##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-27241
 KEYNOTE SYSTEMS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-3226488(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 777 Mariners Island Blvd., San Mateo, CA
    
    94404(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (650) 403-2400
 þ o
  Large accelerated filer o   
    Accelerated filer þ
    Non-accelerated filer o
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Shares outstanding as of August 5, 2008Common Stock, $.001 par value
    
    
    13,899,062




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##### 



KEYNOTE SYSTEMS, INC.
 PagePART IFINANCIAL INFORMATIONItem 1. Unaudited Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    40Item 4. Controls and Procedures
    
    
    40PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49Item 3. Defaults Upon Senior Securities
    
    
    49Item 4. Submission of Matters to a Vote of Security Holders
    
    
    49Item 5. Other Information
    
    
    49Item 6. Exhibits
    
    
    50Signatures
    
    
    51EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### 



PART IFINANCIAL INFORMATION
 
 Item 1. Unaudited Financial Statements.
  
 KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
Index to Unaudited Condensed Consolidated Financial Statements
 PageCondensed Consolidated Balance Sheets as of June 30, 2008 and September 30, 2007
    
    
    4Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2008 and 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2008 and 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7
  3




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 June 30,
    
    
    September 30,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    49,648
    
    
    $
    42,875Short-term investments
    
    
    4,291
    
    
    
    65,060Total cash, cash equivalents, and short-term investments
    
    
    53,939
    
    
    
    107,935Accounts receivable, less allowance for doubtful
accounts and billing adjustment of $291 and $284 as of
June 30, 2008 and September 30, 2007, respectively
    
    
    7,310
    
    
    
    5,988Prepaids, deferred costs and other current assets
    
    
    3,834
    
    
    
    2,703Inventories
    
    
    1,242
    
    
    
    1,059Deferred tax assets
    
    
    4,064
    
    
    
    3,922Total current assets
    
    
    70,389
    
    
    
    121,607Deferred costs and other long-term assets
    
    
    1,765
    
    
    
    1,301Property and equipment, net
    
    
    36,167
    
    
    
    35,480Goodwill
    
    
    69,559
    
    
    
    63,129Identifiable intangible assets, net
    
    
    7,028
    
    
    
    7,963Deferred tax assets
    
    
    604
    
    
    
    Total assets
    
    $
    185,512
    
    
    $
    229,480LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,614
    
    
    $
    2,285Accrued expenses
    
    
    14,863
    
    
    
    11,656Current portion of capital lease obligation
    
    
    16
    
    
    
    24Notes payable
    
    
    287
    
    
    
    Deferred revenue
    
    
    23,086
    
    
    
    19,824Total current liabilities
    
    
    39,866
    
    
    
    33,789Income tax payable
    
    
    1,694
    
    
    
    Long-term portion of capital lease obligation
    
    
    23
    
    
    
    31Deferred rent and other long-term liabilities
    
    
    349
    
    
    
    292Long-term deferred revenue
    
    
    1,083
    
    
    
    2,136Long-term deferred tax liability
    
    
    1,503
    
    
    
    2,347Total liabilities
    
    
    44,518
    
    
    
    38,595Commitments and contingencies  see Note 12Stockholders equity:Common stock
    
    
    14
    
    
    
    18Treasury stock
    
    
    
    
    
    
    (1,151
    )Additional paid-in capital
    
    
    271,558
    
    
    
    325,525Accumulated deficit
    
    
    (142,576
    )
    
    
    (140,188
    )Accumulated other comprehensive income
    
    
    11,998
    
    
    
    6,681Total stockholders equity
    
    
    140,994
    
    
    
    190,885Total liabilities and stockholders equity
    
    $
    185,512
    
    
    $
    229,480
  4




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
2007
    
    
2008
    
    
2007Net revenue:Subscription services
    
    $
    11,441
    
    
    $
    10,881
    
    
    $
    33,405
    
    
    $
    32,121Ratable licenses
    
    
    6,426
    
    
    
    3,443
    
    
    
    15,033
    
    
    
    8,852Professional services
    
    
    2,631
    
    
    
    3,063
    
    
    
    7,414
    
    
    
    8,943Total net revenue
    
    
    20,498
    
    
    
    17,387
    
    
    
    55,852
    
    
    
    49,916Costs and expensesCosts of revenueDirect costs of subscription services
    
    
    2,235
    
    
    
    2,175
    
    
    
    6,571
    
    
    
    6,343Direct costs of ratable licenses
    
    
    1,526
    
    
    
    1,456
    
    
    
    4,240
    
    
    
    3,269Direct costs of professional services
    
    
    1,762
    
    
    
    1,947
    
    
    
    5,361
    
    
    
    6,277Development
    
    
    3,232
    
    
    
    2,950
    
    
    
    9,525
    
    
    
    8,699Operations
    
    
    2,270
    
    
    
    1,853
    
    
    
    6,297
    
    
    
    5,643Amortization of intangible assets  software
    
    
    281
    
    
    
    191
    
    
    
    697
    
    
    
    561Total costs of revenue
    
    
    11,306
    
    
    
    10,572
    
    
    
    32,691
    
    
    
    30,792Sales and marketing
    
    
    6,697
    
    
    
    5,243
    
    
    
    18,993
    
    
    
    14,909General and administrative
    
    
    2,834
    
    
    
    2,490
    
    
    
    7,822
    
    
    
    7,247Excess occupancy income
    
    
    (297
    )
    
    
    (33
    )
    
    
    (887
    )
    
    
    (81
    )Amortization of intangible assets  other
    
    
    568
    
    
    
    522
    
    
    
    1,647
    
    
    
    1,671Total costs and expenses
    
    
    21,108
    
    
    
    18,794
    
    
    
    60,266
    
    
    
    54,538Loss from operations
    
    
    (610
    )
    
    
    (1,407
    )
    
    
    (4,414
    )
    
    
    (4,622
    )Interest income and other, net
    
    
    343
    
    
    
    1,168
    
    
    
    2,374
    
    
    
    3,438Loss before provision for income taxes
    
    
    (267
    )
    
    
    (239
    )
    
    
    (2,040
    )
    
    
    (1,184
    )Provision for income taxes
    
    
    (140
    )
    
    
    (1,294
    )
    
    
    (429
    )
    
    
    (55
    )Net loss
    
    $
    (407
    )
    
    $
    (1,533
    )
    
    $
    (2,469
    )
    
    $
    (1,239
    )Net loss per share:Basic
    
    $
    (0.03
    )
    
    $
    (0.09
    )
    
    $
    (0.15
    )
    
    $
    (0.07
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.09
    )
    
    $
    (0.15
    )
    
    $
    (0.07
    )Shares used in computing basic and diluted net loss per share:Basic
    
    
    13,747
    
    
    
    17,662
    
    
    
    16,039
    
    
    
    17,353Diluted
    
    
    13,747
    
    
    
    17,662
    
    
    
    16,039
    
    
    
    17,353
  5




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##### Table of Contents



KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedJune 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (2,469
    )
    
    $
    (1,239
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    3,808
    
    
    
    3,311Stock-based compensation
    
    
    3,386
    
    
    
    3,051Impairment of short-term investment
    
    
    98
    
    
    
    Charges to bad debt and billing adjustment reserves
    
    
    189
    
    
    
    196Accretion of debt investment discount
    
    
    (423
    )
    
    
    (983
    )Amortization of identifiable intangible assets
    
    
    2,344
    
    
    
    2,232Deferred tax provision
    
    
    
    
    
    
    175Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,253
    )
    
    
    826Inventories
    
    
    (55
    )
    
    
    (349
    )Prepaids, deferred costs and other assets
    
    
    (457
    )
    
    
    (1,049
    )Accounts payable and accrued expenses
    
    
    (1,246
    )
    
    
    (1,718
    )Deferred revenue
    
    
    457
    
    
    
    12,957Net cash provided by operating activities
    
    
    4,379
    
    
    
    17,410Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,987
    )
    
    
    (4,160
    )Purchase of
businesses and assets, net of cash acquired of $19 in 2008
    
    
    (640
    )
    
    
    (307
    )Earnout payment for acquisition of business
    
    
    
    
    
    
    (10,587
    )Sales of short-term investments
    
    
    84,260
    
    
    
    39,226Purchases of short-term investments
    
    
    (23,101
    )
    
    
    (57,323
    )Net cash provided by (used in) investing activities
    
    
    56,532
    
    
    
    (33,151
    )Cash flows from financing activities:Repayment of credit facilities
    
    
    (21
    )
    
    
    (27
    )Proceeds from issuance of common stock and exercise of stock options
    
    
    3,857
    
    
    
    8,497Repurchase of outstanding common stock
    
    
    (60,070
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (56,234
    )
    
    
    8,470Effect of exchange rate changes on cash and cash equivalents
    
    
    2,096
    
    
    
    320Net increase (decrease) in cash and cash equivalents
    
    
    6,773
    
    
    
    (6,951
    )Cash and cash equivalents at beginning of the period
    
    
    42,875
    
    
    
    45,662Cash and cash equivalents at end of the period
    
    $
    49,648
    
    
    $
    38,711Supplemental cash flow disclosure:Income taxes paid (net of refunds)
    
    $
    1,068
    
    
    $
    518Noncash operating and investing activities:Acquisition of property, equipment and software on account
    
    $
    372
    
    
    $
    13Retirement of treasury stock
    
    $
    61,073
    
    
    $
    21,150
  6




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##### Table of Contents



KEYNOTE
SYSTEMS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (1) Basis of Presentation
     Recently Adopted Accounting Pronouncements
   7




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##### Table of Contents



Stock Based Compensation
      Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Stock Option Under Equity
Incentive Plan:Volatility
    
    
    35.3 - 36.4
    %
    
    
    28.9 - 30.0
    %
    
    
    30.0 - 36.4
    %
    
    
    25.7 - 30.5
    %Risk free interest rate
    
    
    2.3 - 3.3
    %
    
    
    4.5 - 5.1
    %
    
    
    2.3 - 4.0
    %
    
    
    4.5- 5.1
    %Expected life (in years)
    
    
    3.8 - 5.4
    
    
    
    3.8
    
    
    
    3.4 - 5.5
    
    
    
    2.4 - 4.9Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee Stock Purchase
Plan:Volatility
    
    
    40.1
    %
    
    
    25.0
    %
    
    
    34.9
    %
    
    
    26.0
    %Risk free interest rate
    
    
    2.1
    %
    
    
    5.1
    %
    
    
    3.0
    %
    
    
    5.1
    %Expected life (in years)
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 8




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##### Table of Contents



AverageWeighted
    
    Remaining
    
    AggregateAverage
    
    Contractual
    
    IntrinsicShares
    
    Exercise Price
    
    Term (years)
    
    ValueOutstanding at September 30, 2007
    
    
    5,723
    
    
    $
    14.21
    
    
    
    6.8
    
    
    $
    15,482Granted
    
    
    730
    
    
    $
    13.61Exercised
    
    
    (388
    )
    
    $
    8.38Forfeited or canceled
    
    
    (67
    )
    
    $
    12.70Expired
    
    
    (19
    )
    
    $
    12.26Outstanding at June 30, 2008
    
    
    5,979
    
    
    $
    14.53
    
    
    
    6.6
    
    
    $
    9,951Exercisable at June 30, 2008
    
    
    3,906
    
    
    $
    15.73
    
    
    
    5.5
    
    
    $
    7,643
   Excess Occupancy Income
  Fiscal years:2008 (remaining three months)
    
    $
    6732009
    
    
    2,2832010
    
    
    1,8052011
    
    
    1,6862012
    
    
    1,408Thereafter
    
    
    306Total future minimum rents receivable
    
    $
    8,161
 (2) Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists.The Company considers a
customer signed quote, contract, or equivalent document to be evidence
of an arrangement.
    
    Delivery of the product or service. For subscription services,
delivery is considered to occur when the customer has been provided
with access to the subscription services. The Companys subscription
services are generally delivered on a consistent basis over the period
of the subscription. For professional services, delivery is considered
to occur when the services or milestones are completed. For ratable
licenses, delivery occurs when all elements of the arrangement have
either been delivered or accepted, if acceptance language exists.
 9




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##### Table of Contents




    
    Fee is fixed and determinable.The Company considers the fee to be
fixed or determinable if the fee is not subject to refund or
adjustment and payment terms are standard.
    
    Collection is deemed reasonably assured.Collection is deemed
reasonably assured if it is expected that the customer will be able to
pay amounts under the arrangement as payments become due. If it is
determined that collection is not reasonably assured, then revenue is
deferred and recognized upon cash collection.
  Subscription Services Revenue:
     Ratable Licenses Revenue:
   10




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##### Table of Contents



Professional Services Revenue:
  Deferred Revenue:
 Deferred Costs:
 (3) Comprehensive Income (Loss) and Foreign Currency Translation
  11




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (407
    )
    
    $
    (1,533
    )
    
    $
    (2,469
    )
    
    $
    (1,239
    )Net unrealized gain (loss) on
available-for-sale investments
    
    
    (36
    )
    
    
    7
    
    
    
    18
    
    
    
    120Foreign currency translation gain (loss)
    
    
    (119
    )
    
    
    586
    
    
    
    5,299
    
    
    
    2,264Comprehensive income (loss)
    
    $
    (562
    )
    
    $
    (940
    )
    
    $
    2,848
    
    
    $
    1,145
  (4) Financial Instruments and Concentration of Risk
    (5) Cash, Cash Equivalents, and Short-Term Investments
   12




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    36,208
    
    
    $
    
    
    
    $
    
    
    
    $
    36,208Money market mutual funds
    
    
    13,440
    
    
    
    
    
    
    
    
    
    
    
    13,440Total
    
    $
    49,648
    
    
    $
    
    
    
    $
    
    
    
    $
    49,648
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCorporate bonds and commercial paper
    
    $
    4,281
    
    
    $
    10
    
    
    $
    
    
    
    $
    4,291Total
    
    $
    4,281
    
    
    $
    10
    
    
    $
    
    
    
    $
    4,291
  EstimatedAmortized
    
    
    MarketCost
    
    
    ValueMature in one year or less
    
    $
    4,281
    
    
    $
    4,291
  (6) Inventories
  (7) Goodwill and Identifiable Intangible Assets
 :
 Balance at September 30, 2007
    
    $
    63,129Goodwill from the acquisition of Zandan S.A.
    
    
    2,320Translation adjustments
    
    
    4,110Balance at June 30, 2008
    
    $
    69,559
  13




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##### Table of Contents



Technology
    
    
    TechnologyBased-
    
    
    Based-
    
    
    CustomerSoftware
    
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    TotalAs of June 30, 2008:Gross carrying value
    
    $
    6,391
    
    
    $
    12,615
    
    
    $
    9,096
    
    
    $
    1,348
    
    
    $
    65
    
    
    $
    195
    
    
    $
    29,710Accumulated amortization
    
    
    (2,457
    )
    
    
    (11,689
    )
    
    
    (7,666
    )
    
    
    (718
    )
    
    
    (38
    )
    
    
    (114
    )
    
    
    (22,682
    )Net carrying value at
June 30, 2008
    
    $
    3,934
    
    
    $
    926
    
    
    $
    1,430
    
    
    $
    630
    
    
    $
    27
    
    
    $
    81
    
    
    $
    7,028As of September 30, 2007:Gross carrying value
    
    $
    4,449
    
    
    $
    11,845
    
    
    $
    9,845
    
    
    $
    1,178
    
    
    $
    93
    
    
    $
    278
    
    
    $
    27,688Accumulated amortization
    
    
    (1,238
    )
    
    
    (11,072
    )
    
    
    (6,803
    )
    
    
    (509
    )
    
    
    (26
    )
    
    
    (77
    )
    
    
    (19,725
    )Net carrying value at
September 30, 2007
    
    $
    3,211
    
    
    $
    773
    
    
    $
    3,042
    
    
    $
    669
    
    
    $
    67
    
    
    $
    201
    
    
    $
    7,963
   TotalFiscal years:2008 (Remaining three months)
    
    $
    8142009
    
    
    2,3852010
    
    
    1,7462011
    
    
    1,4982012
    
    
    585Total
    
    $
    7,028Weighted-average remaining useful lives as of June
30, 2008 (years)
    
    
    3.2
 (8) Net Loss Per Share
   (9) Acquisitions
  Cash consideration
    
    $
    1,455Direct transaction costs
    
    
    543Total purchase price
    
    $
    1,998
 14




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##### Table of Contents




   Cash and cash equivalents
    
    $
    19Accounts receivable
    
    
    148Deferred tax assets
    
    
    604Other assets
    
    
    732Property, plant, equipment and software
    
    
    81Intangible assets:Technology-based intangibles (amortization period of 2 years)
    
    
    778Customer-based intangibles (amortization period of 3 years)
    
    
    302Goodwill
    
    
    2,320Total assets acquired
    
    
    4,984Accounts payable and accrued liabilities
    
    
    (1,834
    )Accrued
compensation
    
    
    (702
    )Deferred revenue
    
    
    (163
    )Notes payable
    
    
    (287
    )Total purchase price, including direct acquisition costs
    
    $
    1,998
  Nine Months Ended
    
    Nine Months EndedJune 30, 2008
    
    June 30, 2007Revenue
    
    $
    56,614
    
    
    $
    51,411Net loss
    
    $
    (4,554
    )
    
    $
    (4,510
    )Net loss per share-basic and diluted
    
    $
    (0.28
    )
    
    $
    (0.26
    )Shares used in pro forma per share computation-basic and diluted
    
    
    16,039
    
    
    
    17,353
  
 (10) Income Taxes
  15




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##### Table of Contents



(11) Notes Payable
  
 (12) Commitments and Contingencies
 (A) Leases
  Operating
    
    
    CapitalLeases
    
    
    LeasesFiscal year:2008 (remaining three months)
    
    $
    287
    
    
    $
    62009
    
    
    959
    
    
    
    192010
    
    
    830
    
    
    
    172011
    
    
    623
    
    
    
    2012
    
    
    446
    
    
    
    Thereafter
    
    
    913
    
    
    
    Total minimum lease payments
    
    $
    4,058
    
    
    
    42Less amounts representing interest
    
    
    
    
    
    
    (3
    )Present value of minimum lease payments
    
    
    
    
    
    
    39Less current portion of capital lease obligation
    
    
    
    
    
    
    (16
    )Long-term portion of capital lease obligation
    
    
    
    
    
    $
    23
 16




---



##### Table of Contents



(B) Commitments
 ,
 (C) Legal Proceedings
 In re Initial Public Offering Securities Litigation
  Simmonds v. JPMorgan Chase & Co.,
et al.
  17




---



##### Table of Contents



(D) Warranties
  (E) Indemnification
  (13) Stock Repurchase Program
      (14) Geographic and Segment Information
  18




---



##### Table of Contents



Subscription
    
    Ratable
    
    ProfessionalServices
    
    Licenses
    
    ServicesInternet Test and Measurement:Application Perspective
    
    
    XDiagnostic Services
    
    
    XEnterprise Adapters
    
    
    XLoadPro
    
    
    X
    
    
    
    
    
    
    
    XNetMechanic
    
    
    XProfessional Services
    
    
    
    
    
    
    
    
    
    
    XRed Alert
    
    
    XStreaming Perspective
    
    
    XTest Perspective
    
    
    XTransaction Perspective
    
    
    XWebIntegrity
    
    
    XWeb Site Perspective
    
    
    XVoice Perspective
    
    
    XPerformance Scoreboard
    
    
    XMobile Test and Measurement:Mobile Device Perspective
    
    
    XMobile Application Perspective
    
    
    XSIGOS SITE
    
    
    
    
    
    
    XSIGOS Global Roamer
    
    
    XCustomer Experience Management:WebEffective
    
    
    X
    
    
    
    
    
    
    
    XFinancial Services Scorecards
    
    
    X
    
    
    
    
    
    
    
    X
  Three Months Ended June 30,2008
    
    
    2007Internet Subscriptions
    
    $
    8,908
    
    
    $
    9,129Internet Engagements
    
    
    1,374
    
    
    
    1,720Total Internet net revenue
    
    
    10,282
    
    
    
    10,849Mobile Subscription
    
    
    1,912
    
    
    
    1,158Mobile Ratable Licenses
    
    
    6,426
    
    
    
    3,443Total Mobile net revenue
    
    
    8,338
    
    
    
    4,601CEM Subscriptions
    
    
    621
    
    
    
    594CEM Engagements
    
    
    1,257
    
    
    
    1,343Total CEM net revenue
    
    
    1,878
    
    
    
    1,937Total net revenue
    
    $
    20,498
    
    
    $
    17,387
 Nine Months Ended June 30,2008
    
    
    2007Internet Subscriptions
    
    $
    26,666
    
    
    $
    27,053Internet Engagements
    
    
    3,989
    
    
    
    4,550Total Internet net revenue
    
    
    30,655
    
    
    
    31,603Mobile Subscription
    
    
    4,906
    
    
    
    3,268Mobile Ratable Licenses
    
    
    15,033
    
    
    
    8,852Total Mobile net revenue
    
    
    19,939
    
    
    
    12,120CEM Subscriptions
    
    
    1,833
    
    
    
    1,700CEM Engagements
    
    
    3,425
    
    
    
    4,393Total CEM net revenue
    
    
    5,258
    
    
    
    6,193Total net revenue
    
    $
    55,852
    
    
    $
    49,916
 19




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:United States
    
    $
    11,241
    
    
    $
    12,136
    
    
    $
    33,023
    
    
    $
    35,588Europe*
    
    
    7,844
    
    
    
    4,113
    
    
    
    18,955
    
    
    
    10,673Other*
    
    
    1,413
    
    
    
    1,138
    
    
    
    3,874
    
    
    
    3,655$
    20,498
    
    
    $
    17,387
    
    
    $
    55,852
    
    
    $
    49,916
 
 *
    
    No individual country represents more than 10% of total revenue. June 30,
    
    
    September 30,2008
    
    
    2007Long Lived Assets:United States
    
    $
    34,873
    
    
    $
    34,543Germany
    
    
    1,201
    
    
    
    905Other
    
    
    93
    
    
    
    32$
    36,167
    
    
    $
    35,480
   (15) Recently Issued Accounting Pronouncements
    20




---



##### Table of Contents



21




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##### Table of Contents



Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations
   Overview
    22




---



##### Table of Contents



Critical Accounting Policies and Estimates
  
    
    Revenue recognition
    
    Allowance for doubtful accounts and billing allowance
    
    Inventories and inventory valuation
    
    Allocation of purchase price for business combinations
    
    Goodwill, identifiable intangible assets, and long-lived assets
    
    Stock-based compensation
    
    Income taxes, deferred income taxes and deferred income tax liabilities
 23




---



##### Table of Contents



Revenue Recognition
  
    
    Persuasive evidence of an arrangement,
    
    Delivery of the product or service,
    
    Fee is fixed and determinable and
    
    Collection is deemed reasonably assured.
   Subscription Services Revenue :
     Ratable Licenses Revenue :
 24




---



##### Table of Contents



Professional Services Revenue:
  Deferred Revenue:
 Domestic
    
    
    International
    
    
    TotalNet deferred revenue
    
    $
    6,300
    
    
    $
    17,869
    
    
    $
    24,169Addback: unpaid deferred revenue
    
    
    2,288
    
    
    
    3,054
    
    
    
    5,342Gross deferred revenue at June 30, 2008
    
    $
    8,588
    
    
    $
    20,923
    
    
    $
    29,511Net deferred revenue
    
    $
    7,511
    
    
    $
    14,449
    
    
    $
    21,960Addback: unpaid deferred revenue
    
    
    3,085
    
    
    
    1,564
    
    
    
    4,649Gross deferred revenue at September 30, 2007
    
    $
    10,596
    
    
    $
    16,013
    
    
    $
    26,609
   Allowance for Doubtful Accounts and Billing Allowance
  25




---



##### Table of Contents



Inventories and Inventory Valuation
    Allocation of Purchase Price for Business Combinations
  Goodwill, Identifiable Intangible Assets and Long-Lived Assets
   
    
    significant changes in the manner of our use of the acquired assets or the strategy of our overall business;
 26




---



##### Table of Contents




    
    significant negative industry or economic trends;
    
    significant decline in our stock price for a sustained period; and
    
    our market capitalization relative to net book value.
    Stock-Based Compensation
  Income Taxes, Deferred Income Tax Assets and Deferred Income Tax Liabilities
     27




---



##### Table of Contents



28




---



##### Table of Contents



Results of Operations
  Three months ended
    
    
    Nine months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenue:Subscription services
    
    
    55.8
    %
    
    
    62.6
    %
    
    
    59.8
    %
    
    
    64.4
    %Ratable licenses
    
    
    31.4
    %
    
    
    19.8
    %
    
    
    26.9
    %
    
    
    17.7
    %Professional services
    
    
    12.8
    %
    
    
    17.6
    %
    
    
    13.3
    %
    
    
    17.9
    %Total revenue, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Costs of revenue:Direct costs of subscription services
    
    
    10.9
    %
    
    
    12.5
    %
    
    
    11.8
    %
    
    
    12.7
    %Direct costs of ratable licenses
    
    
    7.4
    %
    
    
    8.4
    %
    
    
    7.6
    %
    
    
    6.5
    %Direct costs of professional services
    
    
    8.6
    %
    
    
    11.2
    %
    
    
    9.6
    %
    
    
    12.6
    %Development
    
    
    15.8
    %
    
    
    17.0
    %
    
    
    17.1
    %
    
    
    17.4
    %Operations
    
    
    11.1
    %
    
    
    10.7
    %
    
    
    11.3
    %
    
    
    11.3
    %Amortization of intangible assets  software
    
    
    1.4
    %
    
    
    1.1
    %
    
    
    1.2
    %
    
    
    1.1
    %Sales and marketing
    
    
    32.7
    %
    
    
    30.2
    %
    
    
    34.0
    %
    
    
    29.9
    %General and administrative
    
    
    13.8
    %
    
    
    14.3
    %
    
    
    14.0
    %
    
    
    14.5
    %Excess occupancy income
    
    
    (1.4
    %)
    
    
    (0.2
    %)
    
    
    (1.6
    %)
    
    
    (0.2
    %)Amortization of intangible assets  other
    
    
    2.8
    %
    
    
    3.0
    %
    
    
    2.9
    %
    
    
    3.3
    %Total costs and expenses
    
    
    103.1
    %
    
    
    108.2
    %
    
    
    107.9
    %
    
    
    109.1
    %Loss from operations
    
    
    (3.1
    %)
    
    
    (8.2
    %)
    
    
    (7.9
    %)
    
    
    (9.1
    %)Interest income and other, net
    
    
    1.7
    %
    
    
    6.7
    %
    
    
    4.3
    %
    
    
    6.9
    %Loss before provision for income taxes
    
    
    (1.4
    %)
    
    
    (1.5
    %)
    
    
    (3.6
    %)
    
    
    (2.2
    %)Provision for income taxes
    
    
    (0.7
    %)
    
    
    (7.4
    %)
    
    
    (0.8
    %)
    
    
    (0.1
    %)Net loss
    
    
    (2.1
    %)
    
    
    (8.9
    %)
    
    
    (4.4
    %)
    
    
    (2.3
    %)
 Comparison of the Three and Nine Months Ended June 30, 2008 and 2007
 Revenue
 2008
    
    
    2007
    
    
    % Change(in thousands)For the three months ended June 30Subscription services
    
    $
    11,441
    
    
    $
    10,881
    
    
    
    5
    %Ratable licenses
    
    
    6,426
    
    
    
    3,443
    
    
    
    87
    %Professional services
    
    
    2,631
    
    
    
    3,063
    
    
    
    (14
    )%Total revenue, net
    
    $
    20,498
    
    
    $
    17,387
    
    
    
    18
    %
 2008
    
    
    2007
    
    

% ChangeFor the nine months ended June 30Subscription services
    
    $
    33,405
    
    
    $
    32,121
    
    
    
    4
    %Ratable licenses
    
    
    15,033
    
    
    
    8,852
    
    
    
    70
    %Professional services
    
    
    7,414
    
    
    
    8,943
    
    
    
    (17
    )%Total revenue, net
    
    $
    55,852
    
    
    $
    49,916
    
    
    
    12
    %
 29




---



##### Table of Contents



Subscription Services
  Ratable licenses.
 Professional Services
   Subscription
    
    Ratable
    
    ProfessionalServices
    
    Licenses
    
    ServicesInternet Test and Measurement:Application Perspective
    
    
    XDiagnostic Services
    
    
    XEnterprise Adapters
    
    
    XLoadPro
    
    
    X
    
    
    
    
    
    
    
    XNetMechanic
    
    
    XProfessional Services
    
    
    
    
    
    
    
    
    
    
    XRed Alert
    
    
    XStreaming Perspective
    
    
    XTest Perspective
    
    
    XTransaction Perspective
    
    
    XWebIntegrity
    
    
    XWeb Site Perspective
    
    
    XVoice Perspective
    
    
    XPerformance Scoreboard
    
    
    XMobile Test and Measurement:Mobile Device Perspective
    
    
    XMobile Application Perspective
    
    
    XSIGOS SITE
    
    
    
    
    
    
    XSIGOS Global Roamer
    
    
    XCustomer Experience Management:WebEffective
    
    
    X
    
    
    
    
    
    
    
    XFinancial Services Scorecards
    
    
    X
    
    
    
    
    
    
    
    X
 30




---



##### Table of Contents



%2008
    
    
    2007
    
    
    change(In thousands)For the Three Months Ended June 30:Internet Subscriptions
    
    $
    8,908
    
    
    $
    9,129
    
    
    
    (2
    )%Internet Engagements
    
    
    1,374
    
    
    
    1,720
    
    
    
    (20
    )%Total Internet net revenue
    
    
    10,282
    
    
    
    10,849
    
    
    
    (5
    )%Mobile Subscriptions
    
    
    1,912
    
    
    
    1,158
    
    
    
    65
    %Mobile Ratable Licenses
    
    
    6,426
    
    
    
    3,443
    
    
    
    87
    %Total Mobile net revenue
    
    
    8,338
    
    
    
    4,601
    
    
    
    81
    %CEM Subscriptions
    
    
    621
    
    
    
    594
    
    
    
    5
    %CEM Engagements
    
    
    1,257
    
    
    
    1,343
    
    
    
    (6
    )%Total CEM net revenue
    
    
    1,878
    
    
    
    1,937
    
    
    
    (3
    )%Total net revenue
    
    $
    20,498
    
    
    $
    17,387
    
    
    
    18
    %For the Nine Months Ended June 30:Internet Subscriptions
    
    $
    26,666
    
    
    $
    27,053
    
    
    
    (1
    )%Internet Engagements
    
    
    3,989
    
    
    
    4,550
    
    
    
    (12
    )%Total Internet net revenue
    
    
    30,655
    
    
    
    31,603
    
    
    
    (3
    )%Mobile Subscriptions
    
    
    4,906
    
    
    
    3,268
    
    
    
    50
    %Mobile Ratable Licenses
    
    
    15,033
    
    
    
    8,852
    
    
    
    70
    %Total Mobile net revenue
    
    
    19,939
    
    
    
    12,120
    
    
    
    65
    %CEM Subscriptions
    
    
    1,833
    
    
    
    1,800
    
    
    
    2
    %CEM Engagements
    
    
    3,425
    
    
    
    4,393
    
    
    
    (22
    )%Total CEM net revenue
    
    
    5,258
    
    
    
    6,193
    
    
    
    (15
    )%Total net revenue
    
    $
    55,852
    
    
    $
    49,916
    
    
    
    12
    %
  31




---



##### Table of Contents



Expenses:
 Direct Costs of Subscription Services, Ratable Licenses and Professional Services
 2008
    
    2007
    
    % Change(In thousands)For the three months ended June 30:Direct costs of subscription services
    
    $
    2,235
    
    
    $
    2,175
    
    
    
    3
    %Direct costs of ratable licenses
    
    $
    1,526
    
    
    $
    1,456
    
    
    
    5
    %Direct costs of professional services
    
    $
    1,762
    
    
    $
    1,947
    
    
    
    (10)
    %For the nine months ended June 30:Direct costs of subscription services
    
    $
    6,571
    
    
    $
    6,343
    
    
    
    4
    %Direct costs of ratable licenses
    
    $
    4,240
    
    
    $
    3,269
    
    
    
    30
    %Direct costs of professional services
    
    $
    5,361
    
    
    $
    6,277
    
    
    
    (15)
    %
 Direct Costs of Subscription Service
  32




---



##### Table of Contents



Direct Costs of Ratable Licenses.
   Direct Costs of Professional Services.
   Development
 2008
    
    2007
    
    % Change(In thousands)For the three months ended June 30:Development
    
    $
    3,232
    
    
    $
    2,950
    
    
    
    10
    %For the nine months ended June 30:Development
    
    $
    9,525
    
    
    $
    8,699
    
    
    
    9
    %
  33




---



##### Table of Contents



Operations
 2008
    
    2007
    
    % Change(In thousands)For the three months ended June 30:Operations
    
    $
    2,270
    
    
    $
    1,853
    
    
    
    23
    %For the nine months ended June 30:Operations
    
    $
    6,297
    
    
    $
    5,643
    
    
    
    12
    %
  Sales and Marketing
 2008
    
    2007
    
    % Change(In thousands)For the three months ended June 30:Sales and marketing
    
    $
    6,697
    
    
    $
    5,243
    
    
    
    28
    %For the nine months ended June 30:Sales and marketing
    
    $
    18,993
    
    
    $
    14,909
    
    
    
    27
    %
   General and Administrative
 2008
    
    2007
    
    % Change(In thousands)For the three months ended June 30:General and administrative
    
    $
    2,834
    
    
    $
    2,490
    
    
    
    14
    %For the nine months ended June 30:General and administrative
    
    $
    7,822
    
    
    $
    7,247
    
    
    
    8
    %
 34




---



##### Table of Contents



Excess Occupancy Income
 2008
    
    
    2007
    
    
    % Change(In thousands)For the three months ended June 30:Rental income
    
    $
    (633
    )
    
    $
    (277
    )
    
    
    129
    %Rental and other expenses
    
    
    336
    
    
    
    244
    
    
    
    38
    %Excess occupancy income
    
    $
    (297
    )
    
    $
    (33
    )
    
    
    800
    %For the nine months ended June 30:Rental income
    
    $
    (1,882
    )
    
    $
    (857
    )
    
    
    120
    %Rental and other expenses
    
    
    995
    
    
    
    776
    
    
    
    28
    %Excess occupancy income
    
    $
    (887
    )
    
    $
    (81
    )
    
    
    995
    %
  Amortization of Identifiable Intangible Assets
 2008
    
    
    2007
    
    
    % Change(In thousands)For the three months ended June 30:Amortization of identifiable intangible assets  software
    
    $
    281
    
    
    $
    191
    
    
    
    47
    %Amortization of identifiable intangible assets  other
    
    
    568
    
    
    
    522
    
    
    
    9
    %Total amortization of identifiable intangible assets
    
    $
    849
    
    
    $
    713
    
    
    
    19
    %For the nine months ended June 30:Amortization of identifiable intangible assets  software
    
    $
    697
    
    
    $
    561
    
    
    
    24
    %Amortization of identifiable intangible assets  other
    
    
    1,647
    
    
    
    1,671
    
    
    
    (1)
    %Amortization of identifiable intangible assets
    
    $
    2,344
    
    
    $
    2,232
    
    
    
    5
    %
 35




---



##### Table of Contents



Interest Income and Interest and Other Expenses
 2008
    
    
    2007
    
    
    % Change(In thousands)For the three months ended June 30:Interest income
    
    $
    463
    
    
    $
    1,170
    
    
    
    (60
    )%Interest expense and other
    
    
    (120
    )
    
    
    (2
    )
    
    
    5900
    %Interest income, interest and other expenses, net
    
    $
    343
    
    
    $
    1,168
    
    
    
    (71
    )%For the nine months ended June 30:Interest income
    
    $
    2,555
    
    
    $
    3,425
    
    
    
    (25
    )%Interest expense and other
    
    
    (181
    )
    
    
    13
    
    
    
    1,492
    %Interest income, interest and other expenses, net
    
    $
    2,374
    
    
    $
    3,438
    
    
    
    (31
    )%
  Provision for Income Taxes
 2008
    
    2007
    
    % Change(In thousands)For the three months ended June 30:Provision for income taxes
    
    $
    (140
    )
    
    $
    (1,294
    )
    
    
    (89
    )%For the nine months ended June 30:Provision for income taxes
    
    $
    (429
    )
    
    $
    (55
    )
    
    
    680
    %
  36




---



##### Table of Contents



Stock-based Compensation Expense
  Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Direct costs of ratable licenses
    
    $
    68
    
    
    $
    64
    
    
    $
    183
    
    
    $
    145Direct costs of professional services
    
    
    108
    
    
    
    99
    
    
    
    347
    
    
    
    363Development
    
    
    237
    
    
    
    265
    
    
    
    741
    
    
    
    684Operations
    
    
    158
    
    
    
    148
    
    
    
    481
    
    
    
    438Sales and marketing
    
    
    393
    
    
    
    356
    
    
    
    1,133
    
    
    
    952General and administrative
    
    
    162
    
    
    
    195
    
    
    
    501
    
    
    
    469Stock-based compensation expense
related to stock options and
employee stock purchase plans
    
    $
    1,126
    
    
    $
    1,127
    
    
    $
    3,386
    
    
    $
    3,051
 Liquidity and Capital Resources
 June 30,
    
    September 30,2008
    
    2007(In thousands)Cash, cash equivalents and short-term investments
    
    $
    53,939
    
    
    $
    107,935Accounts receivable, net
    
    $
    7,310
    
    
    $
    5,988Working capital
    
    $
    30,523
    
    
    $
    87,818Days sales in accounts receivable (DSO) (a)
    
    
    32
    
    
    
    35
 
 (a)
    
    DSO is calculated as: ((ending net accounts receivable) / net revenue for the three month period)
multiplied by number of days in the periodThe DSOs presented in the table above reflect the three months ended June 30, 2008 and September 30, 2007. 2008
    
    2007(In thousands)For the nine months ended June 30Cash provided by operating activities
    
    $
    4,379
    
    
    $
    17,410Cash provided by (used in) investing activities
    
    $
    56,532
    
    
    $
    (33,151
    )Cash provided by (used in) financing activities
    
    $
    (56,234
    )
    
    $
    8,470
 Cash, cash equivalents and short-term investments
  Cash provided by operating activities
  37




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Cash provided by investing activities
  Cash used in financing activities
   Commitments
   Off Balance Sheet Arrangements
  38




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Recently Issued Accounting Pronouncements
        39




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Item 3. Quantitative and Qualitative Disclosures About Market Risks.
 Interest Rate Sensitivity.
 Foreign Currency Fluctuations and Derivative Transactions.
 
 Item 4. Controls and Procedures
 (a) Changes in Internal Controls
  (b) Evaluation of Disclosure Controls and Procedures
  
 PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
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In re Initial
Public Offering Securities Litigation
  Simmonds v. JPMorgan Chase & Co.,
et al.
  
 Item 1A.Risk Factors
 We have incurred in the past and may in the future continue to incur losses, and we may not achieve
and thereafter sustain profitability.
  The success of our business depends on customers renewing their subscriptions for our services and
purchasing additional services as well as obtaining new customers.
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Our quarterly financial results are subject to significant fluctuations, and if our future results
are below the expectations of investors, the price of our common stock may decline.
  
    
    The rate of new and renewed subscriptions to our services;
    
    The effect of any unforeseen or unplanned operating expenses;
    
    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 and retain new customers in a quarter, particularly larger
enterprise customers;
    
    The timing and service period of orders received during a quarter;
    
    Our ability to successfully introduce new products and services to offset any
reductions in revenue from services that are not as widely used or that are
experiencing decreased demand such as our CEM services;
    
    The level of sales of our MTM products and services and timing of customer acceptance
during the period;
    
    The timing and amount of professional services revenue, which is difficult to predict
because this is dependent on the number of professional services engagements in any
given period, the size of these engagements, and our ability to continue our existing
engagements and secure new engagements from customers;
    
    Our ability to increase sales of each of our three service lines;
    
    The timing and amount of operating costs, including sales and marketing, investments
and capital expenditures relating to changes of our domestic and international
operations infrastructure; and
    
    The timing and amount, if any, of impairment charges related to potential write-down of
acquired assets in acquisitions or charges related to the amortization of intangible
assets from acquisitions.
    
    Future accounting pronouncements and changes in accounting policies;
    
    Future macroeconomic conditions in our domestic and international markets, as well as
the level of discretionary IT spending generally.
  Our operating results could be harmed if sales of ITM subscriptions decline.
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If our MTM services do not continue to grow as rapidly, we may not be able to grow our revenue and
our profitability could be harmed.
  Improvements to the infrastructure of the Internet and mobile networks could reduce or eliminate
demand for our ITM and MTM services.
  If we do not continually improve our services in response to technological changes, including
changes to the Internet and mobile networks, we may encounter difficulties retaining existing
customers and attracting new customers.
   We face competition that could make it difficult for us to acquire and retain customers.
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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.
  Our investment in sales and marketing may not yield increased customers or revenues.
  Our business could be harmed by adverse economic conditions or reduced spending on information
technology.
  If we do not complement our direct sales force with relationships with other companies to help
market our services, we may not be able to grow our business.
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We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our
business.
  If the market does not accept our professional services, our results of operations could be harmed.
  The success of our business depends on the continued use of the Internet and mobile networks by
business and consumers for e-business and communications and if usage of these networks declines,
our operating results and working capital would be harmed.
  
    
    security concerns including the potential for fraud or theft of stored data and information
communicated over the Internet and mobile networks;
    
    inconsistent quality of service, including outages of popular Web sites and mobile networks;
    
    delay in the development or adoption of new standards;
    
    inability to integrate business applications with the Internet; and
    
    the need to operate with multiple and frequently incompatible products.
 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.
   A disruption to our network infrastructure could impair our ability to serve and retain existing
customers or attract new customers
  45




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Our measurement computers and mobile devices 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.
  Others might bring infringement claims which could harm our business.
  Our business which includes our operating results and financial conditions will be susceptible to
additional risks associated with international operations.
  
    
    currency exchange rate fluctuations;
    
    seasonal fluctuations in purchasing patterns;
    
    unexpected changes in regulatory requirements;
    
    maintaining and servicing computer hardware in distant locations;
    
    costs associated with repatriating funds from outside the U.S.;
    
    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;
 46




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##### Table of Contents




    
    the burdens of complying with a wide variety of foreign laws;
    
    reduced protection for intellectual property rights in some countries; and
    
    political or economic instability, war or terrorism in the countries where we are doing
business.
  Industry consolidation may lead to stronger competition and may harm our operating results.
  We failed to maintain the adequacy of our internal controls, consequently, our ability to provide
accurate financial statements could be impaired and any failure to maintain our internal controls
and provide accurate financial statements could cause our stock price to decrease substantially.
  We may face difficulties assimilating, and may incur costs associated with, any future
acquisitions.
  
    
    difficulties in assimilating acquired personnel, operations and technologies;
    
    difficulties in managing a larger organization with geographically dispersed operations;
    
    unanticipated costs associated with the acquisition or incurring of additional unknown
liabilities;
    
    diversion of managements attention from other business concerns;
    
    entry in new businesses in which we have little direct experience;
    
    difficulties in marketing additional services to the acquired companies customer base
or to our customer base;
    
    adverse effects on existing business relationships with resellers of our services, our
customers and other business partners;
    
    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 or dilution in equity if stock is
used to consummate the acquisition and/or operate the acquired business.
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The market price of our common stock is volatile.
  We have anti-takeover protections that may delay or prevent a change in control that could benefit
our stockholders.
  
    
    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.
  If we are unable to raise additional capital, our business could be harmed.
  If the protection of our proprietary technology is inadequate, our competitors may gain access to
our technology, and our market share could decline.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Dollar Value ofTotal
    
    
    Shares ThatTotal
    
    
    
    
    
    
    Number of Shares
    
    
    May Yet beNumber of
    
    
    Average
    
    
    Purchased as Part of
    
    
    PurchasedShares
    
    
    Price Paid
    
    
    Publicly Announced
    
    
    Under the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    Plans or Programs
    
    
    or Programs(In thousands)April 1, 2008 to April 30,
2008
    
    
    91,500
    
    
    $
    12.01
    
    
    
    
    
    
    $
    44,563May 1, 2008 to May 31, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    June 1, 2008 to June 30,
2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance as of June 30, 2008
    
    
    91,500
    
    
    $
    12.01
    
    
    
    
    
    
    $
    44,563
 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  49




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Item 6. Exhibits
 EXHIBIT INDEX
 Incorporated by ReferenceFiledExhibit
    
    For
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith31.1 Certification
of Periodic Report
by Chief Executive
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X31.2 Certification
of Periodic Report
by Chief Financial
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X32.1 Certification
of Chief Executive
Officer Pursuant to
18 U.S.C.
Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X32.2 Certification
of Chief Financial
Officer Pursuant to
18 U.S.C.
Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    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. 50




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##### Table of Contents



SIGNATURES
  KEYNOTE SYSTEMS, INC.By:
    
    /s/ UMANG GUPTA

Umang GuptaChairman of the Board and Chief Executive Officer(Principal Executive Officer)By:
    
    /s/ ANDREW HAMERAndrew HamerVice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 51




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EXHIBIT INDEX
 Incorporated by ReferenceFiledExhibit
    
    For
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith31.1 Certification
of Periodic Report
by Chief Executive
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X31.2 Certification
of Periodic Report
by Chief Financial
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X32.1 Certification
of Chief Executive
Officer Pursuant to
18 U.S.C.
Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X32.2 Certification
of Chief Financial
Officer Pursuant to
18 U.S.C.
Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    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. 52