<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

                                  (Mark One)

          [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended June 30, 2001

                                      OR

          [_] 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. Employer
          incorporation or organization)            Identification No.)

              777 Mariners Island Boulevard, San Mateo, CA 94404
          (Address of principal executive offices)       (Zip Code)

      Registrant's telephone number, including area code: (650) 522-1000

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

         Class                       Shares outstanding at July 31, 2001
         -----                       -----------------------------------

Common Stock, $.001 par value                     28,082,592

                                       1
<PAGE>

                             KEYNOTE SYSTEMS, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                        PART I - FINANCIAL INFORMATION
<S>                                                                         <C>
Item 1. Financial Statements.                                                3
Item 2. Management's Discussion and Analysis of Financial Condition and
          Results of Operations...........................................  13

Item 3. Quantitative and Qualitative Disclosures about Market Risk........  28

                          PART II - OTHER INFORMATION

Item 1. Legal Proceedings.................................................  28
Item 2. Changes in Securities and Use of Proceeds.........................  28
Item 3. Defaults Upon Senior Securities...................................  28
Item 4. Submission of Matters for a Vote of Security Holders..............  28
Item 5. Other Information.................................................  28
Item 6. Exhibits and Reports on Form 8-K..................................  28
Signatures................................................................  29
</TABLE>

                                       2
<PAGE>

                        PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

                    KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

Index to Unaudited Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2001 and
September 30, 2000.........................................................  4

Condensed Consolidated Statements of Operations for the three and nine
months ended June 30, 2001 and 2000........................................  5

Condensed Consolidated Statements of Cash Flows for the nine months ended
June 30, 2001 and 2000.....................................................  6

Notes to Condensed Consolidated Financial Statements.......................  7

                                       3
<PAGE>

                    KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                             June 30, 2001      September 30, 2000
                                                                             -------------      ------------------
<S>                                                                          <C>                <C>
                                  ASSETS
Current assets:
   Cash and cash equivalents...............................................       $ 59,797             $260,201
   Short-term Investments .................................................        195,668                   --
                                                                                  --------             --------
     Total Cash, Cash Equivalents, and Short-Term Investments..............        255,465             $260,201

   Accounts receivable, net................................................          7,986                8,211
   Prepaid and other current assets........................................          2,893                1,569
                                                                                  --------             --------

     Total current assets..................................................        266,344              269,981

Restricted cash............................................................         85,000               85,000
Property and equipment, net................................................         15,149                8,601
Goodwill and other intangible assets.......................................          1,513               44,075
Other assets...............................................................            782                  954
                                                                                  --------             --------

     Total assets..........................................................       $368,788             $408,611
                                                                                  ========             ========

                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of notes payable........................................       $    985             $  1,191
   Current portion of capital lease obligation.............................            144                  143
   Accounts payable........................................................          1,023                1,642
   Accrued expenses........................................................          8,976                7,797
   Deferred revenue........................................................          3,832                4,967
                                                                                  --------             --------

     Total current liabilities.............................................         14,960               15,740

Notes payable, less current portion........................................             32                  684
Capital lease obligation, less current portion.............................              -                  107
                                                                                  --------             --------

     Total liabilities.....................................................         14,992               16,531
                                                                                  --------             --------

Commitments

Stockholders' equity:
   Common stock............................................................             28                   28
   Treasury stock..........................................................            (63)                   -
   Additional paid-in capital..............................................        413,367              413,084
   Deferred compensation...................................................           (538)              (5,629)
   Accumulated other comprehensive loss, net of tax........................         (1,024)                 ---
   Accumulated deficit.....................................................        (57,974)             (15,403)
                                                                                  --------             --------

     Total stockholders' equity............................................        353,796              392,080
                                                                                  --------             --------

     Total liabilities and stockholders' equity............................       $368,788             $408,611
                                                                                  ========             ========
</TABLE>

See accompanying notes to the condensed consolidated financial statements.

                                       4
<PAGE>

                    KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                   (In thousands, except per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                  Three months               Nine months
                                                                                 ended June 30,             ended June 30,
                                                                               -----------------          -----------------
                                                                                 2001      2000             2001      2000
                                                                               --------   -------         --------   -------
<S>                                                                            <C>        <C>             <C>        <C>
Revenue:
 Subscription services   ..................................................    $ 10,376   $ 9,283         $ 34,484   $20,733
 Consulting services..   ..................................................         693       432            1,630       956
                                                                               --------   -------         --------   -------

  Total revenues...........................................................      11,069     9,715           36,114    21,689
Operating Expenses:
 Cost of subscription services.............................................       3,375     2,622            9,629     6,870
 Cost of consulting services...............................................         739       533            2,223     1,086
 Research and development..................................................       1,575     1,463            5,361     3,405
 Sales and marketing.......................................................       4,992     4,808           16,460    11,617
 Operations................................................................       1,832     1,418            5,479     3,256
 General and administrative................................................       1,776     1,346            5,483     3,503
 Restructuring costs.......................................................         271         -              271         -
 Acquisition related charges, amortization and impairment of goodwill and
  other intangible assets, and amortization of stock-based compensation....      34,676     1,210           47,907     1,381
                                                                               --------   -------         --------   -------

  Total operating expenses...................................................    49,236    13,400           92,813    31,118
                                                                               --------   -------         --------   -------

  Loss from operations.......................................................   (38,167)   (3,685)         (56,699)   (9,429)

Interest income, net.........................................................     3,869     5,408           14,578     8,675
                                                                               --------   -------         --------   -------

  (Loss) Income before income taxes..........................................   (34,298)    1,723          (42,121)     (754)

Provision for income taxes...................................................       150         -              450         -
                                                                               --------   -------         --------   -------

  Net (loss) income..........................................................  $(34,448)  $ 1,723         $(42,571)  $  (754)
                                                                               ========   =======         ========   =======

(Loss) Income per share:
 Basic and diluted...........................................................  $  (1.24)  $  0.06         $  (1.54)  $ (0.03)
                                                                               ========   =======         ========   =======

Weighted average common shares outstanding used:
 Basic ......................................................................    27,784    26,623           27,663    24,566
                                                                               ========   =======         ========    ======

 Diluted ....................................................................    27,784    28,569           27,663    24,566
                                                                               ========   =======         ========    ======
</TABLE>

  See accompanying notes to the condensed consolidated financial statements.

                                       5
<PAGE>

                    KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                                   Nine Months
                                                                                                  Ended June 30,
                                                                                                  --------------
                                                                                                 2001        2000
                                                                                                 ----        ----
<S>                                                                                           <C>         <C>
Cash flows from operating activities:
 Net loss...................................................................................  $ (42,571)  $   (754)
 Adjustments to reconcile net loss to net cash
  provided by operating activities:
   Depreciation and amortization............................................................      4,167      1,750
   Amortization and impairment of goodwill and other intangible assets.............              42,568      1,125
   Amortization of deferred compensation....................................................      5,091        256
   Changes in operating assets and liabilities:
    Accounts receivable.....................................................................        224     (4,264)
    Prepaids and other assets...............................................................     (1,152)    (1,618)
    Accounts payable and accrued expenses...................................................        561      3,152
    Deferred revenue........................................................................     (1,135)     4,565
                                                                                              ---------   --------


     Net cash provided by operating activities..............................................      7,753      4,212
                                                                                              ---------   --------

Cash flows used for investing activities:
 Purchases of property and equipment........................................................    (10,699)    (4,819)
 Purchase of fixed maturities, available for sale...........................................   (196,693)      ----
                                                                                              ---------   --------
       Net cash used for investing activities...............................................   (207,392)    (4,819)
                                                                                              ---------   --------

Cash flows from financing activities:
 Repayments of notes payable and capital leases.............................................       (986)    (3,739)
 Cash acquired as part of Velogic acquisition...............................................         --        791
 Proceeds from public offering, net of issuance costs.......................................         --    294,129
 Repayments of stockholder notes............................................................         --        458
 Issuance of common stock, net of issuance costs............................................      1,547        723
 Purchase of treasury stock.................................................................     (1,326)        --
                                                                                              ---------   --------

     Net cash (used for) provided by financing
      activities............................................................................       (765)   292,362
                                                                                              ---------   --------

Net (decrease)increase in cash and cash equivalents.........................................   (200,404)   291,755
Cash and cash equivalents at beginning of the period........................................    260,201     64,647
                                                                                              ---------   --------

Cash and cash equivalents at end of the period..............................................  $  59,797   $356,402
                                                                                              =========   ========

Cash, cash equivalents, short-term investments, and restricted cash at end of the
period......................................................................................  $ 340,465   $356,402
                                                                                              =========   ========

Non-cash financing activities:

     Common stock and options issued in connection with acquisition.........................        ---   $ 39,217
</TABLE>

  See accompanying notes to the condensed consolidated financial statements.

                                       6
<PAGE>

                    KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(1)  Basis of Presentation

The accompanying interim unaudited condensed consolidated balance sheets and
condensed consolidated statements of operations and cash flows reflect all
normal recurring adjustments that are, in the opinion of management, necessary
for a fair presentation of the financial position of Keynote Systems, Inc. and
subsidiaries (the Company) at June 30, 2001, and the results of operations and
cash flows for the interim periods ended June 30, 2001 and 2000.

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all information and footnotes necessary for a complete presentation
of the Company's results of operations, financial position and cash flows. The
Company filed audited financial statements that included all information and
footnotes necessary for a complete presentation for each of the years in the
three year period ended September 30, 2000, in its annual report on Form 10-K
for the fiscal year ended September 30, 2000.

The results of operations for any interim period are not necessarily indicative
of the Company's results of operations for any other future interim period or
for a full fiscal year.

(2)  Revenue Recognition

Subscription services revenue consists of fees from subscriptions to the
Company's Internet measurement monitoring and diagnostic services. The Company's
subscription revenues are deferred upon invoicing and are recognized ratably
over the service period, generally ranging from one to twelve months. Deferred
revenue is comprised entirely of deferred subscription revenue. A portion of
subscription revenues is invoiced monthly upon completion of the measurement
services. We do not generally grant refunds during our three-month initial
subscription term. All discounts granted during the initial term are netted
against revenue. Revenue is not recognized during any free trial periods that we
may offer to our customers. Revenue from consulting services is recognized as
the services are performed, typically a period of one month. All of the revenue
related to the Company's load-testing services is also included in consulting
revenue. For consulting projects that span multiple months, the Company
recognizes revenue on a percentage of completion basis.

Cost of subscription revenues consists of connection fees to Internet service
providers for bandwidth usage of the Company's computer measurement agents which
are located around the world, depreciation, maintenance and other equipment
charges related to the Company's measurement and data collection infrastructure.
Cost of consulting services consists of compensation and other related costs of
consulting personnel, all load-testing bandwidth costs and related
infrastructure costs. Operations expenses consist primarily of compensation and
related costs for management and technical support personnel, who manage and
maintain the Company's field measurement and collection infrastructure and
headquarters' data center and provide twenty-four by seven customer support.

(3)  Comprehensive Loss

Comprehensive loss includes unrealized losses on short-term investments in debt
securities which are excluded from earnings and reported in stockholders'
equity.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
                                         Three Months Ended    Nine Months Ended
                                         -------------------   ------------------

                                         June 30,   June 30,    June 30,   June 30,
                                           2001       2000        2001       2000
                                           ----       ----        ----       ----
<S>                                      <C>        <C>        <C>          <C>
Net (loss) income ...................    $(34,448)  $  1,723   $(42,571)    $ (754)
Net unrealized losses on                   (1,024)       ---     (1,024)        --
    investments, net of taxes........    --------   --------   --------     ------

       Comprehensive (loss) income       $(35,472)  $  1,723   $(43,595)    $ (754)
                                         ========   ========   ========     ======
--------------------------------------------------------------------------------------
</TABLE>


                                       7
<PAGE>

(4)  Financial Instruments and Concentration of Risk

The carrying value of the Company's financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable, restricted cash
and equipment notes payable, approximates fair market value. Cash and cash
equivalents, restricted cash and accounts receivable approximate fair market
value due to their short-term nature. Equipment notes approximate fair market
value as interest rates on these notes approximate market rates. Financial
instruments that subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, restricted cash and trade accounts
receivable.

Credit risk is concentrated in North America. The Company performs ongoing
collections efforts and continual monitoring of its customers' financial
condition and, generally, requires no collateral from its customers. Based on
its historical amount of write-offs, the Company currently believes that it has
adequately reserved for doubtful accounts as of the date of each balance sheet
presented herein. At June 30, 2001 and 2000, no one customer accounted for more
than 10% of total accounts receivable. For each of the three and nine months
ended June 30, 2001, no one customer accounted for more than 10% of the
Company's total revenues. For each of the three months and nine months ended
June 30, 2000, one customer accounted for more than 10% of total revenue.

(5)  Investments

The company classifies its investments in investment-grade debt securities as
available-for-sale. Available-for-sale securities are carried at fair market
value, with unrealized gains and losses excluded from earnings and reported in
other comprehensive income. Market values are based primarily on prices obtained
from independent external pricing and rating service companies. At June 30,
2001, the amortized cost and estimated market values of investments in fixed
maturities are (in thousands):

<TABLE>
<CAPTION>
                                                              Gross       Gross       Estimated
                                                   Amortized  Unrealized  Unrealized  Market
                                                   Cost       Gains       Losses      Value
                                                   ----       -----       ------      -----
<S>                                                <C>        <C>         <C>         <C>
Obligations of U.S. government
  agencies.....................................    $  14,990          --         ---  $ 14,990
Corporate debt securities......................      181,702          24       1,048   180,678
                                                   ---------  ----------  ----------  --------

Total..........................................    $ 196,692  $       24  $    1,048  $195,668
                                                   =========  ==========  ==========  ========
</TABLE>

The amortized cost and estimated market value of investments in fixed maturities
available-for-sale at June 30, 2001, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or repay obligations with or without call or
prepayment penalties (in thousands).

                                                                     Estimated
                                                          Amortized  Market
                                                          Cost       Value
                                                          -----      -----


Due after one year through five years................     $196,692   $195,668
                                                          ========   ========

(6)  Goodwill and Other Intangible Assets

The excess of the purchase price for companies acquired over the fair value of
the net assets acquired is classified as goodwill. Goodwill and other intangible
assets are generally amortized on a straight-line basis over a three-year
period.

(7)  Impairment of Long-Lived Assets

On June 2, 2000, the Company completed the acquisition of Velogic, Inc. for
830,684 shares of the Company's common stock. The acquisition was valued at
approximately $39.2 million in total. The acquisition was accounted for as a
purchase business combination and resulted in approximately $36.7 million of

                                       8
<PAGE>

goodwill and approximately $4.1 million of other intangible assets.

On August 18, 2000, the Company completed the acquisition of Digital Content,
L.L.C.  The acquisition was accounted for as a purchase business combination and
resulted in approximately $5.2 million in goodwill and approximately $3.1
million in other intangible assets.

The Company reviews its goodwill and other intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. The Company's policy is to assess the
recoverability of goodwill using estimated undiscounted cash flows. Those cash
flows include an estimated terminal value based on a hypothetical sale of an
acquisition at the end of the related goodwill amortization period. The
acquisitions have not been performing as well as expected and market conditions
used to estimate terminal values have continued to remain depressed. As a
result, management has recorded an impairment charge in the quarter ended June
30, 2001, in the amount of approximately $30.5 million. At June 30, 2001, the
Company had a remaining balance of approximately $1.5 million of goodwill and
other intangible assets.

The impairment of goodwill and other intangible assets resulted in a write-off
of the net book value during the three months ended June 30, 2001 as follows (in
thousands):

<TABLE>
<CAPTION>
                                                    Goodwill      Other Intangible      Total
                                                    --------      ----------------      -----
                                                                      Assets
                                                                      ------
<S>                                                 <C>           <C>                   <C>
          Digital Content ...................       $  3,100         $  1,800           $ 4,900
          Velogic............................         23,000            2,600            25,600
                                                    -------          --------           -------
                  Total .....................       $ 26,100         $  4,400           $30,500
                                                    ========         ========           =======
</TABLE>

Total acquisition related charges and amortization of goodwill and intangibles
amounted to $34.6 million for the three months ended June 30, 2001, of which
$30.5 million was written off as asset impairment charges and $4.1 million was
due to amortization during the quarter.


(8)  Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock excluding shares of restricted stock subject
to repurchase summarized below. Diluted net loss per share is computed using the
weighted-average number of shares of common stock outstanding and, when
dilutive, potential common shares from options and warrants to purchase common
stock using the treasury stock method.

The following potentially dilutive common shares have been excluded from the
computation of diluted net loss per share because the effect would have been
antidilutive (in thousands):


<TABLE>
<CAPTION>
                                                                        Three and      Nine Months
                                                                           Nine          Ended
                                                                      Months Ended
                                                                      June 30, 2001   June 30, 2000
                                                                      -------------   ------------
<S>                                                                   <C>             <C>
     Shares issuable upon exercise of stock options .............          2,666          1,995

     Shares of restricted stock subject to repurchase ............           130            369
     </TABLE>

For the three months ended June 30, 2000,  the reconciliation of basic to fully
diluted common shares is as follows  (in thousands):

<TABLE>
<S>                                                                   <C>
          Basic shares outstanding ...............................    26,623

          Shares outstanding under stock options....................   1,946
                                                                      ------

          Diluted shares outstanding ...............................  28,569
                                                                      ======
</TABLE>

                                       9
<PAGE>

The weighted-average exercise price per share of common stock subject to stock
options was $22.39 as of June 30, 2001, and $7.24 as of June 30, 2000. The
weighted-average repurchase price of restricted stock was $0.72 as of June 30,
2001, and $0.26 as of June 30, 2000.


(9)  Recent Accounting Pronouncements

In July 2001, the FASB issued Statement No. 141, Business Combinations (SFAS
141), and Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001.  SFAS 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately.  SFAS 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.

The Company is required to adopt the provisions of SFAS 141 immediately, except
with regard to business combinations initiated prior to July 1, 2001, and SFAS
142 effective October 1, 2002.   Furthermore, any goodwill and any intangible
asset determined to have an indefinite useful life that are acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS 142 accounting literature.  Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS 142.

SFAS 141 will require, upon adoption of SFAS 142, that the Company  evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and make any necessary reclassifications in order to
conform with the new criteria in SFAS 141 for recognition apart from goodwill.
Upon adoption of SFAS 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption.  In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of SFAS 142 within the first interim period.  Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, SFAS 142
will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption.  To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption.  The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount.  To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS 141, to its carrying amount, both of which would be
measured as of the date of adoption.   This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.

As of the date of adoption, including the impact of the acquisition of the
assets of the management service provider business of Envive, the Company
expects to have, in total, unamortized goodwill in the amount of approximately
$5.0 million, and unamortized identifiable intangible assets in the amount of
$500,000, all of which will be subject to the transition provisions of SFAS's
141 and 142. Amortization expense related to goodwill and intangible assets was
approximately $4.1 million and approximately $1.1 million for the 3 months ended
June 30, 2001 and 2000, respectively, and approximately $17.1 million and
approximately $1.1 million for the 9 months ended June 30, 2001 and 2000,
respectively. Because of the extensive effort needed to comply with adopting
SFAS's 141 and 142, it is not practicable to reasonably estimate the impact of
adopting these SFAS's on the Company's financial statements at the date of this
report, including whether any transitional impairment losses will be required to
be recognized as the cumulative effect of a change in accounting principle.

                                       10
<PAGE>

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A and SAB101B, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosure related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B, which delays the
implementation of SAB 101. The Company adopted this SAB on July 1, 2001.
Adoption of this bulletin did not have a material effect on the financial
position or results of operations of the Company.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), and in July 1999 issued Financial Accounting
Standard No. 137, Accounting For Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133 (SFAS 137).  SFAS 137 delayed the effective date for SFAS 133
by one year. SFAS 133 was further amended by Financial Accounting Standard No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities (SFAS 138), which was issued in June 2000. The Company adopted SFAS
133 on October 1, 2000. Adoption of this statement did not have a material
effect on the Company's financial position or results of operations, since to
date the Company's investments in derivative instruments have not been
significant and the Company has not engaged in any hedging activities.

(10)  Segment Information

The Company has determined that it operates in a single operating segment:
developing and selling services to measure, assure and improve the quality of
service of web sites.  In December 1999, the Company opened an international
office which is now located in London, England.  All of the Company's long-lived
assets are located in the United States.  To date, there have been no
significant operating revenues or expenses from the Company's international
operations.

(11)  Acquisitions

On June 2, 2000, the Company completed the acquisition of Velogic, Inc., a
provider of load-testing services for e-businesses. The Velogic merger was
intended to be a tax-free reorganization and was accounted for under the
purchase method of accounting. In connection with the Velogic merger, the
Company issued an aggregate of 830,684 shares of its common stock for all of the
outstanding capital stock of Velogic and assumed all stock options and warrants
of Velogic. The value of shares issued and stock options assumed (the purchase
consideration) was approximately $39.2 million. In addition, if Velogic achieves
certain revenue targets attributed to Velogic products and services in 2001, the
Company will be obligated to issue to the former Velogic shareholders additional
shares of Keynote common stock or cash having an aggregate value of up to
approximately $3.9 million. The determination as to whether cash or stock will
be paid, if performance targets are met, is at the sole discretion of the
Company.

The purchase consideration was allocated to the assets acquired and liabilities
assumed based on estimated fair values at the acquisition date. The primary
purchase adjustments related to recording goodwill of approximately $36.7
million and other intangible assets of approximately $4.1 million. Goodwill and
other intangible assets are being amortized on a straight-line basis over
thirty-six months. Impairment write-offs and amortization of goodwill and other
intangible assets related to the Velogic acquisition, for the three and nine
months ended June 30, 2001, was approximately $29.0 million and $35.8 million,
respectively. The condensed consolidated statements of operations include
activity of Velogic subsequent to the acquisition.

On August 18, 2000, the Company completed the acquisition of Digital Content,
L.L.C., a provider of website accessibility monitoring for e-businesses. The
Digital Content merger is accounted for under the purchase method of accounting.

The transaction was completed for $15 million in cash, plus up to an additional
$10 million in cash to be paid if certain revenue target goals are met in the 12
months ended December 31, 2001. If Digital Content's revenues equal or exceed
the revenue target goals in the twelve months ended December 31, 2001, $10
million in cash shall be distributed pro rata by the Company to the designated
members, except those members who were employees of Digital Content on the
agreement date, but who are no longer employees of Digital Content on the
payment date, according to each Digital Content member's percentage of interest.
Notwithstanding the previous sentence, in the event that Digital Content's
revenues for the 12 months ended December 31, 2001 equal or exceed $4 million
but are less than $5 million, $5 million in cash shall be distributed pro rata
by the Company to all of the members according to each Digital Content member's
percentage interest.

The purchase consideration was allocated to the assets acquired and liabilities
assumed based on estimated fair values at the acquisition date. The primary
purchase adjustments related to recording goodwill of approximately $5.2 million
and other intangible assets of approximately $3.1 million. A portion of the
consideration for the Digital Content acquisition, in the amount of $6.4 million
is attributed to deferred compensation, and was amortized over six months and
recorded in the condensed consolidated statement of operations as acquisition-
related charges.  Goodwill and other intangible assets are being amortized on a
straight-line basis over thirty-six months. Impairment write offs and
amortization of goodwill and other intangible assets related to the acquisition,
for the three and nine months ended June 30, 2001 was approximately $5.6 million

                                       11
<PAGE>

and approximately $7.0 million, respectively. The condensed consolidated
statements of operations include activity of Digital Content subsequent to the
acquisition.

Acquisition-related charges, amortization and impairment of goodwill and other
intangible assets and amortization of stock-based compensation of approximately
$34.7 million recorded in the condensed consolidated statement of operations for
the three months ended June 30, 2001, includes amortization of goodwill and
other intangible assets of approximately $4.1 million, impairment write offs of
goodwill and other intangible assets of approximately $30.5 million, and
amortization of stock-based compensation of $85,000.

The following summary, prepared on an unaudited pro-forma basis, reflects
consolidated results of operations for the three and nine months ended June 30,
2001, and 2000, assuming Velogic and Digital Content had been acquired on
October 1, 1999, (in thousands, except per share data):

                                                      2001         2000
                                                      ----         ----
For the three months ended June 30:
   Revenues........................................  $ 11,069   $ 10,079
   Net loss........................................   (34,448)    (2,937)
   Basic and diluted net loss per share............     (1.24)      (.11)
   Shares used in pro-forma per share computation..    27,784     27,385

For the nine months ended June 30:
   Revenues........................................  $ 36,114   $ 22,560
   Net loss........................................   (37,736)   (21,944)
   Basic and diluted net loss per share............     (1.36)     (0.87)
   Shares used in pro-forma per share computation..    27,663     25,328

(12)  Lease Commitments

The Company leases its facilities and certain equipment under non-cancelable
operating leases. Additionally, the Company has entered into capital leases. On
July 11, 2000, the Company entered into a lease agreement for an 188,000 square
foot office building in San Mateo, California, which the Company began occupying
in March 2001. Payments under this operating lease are based on LIBOR. The rates
charged are based on 30-day to 180-day LIBOR contracts. To collateralize this
obligation, $85.0 million has been deposited in an interest-bearing escrow
account and is included in the balance sheet as restricted cash at June 30,
2001.

At June 30, 2001, future minimum payments under the leases, net of sub lease
income, are as follows:


<TABLE>
<CAPTION>
Year ending June 30:                                                           (In Thousands)
                                                                          Operating        Capital
                                                                          ---------        -------
<S>                                                                       <C>              <C>
2002................................................................       $  5,705        $   149
2003................................................................          6,103             --
2004................................................................          6,103             --
2005................................................................         90,853             --
Thereafter..........................................................             52             --
                                                                           --------        -------
Total minimum lease payments........................................       $108,816        $   149
                                                                           ========        -------


Less amount representing interest...................................                            (5)
                                                                                           -------
Present value of minimum lease payments, all of which is current....                       $   144
                                                                                           =======
</TABLE>


(13)  Commitments

In April 2001, the Company's board of directors approved a voluntary stock
option exchange program. The program offered its employees (other than its Chief
Executive Officer, executive officers who report to the Chief Executive Officer,
directors and non-exempt employees) the opportunity to cancel certain stock
options granted on or after September 24, 1999,

                                       12
<PAGE>

in exchange for new options to be granted at least six months and one day after
the current options were cancelled, with exercise price equal to the then fair
market value. Options to purchase a total of approximately 1.2 million shares
were cancelled pursuant to this program in May 2001. Subject to the terms and
conditions of the program, the Company expects to grant new options to purchase
a total of approximately 1.2 million shares on or after November 9, 2001.

(14)  Subsequent Events

On July 13, 2001 Keynote acquired the assets of the management service provider
business of Envive Corporation, a provider of web application performance
management solutions. The transaction was completed for approximately $4 million
in cash.

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

You should read the following information in conjunction with the interim
unaudited condensed consolidated financial statements and related notes.

Except for historical information, this quarterly report contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These forward-
looking statements involve risks and uncertainties, including, among other
things, statements regarding our anticipated costs and expenses and revenue mix.
These forward-looking statements include, among others, statements including the
words "expect," "anticipate," "intend," "believe" and similar language. Our
actual results may differ significantly from those projected in the forward-
looking statements. Factors that might cause or contribute to these differences
include, but are not limited to, those discussed in this section and in our
annual report on Form 10-K for the fiscal year ended September 30, 2000, under
the section "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That May Impact Future Operating Results" and
elsewhere in that report. You should carefully review the risks described in
other documents we file from time to time with the Securities and Exchange
Commission, including our annual report on Form 10-K, which was filed on
December 29, 2000, and the quarterly reports on Form 10-Q or current reports on
Form 8-K that we have filed and will file in 2001. You are cautioned not to
place undue reliance on the forward-looking statements, which speak only as of
the date of this quarterly report on Form 10-Q. We undertake no obligation to
publicly release any revisions to the forward-looking statements or reflect
events or circumstances after the date of this document.


Overview

Keynote provides Internet performance measurement, diagnostic and consulting
services to companies that operate electronic business, or e-business, web
sites. Our benchmarking and performance management services are designed to
enable our customers to improve the quality of service of their e-business web
sites around the world.

We derive and expect to continue to derive our revenues from the sale of our Web
performance benchmarking and Web performance management services. Our
Perspective services, together with our Red Alert and monitoring and alarm
service, are subscription-based services that our customers purchase for an
initial three-month term and then may renew their subscription on an annual,
semi-annual or month-to-month basis. Subscription fees vary based on the number
of URLs measured, the number of devices monitored, the number of measurement
locations, and the frequency of the measurements, the additional features
ordered, and the type of service. We offer our consulting services on a per
engagement basis.

Subscription services revenue consists of fees from subscriptions to our
Internet measurement monitoring and diagnostic services. Our subscription
revenues are deferred upon invoicing and are recognized ratably over the service
period, generally ranging from one to twelve months. Deferred revenue is
comprised entirely of deferred subscription revenue. A portion of subscription
revenues is invoiced monthly upon completion of measurement services. Any
unearned revenue is recorded as deferred revenue on our balance sheet. As of
June 30, 2001, we had recorded approximately $3.8 million of deferred revenue.

Revenues from our consulting services are recognized as the services are
performed; a typical project lasts one month. For longer consulting projects, we
recognize revenue on a percentage-of-completion basis.

For the quarter ended June 30, 2001, 10 customers accounted for approximately
24% of our total revenues. We cannot be certain that customers that have
accounted for significant revenues in past periods, individually or as a group,
will renew our services and continue to generate revenue in any future period.
In addition, our customer agreements can generally be terminated at any time
with little or no penalty. If we lose a major customer, our revenues could
decline.

                                       13
<PAGE>

Results of Operations

Three and Nine Months Ended June 30, 2001 and 2000
<TABLE>
<CAPTION>
Revenues                                                   2001       2000  % Change
                                                        -------    -------  --------
                                                               (in thousands)
<S>                                                     <C>        <C>      <C>
For the three months ended June 30:
  Subscription services.........................        $10,376    $ 9,283        12%
  Consulting services...........................        $   693    $   432        60%

For the nine months ended June 30:
  Subscription services.........................        $34,484    $20,733        66%
  Consulting services...........................        $ 1,630        956        71%
</TABLE>

Subscription Services. Revenues from subscription services increased
approximately $1.1 million, or 12%, for the three months ended June 30, 2001, as
compared to the same period in 2000. Revenues from subscription services also
increased approximately $13.8 million, or 66%, during the nine months period
ended June 30, 2001, as compared to the same period in 2000. Subscription
services represented 94% and 96% of total revenues for the three months ended
June 30, 2001 and 2000, respectively, and 96% for nine months period ended June
30, 2001, and 2000. The increase in subscription services revenue was
attributable to the increase in the number of new customers, the increase in
services purchased by existing customers and the introduction of additional
services during the year. We do not distinguish between revenues generated by
new customers and revenues generated by existing customers. For the three and
nine months ended June 30, 2001, no single customer accounted for more than 10%
of total revenues. For the three and nine months ended June 30, 2000, one
customer accounted for more than 10% of total revenues.

Consulting Services. Revenues from consulting services increased $261,000, or
60%, for the three months ended June 30, 2001, as compared to the same period in
2000. Revenues from consulting services also increased $674,000, or 71%, during
the nine months ended June 30, 2001, as compared to the same period in 2000. We
did not have revenues from our KeyReadiness load-testing service in the quarter
ended June 30, 2000, because we started offering our load testing services in
July 2000. Revenue from these services will continue to be included in
consulting services. Although consulting revenues have not been significant to
date, we believe that consulting revenues may account for a greater portion of
revenue in the future as we introduce additional services and increase the
customer base.

Expenses:

Cost of Consulting and Subscription Services

<TABLE>
<CAPTION>
                                                2001     2000  % Change
                                              ------   ------  --------
                                                   (In thousands)
<S>                                           <C>      <C>     <C>
For the three months ended June 30:
 Cost of subscription services.......         $3,375   $2,622        29%
 Cost of consulting services.........         $  739   $  533        39%

For the nine months ended June 30:
 Cost of subscription services.......         $9,629   $6,870        40%
 Cost of consulting services.........         $2,223   $1,086       105%
</TABLE>

Cost of Subscription Services. Cost of subscription services consists of
connection fees to Internet service providers for bandwidth usage of our
measurement computers, which are located around the world, and depreciation,
maintenance and other equipment charges for our measurement and data collection
infrastructure. Cost of subscription services increased $753,000, or 29% during
the quarter ended June 30, 2001, as compared to the quarter ended June 30, 2000.
Cost of subscription services increased approximately $2.8 million, or 40% for
the nine months ended June 30, 2001, as compared to the same period in 2000.
This increase was primarily due to the greater number of measurement computers
deployed and additional bandwidth consumption, resulting in higher connection
fees and additional depreciation and equipment charges. In addition, we
continued to increase measurement capacity and bandwidth at our existing
locations, and expand our measurement infrastructure. Cost of subscription
services was 33% of subscription service revenue in the quarter ended June 30,
2001, as compared to 28% in the quarter ended June 30, 2000. Cost of
subscription services was 28% of subscription service revenue in the nine months
ended June 30, 2001, as compared to 33% in the nine months ended June 30, 2000.
The increase in the cost of subscription services as a percentage of
subscription revenue was primarily the result of greater depreciation expenses
due to additional investments in our infrastructure.

                                       14
<PAGE>

Cost of Consulting Services. Cost of consulting services consists of
compensation expenses for consulting personnel and related costs and all load-
testing bandwidth costs and related infrastructure costs. Cost of consulting
services increased $206,000, or 39% during the quarter ended June 30, 2001, as
compared to the quarter ended June 30, 2000. Cost of consulting services
increased approximately $1.1 million, or 105% for the nine months ended June 30,
2001, as compared to the same period in 2000. Cost of consulting services
exceeded consulting services revenue in the quarter ended June 30, 2001 and
2000, and the nine months ended June 30, 2001 and 2000 because of the increase
in headcount related costs associated with our growing professional services
group combined with lower revenues generated by this group. The decrease in the
costs of consulting services as a percentage of consulting revenue was due to
better utilization of this group's personnel. We expect that the cost of
consulting services as a percentage of consulting services revenues will
continue to be greater than the cost of subscription services as a percentage of
subscription services revenues.


Research and Development

                                                        2001    2000  % Change
                                                      ------  ------  --------
                                                      (In thousands)

For the three months ended June 30:
 Research and development.......................      $1,575  $1,463      8%
For the nine months ended June 30:
 Research and development.......................      $5,361  $3,405     57%

Research and development expenses consist primarily of compensation and related
costs for research and development personnel. Research and development expenses
increased $112,000 or 8% during the quarter ended June 30, 2001, as compared to
the quarter ended June 30, 2000. Research and development expenses increased
approximately $2.0 million, or 57% for the nine months ended June 30, 2001, as
compared to the same period in 2000. Research and development expenses increased
from the third quarter of fiscal 2000 to the third quarter of fiscal 2001 due to
the increase in software engineers, project management and quality assurance
personnel. To date, all research and development expenses have been expensed as
incurred. We anticipate that research and development expenses will grow in
subsequent quarters due to the expected increases in occupancy costs associated
with our new building and other normal recurring compensation related increases.

Sales and Marketing

                                                     2001     2000   % Change
                                                     ----     ----   --------
                                                    (In thousands)

For the three months ended June 30:
 Sales and marketing...........................    $ 4,992   $ 4,808    4%
For the nine months ended June 30:
 Sales and marketing...........................    $16,460   $11,617   42%

Sales and marketing expenses consist primarily of salaries, commissions and
bonuses earned by sales and marketing personnel, lead-referral fees, marketing
programs and travel expenses. Our sales and marketing expenses increased
approximately $184,000 or 4% during the quarter ended June 30, 2001, as compared
to the quarter ended June 30, 2000. Sales and marketing expenses increased
approximately $4.8 million, or 42% for the nine months ended June 30, 2001, as
compared to the same period in 2000. The increase in sales and marketing
expenses is due to our investment in additional personnel in our sales and
marketing organization and marketing programs. It also includes salaries and
referral fees to recruit and hire sales management, sales representatives and
sales engineers. We anticipate that sales and marketing expenses will grow in
subsequent quarters due to the expected increases in occupancy costs associated
with our new building and other normal recurring compensation related increases.


Operations

                                                        2001    2000  % Change
                                                      ------  ------  --------
                                                      (In thousands)

For the three months ended June 30:
 Operations.....................................      $1,832  $1,418        29%

                                       15
<PAGE>

For the nine months ended June 30:
 Operations.....................................      $5,479  $3,256        68%

Operations expenses consist primarily of compensation and related costs for
management and technical support personnel, who manage and maintain our field
measurement and collection infrastructure, headquarters data center and provide
twenty-four by seven customer support. Our operations personnel also work
closely with other departments to assure the reliability of our services and to
support our sales and marketing activities. Our operations expenses increased
$414,000 or 29% during the quarter ended June 30, 2001, as compared to the
quarter ended June 30, 2000. Operations expenses increased approximately $2.2
million, or 68% for the nine months ended June 30, 2001, as compared to the same
period in 2000. The increase in operations expenses was primarily related to the
hiring of personnel to manage and support our larger customer base. We
anticipate that operations expenses will grow in subsequent quarters due to the
expected increases in occupancy costs associated with our new building and other
normal recurring compensation related increases.



General and Administrative

                                                       2001    2000  % Change
                                                     ------  ------  --------
                                                     (In thousands)
For the three months ended June 30:
 General and administrative....................      $1,776  $1,346        32%

For the nine months ended June 30:
 General and administrative....................      $5,483  $3,503        57%

General and administrative expenses consist primarily of salaries and related
expenses, accounting, legal and administrative expenses, insurance, professional
service fees and other general corporate expenses. Our general and
administrative expenses increased $430,000 or 32% during the quarter ended June
30, 2001, as compared to the quarter ended June 30, 2000. General and
administrative expenses increased approximately $2.0 million, or 57% for the
nine months ended June 30, 2001, as compared to the same period in 2000. The
increase in our general and administrative expenses was primarily related to
hiring additional employees to support the growth of our business, as well as
increases in costs associated with being a public company. We anticipate that
general and administrative expenses will grow in subsequent quarters due to the
expected increases in occupancy costs associated with our new building and other
normal recurring compensation related increases.


Restructuring Costs

                                                      2001     2000    % Change
                                                     -----     ----    --------
                                                     (in thousands)

For the three months ended June 30:
    Restructuring Costs ....................         $ 271      ---

For the nine months ended June 30:                   $ 271      ---
    Restructuring Costs ....................

In April 2001, we incurred restructuring costs of $271,000 relating to a
reduction of our workforce. We reduced our workforce by approximately 36
employees, a 13% reduction from March 31, 2001. The restructuring costs consist
of severance payments which were paid in full during the quarter ended June 30,
2001.

Acquisition Related Charges, Amortization and Impairment of Goodwill and Other
Intangible Assets, and Amortization of Stock-Based Compensation

                                                       2001      2000   % Change
                                                      -------   ------  --------
                                                       (In thousands)

                                       16
<PAGE>

<TABLE>
<S>                                                                   <C>       <C>         <C>
 For the three months ended June 30:
      Acquisition Related Charges, Amortization and
      Impairment of Goodwill and Other Intangible Assets,
      and Amortization of Stock-Based Compensation.................   $34,676   $1,210      2766%

  For the nine months ended June 30:
      Acquisition Related Charges, Amortization and
      Impairment of Goodwill and Intangible Assets,
      and Amortization of Stock-Based Compensation.................   $47,907   $1,381      3369%
</TABLE>

We review our goodwill and other intangible assets for impairment whenever
events or changes in circumstances indicated that the carrying amount of these
assets may not be recoverable. Our policy is to assess the recoverability of
goodwill using estimated undiscounted cash flows. Those cash flows include an
estimated terminal value based on a hypothetical sale of an acquisition at the
end of the related goodwill amortization period.

In connection with the purchase of Velogic in June 2000 and Digital Content in
August 2000, we recorded approximately $49.1 million in goodwill and other
intangible assets. For the quarter ended June 30, 2001, we recorded
approximately $34.6 million in amortization and impairment of goodwill and other
intangible assets, of which approximately $30.5 million relates to impairment.
At June 30, 2001, we had a remaining balance of approximately $1.5 million of
goodwill and other intangible assets. We expect the amortization for the
remainder of fiscal 2001, including the impact of our acquisition of the assets
of the management service provider business of Envive, to be approximately
$500,000, assuming no additional acquisitions or impairment charges.

The approximate amount of the goodwill and other intangible assets written off
as asset impairment charges during the third quarter of fiscal 2001 is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                              Other Intangible
                                                                  Goodwill          Assets           Total
                                                                  --------          ------         ---------


<S>                                                                <C>          <C>                   <C>
          Digital Content .................................       $  3,100       $     1,800       $   4,900
          Velogic..........................................         23,000             2,600          25,600
                                                                  --------       ------------      ---------
               Total .......................................      $ 26,100       $     4,400       $  30,500
                                                                  ========       ============      =========
</TABLE>

Some options granted prior to June 30, 1999, have been considered to be
compensatory, as the estimated fair value for accounting purposes was greater
than the stock price as determined by the board of directors on the date of
grant. As a result, we have recorded amortization of deferred compensation
expense in the amount of $85,000 for the three months ended June 30, 2001 and
2000, and had an aggregate of $538,000 and $879,000 included in deferred
compensation remaining to be amortized as of June 30, 2001 and 2000,
respectively. Deferred compensation is amortized on a straight-line basis over
the vesting period of the options.

The amortization expense related to stock based compensation was the same as in
prior quarters and amounted to approximately $85,000 for each quarter.



Interest Income, Net

                                         2001      2000     % Change
                                       --------  -------- ------------
                                        (In thousands)

For the three months ended June 30:
 Interest income, net................  $  3,869  $  5,408     (28%)

For the nine months ended June 30:
 Interest income, net................  $ 14,578  $  8,675      68%

Net interest income decreased approximately $1.5 million, or 28% during the
quarter ended June 30, 2001, as compared to the quarter ended June 30, 2000. Net
interest income increased approximately $5.9 million, or 68% for the nine months
ended June 30, 2001, as compared to the same period in 2000. The increase in the
nine-month period was primarily due to interest income from our increase in cash
and cash equivalents and restricted cash resulting from the proceeds we received
in February 2000 from our secondary public offering. The decrease in interest
income in the three-month period was related to the decline in interest rates
and the amount of interest income earned on our invested cash. We expect that
net interest income will decline somewhat further during 2001 due to a general
decline in interest rates and the amount of interest that is earned on our cash,
cash equivalents and restricted cash.

                                       17
<PAGE>

Provision for Income Taxes

A provision for federal and state income taxes of $150,000 and $450,000 has been
recorded for the three and nine months ended June 30, 2001, respectively,
principally for alternative minimum tax.

No provision for federal and state income taxes has been recorded for the three
and nine months ended June 30, 2000, because we had experienced net losses
through that date.

Liquidity and Capital Resources

Since our inception, we have funded our operations primarily through sales of
our equity securities. Prior to our initial public offering, in September 1999,
we had raised approximately $25.8 million, net of offering costs, from the sale
of common stock and preferred stock. In September and October 1999, we raised
$56.7 million, net of issuance costs, in connection with our initial public
offering.  In a subsequent public offering in February 2000, we raised $286.3
million, net of issuance costs. In addition, we financed our operations through
subordinated and other debt, equipment loans and a capital lease. The principal
balance outstanding at June 30, 2001, for these loans and leases was
approximately $1.2 million.  At June 30, 2001, we had approximately $59.8
million in cash and cash equivalents, approximately $196 million in short-term
investments, and $85 million in restricted cash, for a total of $340.5 million.

Net cash provided by operating activities was approximately $7.8 million in the
nine months ended June 30, 2001. Net cash provided by operating activities was
primarily the result of income from operations before deduction of depreciation
and amortization of property and equipment and amortization and write-off of
goodwill, other intangible assets, and deferred compensation. The increase was
partially offset by an increase in prepaids and other assets, due mainly to an
increase in interest receivable and a reduction in deferred revenue. Net cash
provided by operating activities was approximately $4.2 millions in the nine
months ended June 30, 2000. Net cash provided by operating activities was
primarily the result of income from operations before deduction of depreciation
and amortization of property and equipment and amortization of goodwill, other
intangible assets, and deferred compensation. The increase was also due to an
increase in deferred revenue and accounts payable and accrued expenses, which
was partially offset by an increase in accounts receivable and an increase in
prepaids and other assets.

Our investing activities are related to purchases of short-term investments and
property and equipment. Capital expenditures totaled approximately $10.7 million
in the nine months ended June 30, 2001, and approximately $4.8 million in the
nine months ended June 30, 2000. Capital expenditures increased during fiscal
2001 primarily due to costs associated with the upgrade and preparation of our
new corporate headquarters for occupancy, costs associated with the enhancement
of our business systems, and growth in our network and infrastructure. Purchases
of short-term investments in each of the three and nine months ended June 30,
2001 were approximately $197 million.

Net cash used for financing activities was $765,000 in the nine months ended
June 30, 2001, primarily as a result of repayments of notes and capital leases
in the amount of $986,000. Our financing activities provided approximately
$292.1 million in the nine months ended June 30, 2000, including $7.8 million,
net of issuance costs, in October 1999, from the exercise of the underwriter
over-allotment option from our initial public offering and $286.3 million, net
of issuance costs, from our subsequent public offering in February 2000.

As of June 30, 2001, our principal commitments consisted of approximately $110.0
million related to loans and lease obligations. We have granted a security
interest in substantially all of our assets to secure these loans and leases.
The interest rates on our loans and leases range from 4.8% to 5.2% per year. Our
commitments include approximately $108.8 million in future lease payments for
our headquarters facility. We have $85.0 million of restricted cash that is
deposited with a financial institution, earning interest income, and serves as
full collateral for the lease transaction. The lease agreement provides a
balloon payment, which is due and payable in June 2005. The building lease costs
have amounted to approximately $6.0 million annually but are expected to decline
somewhat due to a general decline in interest rates.

Because we expect to continue to increase the number of our measurement
computers and increase their measurement capacity, we expect that we will make
additional capital expenditures to purchase this equipment though not to the
level as in 2001. We anticipate that through the end of fiscal 2001 that we will
also make additional capital expenditures related to upgrading and preparing the
headquarters facility for occupancy. A significant part of the upgrades to the
facility are related to providing backup electrical generation capability due to
the inability to secure uninterrupted sources of electric power in California.

We believe our existing cash and cash equivalents will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months and longer. If after some period of time, cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or debt securities or to obtain a credit facility. If
additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and the term of this debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders, and we may not be able to
obtain additional financing on acceptable terms, if at all. If we are unable to
obtain this additional financing, our business may be harmed.

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<PAGE>

Recent Accounting Pronouncements

In July 2001, the FASB issued Statement No. 141, Business Combinations (SFAS
141), and Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001.  SFAS 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately.  SFAS 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.

We are required to adopt the provisions of SFAS 141 immediately, except with
regard to business combinations initiated prior to July 1, 2001, and SFAS 142
effective October 1, 2002.   Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that are acquired in a purchase
business combination completed after June 30, 2001 will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-SFAS 142 accounting literature. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of SFAS 142.

SFAS 141 will require upon adoption of SFAS 142, that we evaluate our existing
intangible assets and goodwill that were acquired in a prior purchase business
combination, and make any necessary reclassifications in order to conform with
the new criteria in SFAS 141 for recognition apart from goodwill.  Upon adoption
of SFAS 142, we will be required to reassess the useful lives and residual
values of all intangible assets acquired in purchase business combinations, and
make any necessary amortization period adjustments by the end of the first
interim period after adoption.  In addition, to the extent an intangible asset
is identified as having an indefinite useful life, we will be required to test
the intangible asset for impairment in accordance with the provisions of SFAS
142 within the first interim period.  Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, SFAS 142
will require us to perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption.  To accomplish this we must
identify our reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of adoption.  We
will then have up to six months from the date of adoption to determine the fair
value of each reporting unit and compare it to the reporting unit's carrying
amount. To the extent a reporting unit's carrying amount exceeds its fair value,
an indication exists that the reporting unit's goodwill may be impaired and we
must perform the second step of the transitional impairment test.  In the second
step, we must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of it assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with SFAS 141, to its carrying amount, both of
which would be measured as of the date of adoption.   This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption.  Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in our statement of
earnings.

As of the date of adoption including the impact of the acquisition of the assets
of the management service provider business of Envive, we expect to have, in
total unamortized goodwill in the amount of approximately $5.0 million, and
unamortized identifiable intangible assets in the amount of $500,000, all of
which will be subject to the transition provisions of SFAS's 141 and 142.
Amortization expense related to goodwill was approximately $4.1 million and
approximately $1.1 for the 3 months ended June 30, 2001 and 2000, respectively,
and approximately $17.1 million and approximately $1.1 million for the 9 months
ended June 30, 2001 and 2000, respectively. Because of the extensive effort
needed to comply with adopting SFAS's 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these SFAS's on the our financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A and SAB101B, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosure related to revenue
recognition policies.  In June 2000, the SEC issued SAB 101B, which delays the
implementation of SAB 101. We adopted SAB 101 on July 1, 2001. Adoption of this
bulletin did not  have a material effect on our financial position or results of
operations.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), and in July 1999 issued Financial Accounting
Standard No. 137,

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<PAGE>

Accounting For Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133
(SFAS 137). SFAS 137 delayed the effective date for SFAS 133 by one year. SFAS
133 was further amended by Financial Accounting Standard No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities (SFAS 138), which
was issued in June 2000. We adopted SFAS 133 on October 1, 2000. Adoption of
this statement did not have a material effect on our financial position or
results of operations since, to date, our investments in derivative instruments
have not been significant and we have not engaged in any hedging activities.

Factors That May Impact Future Operating Results

We are an early stage company with an unproven business model that makes it
difficult to evaluate our current business and future prospects.

We have only a limited operating history upon which to base an evaluation of our
current business and future prospects. For example:

    .   We formed our professional services organization in January 1999.

    .   We introduced our Transaction Perspective service in April 1999, our
        Website Perspective--Consumer Edition service in December 1999, and the
        most recent edition of our Website Perspective--Business Edition service
        in June 2000.

    .   In June 2000, we acquired Velogic, Inc., and in July 2000, we introduced
        our KeyReadiness load-testing service.

    .   In August 2000, we acquired Digital Content, L.L.C., and introduced our
        Red Alert service.

    .   We introduced our Streaming Perspective service in October 2000, and our
        Custom Perspective service in November 2000.

    .   We introduced our SLA Perspective service in February 2001.

    .   We introduced Keynote Enterprise Perspective in July 2001.

    .   In July 2001, we acquired the assets of the management service provider
        business of Envive Corporation and introduced our Test Perspective
        service.

The revenue and income potential of our current business and services and the
related market are unproven. In addition, because of our limited operating
history and because the market for Web performance benchmarking and Web
performance management services is relatively new and rapidly evolving, we have
limited insight into trends that may emerge and affect our business. Before
investing, you should evaluate the risks, expenses and problems frequently
encountered by companies such as ours that are in the early stages of
development and that are entering new and rapidly changing markets such as Web
performance benchmarking and Web performance management services.

We have incurred losses, we expect to incur future losses and we may never
achieve profitability.

We have experienced operating losses in each quarterly and annual period since
inception and we expect to incur operating losses in the future. We incurred net
losses of approximately $34.4 million for the quarter ended June 30, 2001, and,
as of June 30, 2001, we had an accumulated deficit of approximately $58.0
million.  For the quarter ended June 30, 2001, we incurred a significant non-
recurring, non-cash charges relating to the impairment of goodwill and other
intangible assets in connection with our acquisitions of Velogic and Digital
Content in the amount of approximately $30.5 million.  We believe that our
operating expenses will continue to increase as we grow our business. As a
result, we will need to increase our revenues to achieve and then maintain
profitability.  We may continue our recent trend of reporting sequential
quarterly reductions in revenue and may never be able to regain our historic
revenue growth rates.

The success of our business depends on customers renewing their subscriptions
for our services and purchasing additional services.

We depend on achieving high customer renewal rates for our revenues. Our
customers have no obligation to renew our services and therefore, they could
cease using our services at any time. In addition, our customers may renew for
fewer services. Furthermore, our customers may reduce their use of our services
during the term of their subscription. We cannot project the level of renewal
rates. Our customer renewal rates may decline as a result of a number of
factors, including consolidations in the Internet industry or if a significant
number of our customers cease operations. Further, because of the relatively
small size of initial orders, we depend on sales to new customers and sales of
additional services to our existing customers. Renewals by existing customers or
purchases of our

                                       20
<PAGE>

services by new customers may be limited as companies limit or reduce their
technology spending in response to recent uncertain economic conditions. During
the quarter ended June 30, 2001, we experienced a reduction in revenue from
Internet service provider customers, e-commerce and other Internet businesses.
We also experienced an increase in cancellations and nonrenewals. If we continue
to experience reduced renewal rates or if customers renew for a lesser amount of
our services, or if customers, at any time, reduce the amount of services they
purchase from us, our business would continue to be adversely affected.

To date, initial sales of our services and subsequent customer follow-up have
been primarily conducted by telephone. A few customers have, in the past,
expressed a preference for more personal, face-to-face interaction with their
Keynote salesperson. Although we have formed a major accounts sales organization
in January 2000, this team may not be successful in providing the level of
customer service required to satisfy the needs of our larger customer accounts.
Dissatisfaction by a customer with the nature or quality of our services could
lead that customer to elect not to renew its subscription to our services. If we
continue to experience cancellations and/or reductions in service, our revenues
could continue to decline unless we are able to obtain additional customers or
sources of revenues, sufficient to replace lost revenues.

Our quarterly financial results are subject to significant fluctuations, and if
our future results are below the expectations of public-market analysts and
investors, the price of our common stock may decline.

Our results of operations could vary significantly from quarter to quarter. We
expect to incur significant sales and marketing expenses to promote our brand
and our services, as well as additional expenses to expand our presence
worldwide. If revenues fall below our expectations, we may not be able to reduce
our spending rapidly enough in response to the shortfall. Other factors that
could affect our quarterly operating results include those described below and
elsewhere in this report:

    .   the renewal rate of subscriptions to our Internet performance
        measurement services;

    .   the amount and timing in any reductions by our customers in their usage
        of our service offerings;

    .   charges relating to goodwill and other intangibles from our past
        acquisitions or any future acquisitions;

    .   our ability to increase the number of web sites we measure for our
        existing customers in a particular quarter;

    .   our ability to attract new customers in a particular quarter;

    .   the amount and timing of operating costs and capital expenditures
        relating to expansion of our operations infrastructure, including our
        planned international expansion;

    .   the amount and timing of professional services revenues.

Due to these and other factors, we believe that period-to-period comparisons of
our results of operations are not meaningful and should not be relied upon as
indicators of our future performance. It is possible that in some future
periods, our results of operations may be below the expectations of public-
market analysts and investors. If this occurs, the price of our common stock may
decline.

The success of our business depends on the widespread adoption of the Internet
by business and consumers for e-business and communications.

Because our business is based on providing web performance benchmarking and web
performance management services, the Internet must be widely adopted, in a
timely manner, as a means of electronic commerce, or e-business, and
communications. Because e-business and communications over the Internet are new
and evolving, it is difficult to predict the size of this market and its
sustainable growth rate. In addition, we believe that the use of the Internet
for conducting business transactions could be hindered for a number of reasons,
including, but not limited to:

    .   security concerns including the potential for fraud or theft of stored
        data and information communicated over the Internet;

    .   inconsistent quality of service, including well-publicized outages of
        popular web sites;

    .   lack of availability of cost-effective, high-speed service;

                                       21
<PAGE>

    .   limited numbers of local access points for corporate users;

    .   delay in the development of enabling technologies or adoption of new
        standards;

    .   inability to integrate business applications with the Internet;

    .   the need to operate with multiple and frequently incompatible products;
        and

    .   a lack of tools to simplify access to and use of the Internet.


Our operating results depend on sales of our Keynote Perspective services.

Sales of our Perspective services, primarily Website Perspective--Business
Edition, have historically generated a substantial majority of our total
revenue. Therefore, the success of our business currently depends, and for the
immediate future will continue to substantially depend, on the sale of our
Website Perspective--Business Edition in addition to our other Keynote
Perspective services. Therefore, we believe that initial sales and renewals of
our Keynote Perspective services will account for a substantial portion of our
revenues for the immediate future. A decline in the price of, or fluctuation in
the demand for, Keynote Perspective services, or our inability to maintain or
increase sales, would cause our revenues to decline.

If one of our competitors' Internet performance measurement service is adopted
as the industry standard for measuring the speed and reliability of web sites,
we may lose existing customers or encounter difficulties in attracting new
customers.

To date, no Internet performance measurement service has been adopted as an
accepted industry standard for measuring the speed and reliability of web sites.
As a result, if one of our current or potential competitors develops an Internet
performance measurement service that is adopted as the industry standard, our
customers may turn to the services provided by these competitors. In addition,
it would be more difficult for us to attract the additional customers for our
Internet performance measurement services that are necessary for our business to
grow. If this were to occur, our business would be harmed.

Improvements to the infrastructure of the Internet could reduce or eliminate
demand for our Internet performance measurement services.

The demand for our web performance benchmarking and web performance management
services could be reduced or eliminated if future improvements to the
infrastructure of the Internet lead companies to conclude that measuring and
evaluating the performance of their web sites is no longer important to their
business. The Internet is a complex, heterogeneous network of communications
networks with multiple operators and vendors supplying and managing the
underlying infrastructure as well as connections to this infrastructure. Because
the inherent complexity of the Internet currently causes significant quality of
service problems for e-business companies, the vendors and operators that supply
and manage the underlying infrastructure are continuously seeking to improve the
speed, availability, reliability and consistency of the Internet. If these
vendors and operators succeed in significantly improving the performance of the
Internet, which would result in corresponding improvements in the performance of
companies' web sites, demand for our services would likely decline.

It would be more difficult for us to deliver our services and therefore earn
revenues if we cannot expand and manage our computer infrastructure
successfully.

We will need to continue to deploy a large number of measurement computers if we
continue to experience an increase in our customer base or if we expand our
operations and measurement capabilities on a worldwide basis. These computers
are responsible for measuring the performance of web sites and collecting
performance data and it is critical to our ability to deliver our services that
they operate effectively. As of June 30, 2001, we were measuring the performance
of approximately 12,500 web site addresses for our customers. We are still in
the process of deploying additional measurement computers and upgrading the
underlying infrastructure so that in the future we will be able to measure the
performance of a greater number of web site addresses. With more measurement
computers deployed and measurements conducted, we will need to monitor and
maintain a larger and more geographically dispersed computer network, and manage
an ever increasingly complex database, requiring us to devote significant
additional resources for these tasks. In addition, if we experience increases in
the number of our customers prior to deploying additional measurement computers,
our existing infrastructure may not have the capacity to accommodate the
additional customers. This could result in outages, interruptions or slower
response times, any of which could impair our ability to retain and attract
customers.

                                       22
<PAGE>

The inability of our services to perform properly could result in loss of or
delay in revenues, injury to our reputation or other harm to our business.

Services as complex as those we offer may not perform as we expect. We have,
from time to time, given credits to customers as a result of past problems with
our service, though we do not believe that any customers failed to renew their
subscription to our services due to these problems. Despite our testing, our
existing or future services may not perform as expected due to unforeseen
problems, which could result in loss of or delay in revenues, loss of market
share, failure to achieve market acceptance, diversion of development resources,
injury to our reputation, increased insurance costs or increased service costs.

These problems could also result in tort or warranty claims. Although we attempt
to reduce the risk of losses resulting from any claims through warranty
disclaimers and liability-limitation clauses in our customer agreements, these
contractual provisions may not be enforceable in every instance. Furthermore,
although we maintain errors and omissions insurance, this insurance coverage may
not adequately cover us for claims. If a court refused to enforce the liability-
limiting provisions of our contracts for any reason, or if liabilities arose
that were not contractually limited or adequately covered by insurance, we could
be required to pay damages.

If we do not continually improve our services in response to technological
changes, including changes to the Internet, we may encounter difficulties
retaining existing customers and attracting new customers.

The ongoing evolution of the Internet requires us to continually improve the
functionality, features and reliability of our web performance benchmarking and
web performance management services, particularly in response to competitive
offerings. If we do not succeed in developing and marketing new services that
respond to competitive and technological developments and changing customer
needs, we may encounter difficulties retaining existing customers and attracting
new customers. We must also introduce any new Internet services as quickly as
possible. The success of new services depends on several factors, including
properly defining the scope of the new services and timely completion,
introduction and market acceptance of our new services. If new Internet,
networking or telecommunication technologies or standards are widely adopted or
if other technological changes occur, we may need to expend significant
resources to adapt our services.

Our services and brand name might not attain the brand awareness necessary for
our business to succeed.

We believe that maintaining and strengthening the Keynote brand is an important
aspect of our business and an important element in attracting new customers. Our
efforts to build our brand will involve significant expense. To promote our
brand, we may increase our marketing budget or increase our financial commitment
to building our brand. If our brand-building strategy is unsuccessful, we may
fail to attract enough new customers or retain our existing customers to the
extent necessary to realize a sufficient return on our brand- building efforts.

We face growing competition that could make it difficult for us to acquire and
retain customers.

The market for web performance benchmarking and web performance management
services is relatively new and rapidly evolving. We expect competition in this
market to intensify in the future. Our competitors vary in size and in the scope
and breadth of the products and services that they offer. We face competition
from companies that offer software and services with features similar to our
services. For example, Mercury Interactive offers a service that competes with
our Transaction Perspective service, and Gomez Advisors and Service Metrics, a
unit of Exodus Communications, offer services similar to our Website
Perspective-Business Edition and Transaction Perspective services. In addition,
with respect to our KeyReadiness load-testing service, we compete with companies
that offer load-testing software, such as Segue Software, or that offer both
load-testing software and services, such as Mercury Interactive. With respect to
our Red Alert monitoring service, we face competition from software companies
such as Freshwater Software. While we believe these services are not as
comprehensive as ours, customers could still choose to use these less
comprehensive services or these companies could enhance their services to offer
all of the features we offer.

We could also face competition from other companies, which currently do not
offer services similar to our services, but offer software or services related
to web performance benchmarking and web performance management, such as
WebCriteria, MIDS Matrix IQ Service, and INS INSoft Division, and free services
that measure web site availability, including the WebSite Garage unit of
Netscape, NetMechanic and Internet Weather Report, a unit of MIDS Matrix IQ
Service. In addition, companies that sell network management software, such as
BMC Software, CompuWare, CA-Unicenter, HP-Openview and IBM's Tivoli Unit, with
some of whom we have strategic relationships, could choose to offer services
similar to ours.

In the future, we intend to expand our service offerings by measuring the speed
with which a web site can be navigated and desired content can be located. We
intend to continue to measure the impact of new Internet technologies as they
become available such as wireless telephony and Internet telephony. As we expand
the scope of our products and services, we may encounter many additional,

                                       23
<PAGE>

market-specific competitors. For example, in July 2001, we introduced our Test
Perspective service. Mercury Interactive has an offering that competes with
Test Perspective as well as our other load testing services.

We believe that the principal competitive factors affecting our market are:

    .   product features;

    .   product performance, including scalability, flexibility, availability
        and cost-effectiveness;

    .   quality of support and service; and

    .   company reputation.


Some of our competitors have, and our future competitors may have:

    .   longer operating histories;

    .   larger customer bases;

    .   greater brand recognition in similar businesses; and

    .   significantly greater financial, marketing, technical and other
        resources.

    In addition, some of our competitors may be able to:

    .   devote greater resources to marketing and promotional campaigns;

    .   adopt more aggressive pricing policies; and

    .   devote substantially more resources to technology and systems
        development.

Increased competition may result in price reductions, increased costs of
providing our services and loss of market share, any of which could seriously
harm our business. We may not be able to compete successfully against our
current and future competitors.

A limited number of customers account for a significant portion of our revenues,
and the loss of a major customer could harm our operating results.

Ten customers accounted for approximately 24% of our total revenues for the
quarter ended June 30, 2001. This concentration may continue in the future. We
cannot be certain that customers that have accounted for significant revenues in
past periods, individually or as a group, will renew, will not cancel or will
not reduce their services and, therefore, continue to generate revenue in any
future period. In addition, our customer agreements can generally be terminated
at any time with little or no penalty. If we lose a major customer, our revenues
could decline.

To grow our business, we need to establish and maintain relationships with other
companies to help market our Internet performance measurement and diagnostic
services.

To increase sales of our Internet performance measurement and diagnostic
services worldwide, we must complement our direct sales force with relationships
with companies to market and sell our services to their customers. If we are
unable to maintain our existing contractual marketing and distribution
relationships, or fail to enter into additional relationships, we will have to
devote substantially more resources to the direct sale and marketing of our
services. We would also lose anticipated revenues from customer referrals and
other co-marketing benefits. Our success depends in part on the ultimate success
of these relationships and the ability of these companies to market and sell our
services. Our existing relationships do not, and any future relationships may
not, afford us any exclusive marketing or distribution rights. Therefore, they
could reduce their commitment to us at any time in the future. Many of these
companies have multiple relationships and they may not regard us as significant
for their business. In addition, these companies may terminate their
relationships with us, pursue other relationships with our competitors or
develop or acquire products or services that compete with our services. Even if
we succeed in entering into these relationships, they may not result in
additional customers or revenues.

                                       24
<PAGE>

In addition, growth in the sales of our services depends on our ability to
obtain domestic and international resellers, distributors and integrators who
will market and sell our services on our behalf. In the future, we intend to
increase our indirect distribution channels through distribution arrangements.
We may not be successful in establishing relationships with these companies, and
any of these relationships, if established, may not increase our revenue.


To grow our business, we must attract and retain qualified personnel while
competition for personnel in our industry is intense.

We may be unable to retain our key employees, namely our management team and
experienced engineers, or to attract, assimilate or retain other highly
qualified employees. In April 2001, we reduced our workforce by approximately
13%, based on our staffing level as of March 31, 2001. Although a number of
other technology companies have also implemented workforce reductions, there
remains substantial competition for highly skilled employees with experience in
the Internet industry, a complex industry that requires a unique knowledge base.
Umang Gupta, our chief executive officer, is our only key employee with whom we
have entered into an employment agreement. Our key employees are not bound by
agreements that could prevent them from terminating their employment at any
time.

In addition, because we sell our Internet performance measurement and diagnostic
services primarily through our direct sales force, we believe that we will need
to attract additional sales personnel to grow our revenues. Our ability to
deliver our services also depends on our ability to attract and retain
operations personnel. There is a shortage of qualified sales and operations
personnel and competition for personnel in our industry is intense. If we are
unable to hire, train, motivate or retain qualified employees, including sales
and operations personnel, our business could be harmed.


Our recent personnel reduction may seriously harm our business.

In connection with our efforts to streamline our operations and reduce costs, we
recently restructured our organization with headcount reductions of
approximately 13%, based on our staffing level as of March 31, 2001. We incurred
costs associated with this personnel reduction related to severance and other
employee-related costs in the third quarter of 2001. As a result of these
reductions, our ability to respond to unexpected challenges may be impaired, and
we may be unable to take advantage of new opportunities. The personnel reduction
may reduce employee morale and create concern among existing employees about job
security, which would lead to increased turnover. Further, this reduction in
workforce may subject us to the risk of litigation.


If the market does not accept our professional services, our results of
operations could be harmed.

We formed our professional services organization, now part of our KeyReadiness
group, in January 1999. As a result, we have limited experience in delivering
consulting services and we may not be able to successfully introduce additional
consulting services. Consulting services represented approximately 6% of total
revenues for the quarter ended June 30, 2001. We will also need to successfully
market these services to potential customers. There are many experienced firms
which offer computer network and Internet-related consulting services. These
consulting services providers include the consulting companies, such as
Accenture and Ernst & Young, as well as consulting divisions of large technology
companies such as IBM. Because we do not have an established reputation for
delivering consulting services, because this area is very competitive, and due
to our general inexperience in delivering consulting services, we may not
succeed in selling these services.


The growth of our business depends on the continued performance of and future
improvements to the Internet.

The growth in Internet traffic has caused frequent periods of decreased
performance, requiring Internet service providers and web sites on the Internet
to upgrade their infrastructures. Our ability to increase the speed with which
we provide services to our customers and to increase the scope of these services
is limited by and depends upon the speed and reliability of the Internet.
Consequently, the emergence and growth of the market for our services and,
consequently our revenues, depends on the performance of and future improvements
to the Internet.


Because we have expanded our operations, our success will depend on our ability
to manage our growth, improve our existing systems and implement new systems,
procedures and controls.

We are expanding, and we intend to continue to expand, our operations by
deploying additional measurement computers, both domestically and
internationally, hiring new personnel and implementing and integrating new
accounting and control systems to manage this expansion. In addition, in fiscal
2000, we acquired Velogic and Digital Content, and we recently acquired the
assets of the management service provider business of Envive Corporation. We may
encounter difficulties in managing this growth. Our ability to compete


                                       25
<PAGE>

effectively and to manage any future expansion of our operations will require
continual improvement of our financial and management controls, reporting
systems and procedures on a timely basis. We may not succeed in these efforts
and a disruption could impair our ability to retain existing customers or
attract new customers.


Our network infrastructure could be disrupted by a number of different
occurrences, which could impair our ability to serve and retain existing
customers or attract new customers.

All data collected from our measurement computers are stored in and distributed
from our one operations center. Therefore, our operations depend upon our
ability to maintain and protect our computer systems, most of which are located
at our corporate headquarters in San Mateo, California, which is an area
susceptible to earthquakes and possible power outages resulting from a severe
shortage of electricity in California. If we experience outages at our
operations center, we would not be able to receive data from our measurement
computers and we would not be able to deliver our services to our customers. We
plan to develop a redundant system for computer-network and other services at an
alternate site, and to provide our own source of long-term uninterruptible
power. However, we do not currently have and may never develop a redundant
system, and we now currently have only short-term power back-up capability.
Various factors could cause us to not be able to ever develop such systems.
Therefore, our operations systems are vulnerable to damage from break-ins,
computer viruses, unauthorized access, vandalism, fire, floods, earthquakes,
power loss, telecommunications failures and similar events. Although we maintain
insurance against fires, floods, earthquakes and general business interruptions,
the amount of coverage may not be adequate in any particular case. If our
operations center is damaged, causing a disruption in our services, this could
impair our ability to retain existing customers or attract new customers.

In addition, we constructed a new data center at our new corporate headquarters
in San Mateo, California, which just recently became operational. If the
transition to the new data center results in data not being collected and
retained or if access to the data by our customers is limited or unavailable,
our revenue would be severely affected and our business would be harmed.

If our computer infrastructure is not functioning properly, we may not be able
to deliver our services in a timely or accurate manner. We have occasionally
experienced outages of our service in the past, the last of which occurred over
a year ago. The outages that we have experienced have lasted no more than a few
hours. These outages have been caused by a variety of factors including operator
error, the failure of a back-up computer to operate when the primary computer
ceased functioning and power outages due to our previous facility's being
inadequately equipped to house our operations center. Although we do not believe
we have lost any customers due to these prior outages, any outage for any period
of time could cause us to lose customers.

Individuals who attempt to breach our network security, such as hackers, could,
if successful, misappropriate proprietary information or cause interruptions in
our services. Although we have not yet experienced any breaches of our network
security or sabotage that has prevented us from serving our customers, we might
be required to expend significant capital and resources to protect against, or
to alleviate, problems caused by hackers. We may not have a timely remedy
against a hacker who is able to breach our network security. In addition to
intentional security breaches, the inadvertent transmission of computer viruses
could expose us to litigation or to a material risk of loss.


We rely on a continuous power supply to conduct our business, and California's
current energy crisis could disrupt our operations and increase our expenses.

We collect and store performance data at our data center located in California,
which is currently experiencing an extreme shortage of electricity. When
electrical power reserves for the State of California fall below specified
levels, California has, in the past, implemented, and may in the future continue
to implement, rolling blackouts of electrical service throughout the state.
Although we currently have battery powered back-up capacity and short-term
diesel powered electrical generating capability, if the blackouts extend for
periods extending beyond the levels of our battery powered and diesel powered
back-up, we would be temporarily unable to continue operations at our
facilities. We would not be able to receive data from our measurement computers
and we would not be able to deliver our services to our customers. Our current
insurance does not provide coverage for any damages our customers or we may
suffer as a result of any interruption in our power supply or that of our
hosting provider. Any interruption of our electrical power could damage our
reputation, harm our ability to retain existing customers and to obtain new
customers, and could result in lost revenue, any of which could substantially
harm our business and results of operations. Furthermore, prices for electricity
have increased dramatically over the past year. If prices continue to increase,
our operating expenses and costs to supply power to tenants will likely
increase, as our principal facilities are located in California.


Our measurement computers are located at sites, which we do not own or operate
and it could be difficult for us to maintain or repair them if they do not
function properly.

Our measurement computers are located at facilities that are not owned by our
customers or us. Instead, these computers are installed at locations near
various Internet access points worldwide. Although we operate these computers
remotely from our San Mateo, California operations center, we do not own or

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operate the facilities, we have little control over how these computers are
maintained on a day-to-day basis. We do not have long-term contractual
relationships with the companies that operate the facilities where are
measurement computers are located. We may have to find new locations for these
computers if we are unable to develop relationships with these companies or if
these companies cease their operations. In addition, if our measurement
computers were not functioning properly, we may not be able to repair or service
these computers on a timely basis, as we may not have immediate access to our
measurement computers. Our ability to collect data in a timely manner could be
impaired if we are unable to maintain and repair our computers should
performance problems arise.


Others might bring infringement claims against us or our suppliers that could
harm our business.

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We expect that we
could become subject to intellectual property infringement claims as the number
of our competitors grows and our services overlap with competitive offerings.
These claims, even if not meritorious, could be expensive and divert
management's attention from operating our company. If we become liable to others
for infringing their intellectual property rights, we would be required to pay a
substantial damage award and to develop noninfringing technology, obtain a
license or cease selling the services that contain the infringing intellectual
property. We may be unable to develop non-infringing technology or to obtain a
license on commercially reasonable terms, if at all.


As we expand our international activities, our business will be susceptible to
additional risks associated with international operations.

We believe we must expand the sales of our services outside the United States
and hire additional international personnel. Therefore, we expect to commit
significant resources to expand our international sales and marketing
activities, which were 7% of our total revenues for the three months ended June
30, 2001. In addition, we intend to deploy additional measurement computers
worldwide, which would require us to maintain and service computers over larger
distances. Conducting international operations would subject us to risks we do
not face in the United States. These include:

    .   currency exchange rate fluctuations;

    .   seasonal fluctuations in purchasing patterns;

    .   unexpected changes in regulatory requirements;

    .   maintaining and servicing computer hardware in distant locations;

    .   longer accounts receivable payment cycles and difficulties in collecting
        accounts receivable;

    .   difficulties in managing and staffing international operations;

    .   potentially adverse tax consequences, including restrictions on the
        repatriation of earnings;

    .   the burdens of complying with a wide variety of foreign laws; and

    .   reduced protection for intellectual property rights in some countries.

The Internet may not be used as widely in other countries and the adoption of e-
business may evolve slowly or may not evolve at all. As a result, we may not be
successful in selling our services to customers in markets outside the United
States.


We may face difficulties assimilating our acquisitions of Velogic and Digital
Content and the acquisition of assets of the management service provider
business of Envive Corporation and we may incur costs associated with any future
acquisitions.

In June 2000, we acquired Velogic, a provider of load-testing services for
Internet web sites, in August 2000, we acquired Digital Content, which provides
web site accessibility monitoring services, and in July 2001, we acquired the
assets of the management service provider business of Envive Corporation, a
provider of web application performance management solutions. As a part of our
business strategy, we may seek to acquire or invest in additional businesses,
products or technologies that we feel could complement or expand our business,
augment our market coverage, enhance our technical capabilities or that may
otherwise offer growth opportunities. These acquisitions and any future
acquisitions could create risks for us, including:

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<PAGE>

    .   difficulties in assimilating acquired personnel, operations and
        technologies;

    .   unanticipated costs associated with the acquisition;

    .   diversion of management's attention from other business concerns;

    .   adverse effects on existing business relationships with resellers of
        our service and our customers;

    .   difficulties in managing geographically-dispersed businesses;

    .   the need to integrate or enhance the systems of an acquired business;

    .   charges related to potential write-down of acquired assets in future
        acquisitions;

    .   failure to realize any of the anticipated benefits of the acquisition;
        and

    .   use of substantial portions of our available cash to consummate the
        acquisition and operate the acquired business.


Our operating results could be harmed if we are unable to sublease a major
portion of the space in our new corporate headquarters building.

We currently expect that we will need to sublease approximately one half of the
space in our new corporate headquarters building to a third party. We may be
unable to lease all or a part of the available space and, if it is leased, we
may not receive sufficiently high rental rates to cover our costs in connection
with leasing space in the building.


Item 3. Qualitative and Quantitative Disclosures about Market Risks.

Interest Rate Sensitivity. Our interest income and expense is sensitive to
changes in the general level of U.S. interest rates, particularly because most
of our cash equivalents and short-term investments are invested in short-term
debt instruments. If market interest rates were to change immediately and
uniformly by ten percent from levels at June 30, 2001, the interest earned on
those cash equivalents and short-term investments could increase or decrease by
approximately $2.0 million on an annualized basis. If market interest rates were
to change immediately and uniformly by ten percent from levels at June 30, 2001,
the interest paid on our existing long-term debt would not change significantly.

Foreign Currency Fluctuations and Derivative Transactions. We have not had any
significant transactions in foreign currencies, nor do we have any significant
balances that are due or payable in foreign currencies at June 30, 2001. We do
not enter into derivative transactions for trading or speculative purposes.


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

We are not a party to any material legal proceedings.

Item 2.  Changes in Securities and Use of Proceeds

Not applicable.

Item 3.  Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5.  Other Information

Not applicable.

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

We did not file any current reports on Form 8-K during the three months ended
June 30, 2001. No exhibits are filed with this quarterly report.

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                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Mateo, State of
California, on this 14th day of August 2001.

                 KEYNOTE SYSTEMS, INC.

                        By: /s/ Umang Gupta
                        -------------------

                           Umang Gupta
                           Chairman of the Board and Chief Executive
                           Officer (Principal Executive Officer)

                        By: /s/ John J. Flavio
                        ----------------------

                           John J. Flavio
                           Chief Financial Officer (Principal Financial
                           Officer and Principal Accounting Officer)

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