##### 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, 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
    
    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
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a  smaller reporting company)
 o þ
  Class
    
    Shares outstanding as of May 5, 2009Common Stock, $.001 par value
    
    14,395,701 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
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    42Item 4. Controls and Procedures
    
    
    42PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    43Item 1A. Risk Factors
    
    
    44Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 3. Defaults Upon Senior Securities
    
    
    52Item 4. Submission of Matters to a Vote of Security Holders
    
    
    52Item 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 March 31, 2009 and September 30, 2008
    
    
    4Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2009 and 2008
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2009 and 2008
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7
 3




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)
 (Unaudited)
 March 31,
    
    
    September 30,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    50,776
    
    
    $
    46,769Short-term investments
    
    
    172
    
    
    
    2,562Total cash, cash equivalents, and short-term investments
    
    
    50,948
    
    
    
    49,331Accounts receivable, less allowance for doubtful
accounts of $175 and $118, at March 31, 2009 and
September 30, 2008, respectively, and less billing
allowance of $205 and $150 at March 31, 2009 and
September 30, 2008, respectively
    
    
    5,958
    
    
    
    7,316Prepaids, deferred costs and other current assets
    
    
    4,259
    
    
    
    2,909Inventories
    
    
    1,136
    
    
    
    1,081Deferred tax assets
    
    
    988
    
    
    
    1,042Total current assets
    
    
    63,289
    
    
    
    61,679Deferred costs and other long term assets
    
    
    2,584
    
    
    
    2,788Property, equipment and software, net
    
    
    35,409
    
    
    
    36,405Goodwill
    
    
    62,133
    
    
    
    64,396Identifiable intangible assets, net
    
    
    7,149
    
    
    
    8,430Deferred tax assets
    
    
    1,913
    
    
    
    2,146Total assets
    
    $
    172,477
    
    
    $
    175,844LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,763
    
    
    $
    2,505Accrued expenses
    
    
    8,507
    
    
    
    12,767Current portion of capital lease obligation
    
    
    13
    
    
    
    14Notes payable
    
    
    243
    
    
    
    256Deferred revenue
    
    
    19,896
    
    
    
    19,029Total current liabilities
    
    
    30,422
    
    
    
    34,571Long-term portion of capital lease obligation
    
    
    9
    
    
    
    17Deferred rent and other long-term liabilities
    
    
    2,103
    
    
    
    2,605Long-term deferred revenue
    
    
    1,435
    
    
    
    904Long-term deferred tax liability
    
    
    277
    
    
    
    236Total liabilities
    
    
    34,246
    
    
    
    38,333Commitments and contingencies  see Note 13Stockholders equity:Common stock
    
    
    14
    
    
    
    14Additional paid-in capital
    
    
    279,379
    
    
    
    275,316Accumulated deficit
    
    
    (142,579
    )
    
    
    (143,207
    )Accumulated other comprehensive income
    
    
    1,417
    
    
    
    5,388Total stockholders equity
    
    
    138,231
    
    
    
    137,511Total liabilities and stockholders equity
    
    $
    172,477
    
    
    $
    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
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008
   

    2009
    
    
    2008Net revenue:Subscription services
    
    $
    11,341
    
    
    $
    11,092
    
    
    $
    22,814
    
    
    $
    21,964Ratable licenses
    
    
    5,915
    
    
    
    4,605
    
    
    
    11,958
    
    
    
    8,607Professional services
    
    
    2,308
    
    
    
    1,937
    
    
    
    5,429
    
    
    
    4,783Total revenue, net
    
    
    19,564
    
    
    
    17,634
    
    
    
    40,201
    
    
    
    35,354Costs and expensesCosts of revenueDirect costs of subscription services
    
    
    2,319
    
    
    
    2,225
    
    
    
    4,575
    
    
    
    4,336Direct costs of ratable licenses
    
    
    1,639
    
    
    
    1,111
    
    
    
    3,127
    
    
    
    2,714Direct costs of professional services
    
    
    1,495
    
    
    
    1,794
    
    
    
    3,173
    
    
    
    3,599Development
    
    
    3,191
    
    
    
    3,160
    
    
    
    6,274
    
    
    
    6,293Operations
    
    
    2,248
    
    
    
    2,024
    
    
    
    4,410
    
    
    
    4,027Amortization of intangible
assets  software
    
    
    288
    
    
    
    211
    
    
    
    576
    
    
    
    416Total costs of revenue
    
    
    11,180
    
    
    
    10,525
    
    
    
    22,135
    
    
    
    21,385Sales and marketing
    
    
    6,317
    
    
    
    6,529
    
    
    
    12,497
    
    
    
    12,296General and administrative
    
    
    2,551
    
    
    
    2,501
    
    
    
    5,371
    
    
    
    4,988Excess occupancy income
    
    
    (251
    )
    
    
    (309
    )
    
    
    (471
    )
    
    
    (590
    )Amortization of intangible assets  other
    
    
    263
    
    
    
    542
    
    
    
    532
    
    
    
    1,079Total costs and expenses
    
    
    20,060
    
    
    
    19,788
    
    
    
    40,064
    
    
    
    39,158Income (loss) from operations
    
    
    (496
    )
    
    
    (2,154
    )
    
    
    137
    
    
    
    (3,804
    )Interest income
    
    
    254
    
    
    
    807
    
    
    
    587
    
    
    
    2,092Other income (expenses)
    
    
    116
    
    
    
    74
    
    
    
    456
    
    
    
    (61
    )Income (loss) before provision for income taxes
    
    
    (126
    )
    
    
    (1,273
    )
    
    
    1,180
    
    
    
    (1,773
    )Provision for income taxes
    
    
    (132
    )
    
    
    (45
    )
    
    
    (552
    )
    
    
    (289
    )Net income (loss)
    
    $
    (258
    )
    
    $
    (1,318
    )
    
    $
    628
    
    
    $
    (2,062
    )Net income (loss) per share:Basic
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    (0.12
    )Diluted
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    (0.12
    )Shares used in computing basic and diluted net
income (loss) per share:Basic
    
    
    14,259
    
    
    
    16,130
    
    
    
    14,222
    
    
    
    17,180Diluted
    
    
    14,259
    
    
    
    16,130
    
    
    
    14,330
    
    
    
    17,180
  5




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedMarch 31,2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    628
    
    
    $
    (2,062
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,501
    
    
    
    2,559Stock-based compensation
    
    
    2,637
    
    
    
    2,260Impairment of short-term investment
    
    
    
    
    
    
    98Charges to bad debt and billing adjustment reserves
    
    
    196
    
    
    
    98Amortization (accretion) of debt investment premium (discount)
    
    
    3
    
    
    
    (437
    )Amortization of identifiable intangible assets
    
    
    1,107
    
    
    
    1,495Amortization of prepaid tax asset
    
    
    207
    
    
    
    193Collection of tax credit receivable within deferred tax assets
    
    
    181
    
    
    
    Deferred tax provision
    
    
    20
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    948
    
    
    
    (1,548
    )Inventories
    
    
    (114
    )
    
    
    (271
    )Prepaids, deferred costs and other assets
    
    
    (530
    )
    
    
    (1,183
    )Accounts payable and accrued expenses
    
    
    (6,706
    )
    
    
    29Deferred revenue
    
    
    2,191
    
    
    
    1,626Net cash provided by operating activities
    
    
    3,269
    
    
    
    2,857Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,397
    )
    
    
    (2,385
    )Payment of acquisition costs for Zandan S.A.
    
    
    (170
    )
    
    
    Maturities and sales of short-term investments
    
    
    2,380
    
    
    
    71,076Purchases of short-term investments
    
    
    
    
    
    
    (23,101
    )Net cash provided by investing activities
    
    
    813
    
    
    
    45,590Cash flows from financing activities:Repayment of credit facilities
    
    
    (8
    )
    
    
    (15
    )Proceeds from issuance of common stock and exercise of stock options
    
    
    1,426
    
    
    
    3,072Repurchase of outstanding common stock
    
    
    
    
    
    
    (58,971
    )Net cash provided by (used in) financing activities
    
    
    1,418
    
    
    
    (55,914
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,493
    )
    
    
    2,168Net change in cash and cash equivalents
    
    
    4,007
    
    
    
    (5,299
    )Cash and cash equivalents at beginning of the period
    
    
    46,769
    
    
    
    42,875Cash and cash equivalents at end of the period
    
    $
    50,776
    
    
    $
    37,576Supplemental cash flow disclosure:Income taxes paid (net of refunds)
    
    $
    4,541
    
    
    $
    542Noncash operating and investing activities:Acquisition of property, equipment and software on account
    
    $
    420
    
    
    $
    429Retirement of treasury stock
    
    $
    
    
    
    $
    21,760
  6




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (1) Basis of Presentation
    Fair Value Measurements
     7




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Recent Pronouncements
       8




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Stock Based Compensation
      9




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Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2009
    
    2008
    
    2009
    
    2008Stock Option Under
Equity Incentive Plan:Volatility
    
    
    43.9
    %
    
    
    35.1
    %
    
    
    40.9
    %
    
    
    33.0
    %Risk free interest rate
    
    
    2.0
    %
    
    
    2.5
    %
    
    
    2.3
    %
    
    
    3.3
    %Expected life (in years)
    
    
    4.5
    
    
    
    4.5
    
    
    
    4.5
    
    
    
    4.5Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase
Plan:Volatility
    
    
    58.4
    %
    
    
    40.1
    %
    
    
    50.9
    %
    
    
    32.3
    %Risk free interest rate
    
    
    0.6
    %
    
    
    2.1
    %
    
    
    1.4
    %
    
    
    3.4
    %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
    
    
    66
    
    
    
    10.20Exercised
    
    
    (113
    )
    
    
    6.86Forfeited or canceled
    
    
    (799
    )
    
    
    37.11Expired
    
    
    (56
    )
    
    
    13.72Outstanding at March 31, 2009
    
    
    5,046
    
    
    
    11.52
    
    
    
    6.2
    
    
    
    259Vested and expected to vest at March 31, 2009
    
    
    4,790
    
    
    
    11.51
    
    
    
    6.1
    
    
    
    257Exercisable at March 31, 2009
    
    
    3,724
    
    
    
    11.40
    
    
    
    5.5
    
    
    
    249
    Excess Occupancy Income
  10




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Fiscal years:2009 (remaining six months)
    
    $
    1,1632010
    
    
    1,9772011
    
    
    1,8662012
    
    
    1,5632013
    
    
    218Thereafter
    
    
    88Total future minimum rents receivable
    
    $
    6,875
 (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.
    
    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:
    11




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Ratable Licenses Revenue:
  Professional Services Revenue:
  Deferred Revenue:
 Deferred Costs:
 12




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(3) Other
Comprehensive Income (Loss) and Foreign Currency Translation
   Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    (258
    )
    
    $
    (1,318
    )
    
    $
    628
    
    
    $
    (2,062
    )Net unrealized
gain on
available-for-sale
investments
    
    
    12
    
    
    
    44
    
    
    
    12
    
    
    
    54Foreign currency
translation gain
(loss)
    
    
    (3,020
    )
    
    
    4,191
    
    
    
    (3,983
    )
    
    
    5,418Other comprehensive
income (loss)
    
    $
    (3,266
    )
    
    $
    2,917
    
    
    $
    (3,343
    )
    
    $
    3,410
  (4) Financial Instruments and Concentration of Risk
    13




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(5) Fair Value Measurements
   March 31, 2009Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssets:Cash and cash equivalents:Money market funds
    
    $
    19,344
    
    
    $
    
    
    
    $
    
    
    
    $
    19,344Short term investments:Real estate funds
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    172Total assets measured at fair value
    
    $
    19,516
    
    
    $
    
    
    
    $
    
    
    
    $
    19,516Liabilities:Notes payable
    
    $
    
    
    
    $
    243
    
    
    $
    
    
    
    $
    243Total liabilities measured at fair value
    
    $
    
    
    
    $
    243
    
    
    $
    
    
    
    $
    243
  14




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(6) Cash, Cash Equivalents, and Short-Term Investments
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    31,432
    
    
    $
    
    
    
    $
    
    
    
    $
    31,432Money market mutual funds
    
    
    19,344
    
    
    
    
    
    
    
    
    
    
    
    19,344Total
    
    $
    50,776
    
    
    $
    
    
    
    $
    
    
    
    $
    50,776
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueReal estate mutual funds
    
    $
    160
    
    
    $
    12
    
    
    $
    
    
    
    $
    172
  (7) Consolidated Financial Statement Details
  Prepaids, Deferred Costs and Other Current Assets
 March 31, 2009
    
    
    September 30, 2008Prepaid expenses
    
    $
    2,088
    
    
    $
    1,332Income tax receivable
    
    
    1,215
    
    
    
    Deferred costs of revenue
    
    
    509
    
    
    
    749Other assets
    
    
    398
    
    
    
    576Security deposits, advances, and interest receivable
    
    
    49
    
    
    
    252Total
    
    $
    4,259
    
    
    $
    2,909
 15




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Property, equipment, and software
 March 31, 2009
    
    
    September 30, 2008Land and buildings
    
    $
    35,992
    
    
    $
    35,789Computer equipment and software
    
    
    27,977
    
    
    
    27,094Furniture and fixtures
    
    
    1,879
    
    
    
    1,839Leasehold and building improvements
    
    
    1,063
    
    
    
    1,170Construction in progress
    
    
    246
    
    
    
    288Total
    
    
    67,157
    
    
    
    66,180Less accumulated depreciation and amortization
    
    
    (31,748
    )
    
    
    (29,775
    )Total
    
    $
    35,409
    
    
    $
    36,405
 Deferred Costs and Other Long-Term Assets
 March 31, 2009
    
    
    September 30, 2008Prepaid tax asset
    
    $
    1,116
    
    
    $
    1,429Deferred costs of revenue
    
    
    637
    
    
    
    563Tenant rent receivable
    
    
    298
    
    
    
    312Deposits
    
    
    243
    
    
    
    162Prepaid expenses
    
    
    290
    
    
    
    322Total
    
    $
    2,584
    
    
    $
    2,788
 Accrued Expenses :
 March 31, 2009
    
    
    September 30, 2008Accrued employee compensation
    
    $
    2,929
    
    
    $
    3,476Accrued audit and professional fees
    
    
    251
    
    
    
    641Income and other taxes
    
    
    860
    
    
    
    3,635Other accrued expenses
    
    
    4,467
    
    
    
    5,015Total
    
    $
    8,507
    
    
    $
    12,767
 Notes Payable
 March 31, 2009
    
    
    September 30, 2008Notes payable
    
    $
    243
    
    
    $
    256
  
 (8) Inventories
  16




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(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
    
    
    (2,353
    )Balance at March 31, 2009
    
    $
    62,133
    Technology
    
    
    TechnologyBased-
    
    
    Based-
    
    
    CustomerSoftware
    
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    TotalAs of March 31, 2009Gross carrying value
    
    $
    7,884
    
    
    $
    11,844
    
    
    $
    8,011
    
    
    $
    1,371
    
    
    $
    37
    
    
    $
    110
    
    
    $
    29,257Accumulated amortization
    
    
    (2,512
    )
    
    
    (11,800
    )
    
    
    (7,104
    )
    
    
    (619
    )
    
    
    (18
    )
    
    
    (55
    )
    
    
    (22,108
    )Net carrying value at March 31, 2009
    
    $
    5,372
    
    
    $
    44
    
    
    $
    907
    
    
    $
    752
    
    
    $
    19
    
    
    $
    55
    
    
    $
    7,149As 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
 17




---



##### Table of Contents



TotalFiscal years:2009 (remaining six months)
    
    $
    1,5162010
    
    
    2,4492011
    
    
    2,2212012
    
    
    963Total
    
    $
    7,149Weighted-average remaining useful life as of March
31, 2009 (years)
    
    
    3.0
 (10) Net Income (Loss) Per Share
   Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    

March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008NumeratorNet income (loss)
    
    $
    (258
    )
    
    $
    (1,318
    )
    
    $
    628
    
    
    $
    (2,062
    )Denominator:Denominator for basic net income
(loss) per share  weighted
average shares
    
    
    14,259
    
    
    
    16,130
    
    
    
    14,222
    
    
    
    17,180Effect of dilutive stock options
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    Denominator for diluted net income
(loss) per shareweighted average
shares
    
    
    14,259
    
    
    
    16,130
    
    
    
    14,330
    
    
    
    17,180Basic net income (loss) per share
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    (0.12
    )Diluted net income (loss) per share
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    (0.12
    )
  (11) Acquisitions
  18




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##### Table of Contents



 
 
 
 
 (12) Income Taxes
      19




---



##### Table of Contents



(13) Commitments and Contingencies
 (A) Leases
  Operating
    
    
    CapitalLeases
    
    
    LeasesFiscal year:2009 (remaining six months)
    
    $
    499
    
    
    $
    142010
    
    
    888
    
    
    
    92011
    
    
    7032012
    
    
    5172013
    
    
    418Thereafter
    
    
    779Total minimum lease payments
    
    $
    3,804
    
    
    
    23Less amounts representing interest
    
    
    
    
    
    
    (1
    )Present value of minimum lease payments
    
    
    
    
    
    
    22Less current portion of capital lease obligation
    
    
    
    
    
    
    (13
    )Long-term portion of capital lease obligation
    
    
    
    
    
    $
    9
  (B) Commitments
   (C) Legal Proceedings
   20




---



##### Table of Contents



(D) Warranties
  (E) Indemnification
  (14) Geographic and Segment Information
   21




---



##### Table of Contents



Subscription
    
    Ratable
    
    ProfessionalServices
    
    Licenses
    
    ServicesInternet Test and Measurement:Application Perspective
    
    
    XDiagnostic Services
    
    
    XEnterprise Adapters
    
    
    XFinancial Industry Scorecards
    
    
    X
    
    
    
    
    
    
    
    XLoadPro
    
    
    
    
    
    
    
    
    
    
    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 March 31,2009
    
    
    2008Internet Subscriptions
    
    $
    9,333
    
    
    $
    9,438Internet Engagements
    
    
    2,308
    
    
    
    1,937Total Internet net revenue
    
    
    11,641
    
    
    
    11,375Mobile Subscription
    
    
    2,008
    
    
    
    1,654Mobile Ratable Licenses
    
    
    5,915
    
    
    
    4,605Total Mobile Subscriptions net revenue
    
    
    7,923
    
    
    
    6,259Total net revenue
    
    $
    19,564
    
    
    $
    17,634
 Six Months Ended March 31,2009
    
    
    2008Internet Subscriptions
    
    $
    18,997
    
    
    $
    18,970Internet Engagements
    
    
    5,429
    
    
    
    4,783Total Internet net revenue
    
    
    24,426
    
    
    
    23,753Mobile Subscription
    
    
    3,817
    
    
    
    2,994Mobile Ratable Licenses
    
    
    11,958
    
    
    
    8,607Total Mobile Subscriptions net revenue
    
    
    15,775
    
    
    
    11,601Total net revenue
    
    $
    40,201
    
    
    $
    35,354
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008RevenuesUnited States
    
    $
    10,932
    
    
    $
    10,529
    
    
    $
    22,980
    
    
    $
    21,782Europe*
    
    
    5,814
    
    
    
    5,889
    
    
    
    12,339
    
    
    
    11,111Other*
    
    
    2,818
    
    
    
    1,216
    
    
    
    4,882
    
    
    
    2,461Total net revenue
    
    $
    19,564
    
    
    $
    17,634
    
    
    $
    40,201
    
    
    $
    35,354
 
 *
    
    No individual country represents more than 10% of total net revenue. 22




---



##### Table of Contents



March 31,
    
    
    September 30,2009
    
    
    2008Long Lived Assets:United States
    
    $
    34,458
    
    
    $
    35,317Germany
    
    
    944
    
    
    
    1,062Other
    
    
    7
    
    
    
    26$
    35,409
    
    
    $
    36,405
   23




---



##### Table of Contents



Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations
   Overview
      24




---



##### 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:
 25




---



##### Table of Contents



Ratable Licenses Revenue:
   Professional Services Revenue:
  Deferred Revenue:
 26




---



##### Table of Contents



Domestic
    
    
    International
    
    
    TotalNet deferred revenue
    
    $
    6,107
    
    
    $
    15,224
    
    
    $
    21,331Addback: unpaid deferred revenue
    
    
    3,210
    
    
    
    2,304
    
    
    
    5,514Gross deferred revenue at March 31, 2009
    
    $
    9,317
    
    
    $
    17,528
    
    
    $
    26,845Net 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
    27




---



##### 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.
     28




---



##### Table of Contents



Stock-Based Compensation
  Income Taxes, Deferred Income Tax Assets and Deferred Income Tax Liabilities
      29




---



##### Table of Contents



Results of Operations
  Comparison of the Three and Six Months Ended March 31, 2009 and 2008
 Three months ended
    
    Six months endedMarch 31,
    
    March 31,2009
    
    2008
    
    2009
    
    2008Net revenue:Subscription services
    
    
    58.0
    %
    
    
    62.9
    %
    
    
    56.7
    %
    
    
    62.1
    %Ratable licenses
    
    
    30.2
    %
    
    
    26.1
    %
    
    
    29.7
    %
    
    
    24.4
    %Professional services
    
    
    11.8
    %
    
    
    11.0
    %
    
    
    13.6
    %
    
    
    13.5
    %Total revenue, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Costs of revenue:Direct costs of subscription services
    
    
    11.9
    %
    
    
    12.6
    %
    
    
    11.4
    %
    
    
    12.3
    %Direct costs of ratable licenses
    
    
    8.4
    %
    
    
    6.3
    %
    
    
    7.8
    %
    
    
    7.7
    %Direct costs of professional services
    
    
    7.6
    %
    
    
    10.2
    %
    
    
    7.9
    %
    
    
    10.2
    %Operations
    
    
    11.5
    %
    
    
    11.5
    %
    
    
    11.0
    %
    
    
    11.4
    %Development
    
    
    16.3
    %
    
    
    17.9
    %
    
    
    15.6
    %
    
    
    17.8
    %Amortization of intangible assets  software
    
    
    1.4
    %
    
    
    1.2
    %
    
    
    1.4
    %
    
    
    1.1
    %Total costs of revenue
    
    
    57.1
    %
    
    
    59.7
    %
    
    
    55.1
    %
    
    
    60.5
    %Sales and marketing
    
    
    32.3
    %
    
    
    37.0
    %
    
    
    31.1
    %
    
    
    34.8
    %General and administrative
    
    
    13.0
    %
    
    
    14.2
    %
    
    
    13.4
    %
    
    
    14.1
    %Excess occupancy income, net
    
    
    (1.3
    %)
    
    
    (1.8
    %)
    
    
    (1.2
    %)
    
    
    (1.7
    %)Amortization of intangible assets  other
    
    
    1.4
    %
    
    
    3.1
    %
    
    
    1.3
    %
    
    
    3.1
    %Total costs and expenses
    
    
    102.5
    %
    
    
    112.2
    %
    
    
    99.7
    %
    
    
    110.8
    %Income (loss) from operations
    
    
    (2.5
    %)
    
    
    (12.2
    %)
    
    
    0.3
    %
    
    
    (10.8
    %)Interest income and other, net
    
    
    1.9
    %
    
    
    5.0
    %
    
    
    2.6
    %
    
    
    5.8
    %Income (loss) before provision for income taxes
    
    
    (0.6
    %)
    
    
    (7.2
    %)
    
    
    2.9
    %
    
    
    (5.0
    %)Provision for income taxes
    
    
    (0.7
    %)
    
    
    (0.3
    %)
    
    
    (1.3
    %)
    
    
    (0.8
    %)Net income (loss)
    
    
    (1.3
    %)
    
    
    (7.5
    %)
    
    
    1.6
    %
    
    
    (5.8
    %)
  30




---



##### Table of Contents




    
    Increase of $272,000, or 1%, in total costs and expenses, from approximately $19.8
million for the three months ended March 31, 2008 to approximately $20.1 million for the
three months ended March 31, 2009.
 o
    
    Of the increase, $528,000 was associated with higher direct costs of
ratable licenses primarily attributable to higher ratable license revenueo
    
    $224,000 of the increase was attributable to higher operations costs
associated with higher professional fees and personnel costs associated with higher
headcount associated with the acquisition of Zandan in the third quarter of fiscal
2008.o
    
    Decrease in direct costs of professional services of $299,000
attributable to lower personnel costs.o
    
    Decrease in sales and marketing costs of $212,000 attributable to lower
spending on marketing programs and tradeshow events.
 
    
    Decrease in net interest income and other of $511,000 due to reduction in interest
income attributable to lower cash balances and lower interest rates during the three months
ended March 31, 2009 as compared to March 31, 2008.
   
    
    Increase of $906,000, or 2%, in total costs and expenses, from approximately $39.2
million for the six months ended March 31, 2008 to approximately $40.1 million for the six
months ended March 31, 2009.
 o
    
    Of the increase, $413,000 was associated with higher direct costs of
ratable licenses primarily attributable to higher ratable license revenue.o
    
    $383,000 of the increase was attributable to higher operations costs
associated with higher professional fees and personnel costs associated with higher
headcount associated with the acquisition of Zandan in the third quarter of fiscal
2008.o
    
    $383,000 of the increase was attributable to higher general and
administrative expenses primarily related to additional headcount.o
    
    Decrease in direct costs of professional services of $426,000
attributable to lower personnel costs.o
    
    Decrease in net interest income and other of $988,000 due to reduction in
interest income attributable to lower cash balances and lower interest rates during
the six months ended March 31, 2009 as compared to March 31, 2008.
 Net Revenue
 For the three months ended March 31
    
    2009
    
    
    2008
    
    
    % Change(in thousands)Subscription services
    
    $
    11,341
    
    
    $
    11,092
    
    
    
    2
    %Ratable licenses
    
    
    5,915
    
    
    
    4,605
    
    
    
    28
    %Professional services
    
    
    2,308
    
    
    
    1,937
    
    
    
    19
    %Total revenue, net
    
    $
    19,564
    
    
    $
    17,634
    
    
    
    11
    %
 For the six months ended March 31
    
    2009
    
    
    2008
    
    
    % ChangeSubscription services
    
    $
    22,814
    
    
    $
    21,964
    
    
    
    4
    %Ratable licenses
    
    
    11,958
    
    
    
    8,607
    
    
    
    39
    %Professional services
    
    
    5,429
    
    
    
    4,783
    
    
    
    14
    %Total revenue, net
    
    $
    40,201
    
    
    $
    35,354
    
    
    
    14
    %
 Subscription Services
 31




---



##### Table of Contents



Ratable licenses.
 Professional Services
   Subscription
    
    Ratable
    
    ProfessionalServices
    
    Licenses
    
    ServicesInternet Test and Measurement:Application Perspective
    
    
    XDiagnostic Services
    
    
    XEnterprise Adapters
    
    
    XFinancial Industry Scorecards
    
    
    X
    
    
    
    
    
    
    
    XLoadPro
    
    
    
    
    
    
    
    
    
    
    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
 32




---



##### Table of Contents



%For the Three Months Ended March 31,
    
    2009
    
    
    2008
    
    
    Change(In thousands)Internet Subscriptions
    
    $
    9,333
    
    
    $
    9,438
    
    
    
    (1
    %)Internet Engagements
    
    
    2,308
    
    
    
    1,937
    
    
    
    19
    %Total Internet net revenue
    
    
    11,641
    
    
    
    11,375
    
    
    
    2
    %Mobile Subscription
    
    
    2,008
    
    
    
    1,654
    
    
    
    21
    %Mobile Ratable Licenses
    
    
    5,915
    
    
    
    4,605
    
    
    
    28
    %Total Mobile net revenue
    
    
    7,923
    
    
    
    6,259
    
    
    
    27
    %Total net revenue
    
    $
    19,564
    
    
    $
    17,634
    
    
    
    11
    %
 %For the Six Months Ended March 31,
    
    2009
    
    
    2008
    
    
    Change(In thousands)Internet Subscriptions
    
    $
    18,997
    
    
    $
    18,970
    
    
    
    0
    %Internet Engagements
    
    
    5,429
    
    
    
    4,783
    
    
    
    14
    %Total Internet net revenue
    
    
    24,426
    
    
    
    23,753
    
    
    
    3
    %Mobile Subscription
    
    
    3,817
    
    
    
    2,994
    
    
    
    27
    %Mobile Ratable Licenses
    
    
    11,958
    
    
    
    8,607
    
    
    
    39
    %Total Mobile net revenue
    
    
    15,775
    
    
    
    11,601
    
    
    
    36
    %Total net revenue
    
    $
    40,201
    
    
    $
    35,354
    
    
    
    14
    %
    33




---



##### Table of Contents



Expenses:
 Direct Costs of Subscription Services, Ratable Licenses and Professional Services
 For the three months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)Direct costs of subscription services
    
    $
    2,319
    
    
    $
    2,225
    
    
    
    4
    %Direct costs of ratable licenses
    
    $
    1,639
    
    
    $
    1,111
    
    
    
    48
    %Direct costs of professional services
    
    $
    1,495
    
    
    $
    1,794
    
    
    
    (17
    )%
 For the six months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)Direct costs of subscription services
    
    $
    4,575
    
    
    $
    4,336
    
    
    
    6
    %Direct costs of ratable licenses
    
    $
    3,127
    
    
    $
    2,714
    
    
    
    15
    %Direct costs of professional services
    
    $
    3,173
    
    
    $
    3,599
    
    
    
    (12
    )%
 Direct Costs of Subscription Service
   Direct Costs of Ratable Licenses.
   Direct Costs of Professional Services.
 34




---



##### Table of Contents



Development
 For the three months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)Development
    
    $
    3,191
    
    
    $
    3,160
    
    
    
    1
    %For the six months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)Development
    
    $
    6,274
    
    
    $
    6,293
    
    
    
    (0.3)
    %
  Operations
 For the three months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)Operations
    
    $
    2,248
    
    
    $
    2,024
    
    
    
    11
    %
 For the six months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)Operations
    
    $
    4,410
    
    
    $
    4,027
    
    
    
    10
    %
  35




---



##### Table of Contents



Sales and Marketing
 For the three months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)Sales and marketing
    
    $
    6,317
    
    
    $
    6,529
    
    
    
    (3
    %)
 For the six months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)Sales and marketing
    
    $
    12,497
    
    
    $
    12,296
    
    
    
    2
    %
   General and Administrative
 For the three months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)General and administrative
    
    $
    2,551
    
    
    $
    2,501
    
    
    
    2
    %
 For the six months ended March 31:
    
    2009
    
    2008
    
    % Change(In thousands)General and administrative
    
    $
    5,371
    
    
    $
    4,988
    
    
    
    8
    %
  36




---



##### Table of Contents



Excess Occupancy Income
 2009
    
    
    2008
    
    
    % Change(In thousands)For the three months ended March 31:Rental income
    
    $
    (647
    )
    
    $
    (643
    )
    
    
    1
    %Rental and other expenses
    
    
    396
    
    
    
    334
    
    
    
    19
    %Excess occupancy income
    
    $
    (251
    )
    
    $
    (309
    )
    
    
    (19
    )%For the six months ended March 31:Rental income
    
    $
    (1,274
    )
    
    $
    (1,250
    )
    
    
    2
    %Rental and other expenses
    
    
    803
    
    
    
    660
    
    
    
    22
    %Excess occupancy income
    
    $
    (471
    )
    
    $
    (590
    )
    
    
    (20
    )%
  Amortization of Identifiable Intangible Assets
 2009
    
    
    2008
    
    % Change(In thousands)For the three months ended March 31:Amortization of identifiable
intangible assets  software
    
    $
    288
    
    
    $
    211
    
    
    
    36
    %Amortization of identifiable
intangible assets  other
    
    
    263
    
    
    
    542
    
    
    
    (51
    )%Total amortization of identifiable
intangible assets
    
    $
    551
    
    
    $
    753
    
    
    
    (27
    )%For the six months ended March 31:Amortization of identifiable
intangible assets  software
    
    $
    576
    
    
    $
    416
    
    
    
    38
    %Amortization of identifiable
intangible assets  other
    
    
    532
    
    
    
    1,079
    
    
    
    (51
    )%Amortization of identifiable
intangible assets
    
    $
    1,108
    
    
    $
    1,495
    
    
    
    (26
    )%
   37




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##### Table of Contents



Technology
    
    TechnologyBased-
    
    Based-
    
    CustomerSoftware
    
    Other
    
    Based
    
    Trademark
    
    Covenant
    
    Backlog
    
    TotalNet carrying value at March 31, 2009
    
    $
    5,372
    
    
    $
    44
    
    
    $
    907
    
    
    $
    752
    
    
    $
    19
    
    
    $
    55
    
    
    $
    7,149
 Interest Income and Other Income (Expenses), Net
 2009
    
    
    2008
    
    
    % Change(In thousands)For the three months ended March 31:Interest income
    
    $
    254
    
    
    $
    807
    
    
    
    (69
    )%Interest expense and other income
    
    
    116
    
    
    
    74
    
    
    
    57
    %Interest income and other income
(expenses), net
    
    $
    370
    
    
    $
    881
    
    
    
    (58
    )%For the six months ended March 31:Interest income
    
    $
    587
    
    
    $
    2,092
    
    
    
    (72
    )%Interest expense and other income (expense)
    
    
    456
    
    
    
    (61
    )
    
    
    (848
    )%Interest income and other income
(expenses), net
    
    $
    1,043
    
    
    $
    2,031
    
    
    
    (49
    )%
  Provision for Income Taxes
 2009
    
    2008
    
    % Change(In thousands)For the three months ended March 31:Provision for income taxes
    
    $
    132
    
    
    $
    45
    
    
    
    193
    %For the six months ended March 31:Provision for income taxes
    
    $
    552
    
    
    $
    289
    
    
    
    91
    %
  Stock-based Compensation Expense
  38




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Three Months Ended March 31,
    
    
    Six Months Ended March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Direct costs of ratable licenses
    
    $
    27
    
    
    $
    66
    
    
    $
    24
    
    
    $
    $115Direct costs of professional services
    
    
    214
    
    
    
    124
    
    
    
    326
    
    
    
    239Development
    
    
    344
    
    
    
    274
    
    
    
    574
    
    
    
    504Operations
    
    
    210
    
    
    
    178
    
    
    
    333
    
    
    
    323Sales and marketing
    
    
    566
    
    
    
    413
    
    
    
    930
    
    
    
    740General and administrative
    
    
    235
    
    
    
    105
    
    
    
    450
    
    
    
    339Stock-based compensation expense
related to stock options and
employee stock purchase plans
    
    $
    1,596
    
    
    $
    1,160
    
    
    $
    2,637
    
    
    $
    2,260
 Liquidity and Capital Resources
 March 31,
    
    September 30,2009
    
    2008(In thousands)Cash, cash equivalents and short-term investments
    
    $
    50,948
    
    
    $
    49,331Accounts receivable, net
    
    $
    5,958
    
    
    $
    7,316Working capital
    
    $
    32,867
    
    
    $
    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 March 31, 2009 and September 30, 2008. 2009
    
    2008(In thousands)For the six months ended March 31Cash provided by operating activities
    
    $
    3,269
    
    
    $
    2,857Cash provided by investing activities
    
    $
    813
    
    
    $
    45,590Cash provided by (used in) financing activities
    
    $
    1,418
    
    
    $
    (55,914
    )
 Cash, cash equivalents and short-term investments
  39




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Cash provided by operating activities
   Cash provided by investing activities
  Cash used in financing activities
  Commitments
    Off Balance Sheet Arrangements
  40




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Recently Issued Accounting Pronouncements
       41




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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
  42




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Changes in Internal Control Over Financial Reporting
  
 PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
     
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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 used to prepare our consolidated financial statements;
    
    The rate of new and renewed subscriptions to our services;
    
    The effect of the global economic downturn on customers and partners;
    
    The effect of any unforeseen or unplanned operating expenses;
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
    
    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.
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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.
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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.
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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.
 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.
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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.
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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.
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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
 (a)
    
    We held our Annual Meeting of Stockholders on March 6, 2009. 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
    
    
    13,398,786
    
    
    
    
    
    
    
    88,912
    
    
    
    David Cowan
    
    
    13,394,854
    
    
    
    
    
    
    
    86,844
    
    
    
    Deborah Rieman
    
    
    13,397,327
    
    
    
    
    
    
    
    84,371
    
    
    
    Mohan Gyani
    
    
    13,280,415
    
    
    
    
    
    
    
    201,283
    
    
    
    Raymond L. Ocampo Jr.
    
    
    13,437,022
    
    
    
    
    
    
    
    44,676
    
    
    
    Jennifer Bolt
    
    
    13,397,677
    
    
    
    
    
    
    
    84,021
    
    
    
    Charles M. Boesenberg
    
    
    12,647,006
    
    
    
    
    
    
    
    834,692
    
    
    
    
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(2)
    
    Holders of our common stock voted to approve amendments to our 1999
Equity Incentive Plan to extend its term to December, 2011 as follows:
 For
    
    7,431,516
    
    Against
    
    4,951,127
    
    Abstain
    
    7,635
    Non-Vote

    1,091,421
 (3)
    
    Holders of our common stock voted to approve amendments to our 1999
Employee Stock Purchase Plan to extend its term by ten years as
follows:
 For
    
    12,098,326
    
    Against
    
    284,538
    
    Abstain
    
    7,414
    Non-Vote

    1,091,421
 (4)
    
    Holders of our common stock voted to ratify the appointment of
Deloitte & Touche LLP as our auditors for the fiscal year ending
September 30, 2009.
 For
    
    13,463,513
    
    Against
    
    7,830
    
    Abstain
    
    10,355
    Non-Vote

    
 
 Item 5. Other Information
  53




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Item 6. Exhibits
 EXHIBIT INDEX
 Exhibit
    
    Incorporated by ReferenceFiledForm
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith31.1 Certification of
Periodic Report by Chief Executive
Officer underSection 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X31.2 Certification
of Periodic Report
by Chief Financial
Officer underSection 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X32.1 Certification
of Chief Executive
Officer Pursuant to
18 U.S.C.
Section 1350as
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 1350as
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 ChiefExecutive Officer(Principal Executive Officer)By:
    
    /s/ ANDREW HAMERAndrew HamerVice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 55