<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 March 31, 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.)


            2855 Campus Drive, San Mateo, CA                 94403
         (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 April 30, 2001
          -----                --------------------------------------
Common Stock, $.001 par value                28,026,833



<PAGE>


                             KEYNOTE SYSTEMS, INC.

                               TABLE OF CONTENTS


                                                                            Page
                                                                            ----

                        PART I - FINANCIAL INFORMATION

Item 1. Financial Statements...............................................    2
Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations .............................................   11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........   29

                          PART II - OTHER INFORMATION

Item 1. Legal Proceedings..................................................   30
Item 2. Changes in Securities and Use of Proceeds..........................   30
Item 3. Defaults Upon Senior Securities....................................   30
Item 4. Submission of Matters for a Vote of Security Holders...............   30
Item 5. Other Information..................................................   30
Item 6. Exhibits and Reports on Form 8-K...................................   30
Signatures.................................................................   31


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                                                                          Page 1

<PAGE>



                        PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.


                    KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

        Index to Unaudited Condensed Consolidated Financial Statements

                                                                            Page
                                                                            ----
Condensed Consolidated Balance Sheets as of March 31, 2001 and
September 30, 2000........................................................     3

Condensed Consolidated Statements of Operations for the three and six
months ended March 31, 2001 and 2000 ......................................    4

Condensed Consolidated Statements of Cash Flows for the six months ended
March 31, 2001 and 2000 ..................................................     5

Notes to Condensed Consolidated Financial Statements.......................    6


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                                                                          Page 2
<PAGE>

                    KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                (In thousands)
                                  (Unaudited)


                                            March 31, 2001    September 30, 2000
                                            --------------    ------------------
                  ASSETS
Current assets:
  Cash and cash equivalents..............      $256,109            $260,201
  Accounts receivable, net...............         9,376               8,211
  Prepaid and other current assets.......         2,621               1,569
                                               --------            --------
    Total current assets.................       268,106             269,981

Restricted cash..........................        85,000              85,000
Property and equipment, net..............        14,757               8,601
Goodwill and other intangible assets.....        36,104              44,075
Other assets.............................         1,524                 954
                                               --------            --------
    Total assets.........................      $405,491            $408,611
                                               ========            ========

  LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of notes payable.......      $  1,173            $  1,191
  Current portion of capital lease
   obligation............................           148                 143
  Accounts payable.......................         2,488               1,642
  Accrued expenses.......................         8,363               7,797
  Deferred revenue.......................         4,172               4,967
                                               --------            --------
    Total current liabilities............        16,344              15,740

Notes payable, less current portion......           137                 684
Capital lease obligation, less current
 portion.................................            22                 107
                                               --------            --------
    Total liabilities....................        16,503              16,531

Commitments

Stockholders' equity:
  Common stock...........................            28                  28
  Treasury stock.........................        (1,326)                  -
  Additional paid-in capital.............       414,435             413,084
  Deferred compensation..................          (623)             (5,629)
  Accumulated deficit....................       (23,526)            (15,403)
                                               --------            --------
    Total stockholders' equity...........       388,988             392,080
                                               --------            --------
    Total liabilities and stockholders'
     equity..............................      $405,491            $408,611
                                               ========            ========


  See accompanying notes to the condensed consolidated financial statements.



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                                                                          Page 3
<PAGE>

                    KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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


<TABLE>
<CAPTION>

                                                                  Three months       Six months
                                                                 ended March 31,   ended March 31,
                                                                 ----------------  ----------------

                                                                  2001     2000     2001     2000
                                                                 -------  -------  -------  -------

<S>                                                              <C>       <C>      <C>     <C>
Revenue:
 Subscription services........................................   $11,583  $ 6,871  $24,108  $11,450
 Consulting services..........................................       444      307      937      524
                                                                 -------  -------  -------  -------
   Total revenues.............................................    12,027    7,178   25,045   11,974
Operating Expenses:
 Cost of subscription services................................     3,120    2,182    6,254    4,248
 Cost of consulting services..................................       700      299    1,484      553
 Research and development.....................................     1,861    1,102    3,786    1,943
 Sales and marketing..........................................     5,647    4,080   11,468    6,808
 Operations...................................................     1,959    1,062    3,647    1,839
 General and administrative...................................     1,860    1,316    3,707    2,155
 Acquisition related charges and amortization of goodwill,
  intangibles, and stock-based compensation...................     5,755       85   13,231      171
                                                                 -------  -------  -------  -------
   Total operating expenses...................................    20,902   10,126   43,577   17,717
                                                                  ------  -------  -------  -------
   Loss from operations.......................................    (8,875)  (2,948) (18,532)  (5,743)
Interest income, net..........................................     5,282    2,507   10,709    3,266
                                                                 -------  -------  -------  -------
   Loss before income taxes...................................    (3,593)    (441)  (7,823)  (2,477)

Provision for income taxes....................................       100       -       300       -
                                                                 -------  -------  -------  -------

   Net loss...................................................   $(3,693) $  (441) $(8,123) $(2,477)
                                                                 =======  =======  =======  =======

Loss per share:
  Basic and diluted..........................................    $ (0.13) $ (0.02) $ (0.29) $ (0.11)
                                                                 =======  =======  =======  =======
Weighted average common shares outstanding used:
  Basic and diluted..........................................     27,673   24,295   27,630   23,539
                                                                 =======  =======  =======  =======
</TABLE>

  See accompanying notes to the condensed consolidated financial statements.

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                                                                          Page 4
<PAGE>

                    KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)


                                                              Six Months
                                                            Ended March 31
                                                         ---------------------
                                                            2001       2000
                                                         ---------- ----------

Cash flows from operating activities:
  Net loss.............................................   $ (8,123)  $ (2,477)
  Adjustments to reconcile net loss to net cash
   provided by operating activities:
    Depreciation and amortization......................      2,783        947
    Amortization of goodwill and other intangible
     assets............................................      7,971        --
    Amortization of deferred compensation..............      5,006        171
    Changes in operating assets and liabilities:
      Accounts receivable..............................     (1,165)    (4,054)
      Prepaids and other assets........................     (1,622)      (992)
      Accounts payable and accrued expenses............      1,412      3,504
      Deferred revenue.................................       (795)     3,577
                                                         ---------- ----------
        Net cash provided by operating activities......      5,467        676
                                                         ---------- ----------
Cash flows used for investing activities:
  Purchases of property and equipment..................     (8,923)    (2,387)
                                                         ---------- ----------
Cash flows from financing activities:
  Repayments of notes payable and capital leases.......       (661)      (644)
  Proceeds from public offering, net of issuance
   costs...............................................        --     294,447
  Repayments of stockholder notes......................        --          90
  Issuance of common stock, net of issuance costs......      1,351        490
  Purchase of treasury stock...........................     (1,326)       --
                                                         ---------- ----------
        Net cash (used for) provided by financing
         activities....................................       (636)   294,383
                                                         ---------- ----------
Net (decrease)increase in cash and cash equivalents....     (4,092)   292,672
Cash and cash equivalents at beginning of the period...    260,201     64,647
                                                         ---------- ----------

Cash and cash equivalents at end of the period..........  $256,109   $357,319
                                                         ========== ==========


 See accompanying notes to the condensed consolidated financial statements.


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                                                                          Page 5
<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 March 31, 2001, and the results of operations and
cash flows for the interim periods ended March 31, 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

     The Company has no components of other comprehensive loss for any period
presented.

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                                                                          Page 6
<PAGE>

(4)  Financial Instruments and Concentration of Risk

     The carrying value of the Company's financial instruments, including cash
and cash equivalents, 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. The Company
has had write-offs of accounts receivable to date. 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 March 31, 2001 and 2000, no one customer accounted for more than 10%
of total accounts receivable. For the three and six months ended March 31, 2001,
no one customer accounted for more than 10% of the Company's total revenues. For
the three and six months ended March 31, 2000, one customer accounted for
approximately 12% of total revenue.


(5)  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.


(6)  Impairment of Long-Lived Assets

     The Company evaluates its long-lived assets, including 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.
Recoverability of an asset to be held and used is measured by a comparison of
the carrying amount of the asset to future net cash flows expected to be
generated by the asset.  If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.  Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

     On June 2, 2000, the Company completed the acquisition of Velogic 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 $36.7 million of goodwill and $4.1
million of other intangible assets.  As of March 31, 2001, the Company's stock
price has declined by 78% in the aggregate since the valuation date of the
shares issued in connection with the acquisition.  As a result, the Company has
begun a formal process to determine whether a decrease in the market price of
its common stock and the resulting decline in its market capitalization is other
than temporary, resulting in a potential impairment of the goodwill and other
intangible assets related to this acquisition.  This formal process will include
a detailed analysis of estimated cash flows expected to be generated by the
entity from future operations.  This analysis is expected to be completed by
June 2001.  If, as a result of its detailed analysis and investigation, the
Company determines that there has been an impairment of goodwill, this
impairment will be recognized in the quarter ending June 30, 2001.

     On August 18, 2000, the Company completed the acquisition of Digital
Content for $15 million in cash.  The acquisition was accounted for as a
purchase business combination and resulted in $5.2 million of goodwill and $3.1
million of other intangible assets.  The Company has begun a formal process to
determine whether the goodwill and other intangible assets related to this
acquisition have been other than temporarily impaired.  This formal process will
include a detailed analysis of estimated cash flows expected to be generated by
the entity from future operations.

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                                                                          Page 7
<PAGE>

This analysis is expected to be completed by June 2001. If, as a result of its
detailed analysis and investigation, the Company determines that there has been
an impairment of goodwill, this impairment will be recognized in the quarter
ending June 30, 2001.


(7)  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):

                                                                   -----  -----
                                                                    2001   2000
                                                                   -----  -----
For the three and six months ended March 31:
 Shares issuable upon exercise of stock options..................  4,166  2,545
 Shares of restricted stock subject to repurchase................    177    452
 Shares issuable upon exercise of warrants to purchase common
     stock.......................................................    --       7


     The weighted-average exercise price per share of common stock subject to
stock options was $30.53 as of March 31, 2001 and $27.09 as of March 31, 2000.
The weighted-average repurchase price of restricted stock was $0.68 as of March
31, 2001 and $0.30 as of March 31, 2000.


(8)  Recent Accounting Pronouncements

     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 must adopt SAB 101 no later than the
fourth quarter of fiscal year 2001. The Company does not believe that the impact
of this staff accounting bulletin, when adopted, will 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.

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                                                                          Page 8
<PAGE>

(9)   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.


(10)  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 is
intended to be a tax-free reorganization and is 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. Amortization of goodwill and other intangible
assets related to the Velogic acquisition, for the three and six months ended
March 31, 2001 was approximately $3.4 million and $6.8 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 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

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                                                                          Page 9
<PAGE>

million is attributed to deferred compensation, and is being amortized over six
months. The related amortization of approximately $1.6 million for the three
months ended March 31, 2001, is recorded in the accompanying 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. Amortization of goodwill and other intangible assets related
to the acquisition, for the three and six months ended March 31, 2001 was
approximately $2.3 million and $6.2 million, respectively.  The condensed
consolidated statements of operations include activity of Digital Content
subsequent to the acquisition.

      Acquisition-related charges and amortization of goodwill and other
intangibles and stock based compensation of approximately $5.8 million recorded
in the condensed consolidated statement of operations for the three months ended
March 31, 2001,includes acquisition related charges of approximately $1.6
million, amortization of goodwill and other intangibles of approximately $4.1
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 six months ended March 31,
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 March 31:
 Revenues.........................................    $12,027   $  7,498
 Net loss.........................................     (2,075)    (8,927)
 Basic and diluted net loss per share.............      (0.07)     (0.36)
 Shares used in pro-forma per share computation...     27,673     25,126

For the six months ended March 31:
 Revenues.........................................    $25,045   $ 12,481
 Net loss.........................................     (3,288)   (19,007)
 Basic and diluted net loss per share.............      (0.12)     (0.78)
 Shares used in pro-forma per share computation...     27,630     24,370


(11)  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 labor 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 March 31, 2001.

     Because of a dramatic decline in lease rates and the increase in available
lease space in the San Francisco Bay Area commercial real estate market, the
Company is currently reviewing its operating lease with respect to its
headquarters building. The Company is exploring various alternatives and expect
that an analysis will be completed by June 2001. As a result of its analysis and
investigation, the Company may take certain business actions with regards to the
structure of the lease of this building which may result in significant charges
which would be recognized in the quarter ending June 30, 2001.

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                                                                         Page 10
<PAGE>

     At March 31, 2001, future minimum payments under the leases, net of sub
lease income, are as follows:

Year ending March 31:                                (In Thousands)
                                                  Operating   Capital
                                                  ---------   -------
2002...........................................    $  4,511      $145
2003...........................................       6,103        33
2004...........................................       6,103        --
2005...........................................       6,103        --
Thereafter.....................................      86,827        --
                                                   --------      ----
Total minimum lease payments...................    $109,647      $178
                                                   ========      ====
Less amount representing interest..............                    (8)
                                                                 ----
Present value of minimum lease payments........                   170
Current portion of capital lease obligation....                   148
                                                                 ----
Capital lease obligation, less current portion.                  $ 22
                                                                 ====

(12)  Subsequent Events

      In April 2001, the Company reduced its workforce by approximately 13%,
based on its staffing level of 280 employees as of March 31, 2001, to better
match costs with forecasted near-term revenues. The reduction in workforce will
result in approximately $300,000 of severance costs, which the Company will
record in the quarter ending June 30, 2001.

      In April 2001, the Company's board of directors approved a voluntary stock
option exchange program.  The program, offered in April and May 2001, provided
the Company's 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, with exercise prices below the current market value of
Keynote stock, in exchange for new options to be granted on or after November 9,
2001 at the then fair market value of the Company's common stock. Options to
purchase approximately 2.0 million shares were eligible for the exchange
program. The Company cancelled options to purchase approximately 1.2 million
shares, and will grant new options to purchase approximately 1.2 million shares
on or after November 9, 2001.


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

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                                                                         Page 11
<PAGE>

"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 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
March 31, 2001, we had recorded approximately $4.2 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 March 31, 2001, 10 customers accounted for
approximately 29% 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.


Results of Operations
Three and Six Months Ended March 31, 2001 and 2000

<TABLE>
<CAPTION>

Revenues                                           2001        2000     % Change
                                                  ------      ------    --------
                                                     (in thousands)
<S>                                              <C>           <C>       <C>
For the three months ended March 31:
 Subscription services.......................    $11,583      $ 6,871         69%
 Consulting services........,................    $   444      $   307         45%

For the six months ended March 31:
 Subscription services.......................    $24,108      $11,450        111%
 Consulting services.........................    $   937      $   524         79%

</TABLE>

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                                                                         Page 12
<PAGE>

     Subscription Services. Revenues from subscription services increased
approximately $4.7 million, or 69%, for the three months ended March 31, 2001,
as compared to the same period in 2000. Revenues from subscription services also
increased approximately $12.7 million, or 111%, during the six months period
ended March 31, 2001, as compared to the same period in 2000. Subscription
services represented 96% of total revenues for each of the three months and six
months periods ended March 31, 2001 and March 31, 2000. The increase in 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
six months ended March 31, 2001 no single customer accounted for more than 10%
of total revenues. However, for the three and six months ended March 31, 2000,
one customer accounted for more than 10% of total revenues.

     Consulting Services.  Revenues from consulting services increased
$137,000, or 45%, for the three months ended March 31, 2001, as compared to the
same period in 2000. Revenues from consulting services also increased $413,000,
or 79%, during the six months ended March 31, 2001, as compared to 2000.  We did
not have revenues from our KeyReadiness load-testing service in the quarter
ended March 31, 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

                                                     2001      2000   % Change
                                                    ------    ------  --------
                                                     (In thousands)
 For the three months ended March 31:
  Cost of subscription services.................    $3,120    $2,182     43%
  Cost of consulting services...................    $  700    $  299    134%

 For the six months ended March 31:
  Cost of subscription services.................    $6,254    $4,248     47%
  Cost of consulting services...................    $1,484    $  553    168%


     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 $938,000, or 43% during
the quarter ended March 31, 2001, as compared to the quarter ended March 31,
2000. Cost of subscription services increased approximately $2.0 million, or 47%
for the six months ended March 31, 2001, as compared to 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 27% of
subscription service revenue in the quarter ended March 31, 2001, as compared to
32% in the quarter ended March 31, 2000. Cost of subscription services was 26%
of subscription service revenue in the six months ended March 31, 2001, as
compared to 37% in the six months ended March 31, 2000. The decrease in the cost
of subscription services as a percentage of subscription revenue resulted from a
decline in band-width costs as a percentage of total subscription costs. This
improvement in subscription margins is a result of the declining unit costs of
band-width as volume increases.

--------------------------------------------------------------------------------

                                                                         Page 13
<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 $401,000, or 134% during the quarter ended March 31, 2001, as
compared to the quarter ended March 31, 2000. Cost of subscription services
increased $931,000, or 168% for the six months ended March 31, 2001, as compared
to 2000. Cost of consulting services exceeded consulting services revenue in the
quarter ended March 31, 2001, and the six months ended March 31, 2001 and 2000
because of the increase in costs associated with our professional services group
combined with lower revenues generated by this group. Cost of consulting
services also includes network infrastructure costs associated with our load-
testing service. We expect that the cost of consulting services as a percentage
of consulting services revenues will 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 March 31:
  Research and development.............................. $1,861 $1,102     69%
 For the six months ended March 31:
  Research and development.............................. $3,786 $1,943     95%

     Research and development expenses consist primarily of compensation and
related costs for research and development personnel. Research and development
expenses increased $759,000 or 69% during the quarter ended March 31, 2001, as
compared to the quarter ended March 31, 2000. Research and development expenses
increased approximately $1.8 million, or 95% for the six months ended March 31,
2001, as compared to 2000. Research and development expenses increased from the
second quarter of fiscal 2000 to the second 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 decline in
the quarter ended June 30, 2001 as a result of our recent reduction in
workforce. However, 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 March 31:
  Sales and marketing.................................   $5,647 $4,080    38%
 For the six months ended March 31:
  Sales and marketing.................................  $11,468 $6,808    68%


     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 $1.6 million or 38% during the quarter ended March 31, 2001, as

--------------------------------------------------------------------------------

                                                                         Page 14
<PAGE>

compared to the quarter ended March 31, 2000. Sales and marketing expenses
increased approximately $4.7 million, or 68% for the six months ended March 31,
2001, as compared to 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 decline in the quarter
ended June 30, 2001 as a result of our recent reduction in workforce. However,
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 March 31:
  Operations.................................     $1,959   $1,062     84%

 For the six months ended March 31:
  Operations.................................     $3,647   $1,839     98%


     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
$897,000 or 84% during the quarter ended March 31, 2001, as compared to the
quarter ended March 31, 2000. Operations expenses increased approximately $1.8
million, or 98% for the six months ended March 31, 2001, as compared to 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 decline in the quarter ended June 30, 2001 as a result
of our recent reduction in workforce. However, 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 March 31:
  General and administrative.................     $1,860  $1,316      41%

 For the six months ended March 31:
  General and administrative.................     $3,706  $2,155      72%


     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 $544,000 or 41% during the quarter ended March
31, 2001, as compared to the quarter ended March 31, 2000. General and
administrative expenses increased approximately $1.6 million, or 72% for the six
months ended March 31, 2001, as compared to 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 decline in the quarter ended June 30, 2001 as a result of our
recent reduction in workforce. However, we anticipate that general and
administrative expenses will grow in subsequent quarters due to the expected

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                                                                         Page 15
<PAGE>

increases in occupancy costs associated with our new building and other normal
recurring compensation related increases.


Acquisition Related Charges and Amortization of Goodwill, Intangible Assets, and
Stock-Based Compensation.
                                                   2001     2000     % Change
                                                  ------   ------    --------
                                                   (In thousands)

 For the three months ended March 31:
  Amortization of Acquisition Related Charges
     and Amortization of Goodwill, Intangible
     Assets, and Stock-Based Compensation......   $ 5,755    $ 85       6670%

 For the six months ended March 31:
  Amortization of Acquisition Related Charges
     and Amortization of Goodwill, Intangible
  Assets, and Stock-Based compensation.........   $13,231    $171       7637%


     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, and the unamortized portion is included in goodwill and other
intangible assets on our balance sheet. For the quarter ended March 31, 2001, we
recorded approximately $4.1 million in amortization of goodwill and other
intangible assets. We expect the amortization for fiscal 2001, excluding any
other acquisitions, to be approximately $16.8 million. Goodwill and other
intangible assets are being amortized over 36 months. A portion of the
consideration for the Digital Content acquisition, in the amount of $6.4 million
is attributed to deferred compensation, and has been amortized over the six
months ended March 31, 2001. For the quarter ended March 31, 2001, we expensed
acquisition-related charges of approximately $1.6 million representing
amortization of this deferred compensation. The amortization of deferred
compensation related to the Digital Content acquisition for fiscal 2001 is $4.8
million. This deferred compensation is fully amortized as of March 31, 2001.

     We have begun a formal process to determine whether the goodwill and other
intangible assets related to the acquisition of Velogic and Digital Content have
been other than temporarily impaired. This formal process will include a
detailed analysis of estimated cash flows expected to be generated by the entity
from future operations. This analysis is expected to be complete by June 2001.
If, as a result of its detailed analysis and investigation, we determine that
there has been an impairment of goodwill, this impairment will be recognized in
the quarter ending June 30, 2001.

     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 March 31, 2001 and
2000, and had an aggregate of $623,000 and approximately $1.0 million included
in deferred compensation remaining to be amortized as of March 31, 2001 and
2000, respectively. Deferred compensation is amortized on a straight-line basis
over the vesting period of the options.

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                                                                         Page 16
<PAGE>

Interest Income, Net

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

 For the three months ended March 31:
  Interest income, net......................           $ 5,282 $2,507    111%

 For the six months ended March 31:
  Interest income, net......................           $10,709 $3,266    228%


     Net interest income increased approximately $2.8 million, or 111% during
the quarter ended March 31, 2001, as compared to the quarter ended March 31,
2000. Net interest income increased approximately $7.4 million, or 228% for the
six months ended March 31, 2001, as compared to 2000. The increase was primarily
due to interest income from our increase in cash and cash equivalents and
restricted cash resulting from the proceeds we received in September 1999 and
October 1999 from our initial public offering and in February 2000 from our
subsequent public offering. We expect that net interest income will decline
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.


Provision for Income Taxes

     A provision for federal and state income taxes of $100,000 and $300,000 has
been recorded for the three and six months ended March 31, 2001, principally for
alternative minimum tax.

     No provision for federal and state income taxes has been recorded for the
three and six months ended March 31, 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 March 31, 2001 for these loans and leases was
approximately $1.5 million. At March 31, 2001, we had approximately $256.1
million in cash and cash equivalents plus $85 million in restricted cash.

     Net cash provided by operating activities was approximately $5.5 million in
the six months ended March 31, 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 of
goodwill, intangible assets, and deferred compensation. The increase was
partially offset by an increase in accounts receivable due to an increase in the
days receivable outstanding and an increase in prepaids and other assets, due
mainly to an increase in interest receivable. Net cash provided by operating
activities was $676,000 in the six months ended March 31, 2000. Net cash
provided by operating activities was primarily the result of an increase in
deferred revenue and accounts payable and accrued expenses, which was partially
offset by an increase in accounts receivable and our net operating loss.

     Our investing activities represent purchases of property and equipment.
Capital expenditures totaled approximately $8.9 million in the six months ended
March 31, 2001 and approximately $2.4 million in the six months ended March 31,
2000. Capital expenditures increased during fiscal 2001 primarily due to costs
associated with the upgrade and preparation of our new corporate headquarters
for

--------------------------------------------------------------------------------

                                                                         Page 17
<PAGE>

occupancy, costs associated with the enhancement of our business systems,
and growth in our network and infrastructure.

     Net cash used for financing activities was $636,000 in the six months ended
March 31, 2001, primarily as a result of repayments of notes in the amount of
$661,000. Our financing activities provided approximately $294.4 million in the
six months ended March 31, 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. In March 2001, we spent
approximately $1.3 million to repurchase 103,300 shares of our stock in the open
market.

     As of March 31, 2001, our principal commitments consisted of approximately
$111.1 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 5.6% to 10.25% per
year. Our commitments include approximately $110.0 million in future lease
payments for our headquarters facility. We have $85.0 million of restricted cash
that is invested and provides collateral for the lease transaction. The lease
agreement provides a balloon payment which is due and payable in June 2005. In
addition, rental expenses have been approximately $6.0 million on an annual
basis but are expected to decline due to a general decline in LIBOR. Because of
a dramatic decline in lease rates and the increase in available lease space in
the San Francisco Bay Area commercial real estate market, we are currently
reviewing our operating lease with respect to our headquarters building. We are
exploring various alternatives and we expect that an analysis will be completed
by June 2001. As a result of our detailed analysis and investigation, we may
take certain business actions with regards to the structure of the lease of this
building which may result in significant charges which would be recognized in
the quarter ending June 30, 2001.

     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.  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. After that time, if 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.


Recent Accounting Pronouncements

     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 must adopt SAB 101 no later than the fourth
quarter of fiscal year 2001. We do not believe that the impact of this staff
accounting bulletin when adopted will have a material effect on our financial
position or results of operations.

--------------------------------------------------------------------------------

                                                                         Page 18
<PAGE>

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

     .   We recently introduced our SLA Perspective service in February 2001.


     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 $3.7 million for the quarter ended
March 31, 2001, and, as of March 31, 2001, we had an accumulated deficit of
approximately $23.5 million. In addition, we expect to incur significant non-
cash charges relating to the amortization of goodwill and other intangible
assets in connection with our acquisitions of Velogic and Digital Content. We
have begun a detailed analysis to

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                                                                         Page 19
<PAGE>

determine whether the goodwill and other intangible assets related to the
acquisition of Velogic and Digital Content as well as the value of our new
building have been other than temporarily impaired. If, as a result of our
detailed analysis and investigation, we determine that there has been an
impairment of goodwill, this impairment will be recognized in the quarter ending
June 30, 2001.

     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, as reported in our financial statements. 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 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 March 31, 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 is new and 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 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 recent
           acquisitions or any future acquisitions;

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                                                                         Page 20
<PAGE>

     .   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; and

     .   expenses related to our recent reduction in workforce.


     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;

     .   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.

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                                                                         Page 21
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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 March 31, 2001, we were measuring
the performance of approximately 13,000 web site addresses for our customers. We
are 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.


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
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

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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.

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     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,
market-specific competitors. For example, in October 2000, we introduced our
Streaming Perspective service. Streamcheck, a Canadian company, has a service,
which competes with Streaming Perspective.

     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 29% of our total revenues for the
quarter ended March 31, 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.

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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.

     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.
In addition, there is significant competition for qualified employees in the
Internet industry. 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. There will
be significant costs associated with this personnel reduction related to
severance and other employee-related costs. 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

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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 4%
of total revenues for the quarter ended March 31, 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, we
recently acquired Velogic and Digital Content. We may encounter difficulties in
managing this growth. Our ability to compete 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 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 only have a short-term power back-up capability. Various factors

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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 are constructing a new data center at our new corporate
headquarters in San Mateo, California, and expect this to be operational by the
fourth quarter of fiscal 2001. 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 effected 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, 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, if the
blackouts extend for periods extending beyond the levels of our battery 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 we or our
customers 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 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.

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                                                                         Page 27
<PAGE>

     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
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 less than 6% of our total revenues for the three months
ended March 31, 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

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                                                                         Page 28
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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 recent acquisitions of Velogic and
Digital Content and may incur costs associated with any future acquisitions.

     In June 2000, we acquired Velogic, a provider of load-testing services for
Internet web sites, and in August 2000, we acquired Digital Content, which
provides web site accessibility monitoring services. 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:

     .   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;

     .   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 expect that, beginning in August 2001, we will need to sublease 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 are invested in short-term debt instruments. If market
interest rates were to change immediately and uniformly by ten percent from
levels at March 31, 2001, the interest earned on those cash equivalents 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 March 31, 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 March 31, 2001. We do
not enter into derivative transactions for trading or speculative purposes.

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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.

(a)      Index to Exhibits


         Exhibit No.      Exhibit Title
         10.01            Loan and Security Agreement, dated January 3, 2001,
                          between the Company and Donald J. Aoki.

(b)      Reports on Form 8-K

     We did not file any current reports on Form 8-K during the three months
ended March 31, 2001.


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                                                                         Page 30
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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 May 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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