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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



(Mark One)



| | x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | 
| | - |  | --------------------------------------------------------------------------------------- | 



For the quarterly period ended March 31, 2003



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



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Keynote Systems, Inc.

(Exact name of registrant as specified in its charter)



|DELAWARE                                                       |  | 94-3226488                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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 by check mark whether the registrant
is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES x  NO ̈



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



|Class                         |  | Shares outstanding at April 30, 2003
|----------------------------- |  | ------------------------------------
|Common Stock, $.001 par value |  | 22,792,039                          



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##### Table of Contents

KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES



TABLE OF CONTENTS



|                             |  |                                                                                       |  | Page
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART IFINANCIAL INFORMATION
|                            
|Item 1.                      |  | Financial Statements                                                                  |  | 3   
|                            
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|                            
|Item 3.                      |  | Qualitative and Quantitative Disclosures about Market Risk                            |  | 21  
|                            
|Item 4.                      |  | Controls and Procedures                                                               |  | 21  
|                            
|PART IIOTHER INFORMATION   
|                            
|Item 1.                      |  | Legal Proceedings                                                                     |  | 22  
|                            
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                             |  | 22  
|                            
|Item 3.                      |  | Defaults Upon Senior Securities                                                       |  | 22  
|                            
|Item 4.                      |  | Submission of Matters for a Vote of Security Holders                                  |  | 22  
|                            
|Item 5.                      |  | Other Information                                                                     |  | 23  
|                            
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 23  
|                            
|Signatures                   |  |                                                                                       |  | 24  
|                            
|Certifications               |  |                                                                                       |  | 25  



2



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##### Table of Contents



PART
IFINANCIAL INFORMATION



Item
1.    
Financial Statements



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES



Index to Unaudited Condensed Consolidated Financial Statements



|                                                                                                           |  | Page
|---------------------------------------------------------------------------------------------------------- |  | ----
|Condensed Consolidated Balance Sheets as of March 31, 2003 and September 30,
2002                          |  | 4   
|                                                                                                          
|Condensed Consolidated Statements of Operations for the three and six months ended March
31, 2003 and 2002 |  | 5   
|                                                                                                          
|Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2003
and 2002           |  | 6   
|                                                                                                          
|Notes to Condensed Consolidated Financial Statements                                                       |  | 7   



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KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                         |  | March 31, 2003 |          |   | September 30, 2002 |  
|-------------------------------------------------------- |  | -------------- | -------- | - | ------------------ | -
|ASSETS                                                   |  |                |          |   |                    |  
|Current assets:                                          |  |                |          |   |                    |  
|Cash and cash equivalents                                |  | $              | 28,578   |   |                    | $
|Short-term investments                                   |  |                | 170,566  |   |                    |  
|                                                         |  |                |          |   |                    |  
|Total cash, cash equivalents, and short-term investments |  |                | 199,144  |   |                    |  
|Accounts receivable, net                                 |  |                | 4,149    |   |                    |  
|Prepaid and other current assets                         |  |                | 1,503    |   |                    |  
|                                                         |  |                |          |   |                    |  
|Total current assets                                     |  |                | 204,796  |   |                    |  
|Property and equipment, net                              |  |                | 36,000   |   |                    |  
|Identifiable intangible assets, net                      |  |                | 2,719    |   |                    |  
|                                                         |  |                |          |   |                    |  
|Total assets                                             |  | $              | 243,515  |   |                    | $
|                                                         |  |                |          |   |                    |  
|LIABILITIES AND STOCKHOLDERS EQUITY                     |  |                |          |   |                    |  
|Current liabilities:                                     |  |                |          |   |                    |  
|Accounts payable                                         |  | $              | 1,239    |   |                    |  
|Accrued expenses                                         |  |                | 7,563    |   |                    |  
|Deferred revenue                                         |  |                | 5,182    |   |                    |  
|                                                         |  |                |          |   |                    |  
|Total current liabilities                                |  |                | 13,984   |   |                    |  
|                                                         |  |                |          |   |                    |  
|Total liabilities                                        |  |                | 13,984   |   |                    |  
|                                                         |  |                |          |   |                    |  
|Stockholders equity:                                    |  |                |          |   |                    |  
|Common stock                                             |  |                | 23       |   |                    |  
|Treasury stock                                           |  |                | (2,222   | ) |                    |  
|Additional paid-in capital                               |  |                | 372,352  |   |                    |  
|Deferred compensation                                    |  |                | (4       | ) |                    |  
|Accumulated deficit                                      |  |                | (141,445 | ) |                    |  
|Accumulated other comprehensive income                   |  |                | 827      |   |                    |  
|                                                         |  |                |          |   |                    |  
|Total stockholders equity                               |  |                | 229,531  |   |                    |  
|                                                         |  |                |          |   |                    |  
|Total liabilities and stockholders equity               |  | $              | 243,515  |   |                    | $
|                                                         |  |                |          |   |                    |  



See
accompanying notes to the condensed consolidated financial statements



4



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KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                                                      |  | Three months ended March 31, |        |   | Six months ended March 31, |  
|----------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | -------------------------- | -
|                                                                                                      |  | 2003                         |        |   | 2002                       |  
|Revenue:                                                                                              |  |                              |        |   |                            |  
|Subscription services                                                                                 |  | $                            | 8,567  |   |                            | $
|Consulting and support services                                                                       |  |                              | 991    |   |                            |  
|                                                                                                      |  |                              |        |   |                            |  
|Total revenue                                                                                         |  |                              | 9,558  |   |                            |  
|                                                                                                      |  |                              |        |   |                            |  
|Operating expenses:                                                                                   |  |                              |        |   |                            |  
|Costs of subscription services                                                                        |  |                              | 2,262  |   |                            |  
|Costs of consulting and support services                                                              |  |                              | 971    |   |                            |  
|Research and development                                                                              |  |                              | 2,053  |   |                            |  
|Sales and marketing                                                                                   |  |                              | 4,033  |   |                            |  
|Operations                                                                                            |  |                              | 1,688  |   |                            |  
|General and administrative                                                                            |  |                              | 1,612  |   |                            |  
|Excess occupancy costs                                                                                |  |                              | 293    |   |                            |  
|Amortization of identifiable intangible assets and stock-based
compensation                           |  |                              | 424    |   |                            |  
|                                                                                                      |  |                              |        |   |                            |  
|Total operating expenses                                                                              |  |                              | 13,336 |   |                            |  
|                                                                                                      |  |                              |        |   |                            |  
|Loss from operations                                                                                  |  |                              | (3,778 | ) |                            |  
|Interest income, net                                                                                  |  |                              | 1,661  |   |                            |  
|                                                                                                      |  |                              |        |   |                            |  
|Loss before cumulative effect of a change in accounting principle                                     |  |                              | (2,117 | ) |                            |  
|Cumulative effect of a change in accounting principle                                                 |  |                              |       |   |                            |  
|                                                                                                      |  |                              |        |   |                            |  
|Net loss                                                                                              |  | $                            | (2,117 | ) |                            | $
|                                                                                                      |  |                              |        |   |                            |  
|Net loss per share:                                                                                   |  |                              |        |   |                            |  
|Basic and diluted net loss per share before the cumulative effect of a change in
accounting principle |  | $                            | (0.09  | ) |                            | $
|Basic and diluted cumulative effect per share of a change in accounting
principle                     |  | $                            |       |   |                            | $
|                                                                                                      |  |                              |        |   |                            |  
|Basic and diluted net loss per share                                                                  |  | $                            | (0.09  | ) |                            | $
|                                                                                                      |  |                              |        |   |                            |  
|Shares used in computing basic and diluted net loss per share                                         |  |                              | 22,838 |   |                            |  
|                                                                                                      |  |                              |        |   |                            |  



See
accompanying notes to the condensed consolidated financial statements



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KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                     |  | Six months ended March 31, |        
|------------------------------------------------------------------------------------ |  | -------------------------- | -------
|                                                                                     |  | 2003                       |        
|Cash flows from operating activities:                                                |  |                            |        
|Net loss                                                                             |  | $                          | (4,114 
|Adjustments to reconcile net loss to net cash provided by operating
activities:      |  |                            |        
|Depreciation and amortization                                                        |  |                            | 3,352  
|Amortization of identifiable intangible assets                                       |  |                            | 800    
|Amortization of debt investment premium                                              |  |                            | 2,095  
|Amortization of deferred stock-based compensation                                    |  |                            | 27     
|Cumulative effect of a change in accounting principle                                |  |                            |       
|Changes in operating assets and liabilities, net of acquired assets and
liabilities: |  |                            |        
|Accounts receivable, net                                                             |  |                            | 671    
|Prepaids and other current assets                                                    |  |                            | (74    
|Accounts payable, accrued expenses and accrued excess facility costs                 |  |                            | (454   
|Deferred revenue                                                                     |  |                            | 46     
|                                                                                     |  |                            |        
|Net cash provided by operating activities                                            |  |                            | 2,349  
|                                                                                     |  |                            |        
|Cash flows from investing activities:                                                |  |                            |        
|Purchases of property and equipment                                                  |  |                            | (1,540 
|Purchase of businesses and assets, net                                               |  |                            | 75     
|Sale of short-term investments                                                       |  |                            | 103,633
|Purchases of short-term investments                                                  |  |                            | (59,548
|                                                                                     |  |                            |        
|Net cash provided by (used in) investing activities                                  |  |                            | 42,620 
|                                                                                     |  |                            |        
|Cash flows from financing activities:                                                |  |                            |        
|Repayments of notes payable and capital lease                                        |  |                            |       
|Proceeds from issuance of common stock, net of issuance costs                        |  |                            | 1,273  
|Repurchase of outstanding common stock                                               |  |                            | (38,538
|                                                                                     |  |                            |        
|Net cash provided by (used in) financing activities                                  |  |                            | (37,265
|                                                                                     |  |                            |        
|Net increase (decrease) in cash and cash equivalents                                 |  |                            | 7,704  
|Cash and cash equivalents at beginning of the period                                 |  |                            | 20,874 
|                                                                                     |  |                            |        
|Cash and cash equivalents at end of the period                                       |  | $                          | 28,578 
|                                                                                     |  |                            |        



See
accompanying notes to the condensed consolidated financial statements



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KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|(1) |  | Basis of Presentation
|--- |  | ---------------------



The accompanying interim unaudited condensed consolidated financial statements reflect all normal recurring adjustments that are, in the
opinion of management, necessary for a fair presentation of the financial position of Keynote Systems, Inc. and subsidiaries (the Company) at March 31, 2003, and the results of operations and cash flows for the interim periods ended March 31, 2003
and 2002.



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, 2002 included
in the Companys Report on Form 10-K 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.



Excess occupancy costs are costs related to fixed charges
associated with the unoccupied portion of the Companys headquarters building, such as property taxes, insurance and depreciation. These costs represent the fixed costs of operating the Companys headquarters building acquired
in September 2002 and are based on the actual unoccupied square footage, which was determined to be 60% during the three and six months ended March 31, 2003.



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



|(2) |  | Stock-Based Compensation Plans
|--- |  | ------------------------------



The Company issues stock options to its employees and outside directors and provides employees purchase rights with respect to its stock
pursuant to stockholder approved stock option and employee stock purchase plans. The Company accounts for its stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based employee compensation cost is reflected in net income for the three and six months ended March 31, 2003 and 2002, as all options granted
under these plans had an exercise price equal to or in excess of the fair market value of the underlying common stock as of the grant date for each stock option, except for certain stock options granted in fiscal 1999 or earlier, prior to its
initial public offering. For those option grants in fiscal 1999 or earlier, the Company recorded deferred stock compensation of $1.9 million for the difference at the grant date between the exercise price of each stock option granted and the fair
value of the underlying common stock. This amount is being amortized on a straight-line basis over the vesting period, which is generally four years. As of March 31, 2003, the unamortized deferred compensation balance was $4,000.



The following table illustrates the effect on net loss and
basic and diluted net loss per share if the Company had accounted for its stock option and stock purchase plans under the fair value method of accounting under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (in thousands):



|                                                                                                              |  | Three Months Ended |        |   | Six Months Ended |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | -
|                                                                                                              |  | March 31, 2003     |        |   | March 31, 2002   |  
|Net loss, as reported                                                                                         |  | $                  | (2,117 | ) |                  | $
|Add: Stock-based employee compensation included in net loss                                                   |  |                    | 3      |   |                  |  
|Less: Total stock-based employee compensation expense determined under fair value based
method for all awards |  |                    | (2,881 | ) |                  |  
|                                                                                                              |  |                    |        |   |                  |  
|Pro forma net loss                                                                                            |  | $                  | (4,995 | ) |                  | $
|                                                                                                              |  |                    |        |   |                  |  
|Basic and diluted net loss per share:                                                                         |  |                    |        |   |                  |  
|As reported                                                                                                   |  | $                  | (0.09  | ) |                  | $
|Pro forma                                                                                                     |  | $                  | (0.22  | ) |                  | $
|                                                                                                              |  |                    |        |   |                  |  



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|(3) |  | Revenue Recognition
|--- |  | -------------------



Subscription services revenue consists of fees from subscriptions to the Companys Internet measurement, monitoring, testing and
diagnostic services. The Companys subscription services revenue is deferred upon invoicing and is recognized ratably over the service period, generally ranging from one to twelve months. For some customers, subscription services revenue is
invoiced monthly upon completion of the services. Deferred revenue is comprised of all unearned revenue, primarily unearned subscription revenue, and is recorded as deferred revenue on the balance sheet until the revenue is earned. The Company does
not generally grant refunds during the initial subscription term. All discounts granted during the initial term are netted against revenue. Revenue is not recognized for free trial periods. Revenue from consulting and support services, which
includes revenue from its load-testing services, is recognized as the services are performed, typically over a one to three month period. For consulting projects that span more than one month, the Company recognizes revenue as milestones or
deliverables are completed.



|(4) |  | Cumulative Effect of a Change in Accounting Principle
|--- |  | -----------------------------------------------------



Effective October 1, 2001, the Company early adopted Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other
Intangible Assets. On adoption of SFAS No. 142, the Company determined its market value based on the number of shares outstanding and the stock price as of October 1, 2001, after adjusting for a 10% premium that is assumed to represent
additional value that an acquirer would be required to pay for a controlling interest in the Company. This evaluation indicated that goodwill associated with acquisitions completed prior to fiscal 2002 was impaired as of October 1, 2001.
Accordingly, the Company recorded a $3.2 million non-cash impairment charge as a cumulative effect of a change in accounting principle for the write-off of the remaining amount of goodwill as of October 1, 2001. Currently, there is no remaining
goodwill on the Companys condensed consolidated balance sheet.



|(5) |  | Comprehensive Loss
|--- |  | ------------------



Comprehensive loss includes net loss and unrealized gains and losses on short-term investments in debt securities and foreign currency
translation. These items are excluded from earnings and reported as a component of stockholders equity. The functional currency of the Companys foreign operations is the applicable local currency. The translation of foreign currencies
into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using average exchange rates for each reporting period. Gains and losses from foreign currency
transactions are reflected in the condensed consolidated statements of operations as incurred (in thousands):



|                                                      |  | Three Months Ended |       | Six Months Ended
|----------------------------------------------------- |  | ------------------ | ----- | ----------------
|                                                      |  | March 31, 2003     |       | March 31, 2002  
|Net loss                                              |  | $                  | 2,117 |                 
|Net unrealized loss on available-for-sale investments |  |                    | 569   |                 
|Foreign currency translation loss                     |  |                    | 63    |                 
|                                                      |  |                    |       |                 
|Comprehensive loss                                    |  | $                  | 2,749 |                 
|                                                      |  |                    |       |                 



|(6) |  | 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, and accounts payable, approximates fair market value due to the short-term nature of these instruments. Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable.



Credit risk is
concentrated in North America, but also exists in Europe. The Company generally requires no collateral from customers, however, throughout the collection process, it conducts an ongoing evaluation of customers ability to pay. The
Companys allowance for doubtful accounts is determined based on historical trends, experience and current market and industry conditions. Management regularly reviews the adequacy of the Companys allowance for doubtful accounts after
considering the aging of accounts receivable, the age of each invoice, each customers expected ability to pay and the Companys collection history with each customer. Management reviews invoices greater than 60 days old to determine
whether an allowance is appropriate based on the receivable balance. 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 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 additional allowances in the future. The Company believes that it has adequately reserved for doubtful accounts as of the date of each balance sheet presented herein. At March 31, 2003 and 2002, no single customer accounted for
more than 10% of the Companys total accounts receivable. For the three and six months ended March 31, 2003 and 2002, no single customer accounted for more than 10% of the Companys total revenue during each period.



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|(7) |  | Investments
|--- |  | -----------



For the purposes of the condensed consolidated financial statements, the Company considers all highly liquid investments with original
maturities of three months or less when acquired to be cash equivalents. All of the Companys cash equivalents and short-term investments are classified as available-for-sale. These securities are carried at fair market value, with unrealized
gains and losses excluded from earnings and reported as a component of other comprehensive income (loss). The following table summarizes the Companys short-term investments in investment-grade debt securities as of March 31, 2003 (in
thousands):



|                                        |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Estimated Fair Market Value
|--------------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | - | ---------------------------
|Obligations of U.S. government agencies |  | $              | 35,538  |                        | $ | 209                     |  | $ | (5                         
|Corporate bonds and commercial paper    |  |                | 134,250 |                        |   | 614                     |  |   | (40                        
|                                        |  |                |         |                        |   |                         |  |   |                            
|Total                                   |  | $              | 169,788 |                        | $ | 823                     |  | $ | (45                        
|                                        |  |                |         |                        |   |                         |  |   |                            



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



The following table summarizes the contractual maturities of investments available for sale at March 31, 2003 (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.



|               |  | Amortized Cost |         | Estimated Fair Market Value
|-------------- |  | -------------- | ------- | ---------------------------
|Due in 1 year  |  | $              | 106,403 |                            
|Due in 2 years |  |                | 63,385  |                            
|               |  |                |         |                            
|Total          |  | $              | 169,788 |                            
|               |  |                |         |                            



|(8) |  | Identifiable Intangible Assets
|--- |  | ------------------------------



As of March 31, 2003, the net carrying value of identifiable intangible assets was approximately $2.7 million. During the first quarter of
fiscal 2003, the Company acquired approximately $813,000 of technology-based and $31,000 of customer-based intangible assets related to the acquisition of the business of Enviz, Inc. (Enviz) (see Note 10). The purchase price allocation for the
acquisition of the business of Enviz, Inc. was adjusted by approximately $40,000 of cash, which was received during the second quarter of fiscal 2003 as a result of the finalization of the acquisition. This amount was allocated based on the original
purchase price allocation ratios to technology-based and customer-based intangible assets. In addition, the purchase price allocation for the acquisition of the business of Envive Corporation (Envive) was adjusted to reflect an amount of
approximately $144,000 of cash, which was received during the first quarter of fiscal 2003 as a result of the finalization of the acquisition. This amount was allocated based on the original purchase price allocation ratios to technology-based and
customer-based intangible assets. As a result, the net change in identifiable intangible assets for the three and six months ended March 31, 2003 was a decrease of $40,000 and an increase of $660,000, respectively. These assets are being amortized
over a three year period, with minimal residual values. During the three and six month periods ended March 31, 2003, the amortization expense for intangible assets was approximately $421,000 and $800,000, respectively. The components of identifiable
intangible assets are as follows (in thousands):



|As of March 31, 2003:                    |  | Technology Based |        |   | Customer Based |   |        | Trademark |  |   | Total |  
|---------------------------------------- |  | ---------------- | ------ | - | -------------- | - | ------ | --------- |  | - | ----- | -
|Gross carrying value                     |  | $                | 7,815  |   |                | $ | 3,678  |           |  | $ | 250   |  
|Accumulated amortization                 |  |                  | (5,226 | ) |                |   | (3,552 | )         |  |   | (246  | )
|                                         |  |                  |        |   |                |   |        |           |  |   |       |  
|Net carrying value at March 31, 2003     |  | $                | 2,589  |   |                | $ | 126    |           |  | $ | 4     |  
|                                         |  |                  |        |   |                |   |        |           |  |   |       |  
|                                        
|As of September 30, 2002:                |  |                  |        |   |                |   |        |           |  |   |       |  
|Gross carrying value                     |  | $                | 7,173  |   |                | $ | 3,660  |           |  | $ | 250   |  
|Accumulated amortization                 |  |                  | (4,520 | ) |                |   | (3,465 | )         |  |   | (239  | )
|                                         |  |                  |        |   |                |   |        |           |  |   |       |  
|Net carrying value at September 30, 2002 |  | $                | 2,653  |   |                | $ | 195    |           |  | $ | 11    |  
|                                         |  |                  |        |   |                |   |        |           |  |   |       |  



The
amortization expense for existing intangible assets is estimated to be approximately $789,000 for the remainder of fiscal 2003, approximately $1.35 million for fiscal 2004, and approximately $580,000 for fiscal 2005, assuming that the Company is not
required to write-off identifiable intangible assets in the future.



9



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|(9) |  | 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 and six months ended March 31
|------------------------------------------------ |  | -----------------------------------
|                                                 |  | 2003                               
|Shares outstanding under stock options           |  | 5,718                              
|Shares of restricted stock subject to repurchase |  | 7                                  
|                                                 |  |                                    
|Total shares excluded                            |  | 5,725                              
|                                                 |  |                                    



The
weighted-average exercise price per share of common stock subject to stock options was $12.50 as of March 31, 2003 and $13.74 as of March 31, 2002. The weighted-average repurchase price of restricted stock was $0.26 as of March 31, 2003, and $0.90
as of March 31, 2002.



|(10) |  | Acquisitions
|---- |  | ------------



In October 2002, the Company acquired the business of Enviz, Inc. (Enviz), a developer of user experience testing technology for $76,000
in cash and 111,000 shares of the Companys common stock.



The $841,000 purchase price consideration was based on estimated fair values of the assets and liabilities of Enviz, Inc. at the acquisition date, and allocated to the technology-based and customer-based intangible assets acquired.
There was no goodwill arising from the acquisition. Identifiable intangible assets are being amortized on a straight-line basis over a three year period. Amortization of identifiable intangible assets related to the acquisition of the business of
Enviz was $73,000 and $143,000 for the three and six months ended March 31, 2003. The condensed consolidated statements of operations for the three and six months ended March 31, 2003 include the results of operations relating to Envizs
business activity subsequent to the acquisition. If the results of the two companies were combined on a pro forma basis for the three and six months ended March 31, 2002, the difference between pro forma results and the actual results reported
herein, would be immaterial.



During the three
months ended March 31, 2003, the $841,000 purchase price allocation of the business of Enviz, Inc. was adjusted to reflect an amount of approximately $40,000 of cash, which was received as a result of the finalization of the acquisition. This amount
was allocated based on the original purchase price allocation ratios to technology-base and customer-based intangible assets. Thus, the total purchase price of $801,000 was allocated $774,000 to technology-based intangible assets, $29,000 to
customer-based intangible assets, and $2,000 to net liabilities.



During the six months ended March 31, 2003, the purchase price allocation for the acquisition of the business of Envive Corporation was adjusted to reflect an amount of approximately $144,000 of cash, which was received as a result
of the finalization of the acquisition. This amount was allocated based on the original purchase price allocation ratios to technology-based and customer-based intangible assets.



Additionally, as of October 1, 2001, the Company recorded a charge of approximately $3.2 million as a
cumulative effect of a change in accounting principle for the write-off of the remaining goodwill associated with its acquisitions made prior to fiscal 2002.



|(11) |  | Commitments and Contingencies
|---- |  | -----------------------------



|(A) |  | Leases
|--- |  | ------



The Company leases certain of its facilities under non-cancelable operating leases, which expire on various dates through December 2005.
At March 31, 2003, future minimum payments under the leases are as follows (in thousands):



|Twelve months ending March 31: |  |  
|------------------------------ |  | -
|2004                           |  | $
|2005                           |  |  
|2006                           |  |  
|Thereafter                     |  |  
|                               |  |  
|Total minimum lease payments   |  | $
|                               |  |  



|(B) |  | Legal Proceedings
|--- |  | -----------------



Beginning on August 16, 2001, a number of class action lawsuits were 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 lawsuits are essentially identical, and were brought on behalf of those who purchased the Companys securities
between September 24, 1999 and August 19, 2001. These complaints allege generally that the underwriters in certain initial public offerings, including the Companys, allocated shares in those initial public offerings in unfair or unlawful ways,
such as requiring the purchaser to agree to buy 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 Company had a duty to disclose the activities of the
underwriters in the registration statement relating to its initial public 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 plaintiffs counsel and the individual named defendants counsel have reached an agreement whereby the individual named defendants have been dismissed from the case,
without any payments by the Company. The case against the underwriters and the Company continues, however, plaintiffs counsel and the underwriters have each offered revised settlement proposals to the issuers, but various terms and conditions
are being negotiated. The Company is still evaluating each proposal. The Company believes the claims are without merit and intends to defend the actions vigorously should settlement not be reached. However, these claims, even if not meritorious,
could be expensive to defend and divert managements attention from operating the Company.



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 condensed consolidated financial position, results of operations, or cash flows.



10



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##### Table of Contents



|(12) |  | Stockholder Rights Plan
|---- |  | -----------------------



On October 28, 2002, the Company announced that its Board of Directors adopted a stockholder rights plan. The plan is designed to protect
the long-term value of the Company for its stockholders during any future unsolicited acquisition attempt. Key features of the rights plan include:



| |  |  | The rights become exercisable only upon the occurrence of certain events specified in the plan, including the acquisition of 15% of the Companys outstanding
common stock by a person or group;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Each right entitles the holder, other than an acquiring person, to acquire shares of the Companys common stock at a 50% discount to the
then-prevailing market price; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys Board of Directors may redeem outstanding rights at any time prior to a person becoming an acquiring person, at a price of $0.001 per
right and, prior to such time, the Board may amend the terms of the rights without the approval of the holders of the rights.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(13) |  | Stock Repurchase Plan
|---- |  | ---------------------



On October 28, 2002, the Company announced that it had commenced an issuer tender offer for 10 million shares or approximately 36.9% of
its outstanding common stock as of September 30, 2002, at a purchase price between $7.00 and $8.00 per share, net to the seller in cash. The offer expired on November 26, 2002. The Company repurchased approximately 4.3 million shares under the offer
for approximately $34.2 million. On January 17, 2003, the Company retired its treasury shares of approximately 5.3 million shares, which was mainly related to the shares repurchased under the 2002 tender offer.



The total number of shares repurchased since January 2001,
including the 2002 issuer tender offer, is approximately 6.1 million shares, for an aggregate price of approximately $48.7 million.



On March 24, 2003, the Company announced that it had commenced an issuer tender offer for 7.5 million shares, or approximately 33.0% of
its outstanding common stock as of February 28, 2003, at a purchase price of $9.50 per share, net to the seller in cash. The tender offer was scheduled to expire on May 9, 2003, however, on May 12, 2003, the tender offer was extended five business
days to May 16, 2003.



|(14) |  | Geographic, Segment, and Significant Customer Information
|---- |  | ---------------------------------------------------------



The Company has determined that it operates in a single reportable segment: the development and sale of
services to measure, test, assure and improve the quality of service of web sites.



The Company markets its products primarily from its operations in the United States. International sales are primarily to customers in Europe. These sales and the Companys foreign-owned assets
are not significant. For the three and six months ended March 31, 2003, and March 31, 2002, respectively, no single customer accounted for more than 10% of the Companys total revenue. At March 31, 2003, and March 31, 2002, respectively no
single customer accounted for more than 10% of the Companys total receivable.



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, 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, 2002, 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 also 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 fiscal 2003. 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.



11



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##### Table of Contents



Overview



We provide services that enable corporate enterprises to
benchmark, test, and manage their electronic business, or e-business, applications, and systems, both inside and outside the firewall. Our services are designed to provide total performance management by allowing enterprise customers to
improve the quality of their e-business from the end-user perspective through cost-effective and easy-to-use web performance management and testing solutions. We provide outsourced services and appliances, which do not require complex and costly
software implementations, configuration or maintenance by our customers. We believe that enterprises who use our services leverage their existing software and hardware, improve customer satisfaction and reduce capital expenditures.



Revenue consists of subscription services revenue and
consulting and support services revenue. Subscription services revenue consists of fees from subscriptions to our Internet measurement, monitoring, testing, and diagnostic services. Our subscription services revenue is deferred upon invoicing and is
recognized ratably over the service period, generally ranging from one to twelve months. For some customers, subscription service revenue is invoiced monthly upon completion of the services. Deferred revenue is comprised of all unearned revenue,
primarily unearned subscription revenue, and is recorded as deferred revenue on our balance sheet until the revenue is earned. As of March 31, 2003, we had recorded $5.2 million of deferred revenue. 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. Revenue from our consulting and support services, which includes revenue from our load testing
services, is recognized as the services are performed, typically over a one to three month period. For longer consulting projects that span more than one month, we recognize revenue as milestones or deliverables are completed.



A majority of our subscription revenue comes from our web
performance benchmarking services. Subscription revenue also includes our Red Alert and NetMechanic monitoring and alarm services, test perspective, web effective subscription services, application performance management subscription services, and
our private agent application performance management services. Our customers purchase these services for an initial terms of three to twelve months and then may renew their subscription on an annual, semi-annual, or month-to-month basis.



Subscription fees can vary based on the number
of URLs measured, the number of devices monitored, the number of measurement locations, the number of users, the number of hours, the frequency of the measurements, the number of private agents, 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 revenue increased as a percentage of total revenue from 7% to 8% for the three and six months ended March 31, 2002, and amounted to 10% of total revenue for both the three months
and six months ended March 31, 2003, respectively. We believe that consulting and support services revenue may continue to increase in the future as a percentage of total revenue as we introduce additional services that require consulting expertise
and if our Keynote Diagnostic and WebEffective services become more widely used. However, we cannot assure you that this revenue will increase in absolute dollars in future periods.



For the quarter ended March 31, 2003, our 10 largest customers accounted for approximately 30% of total
revenue. We cannot be certain that customers that have accounted for significant revenue 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 revenue could significantly decline.



Effective April 1, 2003, we implemented company-wide salary reductions, reduced headcount, and amended our
bonus structure to be dependent on the achievement of overall company profitability as well as individual performance targets. Accordingly, we expect that total expenses for the third quarter of fiscal 2003 will decrease compared to the second
quarter of fiscal 2003.



Results of Operations



Revenue



|                                     |  | 2003           |        | 2002 |   | % Change | 
|------------------------------------ |  | -------------- | ------ | ---- | - | -------- | 
|For the three months ended March 31: |  | (In thousands) |        |      |  
|Subscription services                |  | $              | 8,567  |      | $ | 8,557    | 
|Consulting and support services      |  | $              | 991    |      | $ | 652      | 
|                                     |  |                |        |      |   |          | 
|                                     |  |                | 9,558  |      |   | 9,209    | 
|                                     |  |                |        |      |   |          | 
|For the six months ended March 31:   |  |                |        |      |   |          | 
|Subscription services                |  | $              | 17,408 |      | $ | 17,353   | 
|Consulting and support services      |  | $              | 1,908  |      | $ | 1,445    | 
|                                     |  |                |        |      |   |          | 
|                                     |  |                | 19,316 |      |   | 18,798   | 
|                                     |  |                |        |      |   |          | 



Subscription Services.    Revenue from subscription services increased $10,000 or 0.1% for the three months ended March 31, 2003 as compared to the corresponding period in 2002. Revenue from subscription
services increased $55,000 or 0.3% for the six months ended March 31, 2003 as compared to the same period in 2002. Subscription services represented 90% and 93% of total revenue for the three months ended March 31, 2003 and March 31, 2002,
respectively, and approximately 90% and 92% of total revenue for the six months ended March 31, 2003 and 2002, respectively. The slight revenue increase was mainly due to services introduced in the last two years, offset by decreases in benchmarking
services.



Consulting and Support
Services.    Revenue from consulting and support services increased $339,000 or 52% for the three months ended March 31, 2003 as compared to the corresponding period in 2002. Revenue from consulting and support services
increased $463,000 or 32% for the six months ended March 31, 2003 as compared to the same period in 2002. Consulting and support services have increased to approximately 10% from 7% of total revenue for the three months ended March 31, 2003, and
March 31, 2002, respectively, and have also increased to approximately 10% from 8% of total revenue for the six months ended March 31, 2003 and 2002. The revenue increase was primarily due to increased contributions from our new service offerings,
Keynote Diagnostic Services, which was introduced in the first quarter of fiscal 2002, and Web Effective, which was introduced in the first quarter of fiscal 2003. The increase was due, to a lesser extent, to our completing a larger number of
testing engagements, which were generally higher in value.



For the three months and six months ended March 31, 2003 and 2002, respectively, no single customer accounted for more than 10% of total revenue. At March 31, 2003 and 2002, no single customer accounted for more than 10% of our total
accounts receivable.



12



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##### Table of Contents



Expenses:



Costs of Subscription and Consulting and Support Services



|                                         |  | 2003           |       | 2002 |   | % Change | 
|---------------------------------------- |  | -------------- | ----- | ---- | - | -------- | 
|For the three months ended March 31:     |  | (In thousands) |       |      |  
|Costs of subscription services           |  | $              | 2,262 |      | $ | 2,857    | 
|Costs of consulting and support services |  | $              | 971   |      | $ | 937      | 
|                                        
|For the six months ended March 31:       |  |                |       |      |   |          | 
|Costs of subscription services           |  | $              | 4,745 |      | $ | 6,249    | 
|Costs of consulting and support services |  | $              | 1,870 |      | $ | 1,889    | 



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 declined 21% for the three months ended March 31, 2003 as compared to the corresponding period in 2002, and were 26% and
33% of subscription services revenue for the three months ending March 31, 2003 and 2002, respectively. Costs of subscription services declined 24% for the six months ended March 31, 2003 as compared to the corresponding period in 2002, and were 27%
and 36% of subscription services revenue for the six months ended March 31, 2003 and 2002, respectively. In absolute dollars, costs of subscription services decreased $595,000 during the quarter ended March 31, 2003 as compared to the corresponding
period in 2002 and $1.5 million during the six months ended March 31, 2003 as compared to the corresponding period in 2002. The decreases were primarily due to reduced costs for bandwidth and, to a lesser extent, lower bandwidth and depreciation
expenses. We believe that costs of subscription services in absolute dollars for the third quarter of fiscal 2003 will decrease compared to the second quarter of fiscal 2003 due to lower depreciation expenses.



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. On a quarterly basis, costs of consulting and support services have increased 4% for the three months ended March 31, 2003 as compared to the corresponding period in 2002, and were 98% and 144% of consulting and support services revenue for
the three months ended March 31, 2003 and 2002, respectively. Costs of consulting and support services have declined 1% for the six months ended March 31, 2003 as compared to the corresponding period in 2002, and were 98% and 131% of consulting and
support services for the six months ending March 31, 2003 and 2002, respectively. Costs of consulting and support services increased $34,000 or 4% during the quarter ended March 31, 2003 compared to the corresponding period in 2002 and decreased
$19,000 or 1% for the six months ended March 31, 2003 compared to the corresponding period in 2002. The increase in costs of consulting and support services for the three months ended March 31, 2003 as compared to the corresponding period in 2002
was primarily attributable to costs associated with WebEffective which we had acquired in October 2002. 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 for the third quarter of fiscal 2003 will decrease slightly from the second
quarter of fiscal 2003.



Research and Development



|                                     |  | 2003           |       | 2002 |   | % Change | 
|------------------------------------ |  | -------------- | ----- | ---- | - | -------- | 
|For the three months ended March 31: |  | (In thousands) |       |      |  
|Research and development             |  | $              | 2,053 |      | $ | 2,238    | 
|                                    
|For the six months ended March 31:   |  |                |       |      |   |          | 
|Research and development             |  | $              | 4,235 |      | $ | 4,551    | 



Research
and development expenses consist primarily of compensation and related costs for research and development personnel. Research and development expenses decreased $185,000 or 8% for the three months ended March 31, 2003 as compared to the
corresponding period in 2002 and $316,000 or 7% for the six months ended March 31, 2003 as compared to the corresponding period in 2002. The decrease was primarily attributable to lower costs resulting from a reduced number of research and
development personnel, offset, in part, by additional costs related to acquisitions. To date, all research and development expenses have been expensed as incurred. We believe that research and development expenses in absolute dollars for the third
quarter of fiscal 2003 will decrease compared to the second quarter of fiscal 2003 due to reductions in personnel costs as a result of reduced salaries and lower headcount.



Sales and Marketing



|                                     |  | 2003           |       | 2002 |   | % Change | 
|------------------------------------ |  | -------------- | ----- | ---- | - | -------- | 
|For the three months ended March 31: |  | (In thousands) |       |      |  
|Sales and marketing                  |  | $              | 4,033 |      | $ | 4,968    | 
|                                    
|For the six months ended March 31:   |  |                |       |      |   |          | 
|Sales and marketing                  |  | $              | 8,478 |      | $ | 10,066   | 



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 $935,000 or 19% for the
three months ended March 31, 2003 as compared to the corresponding period in 2002 and approximately $1.6 million or 16% for the six months ended March 31, 2003 as compared to the corresponding period in 2002. The decrease primarily resulted from the
restructuring of our sales organization to focus more resources on our large corporate customers and, to a lesser extent, from reduced spending on certain marketing programs. We believe that sales and marketing expenses in absolute dollars for the
third quarter of fiscal 2003 will decrease compared to the second quarter of fiscal 2003 due to reductions in personnel costs as a result of reduced salaries and lower headcount and fewer marketing programs.



Operations



|                                     |  | 2003           |       | 2002 |   | % Change | 
|------------------------------------ |  | -------------- | ----- | ---- | - | -------- | 
|For the three months ended March 31: |  | (In thousands) |       |      |  
|Operations                           |  | $              | 1,688 |      | $ | 1,969    | 
|                                    
|For the six months ended March 31:   |  |                |       |      |   |          | 
|Operations                           |  | $              | 3,406 |      | $ | 3,977    | 



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 decreased
$281,000 or 14% for the three months ended March 31, 2003 as compared to the corresponding period in 2002 and $571,000 or 14% for the six months ended March 31, 2003 as compared to the corresponding period in 2002. The decrease in operations
expenses was primarily the result of increasing operating efficiencies and reducing the number of personnel in the operations group. We believe that operations expenses in absolute dollars for the third quarter of fiscal 2003 will decrease compared
to the second quarter of fiscal 2003 due to continued increases in operating efficiencies and reduction in personnel costs as a result of reduced salaries and lower headcount.



General and Administrative



|                                     |  | 2003           |       | 2002 |   | % Change | 
|------------------------------------ |  | -------------- | ----- | ---- | - | -------- | 
|For the three months ended March 31: |  | (In thousands) |       |      |  
|General and administrative           |  | $              | 1,612 |      | $ | 1,766    | 
|                                    
|For the six months ended March 31:   |  |                |       |      |   |          | 
|General and administrative           |  | $              | 3,116 |      | $ | 3,599    | 



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 decreased
$154,000 or 9% for the three months ended March 31, 2003 as compared to the corresponding period in 2002 and $483,000 or 13% for the six months ended March 31, 2003 as compared to the corresponding period in 2002. The decrease in our general and
administrative expenses was primarily due to lower bad debt provisions due to improved collection efforts. The decrease was due, to a lesser extent, to lower spending on professional service fees. We believe that general and administrative expenses
in absolute dollars for the third quarter of fiscal 2003 will be slightly lower than the second quarter of fiscal 2003 due to reductions in personnel costs as a result of reduced salaries, offset in part by an increase related to recent changes in
securities laws.



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Excess Occupancy Costs



|                                     |  | 2003           |     | 2002 |   | % Change
|------------------------------------ |  | -------------- | --- | ---- | - | --------
|For the three months ended March 31: |  | (In thousands) |     |     
|Excess occupancy costs               |  | $              | 293 |      | $ |        
|                                    
|For the six months ended March 31:   |  |                |     |      |   |         
|Excess occupancy costs               |  | $              | 578 |      | $ |        



Excess
occupancy costs are costs related to fixed charges associated with the unoccupied portion of our headquarters building, such as property taxes, insurance and depreciation. These particular costs represent the fixed costs of operating our
headquarters building acquired in September 2002 and are based on the actual unoccupied square footage, which was determined to be 60% during the three and six months ended March 31, 2003.



Amortization of Identifiable Intangible Assets and Stock-Based
Compensation



|                                                                            |  | 2003           |     | 2002 |   | % Change | 
|--------------------------------------------------------------------------- |  | -------------- | --- | ---- | - | -------- | 
|For the three months ended March 31:                                        |  | (In thousands) |     |      |  
|Amortization of identifiable intangible assets                              |  | $              | 421 |      | $ | 222      | 
|Amortization of stock-based compensation                                    |  |                | 3   |      |   | 85       | 
|                                                                            |  |                |     |      |   |          | 
|Amortization of identifiable intangible assets and stock-based
compensation |  | $              | 424 |      | $ | 307      | 
|                                                                            |  |                |     |      |   |          | 
|                                                                           
|For the six months ended March 31:                                          |  |                |     |      |   |          | 
|Amortization of identifiable intangible assets                              |  |                | 800 |      |   | 436      | 
|Amortization of stock-based compensation                                    |  |                | 27  |      |   | 170      | 
|                                                                            |  |                |     |      |   |          | 
|Amortization of identifiable intangible assets and stock-based
compensation |  | $              | 827 |      | $ | 606      | 
|                                                                            |  |                |     |      |   |          | 



As of
March 31, 2003 and 2002, we had identifiable intangible assets with a gross carrying value of approximately $11.7 million and $9.4 million, respectively. For the three months ended March 31, 2003 and 2002, we recorded expenses of $421,000 and
$222,000, respectively, in amortization of identifiable intangible assets. For the six months ended March 31, 2003 and 2002, we recorded expenses of $800,000 and $436,000, respectively, in amortization of identifiable intangible assets. As of March
31, 2003 and 2002, the net carrying value of identifiable intangible assets was approximately $2.7 million and $1.9 million, respectively.



Certain 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 recorded amortization of deferred compensation expense of $3,000 and $85,000 for the three months ended March 31, 2003 and 2002,
respectively and $27,000 and $170,000 for the six months ended March 31, 2003 and 2002, respectively. The decrease in the amortization of deferred compensation for the three months ended March 31, 2003 as compared to the corresponding period in
fiscal 2002 was a result of our discontinuing to amortize costs associated with former employees that have been terminated. As of March 31, 2003, we had a remaining balance of $4,000 included in deferred compensation remaining to be amortized during
fiscal 2003. Deferred compensation is amortized on a straight-line basis over the vesting period of the options, and will be fully amortized by the end of fiscal 2003.



We expect the amortization of intangible assets and stock-based compensation to be approximately $430,000 for
the third quarter of fiscal 2003, assuming no additional acquisitions or impairment charges. We expect the remaining carrying value of the identifiable intangible assets as of March 31, 2003, as listed in the table below, will be fully amortized by
October 2005 (in thousands).



|                                     |  | Technology Based |       | Customer Based |   | Trademark |  | Total
|------------------------------------ |  | ---------------- | ----- | -------------- | - | --------- |  | -----
|Net carrying value at March 31, 2003 |  | $                | 2,589 |                | $ | 126       |  | $    
|                                     |  |                  |       |                |   |           |  |      



Interest Income,
Net



|                                     |  | 2003           |       | 2002 |   | % Change | 
|------------------------------------ |  | -------------- | ----- | ---- | - | -------- | 
|For the three months ended March 31: |  | (In thousands) |       |      |  
|Interest income, net                 |  | $              | 1,661 |      | $ | 2,844    | 
|                                    
|For the six months ended March 31:   |  |                |       |      |   |          | 
|Interest income, net                 |  | $              | 3,825 |      | $ | 6,147    | 



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Net interest
income decreased approximately $1.2 million or 42% for the three months ended March 31, 2003 as compared to the corresponding period in 2002 and decreased approximately $2.3 million or 38% for the six months ended March 31, 2003 as compared to the
corresponding period in 2002. The majority of the net interest income was earned on our investments. The decrease in net interest income for the three and six months ended March 31, 2003 as compared to the corresponding period in fiscal 2002 was
primarily due to the use of restricted cash to purchase our headquarters building in September 2002, a lower level of invested cash due to the issuer tender offer that closed in November 2002 and open market stock repurchases in fiscal 2003
and the continued decline in interest rates. We utilized $85.0 million of restricted cash to purchase our headquarters building in September 2002. During the three and six months ended March 31, 2003, we utilized approximately $3.1 million to
repurchase 364,000 shares, and approximately $38.5 million to repurchase 4.7 million shares, respectively, primarily pursuant to the tender offer.



Provision for Income Taxes



No provision for federal and state income taxes was recorded for the three and six months ended March 31, 2003 and March 31, 2002, due to
our operating losses, net operating loss carryforwards, and tax credits.



Cumulative Effect of a Change in Accounting Principle



|                                                      |  | 2003           |   | 2002 |   | % Change
|----------------------------------------------------- |  | -------------- | - | ---- | - | --------
|For the three months ended March 31:                  |  | (In thousands) |   |     
|Cumulative effect of a change in accounting principle |  | $              |  |      | $ |        
|                                                     
|For the six months ended March 31:                    |  |                |   |      |   |         
|Cumulative effect of a change in accounting principle |  | $              |  |      | $ | 3,160   



As
discussed in Note 4 of the Notes to the Condensed Consolidated Financial Statements, Cumulative Effect of a Change in Accounting Principle, as a result of the implementation of Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets, we recorded a charge of approximately $3.2 million as a cumulative effect of a change in accounting principle for the write-off of all the remaining goodwill associated with acquisitions prior to
fiscal 2002, in the six months ended March 31, 2002.



Liquidity and Capital Resources



At March 31, 2003, we had approximately $28.6 million in cash and cash equivalents and approximately $170.5 million in short-term investments, for a total of approximately $199.1 million in cash, cash-equivalents, and short-term
investments. Our short-term investments consist of investment-grade corporate and government debt securities with Standard & Poors ratings of A or A+ or better.



Net cash provided by operating activities was approximately $2.3 million for the six months ended March 31,
2003. Net cash provided by operating activities was primarily the result of net income before all non-cash amortization and depreciation charges, a decrease in accounts receivable, and an increase in deferred revenue, offset by a decrease in
accounts payable and accrued expenses and an increase in prepaids. Accounts receivable declined mainly due to improved collections. Accounts payable and accrued expenses declined mainly due to the timing of certain payments associated with large
periodic insurance renewals. Prepaids increased due to the renewal of certain maintenance contracts. Net cash provided by operating activities was $106,000 for the six months ended March 31, 2002 and resulted from a loss from operations before all
non-cash amortization and depreciation charges and the cumulative effect of a change in accounting principle, a decrease in accounts receivable, a decrease in prepaids and other current assets, and an increase in deferred revenue, offset by a
decrease in accounts payable and accrued expenses. Accounts payable and accrued expenses declined mainly due to payments associated with our headquarters building and periodic insurance renewals and other vendors that support our operations. These
decreases were partially offset by a decrease in accounts receivable due to successful collection efforts and a decrease in prepaids and other assets due to the receipt of accrued interest generated from our cash and short-term investments.



Cash provided by our investing activities was
approximately $42.6 million for the six months ended March 31, 2003. We generated the net amount of approximately $44.1 million from the net sale of short-term investments and $75,000 in net receipts associated with the finalization of the
acquisition of the business of Enviz, Inc. (Enviz) and Envive Corporation (Envive). We utilized approximately $1.5 million for capital expenditures. Cash used in our investing activities was approximately $5.9 million for the six months ended March
31, 2002. During the six months ended March 31, 2002, we used approximately $2.4 million for the net purchase of short-term investments, approximately $2.6 million for property and equipment, and approximately $1.0 million for our acquisitions of
onDevice Corporation and Envive.



We used approximately $38.5 million, including fees, for our financing activities for the six months ended March 31, 2003. During the six months ended March 31, 2003, we repurchased
approximately 4.7 million shares for approximately $38.5 million, primarily pursuant to the 2002 tender offer, offset by approximately $1.3 million from the issuance of common stock under our employee stock option and stock purchase plans. As of
March 31, 2003, the total number of shares repurchased since the initial repurchase program was authorized by our Board of Directors in January 2001 was approximately 6.1 million shares at an aggregate cost of approximately $48.7 million, including
fees. On March 24, 2003, we announced that we had commenced an issuer tender offer for 7.5 million shares, or approximately 33.0% of our outstanding common stock as of February 28, 2003, at a purchase price of $9.50 per share, net to the seller in
cash. The tender offer was scheduled to expire on May 9, 2003, however, on May 12, 2003, the tender offer was extended five business days to May 16, 2003. We currently have authorization to repurchase additional shares of our common stock for up to
approximately $130.0 million, less stock already repurchased. Financing activities generated $385,000 for the six months ended March 31, 2002. We received $1.3 million from the issuance of common stock under our employee stock option and stock
purchase plans, offset by $648,000 used for the repayment of notes payable for capital equipment leases, and $248,000 used to repurchase 34,500 shares of our common stock under our open market repurchase program.



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As of March
31, 2003, our principal commitments consisted of $286,000 in real property operating leases. We expect that, we will make additional capital expenditures of approximately $600,000 related to our operations and headquarters building for the third
quarter of fiscal 2003, absent any acquisition costs or other extraordinary transactions. Assuming that the maximum 7.5 million shares are tendered in our issuer tender offer which is scheduled to expire in May 16, 2003, we expect that the aggregate
purchase price will be approximately $71.3 million, plus our expected fees and expenses of approximately $125,000.



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, additional stock repurchases, 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.



Critical Accounting Policies and Judgments



In preparing our condensed consolidated financial statements
in accordance with accounting principles generally accepted in the United States for interim financial statements, our management is required to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial
statements and related notes. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial
statements.



Our critical accounting policies and
judgments are of both a routine and non-routine nature. The recurring policies relate to revenue recognition and the allowance for doubtful accounts receivable. The non-routine policy relates to the valuation of long-lived assets.



Revenue Recognition



Subscription services revenue consists of fees from
subscriptions to our Internet measurement, monitoring, testing and diagnostic services. Our subscription services revenue is generally deferred upon invoicing and is recognized ratably over the service period, generally ranging from one to twelve
months. For some customers, subscription services revenue is invoiced monthly upon completion of the services. We do not generally grant refunds during the initial subscription term. All discounts granted are netted against revenue. Revenue is not
recognized for free trial periods. Revenue from our consulting and support services, which includes revenue from our load testing service, is recognized as the services are performed, typically over one to three month period. For consulting projects
that span more than one month, we recognize revenue as milestones or deliverables are completed.



Allowance for Doubtful Accounts Receivable



Accounts receivable is recorded net of allowance for doubtful accounts, of $844,000 or 17% of total accounts receivable and approximately
$1.2 million or 20% of total accounts receivable as of March 31, 2003 and September 30, 2002, respectively. Our accounting policy for allowance for doubtful accounts is determined based on historical trends, experience and current market and
industry conditions. We regularly review the adequacy of our accounts receivable allowance after considering the aging of accounts receivable, the age of each invoice, each customers expected ability to pay and our collection history with each
customer. We review invoices greater than 60 days past due to determine whether an allowance is appropriate based on the receivable balance. In addition, we maintain a reserve for all other invoices, which is calculated 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 may result in a
requirement for additional allowances in the future or reductions in allowances due to future recoveries.



Valuation of Long-Lived Assets



We evaluate the recoverability of fixed assets and intangible assets other than goodwill whenever events or changes in circumstances indicate the carrying amount of any such asset group may not be
fully recoverable. Changes in circumstances include economic conditions or operating performance. Our evaluation is based upon assumptions about the estimated future undiscounted net cash flows from such asset groups. Management continually applies
its best judgment when performing these evaluations to determine the timing of the testing, the undiscounted net cash flows used to assess recoverability and the fair value of the asset group. If a future event or circumstance indicates that an
impairment assessment is required and an asset group is determined to be impaired, our financial results could be materially and adversely impacted in future periods.



Recent Accounting Pronouncements



In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123, Stock-Based Compensation, to provide alternative methods of
transition to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provision of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entitys
accounting policy decisions with respect to stock-based employee compensation. The disclosure provision is required for all companies with stock-based employee compensation, regardless of whether the company utilizes the fair value method of
accounting described in SFAS No. 123 or the intrinsic value method described in APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 148 also amends APB Opinion No. 28 , Interim Financial Reporting, to
require disclosure about those effects in interim financial information. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are
effective for interim periods ending after December 15, 2002. We will continue to apply the intrinsic value method of APB 25 and have adopted the disclosure requirements of SFAS No. 148, effective January 1, 2003, and have provided the disclosures
required under SFAS No. 148 in Note 2.



In July
2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit of Disposal Activities. SFAS No. 146 addresses financial accounting and reporting associated with exit or disposal activities. Under SFAS No. 146, costs
associated with an exit or disposal activity shall be recognized and measured at their fair value in the period in which the liability is incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of SFAS No. 146
were effective prospectively for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 may affect the timing of recognizing any future restructuring costs as well as the amount recognized of such exit or
disposal activities.



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Factors That May Impact
Future Operating Results



We have introduced new products
and services, and we have an unproven business model, which makes it difficult to evaluate our current business and future prospects.



We have recently introduced many new products, including:



| |  |  | In May 2002, we acquired NetMechanic, Inc., which enhanced the monitoring services that we currently provide through our Red Alert division.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July 2002, we released an updated version of our Transaction Perspective.
| | - |  | ----------------------------------------------------------------------------



| |  |  | In October 2002, we introduced WebEffective, a new online user experience testing service based on our acquisition of Enviz, Inc. We also introduced Enterprise HTML
Toolbox, a web site testing service providing the large enterprise with a scaleable tool to test the content and integrity of web sites in all stages from development to deployment, and Traffic Perspective, a service that provides e-businesses with
a real-time single graphical view into web site traffic.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2002, we introduced the latest version of our Web Site Perspective service and the Keynote Tivoli Adapter, part of our Enterprise Perspective family of
services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In January 2003, we released an updated version of our Wireless Perspective.
| | - |  | ----------------------------------------------------------------------------



The revenue and income potential of our current business and services and the related markets are unproven
over the long term. In addition, because some of our products and services are new and because the market for web performance management and web performance testing services is evolving, we have limited insight into trends that may emerge and affect
our business.



We have incurred losses and may, in the future,
continue to incur losses, and we may never achieve profitability.



We have experienced operating losses in each quarterly and annual period since inception. We incurred net losses of $2.1 million and $4.1 million for the three and six months ended March 31, 2003, and as of March 31, 2003,
we had an accumulated deficit of $141.4 million. In addition, we are required under accounting principles generally accepted in the United States to review our identifiable intangible assets for impairment when events or circumstances indicate that
the carrying value may not be recoverable. As of March 31, 2003, we had approximately $2.7 million of identifiable intangible assets. If we complete acquisitions in the future, we may have additional goodwill and/or identifiable intangibles and,
accordingly, may incur expenses in connection with a write-down of goodwill and identifiable intangible assets due to changes in market conditions as we did in fiscal 2002 when we recorded an impairment charge for goodwill of approximately $3.2
million in connection with acquisitions made prior to fiscal 2002. We must lower our operating expenses and generate sufficient revenue to achieve and sustain profitability.



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



To maintain and grow our revenue,
we must achieve and maintain 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 fewer
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, 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. We have experienced an increase in cancellations and non-renewals in the past and may
continue to experience an increased amount of cancellations and/or non-renewals. We increased the prices for some of our Perspective services during the third quarter of fiscal 2002 and others during the first quarter of fiscal 2003.



We have experienced, and may in the future experience,
cancellations and/or reduction in service. If we 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 revenue could
continue to decline unless we are able to obtain additional customers or sources of revenue, sufficient to replace lost revenue. Continued reductions and/or cancellations could also result in our inability to collect amounts due.



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



Results of operations could vary from quarter to quarter. If revenue falls 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 services;
| | - |  | ----------------------------------------------------------



| |  |  | the amount and timing of any reductions by our customers in their usage of our services;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | our ability to increase the number of web sites we measure and the scope of services we offer for our existing customers in a particular quarter;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract new customers in a quarter, particularly larger customers;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | our ability to successfully introduce new products and services;
| | - |  | ----------------------------------------------------------------



| |  |  | the timing and amount of consulting and support services revenue, which is difficult to predict in any given quarter due to the short-term nature of these
engagements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and amount of operating costs and capital expenditures relating to expansion or contraction of our domestic and international operations infrastructure;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and amount, if any, of impairment charges related to potential write-downs of assets acquired in acquisitions; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and amount, if any, of restructuring costs if we are required to further restructure our operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------



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.



Our operating results could be harmed if sales of our web performance benchmarking services decline.



Sales of our web performance benchmarking services, primarily our Web Site PerspectiveBusiness Edition services, and, to a lesser
degree, Transaction Perspective have generated a majority of our total revenue. Therefore, the success of our business currently depends, and for the immediate future will continue to substantially depend, on sales and renewals of our benchmarking
services. We have recently increased the prices of all of our Perspective services, which could reduce demand for these services. This could result in decreased sales, which would cause our revenue to decline.



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 the measurement and evaluation of the
performance of their web sites is no longer important to their business. Because the inherent complexity of the Internet currently causes significant quality of service problems for e-business companies, the vendors and operators that supply and
manage the underlying infrastructure are continuously seeking to improve the speed, availability, reliability and consistency of the Internet. If these vendors and operators succeed in significantly improving the performance of the Internet, which
would result in corresponding improvements in the performance of companies web sites, demand for our services would likely decline which would harm our operating results.



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



We offer
complex services, which may not perform at the level our customers expect. We have, in the past, occasionally given credits to customers as a result of past problems with our service. 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 revenue, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, increased insurance costs or
increased service costs. In addition, we have acquired, rather than developed internally, some of our services in connection with our acquisitions of companies and businesses. These services may not perform at the level we or our customers expect.



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.



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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 management and web performance testing services, particularly in response to offerings of our competitors. 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 services as quickly as possible. The success of new services depends on several
factors, including proper definition of 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 to these.



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. 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 rapidly 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 such as Mercury Interactive, Gomez Advisors, Segue
Software, WatchFire and a variety of small companies that offer a combination of testing, market research capabilities and data. 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,
an unit of Lucent Technologies, and free services that measure web site availability, including Internet Weather Report, a unit of MIDS Matrix IQ Service. In addition, companies that sell systems management software, such as BMC Software, CompuWare,
CA-Unicenter, HP-Openview, Quest Software, NetIQ, Precise Software (now part of Veritas), 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 technologies. These could include areas such as Internet telephony, wireless networking, and Web Services, and as a result, could face competition from other companies. 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
revenue, and the loss of a major customer could harm our operating results.



Ten customers accounted for approximately 30% of our total revenue for the three months ended March 31, 2003. No single customer accounted for 10% or more of our total revenue for the three or six
months ended March 31, 2003. We cannot be certain that customers that have accounted for significant revenue 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 customers that do not have written contracts may terminate their services at any time with little or no penalty. If we lose a major customer, our revenue could decline.



If we do not complement our direct sales force with relationships with
other companies to help market our web performance management and web performance testing services, we may not be able to grow our business.



To increase sales of our web performance management and web performance testing services worldwide, we
must complement our direct sales force with relationships with companies to help market and sell our services to their customers. If we are unable to maintain our existing marketing and distribution relationships, or fail to enter into additional
relationships, we may have to devote substantially more resources to the direct sale and marketing of our services. We would also lose anticipated revenue from customer referrals and other co-marketing benefits. In fiscal 2002, we terminated
relationships with two of our international resellers and may be required to terminate other reseller relationships in 2003. As a result, we are investing time and resources in evaluating replacements for these resellers and are committing resources
to modify our direct sales effort in the United Kingdom.



Our success depends in part on the ultimate success of these relationships and the ability of these companies to help 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 revenue.



We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our business.



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. Our key employees are not bound by agreements that
could prevent them from terminating their employment at any time. If we fail to attract and retain key employees, our business could be harmed.



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



Consulting and support services revenue represented approximately 10% of total revenue for both the three and six months ended March 31, 2003, respectively. Although our cost of consulting and support
services has not exceeded our consulting revenue in recent periods, in the past it has been greater than consulting revenue. We expect that the costs of consulting and support services as a percentage of consulting and support services revenue will
be greater than the costs of subscription services as a percentage of subscription services revenue. We will also need to successfully market these services to potential customers in order to increase revenue. Each consulting engagement typically
spans a one to three month period, and therefore, it is more difficult for us to predict the amount of consulting and support services revenue recognized in any particular quarter. There are many experienced firms that 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 limited experience in delivering consulting services, we may not succeed in selling these services.



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



Because our business is based on providing web performance management and web performance testing services, the Internet must continue to be used as a means of electronic business, or e-business, and communications. 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 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. If we experience power 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 on a timely basis. We recently completed a generator project to provide our own source of long-term uninterruptible power. However,
we do not currently have a redundant system. Development of a redundant system for computer-network and other services at an alternate site is underway. Various factors could cause us to not be able to ever complete 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, earthquakes and
general business interruptions, the amount of coverage may not be adequate in any particular case. If our operations center is damaged, causing a disruption in our services, this could impair our ability to retain existing customers or attract new
customers.



If our computer infrastructure is not
functioning properly, we may not be able to deliver our services in a timely or accurate manner. We have occasionally experienced outages of our service in the past, with the last one of significance occurring in October 2002. 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. 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 in the past, we had a breach of our security through what appears to be unauthorized access
to certain data belonging to one of our customers, 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.



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



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 cease to function 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.



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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 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 infringement of their intellectual property rights, we could 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, or at all.



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. To date, we have little experience with direct sales outside the United States, and we may not succeed in these efforts. International sales were approximately 6% and 5% of our total revenue for the three and six months ended
March 31, 2003, respectively. We intend to expand the sales of our services by selling directly to certain customers and through resellers to other customers. Therefore, we expect to continue to commit our resources to expand our international sales
and marketing activities. Conducting international operations would subject us to risks we do not face in the United States. These include:



| |  |  | currency exchange rate fluctuations;
| | - |  | ------------------------------------



| |  |  | seasonal fluctuations in purchasing patterns;
| | - |  | ---------------------------------------------



| |  |  | unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------



| |  |  | maintaining and servicing computer hardware in distant locations;
| | - |  | -----------------------------------------------------------------



| |  |  | longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | difficulties in managing and staffing international operations;
| | - |  | ---------------------------------------------------------------



| |  |  | potentially adverse tax consequences, including restrictions on the repatriation of earnings;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the burdens of complying with a wide variety of foreign laws; and
| | - |  | -----------------------------------------------------------------



| |  |  | reduced protection for intellectual property rights in some countries.
| | - |  | ----------------------------------------------------------------------



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



We may face difficulties assimilating our acquisitions 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 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 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 lease a
major portion of the space in our corporate headquarters building or if the fair value of this property decreases further.



We estimate that we will need to lease the unoccupied portion, or approximately 60%, of our headquarters building in San Mateo,
California. 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 building operating costs. In addition, we have previously incurred a charge for the
write-down of the building, and, if the real estate market continues to deteriorate, we may incur charges for future write-downs. Any such charge could harm our results of operations.



Compliance with new rules and regulations concerning corporate governance may be costly and could harm our business.



The Sarbanes-Oxley Act, which was signed
into law in July 2002, mandates, among other things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit
committee members and imposes increased civil and criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations. In addition, The Nasdaq Stock Market, on which our common
stock is listed, is also considering the adoption of additional comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations will increase the scope, complexity and cost of our corporate governance,
reporting and disclosure practices, which could harm our results of operations and divert managements attention from business operations. We also expect these developments to make it more difficult and more expensive for us to obtain director
and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Further, our board members, Chief Executive Officer and Chief Financial Officer could face an increased risk
of personal liability in connection with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified board members and executive officers, which would adversely affect our business.



20



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Threats of war may
negatively impact all aspects of our operations, revenue, costs and stock price.



Threats of war and continued economic weakness could have a substantial adverse impact on sales. If these continue or worsen, our revenue and results of operations may be adversely impacted. Any
escalation in these events or similar future events may disrupt our operations or those of our customers and suppliers. Any of these events could increase volatility in the U.S. and world financial markets, which could harm our stock price. This
could have a significant impact on our operating results, revenue and costs and may result in increased volatility in the market price of our common stock.



We have anti-takeover protections that may delay or prevent a change in control that could benefit our stockholders.



Our amended and restated certificate of incorporation and
bylaws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include:



| |  |  | our stockholders may take action only at a meeting and not by written consent;
| | - |  | ------------------------------------------------------------------------------



| |  |  | our board must be given advance notice regarding stockholder-sponsored proposals for consideration at annual meetings and for stockholder nominations for the
election of directors; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | special meetings of our stockholders may be called only by our Board of Directors, the Chairman of the Board, our Chief Executive Officer or our President, not by
our stockholders.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have also
adopted a stockholder rights plan that may discourage, delay or prevent a change of control and make any future unsolicited acquisition attempt more difficult. Key features of the rights plan include:



| |  |  | the rights will become exercisable only upon the occurrence of certain events specified in the rights plan, including the acquisition of 15% of our outstanding
common stock by a person or group;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | each right entitles the holder, other than an acquiring person, to acquire shares of our common stock at a 50% discount to the then-prevailing market
price; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our Board of Directors may redeem outstanding rights at any time prior to a person becoming an acquiring person, at a price of $0.001 per right and,
prior to such time, the Board may amend the terms of the rights without the approval of the holders of the rights.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, cash
equivalents and short-term investments are invested in short-term debt instruments. If market interest rates were to change immediately and uniformly by ten percent (10%) from levels at March 31, 2003, the interest earned on those cash, cash
equivalents, and short-term investments could increase or decrease by approximately $765,000 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 March 31, 2003. We do not enter into derivative transactions for trading or speculative purposes.



Item 4.    
Controls and Procedures



|(a) |  | Evaluation of Disclosure Controls and Procedures.
|--- |  | -------------------------------------------------



Within the 90 days prior to the date of this report, our Chief Executive Officer and our Chief Financial Officer performed an evaluation,
with the participation of our Disclosure Committee and other members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other
procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within required time
periods. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.



|(b) |  | Changes in Internal Controls
|--- |  | ----------------------------



There were no significant changes in our internal controls or other factors that could significantly affect these controls subsequent to
the date of the evaluation described in paragraph (a) above.



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##### Table of Contents



PART IIOTHER
INFORMATION



Item 1.    
Legal Proceedings



Beginning on August 16, 2001, a number of class action lawsuits were filed in the United States District Court for the Southern District of New York against us, certain of our officers, and the underwriters of our initial public
offering. These lawsuits are essentially identical, and were brought on behalf of those who purchased our securities between September 24, 1999 and August 19, 2001. These complaints allege generally that the underwriters in certain initial public
offerings, including ours, allocated shares in those initial public offerings in unfair or unlawful ways, such as requiring the purchaser to agree to buy in the aftermarket at a higher price or to buy shares in other companies with higher than
normal commissions. The complaint also alleges that we had a duty to disclose the activities of the underwriters in the registration statement relating to our initial public 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 plaintiffs counsel and the individual named defendants counsel have
reached an agreement whereby the individual named defendants have been dismissed from the case, without any payments by us. The case against the underwriters and us continues, however, plaintiffs counsel and the underwriters have each offered
revised settlement proposals to the issuers, but various terms and conditions are still being negotiated. We are still evaluating each proposal. We believe the claims are without merit and intend to defend the actions vigorously should a settlement
not be reached. However, these claims, even if not meritorious, could be expensive to defend and divert managements attention from operating our company.



We are 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 our condensed consolidated financial position, results of operations, or cash flows.



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



| | (a) |  | We held our Annual Meeting of Stockholders on March 25, 2003. Proxies for the meeting were solicited pursuant to Regulation 14A.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | The matters described below were voted on at the Annual Meeting of Stockholders and the number of votes cast with respect to each matter and with respect to the
election of directors were as indicated.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (1) |  | Holders of our common stock voted to re-elect our six directors to serve until his or her successor has been elected and qualified or until his or her earlier
resignation or removal as follows:
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For

Against

Withheld

Non-VoteUmang Gupta

19,265,425

1,818,320



David Cowan

19,712,643

1,371,102



Stratton Sclavos

18,448,365

2,635,380



Deborah Rieman

19,381,921

1,701,824



Mohan Gyani

19,320,425

1,763,320



Geoffrey Penney

19,712,643

1,371,102








| | (2) |  | Holders of our common stock voted to approve amendments to the 1999 Equity Incentive Plan to eliminate the automatic annual increase in the number of shares reserved
under the plan and to reduce the per employee share grant limitation as follows:
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For

Against

Withheld

Non-Vote19,569,017

1,512,667

2,061






| | (3) |  | Holders of our common stock voted to approve an amendment to the 1999 Stock Purchase Plan to eliminate the automatic annual increase in the number of shares reserved
under the plan as follows:
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For

Against

Withheld

Non-Vote21,069,111

12,998

1,636






| | (4) |  | Holders of our common stock voted to ratify the appointment of KPMG LLP as our independent auditors for the fiscal year ending September 30, 2003.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



For

Against

Withheld

Non-Vote20,749,622

321,139

12,984






| | (d) |  | On March 12, 2003, we announced that we had reached an agreement with a stockholder group led by Barington Companies Equity Partners, L.P. to resolve a potential
proxy fight by the Barington Companies group to replace our board with its proposed slate of directors at the 2003 Annual Meeting of Stockholders. As part of the agreement, the Barington Companies group agreed to withdraw its preliminary proxy
statement and its proposed slate of directors.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents



Item
5.    
Other Information



On
May 12, 2003, we announced that we extended the tender offer period for our issuer tender offer from 12:00 midnight, Eastern Time, on May 9, 2003, for an additional 5 business days, until 12:00 Midnight, Eastern Time, on May 16, 2003. Accordingly,
the tender offer and withdrawal rights will expire at 12:00 Midnight, Eastern Time, on Friday, May 16, 2003, unless we further extend the tender offer. At the close of business on May 9, 2003, approximately 5.7 million shares of Keynote common stock
had been validly tendered and not withdrawn pursuant to the tender offer. In addition, during the tender offer period, our management had preliminary discussions with a third party concerning a potential acquisition. These discussions have
terminated. Given the extension of the tender offer, we departed from our policy of not announcing or commenting on potential acquisition transactions. We intend to adhere to this policy in the future and do not intend to update these statements,
whether or not discussions resume with this third party or commence with other parties.



Item 6.    
Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------



The following documents are filed as Exhibits to this Report:



|    
|----
|99.1
|    
|99.2

---

|* |  | As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and
Exchange Commission and are not incorporated by reference in any filing of Keynote Systems, Inc. under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general
incorporation language in such filings.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



Not applicable.



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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 15th day of May
2003.



|KEYNOTE SYSTEMS, INC.
|---------------------
|                     
|By:                  
|                     
|                     
|By:                  
|                     
|                     
|By:                  
|                     



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##### Table of Contents



CERTIFICATION



I, Umang Gupta, certify
that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Keynote Systems, Inc.;
|-- |  | ----------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 15, 2003

|   
|---
|By:
|   



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##### Table of Contents



CERTIFICATION



I, John J. Flavio, certify
that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Keynote Systems, Inc.;
|-- |  | ----------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 15, 2003

|   
|---
|By:
|   



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EXHIBIT
INDEX



|EXHIBIT NO. |  |                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|99.1        |  | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
|           
|99.2        |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

---

|* |  | As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and
Exchange Commission and are not incorporated by reference in any filing of Keynote Systems, Inc. under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general
incorporation language in such filings.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27