
    55,852
 
 *
    
    One individual country represents 10% of total net
revenue, for the three months ended June 30, 2009. 
 **
    
    No individual country represents more than 10% of total net revenue. June 30,
    
    
    September 30,2009
    
    
    2008|
    
    |Long Lived Assets:United States
    
    $
    33,936
    
    
    $
    35,317Germany
    
    
    956
    
    
    
    1,062Other
    
    
    6
    
    
    
    26$
    34,898
    
    
    $
    36,405
   (15) Subsequent Events
  24




---



##### Table of Contents



Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations
   Overview
      25




---



##### 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 
Impairment assessments
    
    Stock-based compensation
    
    Income taxes, deferred income taxes and deferred income tax liabilities
 Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists,
    
    Delivery of the product or service,
    
    Fee is fixed and determinable and
    
    Collection is deemed reasonably assured.
   Subscription Services Revenue:
  26




---



##### Table of Contents



Ratable Licenses Revenue:
   Professional Services Revenue:
  Deferred Revenue:
 27




---



##### Table of Contents



Domestic
    
    
    International
    
    
    TotalNet deferred revenue
    
    $
    6,296
    
    
    $
    15,123
    
    
    $
    21,419Addback: unpaid deferred revenue
    
    
    1,400
    
    
    
    2,819
    
    
    
    4,219Gross deferred revenue at June 30, 2009
    
    $
    7,696
    
    
    $
    17,942
    
    
    $
    25,638Net deferred revenue
    
    $
    5,982
    
    
    $
    13,951
    
    
    $
    19,933Addback: unpaid deferred revenue
    
    
    2,425
    
    
    
    2,331
    
    
    
    4,756Gross deferred revenue at September 30, 2008
    
    $
    8,407
    
    
    $
    16,282
    
    
    $
    24,689
 Allowance for Doubtful Accounts and Billing Allowance
    Inventories and Inventory Valuation
   28




---



##### Table of Contents



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;
    
    significant decline in our stock price for a sustained period; and
    
    our market capitalization relative to net book value.
    29




---



##### Table of Contents



Stock-Based Compensation
  Income Taxes, Deferred Income Tax Assets and Deferred Income Tax Liabilities
      30




---



##### Table of Contents



Results of Operations
  Comparison of the Three and Nine Months Ended June 30, 2009 and 2008
 Three months ended
    
    
    Nine months endedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenue:Subscription services
    
    
    56.8
    %
    
    
    55.8
    %
    
    
    56.8
    %
    
    
    59.8
    %Ratable licenses
    
    
    31.7
    %
    
    
    31.4
    %
    
    
    30.4
    %
    
    
    26.9
    %Professional services
    
    
    11.5
    %
    
    
    12.8
    %
    
    
    12.8
    %
    
    
    13.3
    %Total revenue, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Costs of revenue:Direct costs of subscription services
    
    
    10.4
    %
    
    
    10.9
    %
    
    
    11.1
    %
    
    
    11.8
    %Direct costs of ratable licenses
    
    
    7.1
    %
    
    
    7.4
    %
    
    
    7.5
    %
    
    
    7.6
    %Direct costs of professional services
    
    
    6.4
    %
    
    
    8.6
    %
    
    
    7.4
    %
    
    
    9.6
    %Operations
    
    
    9.6
    %
    
    
    11.1
    %
    
    
    10.6
    %
    
    
    11.3
    %Development
    
    
    14.2
    %
    
    
    15.8
    %
    
    
    15.1
    %
    
    
    17.1
    %Amortization
of intangible assets  software
    
    
    1.4
    %
    
    
    1.4
    %
    
    
    1.4
    %
    
    
    1.2
    %Total costs of revenue
    
    
    49.1
    %
    
    
    55.2
    %
    
    
    53.1
    %
    
    
    58.6
    %Sales and marketing
    
    
    28.1
    %
    
    
    32.7
    %
    
    
    30.1
    %
    
    
    34.0
    %General and administrative
    
    
    11.6
    %
    
    
    13.8
    %
    
    
    12.8
    %
    
    
    14.0
    %Excess occupancy income, net
    
    
    (1.3
    )%
    
    
    (1.5
    )%
    
    
    (1.2
    )%
    
    
    (1.6
    )%Amortization
of intangible assets  other
    
    
    1.3
    %
    
    
    2.8
    %
    
    
    1.3
    %
    
    
    2.9
    %Total costs and expenses
    
    
    88.8
    %
    
    
    103.0
    %
    
    
    96.1
    %
    
    
    107.9
    %Income (loss) from operations
    
    
    11.2
    %
    
    
    (3.0
    )%
    
    
    3.9
    %
    
    
    (7.9
    )%Interest income and other, net
    
    
    0.5
    %
    
    
    1.7
    %
    
    
    1.9
    %
    
    
    4.3
    %Income (loss) before provision for income taxes
    
    
    11.7
    %
    
    
    (1.3
    )%
    
    
    5.8
    %
    
    
    (3.6
    )%Provision for income taxes
    
    
    (1.3
    )%
    
    
    (0.7
    )%
    
    
    (1.3
    )%
    
    
    (0.8
    )%Net income (loss)
    
    
    10.4
    %
    
    
    (2.0
    )%
    
    
    4.5
    %
    
    
    (4.4
    )%
  31




---



##### Table of Contents




    
    Decrease of approximately $2.3 million, or 4%, in total costs and expenses, from
approximately $60.3 million for the nine months ended June 30, 2008 to approximately $58.0
million for the nine months ended June 30, 2009 primarily attributable to strong cost
containment efforts associated with approximately $1.0 million of lower personnel related costs, lower spending on
external consultants of $259,000 and marketing programs of $437,000.
    
    Decrease of approximately $1.2 million in net interest income and other due to reduction
in interest income attributable to lower cash balances and lower interest rates during the
nine months ended June 30, 2009 as compared to June 30, 2008.
 Net Revenue
 For the three months ended June 30
    
    2009
    
    
    2008
    
    

% Change(in thousands)Subscription services
    
    $
    11,455
    
    
    $
    11,441
    
    
    
    0
    %Ratable licenses
    
    
    6,390
    
    
    
    6,426
    
    
    
    (1
    )%Professional services
    
    
    2,324
    
    
    
    2,631
    
    
    
    (12
    )%Total revenue, net
    
    $
    20,169
    
    
    $
    20,498
    
    
    
    (2
    )% For
the nine months ended June 30
    
    2009
    
    
    2008
    
    
    %ChangeSubscription services
    
    $
    34,269
    
    
    $
    33,405
    
    
    
    3
    %Ratable licenses
    
    
    18,348
    
    
    
    15,033
    
    
    
    22
    %Professional services
    
    
    7,753
    
    
    
    7,414
    
    
    
    5
    %Total revenue, net
    
    $
    60,370
    
    
    $
    55,852
    
    
    
    8
    %
 Subscription Services
  Ratable licenses.
 32




---



##### Table of Contents



Professional Services
   Subscription
    
    Ratable
    
    ProfessionalServices
    
    Licenses
    
    ServicesInternet Test and Measurement:Application Perspective
    
    XDiagnostic Services
    
    XEnterprise Adapters
    
    XFinancial Industry Scorecards
    
    X
    
    
    
    XLoadPro
    
    X
    
    
    
    XNetMechanic
    
    XPerformance Scoreboard
    
    XProfessional Services
    
    
    
    
    
    XRed Alert
    
    XStreaming Perspective
    
    XTest Perspective
    
    XTransaction Perspective
    
    XWebEffective
    
    X
    
    
    
    XWeb Site Perspective
    
    XVoice Perspective
    
    X
    
    
    
    XMobile Test and Measurement:Mobile Device Perspective
    
    XMobile Application Perspective
    
    XSIGOS SITE
    
    
    
    XSIGOS Global Roamer
    
    X
 33




---



##### Table of Contents



For the Three Months Ended June 30,
    
    2009
    
    
    2008
    
    
    % Change(In thousands)Internet Subscriptions
    
    $
    9,403
    
    
    $
    9,529
    
    
    
    (1
    )%Internet Engagements
    
    
    2,324
    
    
    
    2,631
    
    
    
    (12
    )%Total Internet net revenue
    
    
    11,727
    
    
    
    12,160
    
    
    
    (4
    )%Mobile Subscription
    
    
    2,052
    
    
    
    1,912
    
    
    
    7
    %Mobile Ratable Licenses
    
    
    6,390
    
    
    
    6,426
    
    
    
    (1
    )%Total Mobile net revenue
    
    
    8,442
    
    
    
    8,338
    
    
    
    1
    %Total net revenue
    
    $
    20,169
    
    
    $
    20,498
    
    
    
    (2
    )%
 For the Nine Months Ended June 30,
    
    2009
    
    
    2008
    
    

% Change(In thousands)Internet Subscriptions
    
    $
    28,400
    
    
    $
    28,499
    
    
    
    0
    %Internet Engagements
    
    
    7,753
    
    
    
    7,414
    
    
    
    5
    %Total Internet net revenue
    
    
    36,153
    
    
    
    35,913
    
    
    
    1
    %Mobile Subscription
    
    
    5,869
    
    
    
    4,906
    
    
    
    20
    %Mobile Ratable Licenses
    
    
    18,348
    
    
    
    15,033
    
    
    
    22
    %Total Mobile net revenue
    
    
    24,217
    
    
    
    19,939
    
    
    
    21
    %Total net revenue
    
    $
    60,370
    
    
    $
    55,852
    
    
    
    8
    %
     34




---



##### Table of Contents



Expenses:
 Direct Costs of Subscription Services, Ratable Licenses and Professional Services
 For the three months ended June 30:
    
    2009
    
    2008
    

% Change(In thousands)Direct costs of subscription services
    
    $
    2,098
    
    
    $
    2,235
    
    
    
    (6
    )%Direct costs of ratable licenses
    
    $
    1,424
    
    
    $
    1,526
    
    
    
    (7
    )%Direct costs of professional services
    
    $
    1,293
    
    
    $
    1,762
    
    
    
    (27
    )%
 For the nine months ended June 30:
    
    2009
    
    2008
    

% Change(In thousands)Direct costs of subscription services
    
    $
    6,673
    
    
    $
    6,571
    
    
    
    2
    %Direct costs of ratable licenses
    
    $
    4,551
    
    
    $
    4,240
    
    
    
    7
    %Direct costs of professional services
    
    $
    4,466
    
    
    $
    5,361
    
    
    
    (17
    )%
 Direct Costs of Subscription Service
   Direct Costs of Ratable Licenses.
   35




---



##### Table of Contents



Direct Costs of Professional Services.
   Development
 For the three months ended June 30:
    
    2009
    
    2008
    

% Change(In thousands)Development
    
    $
    2,863
    
    
    $
    3,232
    
    
    
    (11
    )%
 For the nine months ended June 30:
    
    2009
    
    2008
    

% Change(In thousands)Development
    
    $
    9,137
    
    
    $
    9,525
    
    
    
    (4
    )%
  Operations
 For the three months ended June 30:
    
    2009
    
    2008
    

% Change(In thousands)Operations
    
    $
    1,943
    
    
    $
    2,270
    
    
    
    (14
    )%
 For the nine months ended June 30:
    
    2009
    
    2008
    

% Change(In thousands)Operations
    
    $
    6,353
    
    
    $
    6,297
    
    
    
    1
    %
  36




---



##### Table of Contents



Sales and Marketing
 For the three months ended June 30:
    
    2009
    
    2008
    

% Change(In thousands)Sales and marketing
    
    $
    5,665
    
    
    $
    6,697
    
    
    
    (15
    )%
 For the nine months ended June 30:
    
    2009
    
    2008
    

%
Change(In thousands)Sales and marketing
    
    $
    18,162
    
    
    $
    18,993
    
    
    
    (4
    )%
   General and Administrative
 For the three months ended June 30:
    
    2009
    
    2008
    

% Change(In thousands)General and administrative
    
    $
    2,346
    
    
    $
    2,834
    
    
    
    (17
    )%
 For the nine months ended June 30:
    
    2009
    
    2008
    

% Change(In thousands)General and administrative
    
    $
    7,717
    
    
    $
    7,822
    
    
    
    (1
    )%
   37




---



##### Table of Contents



Excess Occupancy Income
 2009
    
    
    2008
    
    

%
Change(In thousands)For the three months ended June 30:Rental income
    
    $
    (652
    )
    
    $
    (633
    )
    
    
    3
    %Rental and other expenses
    
    
    394
    
    
    
    336
    
    
    
    17
    %Excess occupancy income
    
    $
    (258
    )
    
    $
    (297
    )
    
    
    (13
    )%For the nine months ended June 30:Rental income
    
    $
    (1,926
    )
    
    $
    (1,882
    )
    
    
    2
    %Rental and other expenses
    
    
    1,197
    
    
    
    995
    
    
    
    20
    %Excess occupancy income
    
    $
    (729
    )
    
    $
    (887
    )
    
    
    (18
    )%
  Amortization of Identifiable Intangible Assets
 2009
    
    
    2008
    
    

% Change(In thousands)For the three months ended June 30:Amortization
of identifiable intangible assets -  software
    
    $
    290
    
    
    $
    281
    
    
    
    3
    %Amortization
of identifiable intangible assets - other
    
    
    259
    
    
    
    568
    
    
    
    (54
    )%Total amortization of identifiable intangible assets
    
    $
    549
    
    
    $
    849
    
    
    
    (35
    )%For the nine months ended June 30:Amortization
of identifiable intangible assets - software
    
    $
    866
    
    
    $
    697
    
    
    
    24
    %Amortization
of identifiable intangible assets - other
    
    
    791
    
    
    
    1,647
    
    
    
    (52
    )%Amortization of identifiable intangible assets
    
    $
    1,657
    
    
    $
    2,344
    
    
    
    (29
    )%
  38




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Technology
    
    TechnologyBased-
    
    Based-
    
    CustomerSoftware
    
    Other
    
    Based
    
    Trademark
    
    Covenant
    
    Backlog
    
    TotalNet carrying value at June 30, 2009
    
    
    
    $
    5,051
    
    
    $
    27
    
    
    $
    859
    
    
    $
    715
    
    
    $
    18
    
    
    $
    53
    
    
    $
    6,723
 Interest Income and Other Income (Expenses), Net
 2009
    
    
    2008
    
    

%
Change(In thousands)For the three months ended June 30:Interest income
    
    $
    157
    
    
    $
    463
    
    
    
    (66)
    %Interest
expense and other income (expenses)
    
    
    (53
    )
    
    
    (120
    )
    
    
    (56)
    %Interest income and other income (expenses), net
    
    $
    104
    
    
    $
    343
    
    
    
    (70)
    %For the nine months ended June 30:Interest income
    
    $
    744
    
    
    $
    2,555
    
    
    
    (71)
    %Interest
expense and other income (expenses)
    
    
    403
    
    
    
    (181
    )
    
    
    (323)
    %Interest income and other income (expenses), net
    
    $
    1,147
    
    
    $
    2,374
    
    
    
    (52)
    %
  Provision for Income Taxes
 2009
    
    
    2008
    
    

%
Change(In thousands)For the three months ended June 30:Provision for income taxes
    
    $
    (258
    )
    
    $
    (140
    )
    
    
    84
    %For the nine months ended June 30:Provision for income taxes
    
    $
    (810
    )
    
    $
    (429
    )
    
    
    89
    %
  39




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Stock-based Compensation Expense
     Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Direct costs of ratable licenses
    
    $
    27
    
    
    $
    68
    
    
    $
    51
    
    
    $
    $183Direct costs of professional services
    
    
    65
    
    
    
    108
    
    
    
    391
    
    
    
    347Development
    
    
    171
    
    
    
    237
    
    
    
    745
    
    
    
    741Operations
    
    
    91
    
    
    
    158
    
    
    
    424
    
    
    
    481Sales and marketing
    
    
    285
    
    
    
    393
    
    
    
    1,216
    
    
    
    1,133General and administrative
    
    
    123
    
    
    
    162
    
    
    
    573
    
    
    
    501Stock-based compensation expense
related to stock options and
employee stock purchase plans
    
    $
    762
    
    
    $
    1,126
    
    
    $
    3,400
    
    
    $
    3,386
 Liquidity and Capital Resources
 June 30,
    
    
    September 30,2009
    
    
    2008(In thousands)Cash, cash equivalents and short-term investments
    
    $
    55,985
    
    
    $
    49,331Accounts receivable, net
    
    $
    6,090
    
    
    $
    7,316Working capital
    
    $
    39,705
    
    
    $
    27,108Days sales in accounts receivable (DSO) (a)
    
    
    27
    
    
    
    32
 (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 June 30, 2009 and September 30, 2008.
 2009
    
    
    2008(In thousands)For the nine months ended June 30Cash provided by operating activities
    
    $
    7,420
    
    
    $
    4,379Cash provided by (used in) investing activities
    
    $
    (6,320
    )
    
    $
    56,532Cash provided by (used in) financing activities
    
    $
    2,022
    
    
    $
    (56,234
    )
 Cash, cash equivalents and short-term investments
  40




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Cash provided by operating activities
   Cash provided by investing activities
  Cash used in financing activities
  Commitments
    41




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Off Balance Sheet Arrangements
  Recently Issued Accounting Pronouncements
        42




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TM
 
 Item 3.
Quantitative and Qualitative Disclosures About Market Risks.
 Interest Rate Sensitivity.
 Foreign Currency Fluctuations.
 
 Item 4.
Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  43




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Changes in Internal Control Over Financial Reporting
  
 PART IIOTHER INFORMATION
 
 Item 1.
Legal Proceedings
     44




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Item 1A.Risk Factors
 We have incurred in the past and may, in the future, incur losses, and we may not 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 business could be harmed by adverse economic conditions or reduced spending on information
technology.
  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.
  
    
    Fluctuations of the foreign exchange rates;
    
    The rate of new and renewed subscriptions to our services;
    
    The effect of the global economic downturn on customers and partners;
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
    
    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 some of our Internet services;
    
    The level of sales of our Mobile 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 service lines;
    
    The timing and amount of operating costs, including sales and marketing investments,
and capital expenditures;
    
    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.
    
    Future accounting pronouncements and changes in accounting policies; and
    
    Future macroeconomic conditions in our domestic and international markets, as well as
the level of discretionary IT spending generally.
  The market price of our common stock is volatile.
  If we were required to write down all or part of our goodwill, our net income and net worth could
be materially adversely affected.
  46




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Our operating results could be harmed if sales of Internet subscriptions decline.
  If our Mobile services decline, we may not be able to grow our revenue and our results of
operations will be harmed.
  Improvements to the infrastructure of the Internet and mobile networks could reduce or eliminate
demand for our Internet and Mobile services.
  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.
   47




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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 revenue.
  Our cash and cash equivalents and short-term investments are managed through various banks around
the world and the current capital and credit market conditions are extremely volatile, putting
pressure on the ability of banks to provide service levels and in some cases to fail, both of which
would likely have an adverse affect on our ability to timely access funds.
   48




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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.
  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.
 49




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##### Table of Contents



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.
  Others might bring infringement claims which could harm our business.
  50




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##### Table of Contents



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;
    
    reduced protection for intellectual property rights in some countries; and
    
    political or economic instability, war or terrorism in the countries where we are doing business.
  Industry consolidation may lead to stronger competition and may harm our operating results.
  51




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Failure to maintain effective internal controls may cause us to delay filing our periodic reports
with the SEC and adversely affect our stock price.
  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.
 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
    
    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.
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If we need to raise additional capital and are unable to do so, our business could be harmed.
  If the protection of our proprietary technology is inadequate, our competitors may gain access to
our technology, and our market share could decline.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  53




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Item 6. Exhibits
 EXHIBIT INDEX
 Incorporated by ReferenceFiledExhibit
    
    For
    
    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. 54




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SIGNATURES
  KEYNOTE SYSTEMS, INC.By:
    /s/ UMANG GUPTAUmang GuptaChairman of the Board and Chief

Executive Officer

(Principal Executive Officer)By:
    /s/ ANDREW HAMERAndrew HamerVice President and Chief Financial Officer

(Principal Financial and Accounting Officer) 55