<PAGE>

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                                 UNITED STATES
                      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, 2000

                                      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                  (Zip Code)
              offices)

      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:

<TABLE>
<CAPTION>
                                                              Shares outstanding
      Class                                                   at April 30, 2000
      -----                                                   ------------------
      <S>                                                     <C>
      Common Stock, $.001 par value..........................     26,741,104
</TABLE>

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<PAGE>

                                KEYNOTE SYSTEMS

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<S>      <C>                                                                                     <C>
                                   PART I--FINANCIAL INFORMATION

Item 1.  Financial Statements...................................................................   1

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations..   8

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.............................  22

                                     PART II--OTHER INFORMATION

Item 1.  Legal Proceedings......................................................................  23

Item 2.  Changes in Securities and Use of Proceeds..............................................  23

Item 3.  Defaults Upon Senior Securities........................................................  23

Item 4.  Submission of Matters to a Vote of Security Holders....................................  23

Item 5.  Other Information......................................................................  24

Item 6.  Exhibits and Reports on Form 8-K.......................................................  24

         Signatures.............................................................................  25
</TABLE>
<PAGE>

                         PART I--FINANCIAL INFORMATION

Item 1. Financial Statements.

                             KEYNOTE SYSTEMS, INC.

              INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Condensed Consolidated Balance Sheets as of March 31, 2000 and September
 30, 1999................................................................   2

Condensed Consolidated Statements of Operations for the three months and
 six months ended March 31, 2000 and 1999................................   3

Condensed Consolidated Statements of Cash Flows for the six months ended
 March 31, 2000 and 1999.................................................   4

Notes to Condensed Consolidated Financial Statements.....................   5
</TABLE>

                                       1
<PAGE>

                             KEYNOTE SYSTEMS, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                       March 31,  September 30,
                                                         2000         1999
                                                      ----------- -------------
                                                      (Unaudited)   (Audited)
<S>                                                   <C>         <C>
                       ASSETS
Current assets:
  Cash and cash equivalents..........................  $357,319      $64,647
  Accounts receivable, net...........................     6,349        2,295
  Current portion of loans to related parties........       134          --
  Prepaid and other current assets...................       981          333
                                                       --------      -------
    Total current assets.............................   364,783       67,275
Property and equipment, net..........................     4,733        3,277
Loans to related parties, less current portion.......       306          451
Other assets.........................................       422           68
                                                       --------      -------
    Total assets.....................................  $370,244      $71,071
                                                       ========      =======
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of notes payable...................  $  1,199      $ 1,189
  Current portion of capital lease obligation........       137          133
  Accounts payable and accrued expenses..............     6,082        2,578
  Deferred revenue...................................     4,664        1,087
                                                       --------      -------
    Total current liabilities........................    12,082        4,987
Notes Payable, less current portion..................     2,060        2,591
Capital lease obligation, less current portion.......       140          251
                                                       --------      -------
    Total liabilities................................    14,282        7,829
Stockholders' equity:
  Common stock.......................................        26           23
  Additional paid-in capital.........................   372,363       77,430
  Deferred stock-based compensation..................      (964)      (1,135)
  Stockholder notes receivable.......................      (298)        (388)
  Accumulated deficit................................   (15,165)     (12,688)
                                                       --------      -------
Total stockholders' equity...........................   355,962       63,242
                                                       --------      -------
Total liabilities and stockholders' equity...........  $370,244      $71,071
                                                       ========      =======
</TABLE>

   See accompanying notes to the condensed consolidated financial statements

                                       2
<PAGE>

                             KEYNOTE SYSTEMS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                             Three months       Six months
                                            ended March 31,   ended March 31,
                                            ----------------  ----------------
                                             2000     1999     2000     1999
                                            -------  -------  -------  -------
                                              (Unaudited)       (Unaudited)
<S>                                         <C>      <C>      <C>      <C>
Revenue:
  Subscription services...................  $ 6,871  $ 1,275  $11,450  $ 2,164
  Consulting services.....................      307       26      524       26
                                            -------  -------  -------  -------
    Total revenues........................    7,178    1,301   11,974    2,190
Expenses:
  Cost of subscription services...........    2,182      285    4,248      453
  Cost of consulting services.............      299       87      553       87
  Research and development................    1,102      338    1,943      663
  Sales and marketing.....................    4,080      936    6,808    1,563
  Operations..............................    1,062      320    1,839      549
  General and administrative..............    1,316      189    2,155      443
  Amortization of stock-based
   compensation...........................       85      123      171      146
                                            -------  -------  -------  -------
    Total expenses........................   10,126    2,278   17,717    3,904
                                            -------  -------  -------  -------
    Loss from operations..................   (2,948)    (977)  (5,743)  (1,714)
Interest income (expense), net............    2,507      (88)   3,266     (149)
                                            -------  -------  -------  -------
  Net loss................................  $  (441) $(1,065) $(2,477) $(1,863)
                                            =======  =======  =======  =======
Loss per share:
  Basic and diluted.......................  $ (0.02) $ (0.24) $ (0.11) $ (0.53)
                                            =======  =======  =======  =======
Weighted average common shares outstanding
 used:
  Basic and diluted.......................   24,295    4,502   23,539    3,534
                                            =======  =======  =======  =======
</TABLE>


   See accompanying notes to the condensed consolidated financial statements

                                       3
<PAGE>

                             KEYNOTE SYSTEMS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                Six Months
                                                               Ended March
                                                             -----------------
                                                               2000     1999
                                                             --------  -------
                                                               (Unaudited)
<S>                                                          <C>       <C>
Cash flows from operating activities:
  Net loss.................................................. $ (2,477) $(1,863)
  Adjustments to reconcile net loss to net cash provided by
   (used for) operating activities:
    Depreciation and amortization...........................      931      267
    Amortization of discount on notes.......................       16       18
    Amortization of stock based compensation................      171      146
    Changes in operating assets and liabilities:
      Accounts receivable...................................   (4,054)    (321)
      Prepaids and other assets.............................     (992)    (337)
      Accounts payable and accrued expenses.................    3,504       80
      Deferred revenue......................................    3,577      284
                                                             --------  -------
        Net cash provided by (used for) operating
         activities.........................................      676   (1,726)
                                                             --------  -------
Cash flows used for investing activities:
  Purchases of property and equipment.......................   (2,387)    (497)
                                                             --------  -------
Cash flows from financing activities:
  Repayments of notes payable...............................     (644)    (100)
  Proceeds from issuance of notes payable...................      --     3,444
  Proceeds from public offering, net of issuance costs......  294,447      --
  Repayments of shareholder notes...........................       90      --
  Issuance of common stock, net of issuance costs...........      490      131
                                                             --------  -------
        Net cash provided by financing activities...........  294,383    3,475
                                                             --------  -------
Net increase in cash and cash equivalents...................  292,672    1,252
Cash and cash equivalents at beginning of the period........   64,647    2,293
                                                             --------  -------
Cash and cash equivalents at end of the period.............. $357,319  $ 3,545
                                                             ========  =======
Noncash financing activities:
  Issuance of common stock for shareholder notes
   receivable............................................... $    --   $    79
                                                             ========  =======
  Deferred compensation related to stock option grants...... $    --   $ 1,028
                                                             ========  =======
</TABLE>

   See accompanying notes to the condensed consolidated financial statements

                                       4
<PAGE>

                             KEYNOTE SYSTEMS, INC.

             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.
(the Company) at March 31, 2000, and the results of operations and cash flows
for the interim periods ended March 31, 2000 and 1999.

  The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions on 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. We 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, 1999 in Keynote's
annual report on Form 10-K for the fiscal year ended September 30, 1999.

  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 Policy

  Subscription services revenue consists of fees from subscriptions to the
Company's Internet measurement and diagnostic services. The majority of our
subscription revenues is deferred upon invoicing and is recognized ratably
over the service period, generally ranging from one to twelve months. Deferred
revenue is comprised entirely of deferred subscription revenue. A small
portion of subscription revenues is invoiced monthly upon completion of
measurement services. Revenue from consulting services is recognized as the
services are performed, typically a period of one month. For longer consulting
projects, 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 around the world, depreciation, maintenance and other equipment charges
for the Company's measurement infrastructure. Cost of consulting services
consists of compensation for consulting personnel and related costs.
Operations expenses consist primarily of compensation and related costs for
management personnel, technical support employees who manage and maintain the
Company's measurement data and headquarter infrastructure and support the
Company's customer base.

(3) Comprehensive Loss

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

(4) Fair Values of Financial Instruments

  The carrying amounts of cash and cash equivalents, accounts receivable,
loans to related parties, prepaids and other current assets, accounts payable,
notes payable and capital lease obligations approximate their respective fair
values.

(5) Stockholder's Equity

  In February 2000, the Company raised $286.6 million, net of issuance costs,
from the issuance and sale of 2,862,500 shares of the Company's common stock
in connection with a secondary public offering.


                                       5
<PAGE>

                             KEYNOTE SYSTEMS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(6) 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 and from convertible securities
using the "as-if-converted" basis.

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

<TABLE>
<CAPTION>
                                                                    At March
                                                                       31,
                                                                   -----------
                                                                   2000  1999
                                                                   ----- -----
   <S>                                                             <C>   <C>
   Shares outstanding under stock options......................... 2,545   730
   Shares of restricted stock subject to repurchase...............   452   954
   Shares issuable pursuant to warrants to purchase:
     Convertible preferred stock..................................   --    110
     Common stock.................................................   --    390
   Shares of convertible preferred stock on an "as-if-converted"
    basis.........................................................   --  9,222
</TABLE>

  The weighted-average exercise price of stock options was $27.09 and $0.84 as
of March 31, 2000 and 1999, respectively. The weighted-average repurchase
price of restricted stock was $0.30 and $0.05, as of March 31, 2000 and 1999,
respectively. The weighted-average exercise price of the convertible preferred
stock warrants was $1.26 as of March 31, 1999.

(7) Recent Accounting Pronouncements

  In March 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on EITF No. 00-2, Accounting for the Costs of Developing a Web Site.
EITF No. 00-2 provides guidance on accounting for web site development costs
and is effective for fiscal quarters beginning after June 30, 2000. The
Company is currently reviewing the impact of EITF No. 00-2 on its financial
statements and results of operations.

  In March 2000, the EITF reached a consensus on EITF No. 00-3, Application of
AICPA Statement of Position 97-2, Software Revenue Recognition, to
Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware. The Company does not expect that the adoption of EITF No. 00-3 will
have a material impact on its financial statements or results of operations.

  In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation (FIN 44), an interpretation of APB Opinion No. 25, Accounting for
Stock Issued to Employees. The application of this interpretation is effective
July 1, 2000. The Company does not believe that the impact of this statement
will have a material effect on the financial position or results of operations
upon the adoption of this interpretation.

  In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), summarizing the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. In March 2000, the
SEC issued Staff Accounting Bulletin No. 101A (SAB 101A), delaying the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000 for fiscal years beginning after
June 15, 2000. The Company is currently reviewing the impact of SAB 101 on its
financial position and results of operations.


                                       6
<PAGE>

                             KEYNOTE SYSTEMS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  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 for fiscal years beginning after June 15, 2000. The Company
does not believe that the impact of this statement will have a material effect
on the financial position or results of operations upon the adoption of this
accounting standard.

(8) 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 located in Paris, France. 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.
For the three months ended March 31, 2000, one customer accounted for
approximately 13% of total revenues.

(9) Subsequent Event

  On May 10, 2000, the Company announced the acquisition of Velogic, Inc., a
privately held company based in Sunnyvale, California that provides load-
testing services designed specifically for Web sites. The purchase price is
850,000 shares of the Company's stock, plus additional cash or stock based
upon successful achievement of certain performance goals. The price of the
acquisition based upon the closing price of the Company's common stock on May
10, 2000 is approximately $50 million. The acquisition will be accounted for
as a purchase.

                                       7
<PAGE>

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, as amended. Such
forward-looking statements involve risks and uncertainties, including, among
other things, statements regarding our anticipated costs and expenses, and
revenue mix. Such forward-looking statements include, among others, those
statements including the words "expects," "anticipates," "intends," "believes"
and similar language. Our actual results may differ significantly from those
projected in the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those
discussed in the section "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Impact Future Operating
Results." You should carefully review the risks described in other documents
we file from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q that we will file in 2000 and our
Annual Report on Form 10-K, which was filed on December 21, 1999. 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 and diagnostic services
that enable electronic commerce, or e-commerce, companies to measure, assure
and improve the quality of service of their web sites. E-commerce web sites
face a different set of challenges than those faced by conventional "bricks
and mortar" stores. In order to discourage customers from "clicking away" to
competing web sites, e-commerce web sites must deliver fast page downloads,
efficient transactions and high reliability of access.

  Keynote was founded in June 1995 in California and reincorporated in
Delaware in March 2000. Until we released our Keynote Perspective service in
April 1997, we were engaged in market research and the engineering design of
our services. We have introduced additional versions of the service, most
recently in December 1999, so that Keynote Perspective now includes the
ability to measure Web page download times, secure Web page downloads and
multi-page transactions, and offers our customers a greater ability to
personalize their service through their MyKeynote portal. In July 1999, we
introduced our Keynote Lifeline service. In December 1999, we introduced our
Keynote Consumer Perspective service, which is designed to measure Web-site
performance via various Internet access methods typically used in homes, such
as dial-up connections, cable modems or digital subscriber lines. In April
2000, we introduced our Diagnostic Perspective service that is designed to
enhance the diagnostic capabilities of our Perspective service and increase
the availability of the diagnostic information on a real-time basis. In
January 1999 we formed our professional services organization.

  Our direct sales organization also provides telephone and e-mail sales
support, telemarketing services and pre-sales technical support. We believe
our direct sales approach enables us to focus our resources on ascertaining
the needs of our customers, to devote significant attention to customer
satisfaction and to quickly offer new services to our existing customers.

  We also distribute our services through Web-hosting and Internet service
providers such as Digex, GlobalCenter, Exodus Communications and UUNET, which
manage e-commerce web sites for other companies. These companies sell or
bundle our services to part of their customer base as a value-added service to
these customers and as a management tool for themselves. We also market our
services through VeriSign and Network Solutions, which recently agreed to be
acquired by Verisign, which are companies that sell services complementary to
ours.


                                       8
<PAGE>

  We recently opened a European office in Paris. We plan to move the office to
London in the near future. In Europe, we have implemented an indirect sales
model and utilize resellers to sell our services.

  On May 9, 2000, we agreed to acquire Velogic, Inc., a privately-held
California corporation, in exchange for 850,000 shares of our common stock,
170,000 shares of which will be held in escrow to secure indemnification
obligations. In addition, an aggregate of up to $7.9 million worth of our
common stock may be issued upon the achievement of revenue-based performance
goals. Velogic provides load-testing services designed specifically for web
sites. The transaction will be accounted for as a purchase. The closing of the
transaction is subject to a number of conditions precedent, including
obtaining approval of Velogic's shareholders as well as other customary
closing conditions. We presently anticipate that the acquisition will be
completed during the quarter ended June 30, 2000

  We derive and expect to continue to derive all of our subscription revenues
from the sale of our Internet performance measurement, consulting and
diagnostic services. All of our services are subscription-based services that
our customers purchase for at least an initial three-month term and then may
renew their subscription on a month-to-month basis. Subscription fees vary
based on the number of URLs measured, the number of measurement locations, the
frequency of the measurements, and the additional features ordered. Although
consulting revenues have not been significant to date, we believe that
consulting revenues may become more important in the future as we pursue
additional consulting opportunities. Our international revenues to date have
not been significant.

  We recognize revenues ratably as services are performed. We typically
invoice our customers monthly in advance for our services. Any unearned
revenue is recorded as deferred revenue on our balance sheet. As of March 31,
2000, we had recorded $4.7 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 anticipate
recognizing revenue on a percentage-of-completion basis.

  We have experienced substantial net losses since inception. As of March 31,
2000, we had an accumulated deficit of $15.2 million. Although our revenues
have grown significantly in recent periods, we may be unable to sustain this
growth. Therefore, you should not consider our historical growth indicative of
future revenue levels or operating results. We expect to incur losses in the
near future.

  For the three months ended March 31, 2000, 10 customers accounted for
approximately 40% of our total quarterly 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

 Revenues

<TABLE>
<CAPTION>
                                                          2000    1999  % Change
                                                         ------- ------ --------
                                                         (In thousands)
   <S>                                                   <C>     <C>    <C>
   For the three months ended March 31:
     Subscription Services.............................. $ 6,871 $1,275    439%
     Consulting Services................................ $   307 $   26   1080%
   For the six months ended March 31:
     Subscription Services.............................. $11,450 $2,164    429%
     Consulting Services................................ $   524 $   26   1915%
</TABLE>

  Subscription Services. Revenues from subscription services increased $5.6
million, or 439% for the three months ended March 31, 2000, as compared to the
same period in 1999. Revenues from subscription services

                                       9
<PAGE>

also increased $9.3 million, or 429%, during the six months ended March 31,
2000, as compared to 1999. Subscription services represented 95% of total
revenues for each of the three months and six months ended March 31, 2000 and
approximately 100% of total revenues for each of the three months and six
months ended March 31, 1999. The increase in revenue was attributable to the
increase in both the number of new customers and the increase in revenue from
existing customers. For the three months ended March 31, 2000, one customer
accounted for approximately 13% of total revenues. For the three months ended
March 31, 1999, no customers accounted for more than 10% of total revenues.

  Consulting Services. Revenues from consulting services increased $281,000,
or 1080% for the three months ended March 31, 2000, as compared to the same
period in 1999. Revenues from consulting services also increased $498,000, or
1915%, during the six months ended March 31, 2000, as compared to 1999. Our
professional services group was formed in January 1999.

 Expenses

<TABLE>
<CAPTION>
                                                             2000  1999 % Change
                                                            ------ ---- --------
                                                                (In
                                                            thousands)
   <S>                                                      <C>    <C>  <C>
   For the three months ended March 31:
     Cost of subscription services......................... $2,182 $285   666%
     Cost of consulting services........................... $  299 $ 87   244%
   For the six months ended March 31:
     Cost of subscription services......................... $4,248 $453   838%
     Cost of consulting services........................... $  553 $ 87   536%
</TABLE>

  Cost of Subscription Services. Cost of subscription services consists of
connection fees to Internet service providers for bandwidth usage of our
measurement computers around the world and depreciation, maintenance and other
equipment charges for our measurement infrastructure. Cost of subscription
services increased $1.9 million, or 666% for the three months ended March 31,
2000, as compared to 1999. Cost of subscription services increased $3.8
million, or 838% for the six months ended March 31, 2000, as compared to 1999.
This increase was primarily due to the greater number of measurement computers
deployed and additional bandwidth consumption, resulting in higher connection
fees and more depreciation and equipment charges. In addition, during the six
months ended March 31, 2000, we continued to increase measurement capacity and
bandwidth at our existing locations, and expand our measurement
infrastructure. As a result of these additional costs, cost of subscription
services was 32% of subscription service revenue for the three months ended
March 31, 2000, as compared to 22%, for the three months ended March 31, 1999.
Cost of subscription services was 37% of subscription service revenue for the
six months ended March 31, 2000, as compared to 21%, for the six months ended
March 31, 1999.

  Cost of Consulting Services. Cost of consulting services consists of
compensation expenses for consulting personnel and related costs. Cost of
consulting services exceeded consulting services revenue for the three and the
six months ended March 31, 1999, and the six months ended March 31, 2000
because of the increase in our professional services group costs which was
formed in January 1999. During the three months ended March 31, 2000, cost of
consulting services were slightly less than consulting services revenue as the
professional services group revenue has grown. We expect that the cost of
consulting services as a percentage of consulting services revenue will be
greater than the cost of subscription services as a percentage of subscription
services revenues.

<TABLE>
<CAPTION>
                                                             2000  1999 % Change
                                                            ------ ---- --------
                                                                (In
                                                            thousands)
   <S>                                                      <C>    <C>  <C>
   For the three months ended March 31:
     Research and development.............................. $1,102 $338   226%
   For the six months ended March 31:
     Research and development.............................. $1,943 $663   193%
</TABLE>


                                      10
<PAGE>

  Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
personnel and outside contractors. Research and development expense increased
from 1999 to 2000 due to the increase in software engineers, project
management and quality assurance personnel and outside consultants. To date,
all research and development expenses have been expensed as incurred. We
believe that a significant increase in our research and development investment
is essential for us to maintain our market position and to continue to enhance
and expand our services. Accordingly, we anticipate research and development
expenses are likely to increase in the foreseeable future.

<TABLE>
<CAPTION>
                                                           2000   1999  % Change
                                                          ------ ------ --------
                                                               (In
                                                           thousands)
   <S>                                                    <C>    <C>    <C>
   For the three months ended March 31:
     Sales and marketing................................. $4,080 $  936   336%
   For the six months ended March 31:
     Sales and marketing................................. $6,808 $1,563   336%
</TABLE>

  Sales and Marketing. 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 from 1999 to 2000 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 believe that a
significant increase in our sales and marketing efforts is essential for us to
maintain our market position and to further increase acceptance of our
services. Accordingly, we anticipate sales and marketing expenses will
increase in the foreseeable future.

<TABLE>
<CAPTION>
                                                             2000  1999 % Change
                                                            ------ ---- --------
                                                                (In
                                                            thousands)
   <S>                                                      <C>    <C>  <C>
   For the three months ended March 31:
     Operations............................................ $1,062 $320   232%
   For the six months ended March 31:
     Operations............................................ $1,839 $549   235%
</TABLE>

  Operations. Operations expenses consist primarily of compensation and
related costs for management personnel and technical support employees, who
manage and maintain our measurement and headquarters infrastructure and
support our customers. Our operations personnel also work closely with other
departments to assure the reliability of our services and to support our sales
and marketing activities. The increase in operations expenses from 1999 to
2000 was primarily related to the hiring of personnel to manage and support
our growing customer base. We believe that continued investment is necessary
to support our ability to successfully develop, deploy and operate our growing
Internet measurement infrastructure, as well as to successfully support our
customer base. Accordingly, we anticipate that operations costs will increase
in the foreseeable future.

<TABLE>
<CAPTION>
                                                             2000  1999 % Change
                                                            ------ ---- --------
                                                                (In
                                                            thousands)
   <S>                                                      <C>    <C>  <C>
   For the three months ended March 31:
     General and administrative............................ $1,316 $189   596%
   For the six months ended March 31:
     General and administrative............................ $2,155 $443   386%
</TABLE>

  General and Administrative. 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. The increase in our general and administrative
expenses from 1999 to 2000 was primarily related to hiring additional
employees to support the growth of our business, as well as increases in costs
associated with becoming a public company. We believe that our general and
administrative expenses will continue to increase as a result of the continued
expansion of our administrative staff and expenses associated with being a
public company such as annual and other public reporting costs, directors' and
officers' liability insurance and investor relations programs.

                                      11
<PAGE>

<TABLE>
<CAPTION>
                                                            2000  1999  % Change
                                                            ----- ----- --------
                                                                (In
                                                            thousands)
   <S>                                                      <C>   <C>   <C>
   For the three months ended March 31:
     Amortization of stock-based compensation.............. $  85 $ 123   (31)%
   For the six months ended March 31:
     Amortization of stock-based compensation.............. $ 171 $ 146    17%
</TABLE>

  Amortization of Stock-Based Compensation. 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 and had an aggregate of
approximately $1.0 million of deferred compensation remaining to be amortized
as of March 31, 2000. Deferred compensation is amortized on a straight-line
basis over the vesting period of the options. We expect amortization of
approximately $341,000 in fiscal 2000, $341,000 in fiscal 2001, $341,000 in
fiscal 2002 and $112,000 in fiscal 2003.

<TABLE>
<CAPTION>
                                                           2000  1999   % Change
                                                          ------ -----  --------
                                                              (In
                                                           thousands)
   <S>                                                    <C>    <C>    <C>
   For the three months ended March 31:
     Interest income (expense), net...................... $2,507 $ (88)   2949%
   For the six months ended March 31:
     Interest income (expense), net...................... $3,266 $(149)   2292%
</TABLE>

 Interest Income (Expense), Net

  Net interest income (expense) increased from 1999 to 2000 primarily due to
higher interest income from our increase in cash and cash equivalents
resulting from the proceeds we received from our initial and secondary public
offerings.

 Provision for Income Taxes

  No provision for federal and state income taxes has been recorded because we
have experienced net losses since inception that has resulted in deferred tax
assets. In light of our recent history of operating losses, we have provided a
valuation allowance for all of our deferred tax assets, as we are presently
unable to conclude that it is more likely than not that the deferred tax asset
will be realized.

  As of September 30, 1999, we had net operating loss carryforwards for
federal income tax reporting purposes of approximately $10.6 million available
to reduce future income subject to income taxes. As of September 30, 1999, we
had net operating loss carryforwards for state income tax purposes of
approximately $6.2 million available to reduce future income subject to income
taxes. The federal net operating loss carryforwards expire in various periods
through 2019. State net operating loss carryforwards expire in various periods
through 2004. In addition, as of September 30, 1999, we had federal research
and development tax credit carryforwards of approximately $154,000. The
federal credit carryforwards expire in various periods through 2019. As of
September 30, 1999, we had California research and development tax credit
carryforwards of approximately $140,000. The California credit may be carried
over indefinitely. The U.S. Tax Reform Act of 1986 contains provisions that
limit the net operating loss carryforwards and research and development
credits available to be used in any given year upon the occurrence of certain
events, including a significant change in ownership.

Liquidity and Capital Resources

  Since our inception, we have funded our operations primarily through public
sale and private placements of our common stock and convertible redeemable
preferred stock with strategic investors, venture capital firms and

                                      12
<PAGE>

private investors. 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 our initial public offering, we raised
$56.7 million, net of issuance costs, including $7.8 million raised from the
exercise of the underwriter's over-allotment option, which occurred in October
1999. In our secondary public offering in February 2000, we raised $286.6
million, net of issuance costs, including $86.5 million, net of issuance
costs, raised from the exercise of the underwriter's over-allotment option,
which occurred at the end of February 2000. In addition, we financed our
operations through subordinated and other debt, equipment loans and a capital
lease. The principal balance outstanding at March 31, 2000 for these loans and
leases was approximately $3.5 million. At March 31, 2000, we had approximately
$357 million in cash and cash equivalents.

  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. Net cash used for operating activities was $1.7
million in the six months ended March 31, 1999. Net cash used for operating
activities was primarily the result of our net operating loss.

  Since inception, our investing activities have been purchases of property
and equipment. Capital expenditures totaled $2.4 million in the six months
ended March 31, 2000 and $497,000 in the six months ended March 31, 1999.

  Our financing activities provided $294.4 million in the six months ended
March 31, 2000 and approximately $3.5 million in the six months ended March
31, 1999. In the six months ended March 31, 2000, we raised $7.8 million in
October 1999 from the exercise of the underwriter over-allotment option from
our initial public offering and $286.6 million, net of issuance costs from our
secondary public offering in February 2000. During the six months ended March
31, 1999, we received $3.4 million in proceeds from our equipment loans.

  As of March 31, 2000, our principal commitments consisted of $3.5 million in
loans and capital leases. We have granted a security interest in substantially
all of our assets to secure these loans. The interest rate on our loans in the
form of equipment notes ranged from 5.60% to 10.25% per year and the interest
rate on the loans in the form of a promissory note bore interest at a rate of
8.25% per year. As of March 31, 2000, we also had commitments of approximately
$1.5 million in future lease payments for our headquarters facility. We had no
material commitments for capital expenditures as of March 31, 2000. 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 we will
also experience an increase in our capital expenditures and lease commitments
consistent with our anticipated growth in operations, infrastructure and
personnel.

  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 shareholders, 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.

Year 2000 Compliance

  To date, we have not experienced any year 2000-related problems with our
internally developed software or our third party supplied software and
computer systems, and we are not aware of any failure of our systems or of our
third party suppliers systems to be year 2000 compliant that could impact our
business operations.


                                      13
<PAGE>

Recent Accounting Pronouncements

  In March 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on EITF No. 00-2, Accounting for the Costs of Developing a Web Site.
EITF No. 00-2 provides guidance on accounting for web site development costs
and is effective for fiscal quarters beginning after June 30, 2000. The
Company is currently reviewing the impact of EITF No. 00-2 on its financial
statements and results of operations.

  In March 2000, the EITF reached a consensus on EITF No. 00-3, Application of
AICPA Statement of Position 97-2, Software Revenue Recognition, to
Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware. The Company does not expect that the adoption of EITF No. 00-3 will
have a material impact on its financial statements or results of operations.

  In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation (FIN 44), an interpretation of APB Opinion No. 25, Accounting for
Stock Issued to Employees. The application of this interpretation is effective
July 1, 2000. The Company does not believe that the impact of this statement
will have a material effect on the financial position or results of operations
upon the adoption of this interpretation.

  In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), summarizing the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. In March 2000, the
SEC issued Staff Accounting Bulletin No. 101A (SAB 101A), delaying the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000 for fiscal years beginning after
June 15, 2000. The Company is currently reviewing the impact of SAB 101 on its
financial position and results of operations.

  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), and in July 1999 issued Financial
Accounting Standard No. 137, 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 for fiscal years beginning after June 15, 2000. The Company
does not believe that the impact of this statement will have a material effect
on the financial position or results of operations upon the adoption of this
accounting standard.

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. We began offering our Internet
performance measurement services in May 1997. We introduced our Transaction
Perspective service in April 1999, our Lifeline service in July 1999, the most
recent version of our Perspective service in December 1999, our Consumer
Perspective service in December 1999, and our Diagnostic Perspective in April
2000. We formed our professional services organization in January 1999. The
revenue and income potential of our business and the related market are
unproven. In addition, because of our limited operating history and because
the market for Internet performance measurement and diagnostic 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 Internet performance measurement.


                                      14
<PAGE>

 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 significant losses in the future. We
incurred net losses of $441,000 for the three months ended March 31, 2000, and
as of March 31, 2000, we had an accumulated deficit of $15.2 million. We
believe that our operating expenses will continue to increase as we grow our
business. As a result, although our recent initial and secondary public
offering provided us with cash for our working capital, we will need to
significantly increase our revenues to achieve and maintain profitability, as
reflected in our financial statements. We may not be able to sustain our
recent revenue growth rates. In fact, we may not have any revenue growth, and
our revenues could decline.

 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. We cannot assure you that we will
continue to experience high 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.

  In addition, initial sales of our services and subsequent customer follow-up
are conducted almost exclusively by telephone. A few customers have, in the
past, expressed a preference for more personal, face-to-face customer service.
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
our renewal-rate percentage declines, our revenues could 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 will 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;

  .  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; and

  .  the amount and timing of professional services revenues.

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


                                      15
<PAGE>

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

  Because our business is based on providing performance measurement and
diagnostic services for web sites, the Internet must be widely adopted, in a
timely manner, as a means of electronic commerce, or e-commerce, and
communications. Because e-commerce 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 service.

  Because we have only recently begun to offer professional services and we
only recently introduced our Keynote Consumer Perspective, Keynote Lifeline,
Keynote Transaction Perspective and Keynote Diagnostic Perspective services,
the success of our business currently depends, and for the immediate future
will continue to substantially depend, on the sale of our Keynote Perspective
service. Therefore, we believe that initial sales and renewals of our Keynote
Perspective service will account for substantially all of our revenues for the
immediate future. A decline in the price of, or fluctuation in the demand for,
Keynote Perspective, or our inability to maintain or increase sales, would
cause our revenues to decline.

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

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

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

  The demand for our Internet performance measurement 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

                                      16
<PAGE>

Internet currently causes significant e-commerce quality of service problems
for 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. We currently measure the performance
of approximately 10,000 web-site addresses for our customers. Based on the
number of measurement computers we currently have deployed and the
communications capacity available to these computers, we believe we are able
to measure the performance of approximately 15,000 web-site addresses. We are
in the process of deploying additional measurement computers and upgrading the
underlying infrastructure so that we will have the ability by the end of
fiscal 2000 to measure in excess of 50,000 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 a limited number of customers as a result of past problems
with our service, though we do not believe that any customers failed to renew
their subscription to our services due to these problems. Despite our testing,
our existing or future services may not perform as expected due to unforeseen
problems, which could result in loss of or delay in revenues, loss of market
share, failure to achieve market acceptance, diversion of development
resources, injury to our reputation, increased insurance costs or increased
service costs.

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

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

  The ongoing evolution of the Internet requires us to continually improve the
functionality, features and reliability of our Internet performance
measurement and diagnostic 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.


                                      17
<PAGE>

 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 Internet performance measurement and diagnostic services is
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. Our principal competitors today include
Freshwater Software, Internet Resources Group, Inverse Network Technology, a
unit of Visual Networks and Service Metrics a unit of Exodus Communications.
We also indirectly compete with WebCriteria, MIDS Matrix IQ Service, and INS
INSoft Division, and free services such as the WebSite Garage unit of
Netscape, NetMechanic and Internet Weather Report. While the free services are
not as comprehensive as ours, as they only take measurements from one
location, they do not measure the speed of transactions and they only measure
simple download time, customers could still choose to use these less
comprehensive services.

  If we expand the scope of our products and services, we may encounter many
additional, market-specific competitors. These potential competitors include
companies that sell network management software such as CompuWare, HP-Openview
and IBM's Tivoli Unit, and companies that sell load-testing software such as
Mercury Interactive and Segue Software. Mercury Interactive has a service that
competes with our Transaction Perspective service and the Velogic load testing
service which we have agreed to acquire as part of our proposed acquisition of
Velogic, Inc. 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 shares, 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.

  For the three months ended March 31, 2000, 10 customers accounted for
approximately 40% of our total revenues, and this trend 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
our services and continue to generate revenue in any future period. In
addition, our customer agreements can be generally be terminated at any time
with little or no penalty. If we lose a major customer, our revenues could
decline.

                                      18
<PAGE>

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

  In order 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.

 In order 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. We have from time to time in the past experienced, and we
expect in the future to continue to experience, difficulty in hiring and
retaining 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 other key employees are not
bound by employment 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 telesales 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.

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

  We formed our professional services organization in January 1999. As a
result, we have little experience in delivering consulting services and we may
not be able to successfully introduce additional consulting services. 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 groups of "Big Five" accounting firms, such as Andersen Consulting
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.


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<PAGE>

 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. We may encounter
difficulties in managing this growth. Our ability to compete effectively and
to manage any future expansion of our operations will require us to continue
to improve 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 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. 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
currently do not have a redundant system for computer-network and other
services at an alternate site. 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.

  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 approximately two months ago. The outages that we have experienced
have lasted no more than a few hours, with the longest outage that occurred in
the fall of 1998 having lasted approximately 12 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.

  Hackers or individuals that attempt to breach our network security, 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 purposeful security breaches, the
inadvertent transmission of computer viruses could expose us to litigation or
to a material risk of loss.


                                      20
<PAGE>

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

  Our measurement computers are located at facilities that are not owned by
our customers or us. Instead, these computers are installed at locations near
various Internet access points worldwide. Because we do not own or operate
these 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 noninfringing
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 2% of our total revenues for the three months
ended March 31, 2000 and for our prior periods. 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 complying with a wide variety of foreign laws; and

  .  and reduced protection for intellectual property rights in some
     countries.

  The Internet may not be used as widely in other countries and the adoption
of e-commerce 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.


                                      21
<PAGE>

 Future sales of our common stock may cause our stock price to decline.

  Sales of a large number of shares of our common stock in the market in the
future, or the belief that these sales could occur, could cause a drop in the
market price of our common stock. At March 31, 2000, we had outstanding
26,709,773 shares of common stock. Of these shares, 12,298,620 shares,
including the 4,600,000 shares sold in our initial public offering as well as
the 6,612,500 shares sold in our secondary offering, are freely tradable
without restriction or further registration under the Securities Act, unless
the shares are purchased by our "affiliates".

  The remaining 14,411,153 shares of common stock outstanding upon completion
of our secondary offering will be "restricted securities," as that term is
defined under Rule 144 of the Securities Act. Our officers and directors and
the stockholders who sold in our secondary, who hold 14,360,017 shares of
common stock, have executed lock-up agreements that limit their ability to
sell our common stock. These shareholders have agreed not to sell or otherwise
dispose of any shares of our common stock until May 18, 2000 without the prior
written approval of Fleet Boston Robertson Stephens, Inc. When the lock-up
agreements expire, these shares and shares underlying outstanding stock
options and warrants will become eligible for sale, in some cases only subject
to the volume, manner of sale and notice requirements of Rule 144.

  As of March 31, 2000, the remaining 14,411,153 restricted shares of our
common stock will become eligible for public sale as follows:

  .  0 shares as of March 31, 2000;

  .  5,288 shares as of April 26, 2000;

  .  23,224 shares as of April 30, 2000;

  .  22,624 shares as of May 11, 2000; and

  .  14,360,017 as of May 18, 2000.

  As of March 31, 2000 there were outstanding options to purchase 2,545,620
shares of our common stock. Sales of a substantial number of these shares
could cause our stock price to fall.

 We may face difficulties assimilating and may incur costs associated with any
future acquisitions.

  As a part of our business strategy, we may seek to acquire or invest in
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. For example, we have
recently agreed to acquire Velogic, Inc. Acquisitions could create risks for
us, including:

  .  difficulties in assimilation of 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; and

  .  use of substantial portions of our available cash to consummate the
     acquisition.

Item 3. Qualitative and Quantitative Disclosures about Market Risks.

  Interest Rate Sensitivity. Our interest income and expense could be
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, 2000, the fair value of our cash
equivalents and the interest earned on those cash equivalents would change by
an insignificant amount.

  Foreign Currency Fluctuations. 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, 2000.

                                      22
<PAGE>

                          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

  The effective date of our registration statement on Form S-1 filed under
Securities Act of 1933 (No. 333-82781) relating to our initial public offering
of our common stock was September 24, 1999. A total of 3,875,000 shares of our
common stock were sold by us and 125,000 shares of common stock were sold on
behalf of a selling stockholder, each at a price of $14.00 per share to an
underwriting syndicate led by FleetBoston Robertson Stephens Inc., Chase
Securities, Inc., and Dain Rauscher Incorporated. The offering commenced on
September 24, 2000 and closed on September 29, 2000. On October 15, 1999, we
sold an additional 600,000 shares of common stock at a price of $14.00 per
share to this underwriting syndicate upon their exercise of the over-allotment
option.

  As a result of the initial public offering, we received proceeds of $56.7
million, net of issuance costs, including proceeds of $7.8 million, net of
issuance costs, from the exercise of the underwriters' over-allotment option.
A portion of the proceeds was applied toward continuing operations. The
remaining proceeds are being used as working capital or are included in cash
and cash equivalents. We did not receive any proceeds from the sale of shares
by the selling stockholder.

  The effective date of our registration statement on Form S-1 filed under
Securities Act of 1933 (No. 333-94651) relating to our secondary public
offering of our common stock was February 17, 2000. A total of 2,000,000
shares of our common stock were sold by us and 3,750,000 shares of common
stock were sold on behalf of selling stockholders, each at a price of $105.00
per share to an underwriting syndicate led by FleetBoston Robertson Stephens
Inc., Chase Securities, Inc., Dain Rauscher Incorporated, and Soundview
Technology Group, Inc. The offering commenced on February 18, 2000 and closed
on February 24, 2000. On February 29, 2000, we sold an additional 862,500
shares of common stock under this registration statement at a price of $105.00
per share to the same underwriting syndicate as a result of their exercise of
the underwriter's over-allotment option.

  The secondary public offering resulted in gross proceeds of $286.6 million,
net of issuance costs. A portion of the proceeds was applied toward continuing
operations. The remaining proceeds are being used as working capital or are
included in cash and cash equivalents. We did not receive any proceeds from
the sale of shares by the selling stockholders.

Item 3. Defaults Upon Senior Securities

  Not applicable.

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

  On February 22, 2000, at our 2000 Annual Meeting of Shareholders, held in
Redwood City, California, we submitted the following proposals to a vote of
our stockholders:

    1. Election of Umang Gupta, Eugene Shklar, David Cowan, Mark Leslie and
  Stratton Sclavos, as our directors, each to serve until his successor has
  been elected and qualified or until his earlier resignation or removal;

    2. Approval of a change in our state of incorporation from California to
  Delaware; and

    3. Ratification of the selection of KPMG LLP as our independent auditors
  for the fiscal year ending September 30, 2000.


                                      23
<PAGE>

  With regard to proposal no. 1, 20,115,783 shares voted in favor of the
election of each of Umang Gupta, Eugene Shklar, David Cowan, Mark Leslie and
Stratton Sclavos, and 24,600 shares withheld authority to vote for each of
these nominees as our directors. With regard to proposal no. 2, 18,871,088
shares voted in favor of the proposal, 940,104 shares voted against the
proposal, 834 shares abstained and 328,357 shares were broker non-votes. With
regard to proposal no. 3, 20,138,149 shares voted in favor of the proposal,
1,500 shares voted against the proposal, 734 shares abstained and no shares
were broker non-votes. In each case, the number of shares voting in favor of
the proposal was in excess of the vote required to approve the proposal.

Item 5. Other Information

  In March 2000, we changed our state of incorporation from California to
Delaware.

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

    (a) Index to Exhibits

    Exhibit No. 27.01--Financial Data Schedule (Available in EDGAR format
    only)

    (b) Reports on Form 8-K

    No reports on Form 8-K were filed in the quarter ended March 31, 2000.

                                      24
<PAGE>

                                  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 15th day of May 2000.

                                          Keynote Systems, Inc.

                                                    /s/ Umang Gupta
                                          By: _________________________________
                                                        Umang Gupta
                                              Chairman of the Board and Chief
                                               Executive Officer (Principal
                                                    Executive Officer)

                                                   /s/ John J. Flavio
                                          By: _________________________________
                                                      John J. Flavio
                                            Chief Financial Officer (Principal
                                              Financial Officer and Principal
                                                    Accounting Office)

                                      25