<PAGE>


 ===============================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-Q

                                   (Mark One)

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

                For the quarterly period ended December 31, 2001

                                       OR

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

                        FOR THE TRANSITION PERIOD FROM TO

                        COMMISSION FILE NUMBER: 000-27241

                              Keynote Systems, Inc.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


                       DELAWARE                            94-3226488
           (State or other jurisdiction of             (I.R.S. Employer
            incorporation or organization)              Identification No.)


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


           Registrant's telephone number, including area code:  (650) 403-2400


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

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

                  Class                 Shares outstanding at January 31, 2002
                  -----                 --------------------------------------
      Common Stock, $.001 par value                 28,241,602

                                       1

<PAGE>

                              KEYNOTE SYSTEMS, INC.

                                TABLE OF CONTENTS

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

Item 1. Financial Statements ......................................................    3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
        Operations ................................................................   12
Item 3. Qualitative and Quantitative Disclosures about Market Risk ................   31

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings .........................................................   31
Item 2. Changes in Securities and Use of Proceeds .................................   31
Item 3. Defaults Upon Senior Securities ...........................................   31
Item 4. Submission of Matters for a Vote of Security Holders ......................   31
Item 5. Other Information .........................................................   31
Item 6. Exhibits and Reports on Form 8-K ..........................................   31
Signatures ........................................................................   32
</TABLE>

                                       2

<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

                     KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

         Index to Unaudited Condensed Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C>
Condensed Consolidated Balance Sheets as of December 31, 2001 and
September 30, 2001 ................................................................    4

Condensed Consolidated Statements of Operations for the three months ended
December 31, 2001 and 2000 ........................................................    5

Condensed Consolidated Statements of Cash Flows for the three months ended
December 31, 2001 and 2000 ........................................................    6

Notes to Condensed Consolidated Financial Statements ..............................    7
</TABLE>

                                       3

<PAGE>

                     KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (In thousands)

<TABLE>
<CAPTION>
                                                      December 31, 2001   September 30, 2001
                                                      -----------------   ------------------
                                                         (Unaudited)
<S>                                                   <C>                 <C>
                  ASSETS
Current assets:
  Cash and cash equivalents ........................      $ 37,932            $ 53,130
  Short-term investments ...........................       208,978             198,566
                                                          --------            --------
    Total cash, cash equivalents, and short-term
       investments .................................       246,910             251,696

  Accounts receivable, less allowance for
    doubtful accounts of $1,097 and $1,041 as of
    December 31, 2001 and September 30, 2001 .......         6,002               7,862
  Prepaid and other current assets .................         3,316               4,649
                                                          --------            --------
    Total current assets ...........................       256,228             264,207

Restricted cash ....................................        85,000              85,000
Property and equipment, net ........................        16,385              17,208
Goodwill and other intangible assets ...............         5,311               4,497
Other assets .......................................           205               1,752
                                                          --------            --------
    Total assets ...................................      $363,129            $372,664
                                                          ========            ========

      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Notes payable and capital
    lease obligation ...............................           494                 830
 Accounts payable ..................................           962               2,385
 Accrued expenses ..................................         7,402              10,626
 Accrued excess facility costs .....................         9,747              10,303
 Deferred revenue ..................................         4,843               5,401
                                                          --------            --------
    Total current liabilities ......................        23,448              29,545

                                                          --------            --------
    Total liabilities ..............................        23,448              29,545
                                                          ========            ========

Stockholders' equity:
 Common stock ......................................            28                  28
 Treasury stock ....................................        (1,220)             (1,086)
 Additional paid-in capital ........................       413,897             413,966
 Deferred compensation .............................          (367)               (452)
 Accumulated deficit ...............................       (74,807)            (71,804)
 Accumulated other comprehensive income.............         2,150               2,467
                                                          --------            --------
     Total stockholders' equity ....................       339,681             343,119
                                                          --------            --------
     Total liabilities and stockholders' equity.....      $363,129            $372,664
                                                          ========            ========
</TABLE>

    See accompanying notes to the condensed consolidated financial statements

                                        4

<PAGE>

                     KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                             Three months ended December 31,
                                                             -------------------------------
                                                                     2001       2000
                                                                     ----       ----
<S>                                                                 <C>         <C>
Revenue:
   Subscription services ....................................       $ 8,796    $12,525
   Consulting and support services ..........................           793        493
                                                                    -------    -------
     Total revenues .........................................         9,589     13,018
                                                                    -------    -------

Operating expenses:
   Costs of subscription services ...........................         3,392      3,134
   Costs of consulting and support services .................           952        784
   Research and development .................................         2,131      1,925
   Sales and marketing ......................................         4,836      5,821
   Operations ...............................................         2,012      1,688
   General and administrative ...............................         2,273      1,846
   Acquisition-related charges and amortization of goodwill,
     intangible assets and stock-based compensation .........           299      7,475
                                                                    -------    -------
     Total operating expenses ...............................        15,895     22,673
                                                                    -------    -------
     Loss from operations ...................................        (6,306)    (9,655)

Interest income, net ........................................         3,303      5,427
                                                                    -------    -------
     Loss before income taxes ...............................        (3,003)    (4,228)

Provision for income taxes ..................................             -        200
                                                                    -------    -------
     Net loss ...............................................       $(3,003)   $(4,428)
                                                                    =======    ========

Net loss per share:
     Basic and diluted ......................................       $ (0.11)   $ (0.16)
                                                                    =======    =======
Shares used in computing basic and diluted net loss
  per share .................................................        27,820     27,588
                                                                    =======    =======
</TABLE>

    See accompanying notes to the condensed consolidated financial statements

                                        5

<PAGE>

                     KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                        Three months ended December 31,
                                                                        -------------------------------
                                                                               2001         2000
                                                                               ----         ----
<S>                                                                     <C>            <C>
Cash flows from operating activities:
   Net loss ............................................................    $ (3,003)      $(4,428)

   Adjustments to reconcile net loss to net cash provided by (used for)
   operating activities:

     Depreciation and amortization .....................................       1,845         1,240
     Amortization of goodwill and other intangible assets ..............         214         3,932
     Amortization of deferred compensation .............................          85         3,304
     Changes in operating assets and liabilities:
        Accounts receivable ............................................       1,860            75
        Prepaids and other assets ......................................       2,880        (1,768)
        Accounts payable and accrued expenses ..........................      (5,203)          628
        Deferred revenue ...............................................        (558)         (604)
                                                                            --------       -------
          Net cash provided by (used for) operating activities .........      (1,880)        2,379
                                                                            --------       -------
Cash flows from investing activities:

   Purchases of property and equipment .................................      (1,022)       (3,148)
   Purchase of assets of onDevice and Envive ...........................      (1,028)           --
   Purchase of short-term investments ..................................     (26,235)      (51,497)
   Sales of short-term investments .....................................      15,506            --
                                                                            --------       -------
         Net cash used for investing activities ........................     (12,779)      (54,645)

Cash flows from financing activities:

   Repayments of notes payable .........................................        (336)         (323)
   Issuance of common stock, net of issuance costs .....................          43           170
   Purchase of treasury stock ..........................................        (246)           --
                                                                            --------       -------
     Net cash used for financing activities ............................        (539)         (153)
                                                                            --------       -------
Net decrease in cash and cash equivalents ..............................     (15,198)      (52,419)

Cash and cash equivalents at beginning of the period(1) ................      53,130       260,201
                                                                            --------       -------
Cash and cash equivalents at end of the period (1) .....................    $ 37,932      $207,782
                                                                            ========       =======

Cash, cash equivalents, and short-term investments
     at end of the period (1) ..........................................    $246,910      $259,279
                                                                           =========      ========
</TABLE>

--------
(1) Excludes $85.0 million of restricted cash.



   See accompanying notes to the condensed consolidated financial statements

                                        6

<PAGE>

                     KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)  Basis of Presentation

  The accompanying interim unaudited condensed consolidated balance sheets and
condensed consolidated statements of operations and cash flows reflect all
normal recurring adjustments that are, in the opinion of management, necessary
for a fair presentation of the financial position of Keynote Systems, Inc. and
subsidiaries (the Company) at December 31, 2001, and the results of operations
and cash flows for the interim periods ended December 31, 2001 and 2000.

  The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC"), 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. This report should be read in
conjunction with the consolidated financial statements and notes thereto for the
fiscal year ended September 30, 2001 included in the Company's Report on Form
10K as filed with the SEC.

  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.

  Certain reclassifications have been made to previously issued financial
statements to conform to current presentation.

(2)  Revenue Recognition

  Subscription services revenues consist of fees from subscriptions to the
Company's Internet measurement, monitoring and diagnostic services. The
Company's subscription services revenues are deferred upon invoicing and are
recognized ratably over the service period, generally ranging from one to twelve
months. Deferred revenue is comprised mainly of deferred subscription services
revenue. A portion of subscription services revenues is invoiced monthly upon
completion of measurement services. Any unearned revenue is recorded as deferred
revenue on the balance sheet. The Company does not generally grant refunds
during its initial subscription term. All discounts granted during the initial
term are netted against revenue. Revenue is not recognized during free trial
periods. Revenues from consulting and support services are recognized as the
services are performed, typically a period of one to three months. For
consulting projects that span multiple months, the Company recognizes revenue on
a percentage of completion basis. All of the revenue related to the Company's
load-testing services is also included in consulting revenue.

(3)  Other Comprehensive Loss

  Other comprehensive loss includes unrealized losses on short-term investments
in debt securities which are excluded from earnings and reported as a component
of stockholders' equity.  The tax effect of these unrealized losses is expected
to be immaterial.

                                                           Three months ended
                                                               December 31
                                                           ------------------
                                                            2001       2000
                                                            ----       ----
                                                            (in thousands)

  Net loss................................................ $3,003     $4,428
  Net unrealized loss on available-for-sale investments...    317          -
                                                           ------     ------
   Comprehensive Loss..................................... $3,320     $4,428
                                                           ======     ======

(4)  Financial Instruments and Concentration of Risk

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

  Credit risk is concentrated in North America. The Company generally requires
no collateral from customers, however, throughout the collection process, it
conducts an ongoing evaluation of customers' ability to pay. Based on the
historical amount of accounts receivable written off in prior years, the Company
currently believes that it has adequately reserved for doubtful accounts as of
the date of each balance sheet presented herein. The Company's accounting policy
for its allowance for doubtful accounts is based on historical trends,
experience and current market and industry conditions. Management regularly
reviews the adequacy of the Company's accounts receivable allowance after
considering the accounts receivable aging, the age of each invoice, each
customer's expected ability to pay and the Company's collection history with
each customer. Management reviews any invoice greater than 60 days past due to
determine if an allowance

                                        7

<PAGE>

is appropriate based on the risk category. In addition, the Company maintains a
reserve for all other invoices which is calculated by applying a percentage to
the outstanding accounts receivable balance based on historical trends. The
allowance for doubtful accounts represents management's best current estimate,
but changes in circumstances relating to accounts receivable, including
unforeseen declines in market conditions and collection rates, may result in a
requirement for additional allowances in the future. Based on the historical
amount of accounts receivable written off in prior years, the Company currently
believes that it has adequately reserved for doubtful accounts as of the date of
each balance sheet presented herein. At December 31, 2001, one customer
accounted for more than 10% of the Company's total accounts receivable which was
collected in early January 2002. For the three months ended December 31, 2001
and 2000, no single customer accounted for more than 10% of the Company's total
revenues.

(5) Investments

     The Company classifies its investments as available-for-sale securities
which are carried at fair market value, with unrealized gains and losses
excluded from earnings and reported as a component of other comprehensive loss.
The following table summarizes the Company's short-term investments in
investment-grade debt securities as of December 31, 2001 (in thousands):

<TABLE>
<CAPTION>
                                                            Gross          Gross          Estimated
                                            Amortized       Unrealized     Unrealized     Fair Market
                                            Cost            Gains          Losses         Value
                                            ----            -----          ------         -----
<S>                                         <C>             <C>            <C>            <C>
Obligations of U.S. government
  agencies ...............................  $ 15,690       $  172            ---           $ 15,862
Corporate debt securities ................   191,138        2,538            560            193,117
                                             -------        -----            ---            -------

Total ....................................  $206,828       $2,710          $ 560           $208,978
                                             =======        =====            ===            =======
</TABLE>

Income taxes on net unrealized gains are expected to be immaterial.

    The following table summarizes the maturities of fixed maturity investments
available for sale at December 31, 2001 (in thousands). Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or repay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                           Estimated
                                                            Amortized      Fair Market
                                                            Cost           Value
                                                            --------       --------
<S>                                                         <C>            <C>
Due in 1 year ........................................      $ 42,560       $ 42,756
Due in 2 years .......................................       164,268        166,222
                                                            --------       --------

   Total .............................................      $206,828       $208,978
                                                            ========       ========
</TABLE>

(6)  Goodwill and Other Intangible Assets

     Effective October 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets."
As a result, the Company no longer amortizes goodwill. Instead, the Company will
evaluate goodwill for recoverability on an annual basis, thereby eliminating
quarterly and annual goodwill amortization of approximately $325,000 and $1.3
million, respectively, based on the projected amortization for fiscal 2002. The
Company will also evaluate goodwill whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be recoverable from
estimated future cash flows.

     With its adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to identify any necessary
amortization period adjustments. Based on that assessment, only goodwill was
determined to have an indefinite useful life, and no adjustments were made to
the amortization periods or residual values of other intangible assets.

                                        8

<PAGE>

     SFAS 142 provides a six-month transitional period from the effective date
of adoption, for the Company to perform an assessment as to whether there is an
indication that goodwill is impaired. To accomplish this, the Company must
identify its reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of adoption. As
of October 1, 2001, the Company determined that it has one reporting unit.

     The Company has up to six months from the date of adoption to determine the
fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent that a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with SFAS 141, to its carrying amount, both of which would be measured as of the
date of adoption. This second step must be performed as soon as possible, but no
later than the end of the fiscal year. Any impairment measured as of the date of
adoption will be recognized as the cumulative effect of a change in accounting
principle.

     At December 31, 2001, the Company had remaining goodwill of $3.2 million
(net of accumulated amortization of $14.9 million and impairment charges of
$26.0 million). The Company is currently evaluating the information required to
perform the assessment of goodwill impairment. Because of the extensive effort
needed to complete this assessment, the Company has not yet determined whether
there is any indication that goodwill may have been further impaired since the
impairment evaluation completed in June 2001, and, if such an indication exists,
the amount of any potential impairment. The Company will complete its initial
assessment of impairment by March 31, 2002. Should an indication of impairment
exist, the Company will perform the second test under SFAS 142 to measure and
record the amount of impairment, if any. The Company does not, however,
currently expect that the adoption of SFAS 142 will have a material impact on
its financial position or results of operations.

     The following table outlines the pro forma adjustments to reported net loss
for the three months ended December 31, 2000, which exclude the amortization of
goodwill (in thousands, except for loss per share).

      Net loss:
         Reported net loss ................................      $4,428
         Add back goodwill amortization ...................       3,518
                                                                -------
           Adjusted net loss ..............................      $  910
                                                                -------

      Basic and diluted loss per share:

         Reported basic and diluted loss per share ........      $ 0.16
         Add back goodwill amortization ...................         .13
                                                                 ------
           Adjusted basic and diluted loss per share ......      $ 0.03
                                                                 ------

     Additionally, the Company has approximately $2.1 million of unamortized
intangible assets which are all subject to amortization. During the first
quarter of fiscal 2002, the Company acquired approximately $860,000 of
technology-based intangible assets which are being amortized over a three year
period. No significant residual value is estimated for these intangible assets.
During the three month period ended December 31, 2001, the amortization expense
for intangible assets was approximately $214,000. The components of intangible
assets are as follows (in thousands):

                                        9

<PAGE>

<TABLE>
<CAPTION>
                                 December 31, 2001           September 30, 2001
                                 ------------------          ------------------
                                Gross                       Gross
                               Carrying   Accumulated      Carrying   Accumulated
                                 Value    Amortization       Value    Amortization
                                 -----    ------------       -----    ------------
<S>                             <C>           <C>          <C>         <C>
Technology-based ........        $5,592        $3,752       $ 4,735     $  3,575
Customer-based ..........         3,605         3,352         3,605        3,318
Trademark ...............           250           228           250          225
                                 ------        ------       -------     --------
  Intangible assets .....        $9,447        $7,332       $ 8,590     $  7,118
                                 ------        ------       -------     --------
</TABLE>

The amortization expense for existing intangible assets is estimated to be
$700,000 for the remainder of fiscal 2002, $900,000 for fiscal 2003, $500,000
for fiscal 2004, and $15,000 for fiscal 2005.

(7)  Net Loss Per Share

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

                                                            Three months ended
                                                               December 31
                                                            ------------------
                                                               2001    2000
                                                               ----    ----

Shares outstanding under stock options                         6,055   3,853
Shares of restricted stock subject to repurchase                  67     235
                                                               -----   -----

                 Total shares excluded                         6,122   4,088
                                                               =====   =====


  The weighted-average exercise price per share of common stock subject to stock
options was $15.62 as of December 2001 and $33.07 as of December 31, 2000. The
weighted-average repurchase price of restricted stock was $0.81 as of December
31, 2001, and $0.70 as of December 31, 2000.

(8)  Acquisitions

     On October 10, 2001, the Company acquired the business of onDevice
Corporation (onDevice), a provider of wireless application testing services. The
acquisition is expected to supplement the Company's existing benchmarking
services, and was accounted for under the purchase method of accounting. The
transaction was completed for $860,000 in cash, plus up to an additional $1.25
million in cash to be paid if certain revenue target goals are met in the 12
months ended September 30, 2002.

     The $860,000 cash purchase consideration was allocated to the
technology-based intangible assets acquired based on estimated fair values at
the acquisition date. There was no goodwill arising from the acquisition.
Intangible assets are being amortized on a straight-line basis over three years,
and amortization of intangible assets related to onDevice was $63,000 for the
three months ended December 31, 2001. The consolidated statements of operations
include activity relating to onDevice's business activities subsequent to the
acquisition. If the results of the two companies were combined on a pro forma
basis for the three months ended December 31, 2001 and 2000, the difference
between pro forma results and the actual results reported herein, would be
immaterial to the results of the Company.

                                       10

<PAGE>

Acquisition-related charges and amortization of goodwill and other intangibles
and stock based compensation of approximately $7.5 million recorded in the
condensed consolidated statement of operations for the three months ended
December 31, 2000 which includes acquisition related charges of approximately
$3.2 million, amortization of goodwill and other intangibles of approximately
$4.2 million and amortization of stock-based compensation of approximately
$86,000.

   For the three months ended December 31, 2001, we recorded $214,000 in
amortization related to intangible assets and $85,000 in amortization of
stock-based compensation.

(9)  Commitments and Contingencies

(A)  Leases

   The Company leases its facilities and certain equipment under non-cancelable
operating leases which expire on various dates through December 2005.
Additionally, the Company has leased equipment under a capital lease. At
December 31, 2001, future minimum payments under the leases, net of sublease
income, are as follows (in thousands):

Year ended December 31:

                                                       Operating     Capital
                                                      -----------    -------

2002 ...............................................  $  1,269       $    71
2003 ...............................................     2,071            --
2004 ...............................................     3,155            --
2005 ...............................................    87,648            --
Thereafter .........................................        --            --
                                                      --------       -------
Total minimum lease payments .......................  $ 94,143       $    71
                                                      ========
Less amount representing interest ..................                      (1)
                                                                     -------

Present value of minimum lease payments ............                      70
Current portion of capital lease obligation ........                      70
                                                                     -------
Capital lease obligation, less current portion. ....                 $    --
                                                                     =======

     The above amounts do not include lease expenses related to excess
facilities that were accrued as of September 30, 2001.

     In July 2000, the Company entered into a five year lease agreement for
188,000 square foot office building in San Mateo, California which the Company
began occupying in March 2001. The agreement has a mutual one year renewal
option. The development and acquisition of the property has been financed by a
third party through a financial institution. Monthly lease payments under this
operating lease are based on LIBOR using 30-day to 180-day LIBOR contracts.

     The lease agreement contains events, including the Company's failure to
comply with the terms of the lease, a change in control, the Company's failure
to make payments on indebtedness of $3.0 million or more, a judgment in excess
of $3.0 million and other customary events of default. A default under the
lease, including violation of these covenants, could require the Company to
purchase the leased property for a specified amount, which approximates the
lessor's original cost (the "Termination Value"), as well as any unpaid rent. As
of December 31, 2001, the Termination Value was approximately $85 million and
was fully secured by the $85 million restricted cash held by the financial
institution.

     At the end of the lease term, the Company has an option to either purchase
the leased property for the Termination Value, or to assist the lessor with the
sale of the property. The Company has the ability to exercise this option during
the term of the lease. The Company has provided a residual value guarantee for
up to $79 million to cover any deficiency should the property ultimately be sold
for less than the Termination Value.

                                       11

<PAGE>

     In the event that it is probable that the expected fair value of the
property at the end of the lease term will be less than the Termination Value,
the expected loss will be accrued on a straight-line basis over the remaining
lease term. At present, management does not currently know whether it is
probable that the fair market value of the property at the end of the lease term
will be less than the Termination Value.

     Management has evaluated the expected fair value of the property at the end
of the lease term by reviewing current real estate market conditions and
indicators of expectations for the market in the future. Real estate market
conditions subsequent to the origination of the lease have generally worsened
due to the amount of available space for lease and the corresponding lease
rates. The range of current market values for the property is estimated to be
between $40 million to $50 million. However, due to the historical and expected
volatility of the real estate market, management is currently unable to estimate
the fair value of the property at the end of the lease term.

     To fully collateralize this obligation, $85.0 million has been deposited in
an interest-bearing escrow account and is included in the balance sheet as
restricted cash as of December 31, 2001 and 2000, and is reflected as a future
minimum payment in 2005 in the above table. In accordance with the lease
agreement, the cash restriction expires on June 2005. In addition, the property
covered by the lease, as well as all of the Company's personal property and its
headquarters building, is subject to a deed of trust in favor of the lessor in
order to secure the Company's obligations under the lease.

     (B) Legal Proceedings

     The Company is subject to legal proceedings, claims, and litigation arising
in the ordinary course of business. While the outcome of these matters is
currently not determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.

     Beginning on August 16, 2001, a number of class action lawsuits have been
filed in the United States District Court for the Southern District of New York
against the Company, certain of its officers and the underwriters of the
Company's initial public offering. These so-called "laddering" lawsuits are
essentially identical, and were brought on behalf of those who purchased the
Company's publicly traded securities between September 24, 1999 and August 19,
2001. These complaints allege that the underwriters of the Company's initial
public offering allocated shares in exchange for agreements by investors to buy
additional shares in the aftermarket at a higher price or to buy shares in other
companies with higher than normal commissions. The complaint also alleges that
the prospectus for the Company's initial public offering was false and
misleading in violation of federal securities laws because it did not disclose
these alleged arrangements. The complaints have been consolidated into a single
action with cases brought against over three hundred other issuers and their
underwriters that make similar allegations regarding the initial public
offerings of those issuers. The proceedings against the issuers, including the
Company, have been stayed pending an outcome in the proceedings against the
underwriters. The Company believes the claims are without merit and intends to
defend the actions vigorously. However, these claims, even if not meritorious,
could be expensive and divert management's attention from operating the Company.

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

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

Except for historical information, this Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements involve risks and uncertainties, including, among other things,
statements regarding our anticipated costs and expenses and revenue mix. These
forward-looking statements include, among others, statements including the words
"expect," "anticipate," "intend," "believe" and similar language. Our actual
results may differ significantly from those projected in the forward-looking
statements. Factors that might cause or contribute to these differences include,

                                       12

<PAGE>

but are not limited to, those discussed in this section and in our annual report
on Form 10-K for the fiscal year ended September 30, 2001, in the section
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Factors That May Impact Future Operating Results" and elsewhere in
that report. You should carefully review the risks described in other documents
we file from time to time with the Securities and Exchange Commission, including
the annual report on Form 10-K, the quarterly reports on Form 10-Q and current
reports on Form 8-K that we file in 2002. 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

    We provide Internet performance services that enable companies to benchmark,
test and manage and improve their e-business web sites. We believe that
companies who use our services can increase revenues, improve customer support
and retention while, at the same time, reduce customer support costs, and gain a
competitive advantage.

    Revenues consist of subscription services revenue and consulting and support
services revenues. Subscription services revenue consists of fees from
subscriptions to our Internet measurement, monitoring and diagnostic services.
Our subscription revenues are deferred upon invoicing and are recognized ratably
over the service period, generally ranging from one to twelve months. Deferred
revenue is comprised mainly of deferred subscription revenue. A portion of
subscription revenues is invoiced monthly upon completion of measurement
services. Any unearned revenue is recorded as deferred revenue on our balance
sheet. We do not generally grant refunds during the initial subscription term.
All discounts granted during the initial term are netted against revenue.
Revenue is not recognized during free trial periods. As of December 31, 2001, we
had recorded $4.8 million of deferred revenue. Revenues from our consulting and
support services are recognized as the services are performed; a typical project
duration is approximately one to three months. For longer consulting projects,
we recognize revenue on a percentage-of-completion basis. All of the revenue
related to our load-testing services is also included in consulting revenue.

    We derive and expect to continue to derive our revenues from the sale of our
web performance benchmarking, testing and application performance management
services. These services include our Perspective services, together with our Red
Alert monitoring and alarm services, which are subscription-based services that
our customers purchase for an initial three to twelve month terms and then may
renew their subscription on an annual, semi-annual, or month-to-month basis.
Subscription fees vary based on the number of URLs measured, the number of
devices monitored, the number of measurement locations, the frequency of the
measurements, the additional features ordered, and the type of services. We
offer our consulting and support services on a per engagement basis. Consulting
and support services revenues have amounted to 8% or less of total revenues to
date. We believe that consulting and support services revenues may increase in
the future somewhat as a percentage of total revenue, as we introduce additional
services and as our services are more widely used.

    For the quarter ended December 31, 2001, our 10 largest customers accounted
for approximately 24% of total revenues. We cannot be certain that customers
that have accounted for significant revenues in past periods, individually or in
aggregate, 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 or a group of
significant customers, our revenues could significantly decline.

                                       13

<PAGE>

Results of Operations

  Revenues

<TABLE>
<CAPTION>
                                                  2001      2000    % Change
                                                 ------    -------   -------
<S>                                              <C>       <C>          <C>
For the three months ended December 31:                (In thousands)
 Subscription services .......................   $8,796    $12,525      (30%)
 Consulting and support services .............   $  793    $   493       61%
</TABLE>

     Subscription Services. Revenues from subscription services decreased $3.7
million or 30% for the three months ended December 31, 2001 as compared to the
same period in 2000. Subscription services represented approximately 92% of
total revenues for the three months ended December 31, 2001, and approximately
96% of total revenues for the three months ended December 31, 2000. During the
first quarter of fiscal 2002, we continued to experience a reduction in revenue
from the Internet service provider, e-commerce and Internet business market
segment, which declined to 16% of total revenue, compared to 18% for the
previous quarter and 39% for the first quarter of fiscal 2001. However, for the
first quarter of 2002, the rate of decline for this segment slowed compared to
the previous quarter decline. Additionally, subscription services revenues from
all other customer segments in the aggregate increased 5% from the previous
quarter. For the three months ended December 31, 2001 and 2000, no single
customer accounted for more than 10% of total revenues.

     Consulting and Support Services. Revenues from consulting and support
services increased $300,000 or 61% for the three months ended December 31, 2001
as compared to the same period in 2000. Consulting and support services
represented approximately 8% of total revenues for the three months ended
December 31, 2001, and approximately 4% of total revenues for the three months
ended December 31, 2000. The increase for the quarter ended December 31, 2001
was driven by a large load testing engagement that included significant
deliverables completed during the quarter.

     Expenses:

     Costs of Subscription and Consulting and Support Services

<TABLE>
<CAPTION>
                                                      2001    2000    % Change
                                                     ------  ------   --------
For the three months ended December 31:                    (In thousands)
<S>                                                  <C>     <C>      <C>
    Costs of subscription services ..............    $3,392  $3,134        8%
    Costs of consulting and support services ....    $  952  $  784       21%
</TABLE>

     Costs of Subscription Services. Costs of subscription services consist of
connection fees to Internet service providers for bandwidth usage of our
measurement computers, which are located around the world, and depreciation,
maintenance and other equipment charges for our measurement and data collection
infrastructure. Costs of subscription services increased $258,000 or 8% during
the quarter ended December 31, 2001 as compared to the same period in 2000. This
increase was primarily due to the additional depreciation and equipment charges.
In addition, a small portion of the increase was attributable to the connection
fees associated with our newly introduced testing and wireless services. Costs
of subscription services were 39% of subscription service revenue in the quarter
ended December 31, 2001 as compared to 25% in the quarter ended December 31,
2000. Costs of subscription services in absolute dollars will remain comparable
for the second quarter of fiscal 2002.

     Costs of Consulting and Support Services. Costs of consulting and support
services consist of compensation expenses and related costs for consulting and
support services personnel, all load-testing bandwidth costs and related network
infrastructure costs. Costs of consulting and support services exceeded
consulting and support services revenue in the quarters ended December 31, 2001
and 2000. Costs of consulting and support services increased $168,000 or 21%
during the quarter ended December 31, 2001 compared to the same period in 2000.
The increase in costs was due primarily to providing support services to
customers in connection with our recently introduced program of Advance
Technical Services. We expect that the costs of consulting and support services
as a percentage of consulting and support services revenue will continue to be
greater than the costs of subscription services as a percentage of subscription
services revenue. We expect that costs of consulting and support services in
absolute dollars will remain comparable for the second quarter of fiscal 2002.

                                       14

<PAGE>

     Research and Development

<TABLE>
<CAPTION>
                                              2001     2000    % Change
                                             ------   ------   --------
For the three months ended December 31:            (In thousands)
<S>                                          <C>      <C>      <C>
    Research and development ..............  $2,131   $1,925       11%
</TABLE>

     Research and development expenses consist primarily of compensation and
related costs for research and development personnel. Research and development
expenses increased approximately $206,000 or 11% for the three months ended
December 31, 2001 as compared to the same period in 2000. The increase was
primarily attributable to the increase in personnel to support our new offerings
in testing and wireless perspective services as well as costs incurred in the
enhancement and expansion of our current services. To date, all research and
development expenses have been expensed as incurred. We believe that a
significant investment in research and development is essential for us to
continue to enhance and expand our services. We anticipate that research and
development expenses in absolute dollars will remain comparable for the second
quarter of fiscal 2002.

     Sales and Marketing

<TABLE>
<CAPTION>
                                              2001     2000    % Change
                                             ------   ------   --------
For the three months ended December 31:            (In thousands)
<S>                                          <C>      <C>      <C>
    Sales and marketing ...................  $4,836   $5,821      (17%)
</TABLE>

     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 decreased
$985,000 or 17% for the three months ended December 31, 2001 as compared to the
same period in 2000. The decrease is a result of the restructuring of our sales
organization designed to focus greater resources on our large corporate
customers. We expect that we will need to make significant investment in our
sales and marketing efforts for us to maintain our market position and to
further increase acceptance of our services, however, we must do this
cost-effectively. We anticipate that sales and marketing expenses in absolute
dollars will increase for the second quarter of fiscal 2002.

     Operations

<TABLE>
<CAPTION>
                                              2001     2000    % Change
                                             ------   ------   --------
For the three months ended December 31:            (In thousands)
<S>                                          <C>      <C>      <C>
    Operations ............................  $2,012   $1,688       19%
</TABLE>

     Operations expenses consist primarily of compensation and related costs for
management and technical support personnel who manage and maintain our field
measurement and collection infrastructure, and headquarters data center, and
provide twenty-four by seven basic customer support. Our operations personnel
also work closely with other departments to assure the reliability of our
services and to support our sales and marketing activities. Our operations
expenses increased $324,000 or 19% for the three months ended December 31, 2001
as compared to the same period in 2000. The increase in operations expenses was
primarily related to the hiring of personnel to manage and support our customer
base and data center. We believe that continued investment is necessary to
support our ability to successfully support our current customer base and to
further support our increased number of service offerings. We anticipate that
operations expenses in absolute dollars will remain comparable for the second
quarter of fiscal 2002.

                                       15

<PAGE>

<TABLE>
<CAPTION>
                                              2001     2000    % Change
                                             ------   ------   --------
For the three months ended December 31:          (In thousands)
<S>                                          <C>      <C>      <C>
    General and administrative ..........   $2,273  $1,846     23%
</TABLE>

  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. General and administrative
expenses increased $427,000 or 23% for the three months ended December 31, 2001
as compared to the same period in 2000. The increase in our general and
administrative expenses was mainly attributable to operating costs associated
with the unleased portion of our headquarters building that were not included in
the excess facility charge of $11.0 million recorded last quarter, of which
approximately $9.7 million remains accrued at December 31, 2001. We anticipate
that general and administrative expenses in absolute dollars will remain
comparable for the second quarter of fiscal 2002.

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


<TABLE>
<CAPTION>
    For the three months ended December 31:                              2001            2000        % Change
                                                                         ----            ----        --------
                                                                            (In thousands)
    <S>                                                                <C>             <C>           <C>
    Amortization of goodwill ...................................       $     0         $3,518           --


    Amortization of intangible assets ..........................           214            654          (67%)


    Amortization of deferred compensation ......................             0          3,218           --


    Amortization of stock-based compensation ...................            85             85           --
                                                                       --------        ------        -------

    Acquisition-related charges, amortization of goodwill and
    other intangible assets and amortization of stock-based
     compensation ..............................................       $   299         $7,475          (96%)
                                                                       =======         ======
</TABLE>

    Beginning October 1, 2001, we adopted SFAS 142, and as a result, we no
longer amortize goodwill. Goodwill amortization for the three months ended
December 31, 2000 was $3.5 million. As of December 31, 2001, unamortized
goodwill approximated $3.2 million. Although goodwill is no longer subject to
amortization, it is now subject to impairment testing to be performed at a
minimum on an annual basis, as discussed in Note 6, "Goodwill and Other
Intangible Assets," of the Notes to Condensed Consolidated Financial Statements.

    In connection with the purchase of Velogic Inc. (Velogic)in June 2000,
Digital Content, L.L.C. (Digital Content) in August 2000, the management service
provider business of Envive Corporation (Envive) in July 2001, and the business
of onDevice Corporation (onDevice) in October 2001, we recorded approximately
$53.6 million in goodwill and other intangible assets. For the three months
ended December 31, 2001 and 2000, we recorded expenses of $214,000 and $654,000
relating to amortization of intangible assets, respectively. At December 31,
2001, we had a remaining balance of approximately $2.1 million in other
intangible assets that are amortized over a three year period from the date of
acquisition. For the quarter ended December 31, 2000, we expensed
acquisition-related costs of $3.2 million representing amortization of deferred
compensation.

                                       16

<PAGE>

    We review our goodwill and other intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable in accordance with SFAS 142. Our policy is to
assess the recoverability of goodwill using estimated undiscounted cash flows.
Those cash flows include an estimated terminal value based on a hypothetical
sale of the acquired entity at the end of the related goodwill amortization
period.

    The remaining carrying value of goodwill and intangible assets at December
31, 2001 is summarized as follows (in thousands):

                                            Goodwill     Intangible      Total
                                                           Assets
                                            --------       ------       --------
    Digital Content ....................    $   570        $  273        $  843
    Velogic ............................        379            54           433
    Envive .............................      2,247           995         3,242
    onDevice ...........................         --           793           793
                                            -------        ------       --------
    Total ..............................    $ 3,196        $2,115        $5,311
                                            =======        ======       ========

    A portion of the consideration for the Digital Content acquisition, in the
amount of $6.4 million, was attributed to deferred compensation, and was
amortized over the six months ended March 31, 2001.

    Some options granted prior to June 30, 1999, have been considered to be
compensatory, as the estimated fair value for accounting purposes was greater
than the stock price as determined by the board of directors on the date of
grant. As a result, we have recorded amortization of deferred compensation
expense in the amount of $85,000 for the three months ended December 31, 2001
and 2000, and had an aggregate of $367,000 included in unamortized deferred
compensation as of December 31, 2001. Deferred compensation is amortized on a
straight-line basis over the vesting period of the options.

    We expect the amortization of intangible assets and stock-based compensation
to be approximately $400,000 for the second quarter of fiscal 2002, assuming no
additional acquisitions or impairment charges.


    Interest Income, Net

                                            2001    2000   % Change
                                           ------  ------  --------
For the three months ended December 31:         (In thousands)
    Interest income, net ............      $3,303  $5,427   (39%)


  Net interest income decreased $2.1 million or $39% for the three months ended
December 31, 2001 as compared to the same period in 2000. Substantially all of
the balance represents interest income from our investments and restricted
cash.  The decrease in interest income, net, was primarily due to the decline in
interest rates during the first quarter of fiscal 2002 compared to the first
quarter of fiscal 2001. We expect that net interest income will decline further
during fiscal 2002 due to a general decline in interest rates.


 Provision for Income Taxes

                                       17

<PAGE>

   No provision for federal and state income taxes was recorded for the three
months ended December 31, 2001, due to the operating loss, net operating loss
carryforwards, and tax credits.

   A provision for federal and state income taxes of $200,000 was recorded for
the three months ended December 31, 2000, principally for alternative minimum
tax.

 Liquidity and Capital Resources

   Since our inception, we have funded our operations primarily through sales of
our equity securities. Prior to our initial public offering, in September 1999,
we had raised approximately $25.8 million, net of offering costs, from the sale
of common stock and preferred stock. In September and October 1999, we raised
$56.7 million, net of issuance costs, in connection with our initial public
offering. In a subsequent public offering in February 2000, we raised $286.3
million, net of issuance costs. In addition, we finance our operations through
subordinated and other debt, equipment loans and a capital lease. The principal
balance outstanding at December 31, 2001 for the leases and loans was $494,000.
At December 31, 2001, we had approximately $37.9 million in cash and cash
equivalents, approximately $209.0 million in short-term investments, and $85.0
million in restricted cash in connection with the lease for our headquarters
building, for a total of approximately $331.9 million. Our short-term
investments consist of investment-grade debt securities.

   Net cash used for operating activities was approximately $1.9 million for
the three months ended December 31, 2001. For the three months ended December
31, 2001, net cash used for operating activities was primarily the result of the
loss from operations before deductions for depreciation and amortization, a
decrease in accounts payable and accrued expenses mainly due to payments
associated with our headquarters building, periodic insurance renewals and
ordinary vendors that support our operations, and a decrease in deferred
revenue. The decrease was partially offset by a decrease in accounts receivable
as a result of focused collection efforts and the receipt of accrued interest
generated from our restricted cash balance. Net cash provided by operating
activities was $2.4 million for the three months ended December 31, 2000 and
resulted from income from operations before deduction for depreciation and
amortization, partially offset by an increase in prepaids and other assets, due
mainly to an increase in interest receivable.

     Cash used for our investing activities totaled approximately $12.8 million
for the three months ended December 31, 2001. During the quarter, we purchased
$26.2 million of short-term investments and $1.0 million of property and
equipment, and used $1.0 million for our acquisitions of onDevice and Envive. We
received $15.5 million from the sale of short-term investments. Cash used for
our investing activities totaled $54.6 million in the three months ended
December 31, 2000. During the first quarter of fiscal 2001, we purchased $51.5
million of short-term investments and $3.1 million of capital expenditures. We
expect capital expenditures to be approximately $2.0 to $3.0 million for the
second quarter of fiscal 2002, absent any acquisition costs or other
extraordinary transactions.

   We used $539,000 for financing activities for the three months ended
December 31, 2001. We used $336,000 for loan repayments for equipment and other
loans, and $246,000 for the purchase of treasury stock, offset by $43,000 from
the issuance of common stock under our employee stock option plan. We used
$153,000 for financing activities for the three months ended December 31, 2000.
We made loan repayments for equipment and other loans of $323,000, offset by
$170,000 received from the issuance of common stock under our employee stock
option plan.

   As of December 31, 2001, our principal commitments consisted of $94.6
million in loans and operating and capital leases, including the lease for our
headquarters building. In connection with the lease for our headquarters
building, we have $85.0 million of restricted cash that is deposited with a
financial institution in an interest-bearing escrow account, and serves to fully
collateralize the lease obligation. The lease agreement provides a balloon
payment and is due and payable in June 2005. The building lease costs have
amounted to approximately $4.0 million annually, but may fluctuate based on
fluctuations in the interest rates, which are based on LIBOR.

   The lease agreement contains various events, including our failure to comply
with the terms of the lease, a change in control, our failure to make payments
on indebtedness of

                                       18

<PAGE>

$3.0 million or more, a judgment in excess of $3.0 million and other customary
events of default. A default under the lease, including violation of these
covenants, could require us to purchase the leased property for a specified
amount, which approximates the lessor's original cost (the "Termination Value"),
as well as any unpaid rent. As of December 31, 2001, the Termination Value was
approximately $85 million.

    At the end of the lease term, we have an option to either purchase the
leased property for the Termination Value, or to assist the lessor with the sale
of the property. We have the ability to exercise this option during the term of
the lease. We have provided a residual value guarantee for up to $79 million to
cover any deficiency should the property ultimately be sold for less than the
Termination Value.

    In the event that it is probable that the expected fair value of the
property at the end of the lease term will be less than the Termination Value,
the expected loss will be accrued on a straight-line basis over the remaining
lease term. At the present time, management does not currently know whether it
is probable that the fair market value of the property at the end of the lease
term will be less than the Termination Value.

    Management has evaluated the expected fair value of the property at the end
of the lease term by reviewing current real estate market conditions and
indicators of expectations for the market in the future. Real estate market
conditions subsequent to the origination of the lease have generally worsened
due to the amount of available space for lease and the corresponding lease
rates. The range of current market values for the property is estimated to be
between $40 million to $50 million. However, due to the historical and expected
volatility of the real estate market, management is currently unable to estimate
the fair value of the property at the end of the lease term.

     We had no material commitments for capital expenditures as of December 31,
2001. Because we expect to continue to support our measurement computer
capacity, we expect to make additional capital expenditures during fiscal 2002,
although at a significantly lower level than in fiscal 2001. We anticipate that
we will also make additional capital expenditures related to our headquarters
but at lower levels than in the past. A significant part of the upgrades yet to
be completed to the facility are related to providing complete backup electrical
generation capability in the event of electrical power loss or interruption.

    We believe that 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. Factors that could affect our cash position include
potential acquisitions, decreases in customers or renewals, or changes in the
value of our short-term investments. If, after some period of time, cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or debt securities or to obtain a credit
facility. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and the term of this debt could impose
restrictions on our operations. The sale of additional equity or convertible
debt securities could result in dilution to our stockholders, and we may not be
able to obtain additional financing on acceptable terms, if at all. If we are
unable to obtain this additional financing, our business may be harmed.

Accounting Policies and Judgments

    Our accounting policies and judgments are of both a recurring and
nonrecurring nature. The recurring ones relate to revenue recognition, the
allowance for doubtful accounts receivable, and the valuation of our corporate
headquarters building which is subject to an operating lease. The nonrecurring
ones are those for the excess facility charge, and impairment assessments for
goodwill and other intangible assets. Our revenue recognition policy is
discussed above in the section "Overview." Each of the other areas is discussed
below.


Accounts Receivable, net

    Accounts receivable is recorded net of allowance for doubtful accounts,
which doubtful accounts totaled $1.1 million and $1.0 million as of December 31,
2001 and September 30, 2001, respectively. We regularly review the adequacy of
our accounts receivable allowance after considering the accounts receivable
aging, the age of each invoice, each

                                       19

<PAGE>

customer's expected ability to pay and our collection history with each
customer. We review any invoice greater than 60 days past due to determine if an
allowance is appropriate based on the receivable balance. In addition, we
maintain a reserve for all other invoices by applying a percentage to the
outstanding accounts receivable balance, based on historical collection trends.
The allowance for doubtful accounts represents management's best current
estimate, but changes in circumstances relating to accounts receivable,
including unforeseen declines in market conditions and collection rates, may
result in a requirement for additional allowances in the future.

Valuation of Building Subject to Operating Lease

     In July 2000, we entered into a five year lease agreement for our corporate
headquarters building in San Mateo, California. We have provided a residual
value guarantee for up to $79 million to cover any deficiency should the
property ultimately be sold for less than the termination value of the property.
This obligation is fully collateralized by the restricted cash of $85 million.
On a quarterly basis, management evaluates the expected fair value of our
building at the end of the lease term by consulting with external real estate
experts, reviewing current real estate market conditions and future market
indicators. Management's evaluation considers recent real estate sale and lease
transactions for comparable properties and published market forecasts that may
indicate expected future valuation trends. The range of current market values
for the property is estimated to be between $40 million to $50 million which is
less than the residual value guarantee of $79 million. Due to the historical and
expected volatility of the real estate market, management is currently unable to
estimate the fair value of the property at the end of the lease term. If,
however, the value of the building at the end of the lease could be estimated
and was expected to decline below the residual value guarantee provided by us,
an accrual, which could be significant, would have to be recorded in the
financial statements, reflecting the estimated loss under the lease.


Excess Facility Charge

    We recorded an accrual for excess facility charges of approximately $10.3
million at September 30, 2001, of which approximately $9.7 million remains
accrued at December 31, 2001, for certain costs related to the unoccupied
portion of our headquarters building in San Mateo, California. The accrual
includes certain lease costs such as lease expense, insurance, and property
taxes. Other operating costs associated with the unoccupied space will be
reported as incurred as operating expenses in future periods. The accrual was
determined by estimating the lease costs for unleased space over the life of the
lease. Management's assumptions and estimates included in determining the excess
facility charge were based on expected LIBOR rates for establishing lease rates,
expected insurance and property tax costs, and expected sublease rates. The
remaining accrual for the unoccupied space is reviewed quarterly including
updates to management's assumptions and estimates based on current real estate
market conditions. If actual market conditions are less favorable than those
projected by management and adversely impact the assumptions made by management,
additional lease cost accruals may be required.


Impairment Assessment

    We evaluate our long-lived assets, including goodwill and other intangible
assets, for impairment whenever events or changes in circumstances indicate that
the carrying amount of these assets may not be recoverable. Recoverability of an
asset to be held and used is measured by a comparison of the carrying amount of
the asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

    With our adoption of SFAS 142 on October 1, 2001, we have up to six months
from the date of adoption to determine the fair value of our one reporting unit
and compare it to the reporting unit's carrying amount. To the extent that the
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and we will need to perform
the second step of the transitional impairment test. In the second step, we must
compare the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step must be performed as soon
as possible, but no later than the end of the fiscal year. Any impairment
measured as of the date of adoption will be recognized as the cumulative effect
of a change in accounting principle.

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Recent Accounting Pronouncements

   In October 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121), it
retains many of the fundamental provisions of that statement. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. We are currently
evaluating the impact of SFAS 144 on our financial position and results of
operations, but the Statement is not expected to have any material impact on
reported results.

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

   We adopted SFAS 142 effective October 1, 2001 and no longer amortize
goodwill, thereby eliminating annual goodwill amortization of approximately $1.3
million, based on projected amortization for fiscal 2002. At December 31, 2001,
unamortized goodwill approximated $3.2 million. We will evaluate goodwill at
least on an annual basis and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable from its estimated
future cash flow.

   Upon adoption of SFAS 142, we are required to reassess the useful lives and
residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, we are
required to test the intangible asset for impairment in accordance with the
provisions of SFAS 142 within the first interim period. Any impairment loss is
measured as of the date of adoption and recognized as a cumulative effect of a
change in accounting principle in the first interim period.

   In connection with the transitional goodwill impairment evaluation, SFAS 142
requires us to perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. To accomplish this we must
identify our reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of adoption. We
then have up to six months from the date of adoption to determine the fair value
of each reporting unit and compare it to the reporting unit's carrying amount.

   To the extent that a reporting unit's carrying amount exceeds its fair
value, an indication exists that the reporting unit's goodwill may be impaired
and we must perform the second step of the transitional impairment test. In the
second step, we must compare the implied fair value of the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to all of it
assets (recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation in accordance with SFAS 141, to its carrying amount,
both of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss is recognized as a cumulative
effect of a change in accounting principle in our statement of operations. We do
not currently expect that the adoption of SFAS 142 will have a material impact
on our financial position or results of operations.

Factors That May Impact Future Operating Results

                                       21

<PAGE>

We have an unproven business model that makes it difficult to evaluate our
current business and future prospects.

     We have introduced many new products and services and latest versions of
existing products since the beginning of fiscal 2000. We have only a limited
operating history upon which to base an evaluation of our current business and
future prospects. Our recent product offerings include:

     .    We introduced latest versions of our Website Perspective--Business
          Edition in June 2000, Website Perspective--Consumer Edition in
          September 2001, and Transaction Perspective 3.0 in December 2001.

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

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

     .    We introduced our Streaming Perspective service in October 2000, and
          our Custom Perspective service in November 2001.

     .    We introduced our SLA Perspective service in February 2001, and
          Keynote Enterprise Perspective service in July 2001.

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

     .    In October 2001, we acquired the assets of onDevice and introduced our
          Wireless Perspective service.

     .    In November 2001, we introduced our Advanced Technical Services.

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

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

      We have experienced operating losses in each quarterly and annual period
since inception, and we expect to incur operating losses in the future. We
incurred net losses of $3.0 million for the quarter ended December 31, 2001, and
as of December 31, 2001, we had an accumulated deficit of $74.8 million. In
addition, we are required under generally accepted accounting principles to
review our goodwill and other intangible assets for impairment when events or
circumstances indicate that the carrying value may not be recoverable. As of
December 31, 2001, we had $5.3 million of goodwill and other intangible assets.
We may incur additional expenses in connection with a write-down of goodwill or
other intangible assets due to changes in market conditions as we did in the
quarter ended June 30, 2001, when we recorded an impairment charge of $30.5
million in connection with our acquisitions of Velogic and Digital Content. We
believe that our operating expenses will continue to increase. As a result, we
will need to increase our revenues to initially achieve and then to maintain
profitability. We may continue our recent trend of reporting sequential
quarterly decreases in revenue and may never be able to regain our historic
revenue growth rates.


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

                                       22

<PAGE>

  To maintain and grow our revenues, we must achieve high customer renewal rates
for our services. Our customers have no obligation to renew our services and
therefore, they could cease using our services at any time. In addition, our
customers may renew for services. Further, our customers may reduce their use of
our services during the term of their subscription. We cannot project the level
of renewal rates. Our customer renewal rates may decline as a result of a number
of factors, including consolidations in the Internet industry or if a
significant number of our customers cease operations.

  Further, because of the relatively small size of initial orders, we depend on
sales to new customers and sales of additional services to our existing
customers. Renewals by existing customers or purchases of our services by new
customers may be limited as companies limit or reduce their technology spending
in response to uncertain economic conditions. During fiscal 2001 and the first
quarter of fiscal 2002, we experienced a reduction in revenue from Internet
service provider customers, e-commerce and other Internet businesses. We also
experienced an increase in cancellations and nonrenewals. If we continue to
experience reduced renewal rates or if customers renew for a lesser amount of
our services, or if customers, at any time, reduce the amount of services they
purchase from us, our business would continue to be adversely affected. If we
continue to experience cancellations and/or reductions in service, our revenues
could continue to decline unless we are able to obtain additional customers or
sources of revenues, sufficient to replace lost revenues.

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

  Results of operations could vary significantly from quarter to quarter. If
revenues fall below our expectations, we may not be able to reduce our spending
rapidly in response to the shortfall. Other factors that could affect our
quarterly operating results include those described below and elsewhere in this
report:

  .  the rate of new and renewed subscriptions to our Internet performance
     measurement services;

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

  .  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, particularly
     larger customers;

  .  the amount and timing of professional services revenues;

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

  .  restructuring costs if the market continues its downward trend or market
     conditions do not improve;

  .  excess facility charge if the rental market continues its downward trend or
     market conditions do not improve;


  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.

                                       23

<PAGE>

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

  Because our business is based on providing web performance benchmarking,
testing and application performance management services, the Internet must be
widely adopted as a means of electronic commerce, or e-business, and
communications. Because e-business and communications over the Internet are new
and evolving, with many companies entering and exiting this market, 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 services;

     .    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 benchmarking services.

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


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

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

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

  The demand for our 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
Internet currently causes significant quality of service

                                       24

<PAGE>

problems for e-business companies, the vendors and operators that supply and
manage the underlying infrastructure are continuously seeking to improve the
speed, availability, reliability and consistency of the Internet. If these
vendors and operators succeed in significantly improving the performance of the
Internet, which would result in corresponding improvements in the performance of
companies' web sites, demand for our services would likely decline.


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

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


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

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


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

  We believe that maintaining and strengthening the Keynote brand in a
cost-effective manner is an important aspect of our business and an important
element in attracting new customers. In the past, our efforts to build our brand
have involved significant expense. We may not be successful in building our
brand in a cost-effective manner. 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 competition that could make it difficult for us to acquire and retain
customers.

  The market for web performance benchmarking, testing, and application
performance management services is relatively new and evolving. Our competitors
vary in size and in the scope and breadth of the products and services that they
offer. We face competition from companies that offer software and services with
features similar to our services. For example, Mercury Interactive offers
services that compete with our Transaction and Test

                                       25

<PAGE>

Perspective services, and Gomez Advisors offers services similar to our Website
Perspective-Business Edition and Transaction Perspective services. In addition,
with respect to our LoadPro service, we compete with companies that offer
load-testing software, such as Segue Software, or that offer both load-testing
software and services, such as Mercury Interactive. With respect to our Red
Alert monitoring service, we face competition from software companies such as
Freshwater Software, a division of Mercury Interactive. While we believe these
services are not as comprehensive as ours, customers could still choose to use
these services or these companies could enhance their services to offer all of
the features we offer. As we expand the scope of our products and services, we
expect to encounter many additional, market-specific competitors.

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

     In the future, we intend to expand our service offerings and to continue to
measure the impact of new Internet technologies such as Internet telephony. Some
of our existing and future competitors have or 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, to adopt more aggressive
pricing policies, and to devote substantially more resources to technology and
systems development.

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


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

  Ten customers accounted for approximately 24% of our total revenues for the
three months ended December 31, 2001. No one customer accounted for more than
10% of total revenue for the quarters ended December 31, 2000 and 2001. This
concentration may continue in the future. We cannot be certain that customers
that have accounted for significant revenues in past periods, individually or as
a group, will renew, will not cancel or will not reduce their services and,
therefore, continue to generate revenue in any future period. In addition, our
customer agreements can generally be terminated at any time with little or no
penalty. If we lose a major customer, our revenues could decline.


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

   To increase sales of our Internet performance measurement, testing, and
benchmarking 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 generally 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.

                                       26

<PAGE>

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

To grow our business, we must retain qualified personnel in a competitive
marketplace.

  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. Although we, and a number of other technology companies,
have implemented workforce reductions, there remains substantial competition for
highly skilled employees with experience in the Internet industry, a complex
industry that requires a unique knowledge base. Key employees are not bound by
agreements that could prevent them from terminating their employment at any
time.

  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 application performance management services organization in
January 1999 and expanded our service offerings during fiscal 2001 to include
certain products as well as professional services. We have limited experience in
delivering consulting services and we may not be able to successfully introduce
additional consulting services. Consulting services represented approximately 8%
of total revenues for the quarter ended December 31, 2001. In addition, our cost
of consulting services has exceeded our consulting revenue for all periods. We
expect that the costs of consulting and support services as a percentage of
consulting and support services revenue will continue to be greater than the
costs of subscription services as a percentage of subscription services revenue.
We also expect that costs of consulting and support services in absolute dollars
will increase slightly in subsequent quarters for the foreseeable future. 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 consulting companies, such as Accenture and Ernst & Young, as well as
consulting divisions of large technology companies such as IBM. Because we do
not have an established reputation for delivering consulting services, because
this area is very competitive, and due to our general inexperience in delivering
consulting services, we may not succeed in selling these services.

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

  The growth in Internet traffic has caused frequent periods of decreased
performance, requiring Internet service providers and web sites on the Internet
to upgrade their infrastructures. Our ability to increase the speed of access to
the services we provide 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 intend to continue to expand our operations by deploying additional
measurement computers, both domestically and internationally, hiring new
personnel and implementing and integrating new accounting and control systems to
manage this expansion. In addition, we

                                       27

<PAGE>

acquired Velogic Inc. and Digital Content L.L.C. in fiscal 2000, we acquired the
management service provider business of Envive Corp. in fiscal 2001, and we
acquired the assets of onDevice Corp. in the first quarter of fiscal 2002. We
may encounter difficulties in managing this growth and integrating the
operations of these and additional services and personnel we may acquire. Our
ability to compete effectively and to manage any future expansion of our
operations will require continual improvement of our financial and management
controls, reporting systems and procedures on a timely basis. We may not succeed
in these efforts and a disruption could impair our ability to retain existing
customers or attract new customers.


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

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

  In addition, a new data center at our corporate headquarters in San Mateo,
California, became operational in June 2001. If the transition to the new data
center results in data not being collected and retained or if access to the data
by our customers is limited or unavailable, our revenue would be severely
affected and our business would be harmed.

  If our computer infrastructure is not functioning properly, we may not be able
to deliver our services in a timely or accurate manner. We have occasionally
experienced outages of our service in the past, the last of which occurred in
November 2001. The outages that we have experienced have lasted no more than a
few hours. These outages have been caused by a variety of factors including
electrical distribution equipment malfunctions, 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 or loss
of customer data could cause us to lose customers.

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


We rely on a continuous power supply to conduct our business, and shortages of
electricity in California could disrupt our operations and increase our
expenses.

  We collect and store performance data at our data center located in
California, which experienced a shortage of electricity in 2001. When electrical
power reserves for the State of California fall below specified levels,
California has in the past implemented, and may in the future continue to
implement, rolling blackouts of electrical service throughout the

                                       28


<PAGE>

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


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

   Our measurement computers are located at facilities that are not owned by our
customers or us. Instead, these computers are installed at locations near
various Internet access points worldwide. Although we operate these computers
remotely from our San Mateo, California operations center, we do not own or
operate the facilities, we have little control over how these computers are
maintained on a day-to-day basis. We do not have long-term contractual
relationships with the companies that operate the facilities where our
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 as some have done due to bankruptcies or
are acquired. In addition, if our measurement computers were not functioning
properly, we may not be able to repair or service these computers on a timely
basis, as we may not have immediate access to our measurement computers. Our
ability to collect data in a timely manner could be impaired if we are unable to
maintain and repair our computers should performance problems arise.

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

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


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

   We believe we must expand the sales of our services outside the United States
and hire additional international personnel. Therefore, we expect to commit
significant resources to expand our international sales and marketing
activities, which were 7% of our total revenues for the quarter ended December
31, 2001. In addition, we intend to deploy additional measurement computers
worldwide, which would require us to maintain and service computers over larger
distances. Conducting international operations would subject us to risks we do
not face in the United States. These include:


     .    currency exchange rate fluctuations;

     .    seasonal fluctuations in purchasing patterns;

     .    unexpected changes in regulatory requirements;

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<PAGE>

     .    maintaining and servicing computer hardware in distant locations;

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

     .    difficulties in managing and staffing international operations;

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

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

     .    reduced protection for intellectual property rights in some countries.

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


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

We have completed several acquisitions, and as a part of our business strategy,
we may seek to acquire or invest in additional businesses, products or
technologies that we feel could complement or expand our business, augment our
market coverage, enhance our technical capabilities or that may otherwise offer
growth opportunities. Future acquisitions and any future acquisitions could
create risks for us, including:

     .    difficulties in assimilating acquired personnel, operations and
          technologies;

     .    unanticipated costs associated with the acquisition;

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

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

     .    difficulties in managing geographically-dispersed businesses;

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

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

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

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


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

     For the year ended September 30, 2001, we incurred an excess facility
charge of $11.0 million for certain costs related to the unoccupied portion of
our building in San Mateo, of which approximately $9.7 million remains accrued
as of December 31, 2001. We currently expect that we will need to sublease
approximately 60% of the space to a third party. We may be unable to lease all
or a part of the available space, and if it is leased, we may not receive
sufficiently high rental rates to cover our costs in connection with leasing
space in the building. The excess facility charge may be subject to market
condition changes.

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Item 3. Qualitative and Quantitative Disclosures about Market Risks.

   Interest Rate Sensitivity. Our interest income and expense is sensitive to
changes in the general level of U.S. interest rates, particularly because most
of our cash equivalents, short-term investments, and restricted cash are
invested in short-term debt instruments. If market interest rates were to change
immediately and uniformly by ten percent from levels at December 31, 2001, the
interest earned on those cash and cash equivalents, short-term investments and
restricted cash could increase or decrease by approximately $1.3 million on an
annualized basis.

    Foreign Currency Fluctuations and Derivative Transactions. We have not had
any significant transactions in foreign currencies, nor do we have any
significant balances that are due or payable in foreign currencies at December
31, 2001. We do not enter into derivative transactions for trading or
speculative purposes.

PART II - OTHER INFORMATION


Item 1.   Legal Proceedings

          As disclosed in our annual report on Form 10-K for the fiscal year
          ended September 30, 2001, a number of securities class action lawsuits
          have been filed against us, certain of our officers and the
          underwriters of our initial public offering, in connection with the
          offering. The complaints have been consolidated into a single action
          with cases brought against over three hundred other issuers and their
          underwriters that make similar allegations regarding the initial
          public offerings of those issuers. The proceedings against the
          issuers, including us, have been stayed pending an outcome in the
          proceedings against the underwriters. We believe the claims are
          without merit and intend to defend the actions vigorously.

Item 2.   Changes in Securities and Use of Proceeds

          Not applicable.


Item 3.   Defaults Upon Senior Securities

          Not applicable.


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

          Not applicable.


Item 5.   Other Information

          Not applicable.

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

(a)       Index to Exhibits

          10.01   Amendment Agreement between Registrant and Umang Gupta dated
                  November 12, 2001

(b)       Reports on Form 8-K

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

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                                   SIGNATURES

  Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Mateo, State of
California, on this 14th day of February 2002.

                    KEYNOTE SYSTEMS, INC.

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


                    By:  /s/ John J. Flavio
                        -----------------------------------------
                        John J. Flavio
                        Senior Vice President and Chief Financial Officer
                       (Principal Financial Officer)


                    By:  /s/ Peter J. Maloney
                        -----------------------------------------
                        Peter J. Maloney
                        Vice President and Controller (Principal Accounting
                        Officer)

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