##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
 Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) 
    OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended
    September 30, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 
    OF THE SECURITIES EXCHANGE ACT OF 1934For 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
    incorporation or organization)

(I.R.S. Employer
    Identification No.)777 Mariners Island Blvd,
    San Mateo, CA

94404(Zip Code)(Address of principal executive
    offices)   Registrants telephone number, including area code:
 (650) 403-2400
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class:

Name of Each Exchange on Which Registered:Common Stock, $0.001 Par Value Per Share, and the
    Associated Stock Purchase Rights

The NASDAQ Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer þ
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE:




---



##### 





KEYNOTE
    SYSTEMS, INC.
  ANNUAL
    REPORT ON
    FORM 10-K
 FOR THE
    FISCAL YEAR ENDED SEPTEMBER 30, 2008
  TABLE OF
    CONTENTS
   
 PagePART IITEM 1:

Business


4ITEM 1A:

Risk Factors


12ITEM 1B:

Unresolved Staff Comments


22ITEM 2:

Properties


22ITEM 3:

Legal Proceedings


22ITEM 4:

Submission of Matters to a Vote of Security
    Holders


23ITEM 4A:

Executive Officers


24PART IIITEM 5:

Market for the Registrants Common Equity,
    Related Stockholder Matters, and Issuer Purchases of Equity
    Securities


26ITEM 6:

Selected Consolidated Financial Data


29ITEM 7:

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


30ITEM 7A:

Quantitative and Qualitative Disclosures About
    Market Risks


50ITEM 8:

Financial Statements and Supplementary Data


52ITEM 9:

Changes In and Disagreements with Accountants on
    Accounting and Financial Disclosure


89ITEM 9A:

Controls and Procedures


89ITEM 9B:

Other Information


90PART IIIITEM 10:

Directors, Executive Officers and Corporate
    Governance


90ITEM 11:

Executive Compensation


90ITEM 12:

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


90ITEM 13:

Certain Relationships and Related Transactions,
    and Director Independence


90ITEM 14:

Principal Accountant Fees and Services


90PART IVITEM 15:

Exhibits and Financial Statement Schedules


90Signatures


93EX-10.24EX-21.01EX-23.01EX-23.02EX-31.1EX-31.2EX-32.1EX-32.2




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FORWARD-LOOKING
    STATEMENTS
  Form 10-Q Form 8-K Form 10-K.
  ® ® ® ® ® ® ® ® ® ® ® ® ® tm tm
 3




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PART I  Item 1.
    Business.  Overview
           4




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(650) 403-2400. www.keynote.com Form 10-K, Form 10-Q, Form 8-K,
  Internet
  and/or
    Transaction Perspective Dial-Up
 5




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Application Perspective
  Streaming Perspective
  Test Perspective
  Web Site Perspective
  Voice Perspective
    Keynote Diagnostic Services (KDS)
  Enterprise Adapters
  LoadPro
  NetMechanic
  Performance Scoreboard
  Red Alert
  WebEffective
  Financial Industry Scorecards
 6




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Mobile
  Mobile Device Perspective
  Mobile Application Perspective
  SIGOS SITE
  SIGOS Global Roamer
  Segment
    Financial Information and Geographic Information
  Form 10-K.
  Technology
    and Infrastructure
    Measurement
    and Data Collection Infrastructure
   7




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##### Table of Contents



set-up
        Operations
    and Data Centers
    Reporting
    and Analysis Tools
    
    Pager and Email Alerts.  Our customers can be
    notified by email or pager when download times exceed a
    particular value in specific cities or error counts indicate
    that a Web site is unresponsive.
    Daily Email Reports.  Our customers can receive
    a daily email that summarizes the performance and availability
    of measured Web sites and compares them to industry averages for
    the same time period.
    Web-Based Analysis.  Using their Web browsers
    and a password, our customers can access our online interface,
    MyKeynote, to retrieve, view and analyze measurement data in
    multiple formats or utilize a customized Scoreboard interface
    for more complex properties.
    Data Feed.  Our customers can retrieve
    measurement data through an application program interface, or
    API, or through bulk file transfers using an industry-standard
    file-transfer protocol. This allows our customers to embed our
    measurement data in their own software to create custom
    data-analysis applications.  Customers
   8




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##### Table of Contents



T-Mobile,
  Sales,
    Marketing and Customer Support
  Sales
    e-business
  Marketing
  e-business
    Professional
    Services
    Customer
    Support and Maintenance
   9




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Development
      Competition
           10




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Intellectual
    Property
    Intellectual
    Property Assets
  ® ® ® ® ® ® ® ® ® ® ® ® ® tm
      Protection
    of Our Intellectual Property
         11




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Licensed
    Technology
    Foreign
    and Domestic Operations and Geographic Data
    Employees
    Item 1A.
    Risk
    Factors  We
    have incurred in the past and may, in the future, incur losses,
    and we may not achieve and thereafter sustain
    profitability.
   12




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The
    success of our business depends on customers renewing their
    subscriptions for our services and purchasing additional
    services as well as obtaining new customers.
    and/or
  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.
    
    Fluctuations of the foreign exchange rates used to prepare our
    consolidated financial statements;
    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 Internet services;
    The level of sales of our Mobile 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 service lines;
    The timing and amount of operating costs, including sales and
    marketing investments, and capital expenditures;
    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; and 13




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
    Future macroeconomic conditions in our domestic and
    international markets, as well as the level of discretionary IT
    spending generally.    The
    market price of our common stock is volatile.
    If we
    were required to write down all or part of our goodwill, our net
    earnings and net worth could be materially adversely
    affected.
    Our
    cash and cash equivalents and short-term investments are managed
    through various banks around the world and the current capital
    and credit market conditions are extremely volatile, putting
    pressure on the ability of banks to provide service levels and
    in some cases to fail, both of which would likely have an
    adverse affect on our ability to timely access
    funds.
    Our
    operating results could be harmed if sales of Internet
    subscriptions decline.
   14




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If our
    Mobile services decline, we may not be able to grow our revenue
    and our results of operations will be harmed.
    Improvements
    to the infrastructure of the Internet and mobile networks could
    reduce or eliminate demand for our Internet and Mobile
    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.
     15




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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 revenue.
    Our
    business could be harmed by adverse economic conditions or
    reduced spending on information technology.
  and/or
 16




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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.
      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.
   17




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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
       18




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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.
    non-U.S. dollar non-U.S. dollar
    
    currency exchange rate fluctuations; 19




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
    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;
    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.  e-business
  Industry
    consolidation may lead to stronger competition and may harm our
    operating results.
    Failure
    to maintain effective internal controls may cause us to delay
    filing our periodic reports with the SEC and adversely affect
    our stock price.
  Form 10-K
  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; 20




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
    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.  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.
   21




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Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties.  sales/marketing,
    ApproximateLocation

Square Footage

Business Purpose

Lease ExpirationPlano, Texas

8,200

Red Alert, NetMechanic, inside sales and support and operations

April 2012Austin, Texas

1,200

Engineering and operations support

February 2009New York, New York

7,600

Consulting operations

August 2015Nuremberg, Germany

21,500

Mobile operations, including sales, operations, and general and
    administrative

December 2010Seattle, Washington

3,500

Mobile operations

May 2013Cambridge, Massachusetts

2,650

Consulting operations

June 2011Paris, France

1,485

Mobile operations

September 2017     Item 3.
    Legal
    Proceedings.  class-action
   22




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Simmonds v. JPMorgan
    Chase & Co., et al. No. 07-1634,
    Item 4.
    Submission
    of Matters to a Vote of Security Holders.   23




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Item 4A.
    Executive
    Officers.    Name

Age

PositionUmang Gupta


59


Chairman of the Board and Chief Executive OfficerAdil Kaya


41


Managing Director of Keynote SIGOSAndrew Hamer


43


Vice President of Finance and Chief Financial OfficerAnshu Agarwal


39


Vice President of MarketingDonald Aoki


50


Senior Vice President and General Manager of Customer Experience
    ManagementEric Stokesberry


39


Vice President of OperationsJeffrey Kraatz


53


Senior Vice President of Worldwide Sales and ServicesKrishna Khadloya


48


Vice President of EngineeringMartin Löhlein


42


Managing Director of Keynote SIGOSVik Chaudhary


41


Vice President of Product Management and Corporate Development   Umang Gupta
  Adil Kaya
  Andrew Hamer
  Anshu Agarwal
  Donald Aoki
 24




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Eric Stokesberry
  Jeffrey Kraatz e-commerce
  Krishna Khadloya
  Martin Löhlein
  Vik Chaudhary
 25




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Price
    Range of Common Stock
    High


LowFiscal Year ended September 30, 2008Fourth Quarter

$
14.31


$
10.94Third Quarter


13.95



10.80Second Quarter


14.40



9.00First Quarter


15.48



12.89Fiscal Year ended September 30, 2007Fourth Quarter

$
17.35


$
12.04Third Quarter


16.68



12.80Second Quarter


13.60



9.82First Quarter


11.19



10.18       
    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 new customers in a quarter, particularly
    larger enterprise customers;
    The timing 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 Internet services;
    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 success in obtaining additional professional services
    engagements;
    Our ability to increase revenue from each of our three service
    lines;
    The impact of adverse global economic conditions on demand of
    our services; 26




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
    The timing and amount of operating costs 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.    Dividend
    Policy
    Purchases
    of Equity Securities
   27




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Stock
    Price Performance Graph
      Cumulative
    Total Return
  
  30-Sep-03



30-Sep-04



30-Sep-05



30-Sep-06



30-Sep-07



30-Sep-08Keynote Systems, Inc.


$
100



$
127



$
116



$
94



$
123



$
118NASDAQ Composite Index


$
100



$
106



$
120



$
126



$
151



$
117The Street.com Internet Sector Index


$
100



$
125



$
152



$
166



$
217



$
175  28




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Item 6.
    Selected
    Consolidated Financial Data.  Form 10-K. Form 10-K.
  2008(3)


2007(2)


2006(1)


2005


2004(In thousands, except per share data)Statement of Operations Data:Total revenue, net

$
76,908


$
67,754


$
55,508


$
53,692


$
42,403Net (loss) income


(3,100
)


(4,691
)


(7,534
)


7,365



4,647Basic net (loss) income per share


(0.20
)


(0.27
)


(0.41
)


0.37



0.24Diluted net (loss) income per share


(0.20
)


(0.27
)


(0.41
)


0.35



0.22Shares used in computing basic and diluted net (loss) income per
    share:Basic


15,522



17,533



18,278



19,677



19,397Diluted


15,522



17,533



18,278



20,860



20,886   As of September 30,2008(3)


2007(2)


2006(1)


2005


2004(In thousands)Balance Sheet Data:Cash, cash equivalents, and short-term investments

$
49,331


$
107,935


$
90,751


$
133,803


$
148,117Total assets


175,844



229,480



199,152



209,828



221,730Total long-term capital lease obligations, excluding current
    portion


17



31



50



27



35Total stockholders equity


137,511



190,885



173,389



193,918



201,994     (1)
    
    The results of operations for fiscal 2006 included net tax
    expense of $3.9 million, that included deferred income tax
    expense totaling approximately $3.9 million associated with
    the increase in the valuation allowance against our
    net deferred tax assets, and a $840,000 charge for
    in-process research and development in connection with the
    acquisition of Keynote SIGOS.(2)
    
    The results of operations for fiscal 2007 included net tax
    expense of $4.1 million that included deferred income tax
    expense totaling approximately $5.5 million associated with
    the increase in the valuation allowance against our
    net deferred tax assets.(3)
    
    The results of operations for fiscal 2008 included net tax
    expense of $1.0 million that included deferred income tax
    expense totaling approximately $3.1 million associated with
    the increase in the valuation allowance against our
    net deferred tax assets.   29




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Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  Except for historical information, this Report contains
    forward-looking statements within the meaning of
    Section 27A of the Securities Act of 1933 and
    Section 21E of the Securities Exchange Act of 1934. These
    forward-looking statements involve risks and uncertainties,
    including, among other things, statements regarding our
    anticipated costs and expenses and revenue mix. Forward-looking
    statements include, among others, those statements including the
    words expects, anticipates,
    intends, believes and similar language.
    Our actual results may differ significantly from those projected
    in the forward-looking statements. Factors that might cause or
    contribute to such differences include, but are not limited to,
    those discussed in Item 1A Risk Factors You
    should carefully review the risks described in other documents
    we file from time to time with the Securities and Exchange
    Commission, including the Quarterly Reports on
    Form 10-Q
    or Current Reports on
    Form 8-K
    that we file in the current fiscal year. You are cautioned not
    to place undue reliance on the forward-looking statements, which
    speak only as of the date of this Annual Report on
    Form 10-K.
    Except as required by law, we undertake no obligation to
    publicly release any revisions to the forward-looking statements
    or reflect events or circumstances after the date of this
    document.
  Overview
    and/or
     30




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Critical
    Accounting Policies and Estimates
  Form 10-K
  
    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 tax assets and deferred income tax
    liabilities  Revenue
    Recognition
  00-21 (EITF 00-21), No. 97-2, (SOP 97-2), 03-5, 97-2 (EITF 03-5).
  
    Persuasive evidence of an arrangement exists,
    Delivery of the product or service,
    Fee is fixed and determinable and
    Collection is deemed reasonably assured. 31




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customer-by-customer
    Subscription Services Revenue:
  EITF 00-21.
      Ratable Licenses Revenue: SOP 97-2, EITF 03-5.
     32




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Professional Services Revenue:
  EITF 00-21.
  Deferred Revenue:
      Domestic


International


TotalNet deferred revenue

$
5,982


$
13,951


$
19,933Addback: unpaid deferred revenue


2,425



2,331



4,756Gross deferred revenue at September 30, 2008

$
8,407


$
16,282


$
24,689Net 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
   33




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Inventories
    and Inventory Valuation
  first-in,
      Allocation
    of Purchase Price for Business Combinations
    Goodwill,
    Identifiable Intangibles Assets, and Long-Lived
    Assets
      
    significant changes in the manner of our use of the acquired
    assets or the strategy of our overall business;
    significant negative industry or economic trends; 34




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
    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
       35




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36




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Results
    of Operations
    Year Ended September 30,2008


2007


2006Revenue:Subscription services


58.9
%


63.0
%


73.5
%Ratable licenses


28.4



19.5



4.6Professional services


12.7



17.5



21.9Total revenue, net


100.0



100.0



100.0Costs and expenses:Costs of revenue:Direct costs of subscription services


10.8



12.4



12.5Direct costs of ratable licenses


8.5



6.8



2.2Direct costs of professional services


9.2



12.0



16.2Development


16.4



17.1



17.0Operations


11.2



11.3



13.0Amortization of intangible assets  software


1.3



1.1



0.6Sales and marketing


33.4



29.8



30.4General and administrative


13.2



14.5



17.7Excess occupancy (income) costs


(1.5
)


(0.4
)


0.0Amortization of intangible assets  other


2.8



3.2



3.7In-process research and development


0.0



0.0



1.5Total costs and expenses


105.3



107.8



114.8Loss from operations


(5.3
)


(7.8
)


(14.8
)Interest income


3.9



7.0



8.3Interest and other expenses


(1.3
)


0.0



(0.1
)Provision for income taxes


(1.3
)


(6.1
)


(7.0
)Net loss


(4.0
)%


(6.9
)%


(13.6
)%   Revenue
  2008


% Change


2007


% Change


2006(In thousands)RevenueSubscription services

$
45,314



6
%

$
42,662



4
%

$
40,826Ratable licenses


21,820



65
%


13,220



420
%


2,541Professional services


9,774



(18
)%


11,872



(2
)%


12,141Total Revenue, net

$
76,908






$
67,754






$
55,508   Subscription
    Services.
   37




---



##### Table of Contents



Ratable
    Licenses.
      Professional
    Services.
     38




---



##### Table of Contents



Subscription


Ratable


ProfessionalServices


Licenses


ServicesInternet Test and Measurement:Application Perspective


XDiagnostic Services


XEnterprise Adapters


XLoadPro










XNetMechanic


XProfessional Services










XRed Alert


XStreaming Perspective


XTest Perspective


XTransaction Perspective


XWeb Site Perspective


XVoice Perspective


X







XPerformance Scoreboard


XWebEffective


X







XFinancial Industry Scorecards


X







XMobile Test and Measurement:Mobile Device Perspective


XMobile Application Perspective


XSIGOS SITE






XSIGOS Global Roamer


X     2008


% Change


2007


% Change


2006For the year ended September 30:Internet Subscriptions

$
38,432



0
%

$
38,313



1
%

$
37,982Internet Engagements


9,774



(18
)%


11,873



(2
)%


12,141Total Internet net revenue


48,206



(4
)%


50,186



0
%


50,123Mobile Subscription


6,882



58
%


4,348



53
%


2,844Mobile Ratable Licenses


21,820



65
%


13,220



420
%


2,541Total Mobile net revenue


28,702



63
%


17,568



226
%


5,385Total net revenue

$
76,908



14
%

$
67,754



22
%

$
55,508    39




---



##### Table of Contents



2008


2007


2006For the year ended September 30:Total Internet Revenue


63
%


74
%


90
%Total Mobile Revenue


37



26



10Total Net Revenue


100
%


100
%


100
%     Costs
    and Expenses:
  Direct Costs of Subscription Services, Ratable Licenses and
    Professional Services
  2008


% Change


2007


% Change


2006(In thousands)Direct costs of subscription services

$
8,324



(1
)%

$
8,389



21
%

$
6,953Direct costs of ratable licenses

$
6,558



43
%

$
4,598



273
%

$
1,233Direct costs of professional services

$
7,113



(13
)%

$
8,164



(9
)%

$
8,975   Direct
    Costs of Subscription Services.
   40




---



##### Table of Contents



Direct
    Costs of Ratable Licenses.
      Direct
    Costs of Professional Services.
     41




---



##### Table of Contents



Development
  2008


% Change


2007


% Change


2006(In thousands)Development

$
12,608



9
%

$
11,559



22
%

$
9,452           Operations
  2008


% Change


2007


% Change


2006(In thousands)Operations

$
8,576



12
%

$
7,673



7
%

$
7,203       Sales
    and Marketing
  2008


% Change


2007


% Change


2006(In thousands)Sales and marketing

$
25,705



28
%

$
20,127



19
%

$
16,856    42




---



##### Table of Contents



General
    and Administrative
  2008


% Change


2007


% Change


2006(In thousands)General and administrative

$
10,142



3
%

$
9,856



0
%

$
9,840       Excess
    Occupancy Income
  2008


% Change


2007


% Change


2006(In thousands)Rental income

$
(2,584
)


(91
)%

$
(1,353
)


(35
)%

$
(1,002
)Rental and other expenses


1,374



26
%


1,088



10
%


989Excess occupancy income

$
(1,210
)


(357
)%

$
(265
)


(1938
)%

$
(13
)    43




---



##### Table of Contents



Amortization
    of Identifiable Intangible Assets and In-process Research and
    Development
  2008


% Change


2007


% Change


2006(In thousands)Amortization of identifiable 
    intangible assets  software

$
1,000



33
%

$
754



109
%

$
360Amortization of identifiable 
    intangible assets  other


2,148



(2
)%


2,195



8
%


2,024In-process research and development costs






N/A







(100
)%


840Total amortization of identifiable intangible assets and
    in-process research and development

$
3,148



7
%

$
2,949



(9
)%

$
3,224         Technology


Technology


CustomerBased-Software


Based-Other


Based


Trademark


Covenant


Backlog


TotalNet carrying value at September 30, 2008

$
6,249


$
78


$
1,152


$
860


$
23


$
68


$
8,430   Interest
    Income and Interest and Other Expenses
  2008


% Change


2007


% Change


2006(In thousands)Interest income

$
3,025



(36
)%

$
4,759



3
%

$
4,634Interest and other expenses


(1,035
)


(114
)%


(9
)


88
%


(76
)Interest income and interest and other expenses, net

$
1,990



(58
)%

$
4,750



4
%

$
4,558    44




---



##### Table of Contents



Provision
    for Income Taxes
  2008


% Change


2007


% Change


2006(In thousands)Provision for income taxes

$
(1,034
)


75
%

$
(4,145
)


(7
)%

$
(3,877
)       
    Net loss incurred in fiscal 2007 and
    Recent history of losses             45




---



##### Table of Contents



Liquidity
    and Capital Resources
  As of September 30,2008


2007(In thousands)Cash, cash equivalents and short-term investments

$
49,331


$
107,935Accounts receivable, net

$
7,316


$
5,988Working capital

$
26,941


$
87,818Days sales in accounts receivable (DSO)(a)


32



31     (a)
    
    DSO is calculated as: ((ending net accounts receivable) / net
    sales for the three month period) multiplied by number of days
    in the period  2008


2007


2006(In thousands)For the year ended September 30:Cash provided by operating activities

$
4,944


$
20,380


$
10,615Cash provided by (used in) investing activities

$
52,743


$
(35,208
)

$
7,138Cash provided by (used in) financing activities

$
(53,646
)

$
11,007


$
(19,096
)   Cash,
    cash equivalents and short-term investments and working
    capital
    Cash
    flows from operating activities
     46




---



##### Table of Contents



Comparison
    of Years Ended September 30, 2008 and 2007
    Comparison
    of Years Ended September 30, 2007 and 2006
    Cash
    flow from investing activities
    Comparison
    of Years Ended September 30, 2008 and 2007
    Comparison
    of Years Ended September 30, 2007 and 2006
    Cash
    flows from financing activities
    Comparison
    of Years Ended September 30, 2008 and 2007
   47




---



##### Table of Contents



Comparison
    of Years Ended September 30, 2007 and 2006
    Commitments
    and Contractual Obligations
      Payment Due by PeriodLess Than


1-3


3-5


More ThanTotal


1 Year


Years


Years


5 YearsContractual Obligations: Capital Leases

$
32


$
17


$
15


$



$
Contractual Obligations: Operating Leases


4,219



939



1,532



936



812Contingent Commitments: Bandwidth and
    Co-location


1,364



861



503







Total

$
5,615


$
1,817


$
2,050


$
936


$
812       and/or
   48




---



##### Table of Contents



Off
    Balance Sheet Arrangements
    Recent
    Accounting Pronouncements
  , No. 157-1, No. 157-2, No. 157-1 No. 157-2 No. 157-3, No. 157-3
       49




---



##### Table of Contents



cross-referencing
  142-3, No. 142-3), No. 142-3 No. 142-3
    Item 7A.
    Qualitative
    And Quantitative Disclosures About Market Risks.    Interest Rate Sensitivity.
  Foreign Currency Fluctuations.
 50




---



##### Table of Contents



51




---



##### 



Item 8.
    Financial
    Statements and Supplementary Data.  Keynote
    Systems, Inc. and Subsidiaries
  Index to
    Consolidated Financial Statements
   
 Reports of Independent Registered Public
    Accounting Firms


53Consolidated Balance Sheets


55Consolidated Statements of Operations


56Consolidated Statements of Stockholders
    Equity and Comprehensive Income (Loss)


57Consolidated Statements of Cash Flows


58Notes to Consolidated Financial Statements


59Supplementary Data (Unaudited)


86   52




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm                Internal Control  Integrated Framework
  DELOITTE &
    TOUCHE LLP
    53




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
           Share Based Payment
  KPMG
    LLP
    54




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
 Consolidated
    Balance Sheets  September 30,2008


2007(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
46,769


$
42,875Short-term investments


2,562



65,060Total cash, cash equivalents and short-term investments


49,331



107,935Accounts receivable, less allowance for doubtful accounts of
    $118 and $119, at September 30, 2008 and 2007,
    respectively, and less billing adjustment of $150 and $165, at
    September 30, 2008 and 2007, respectively


7,316



5,988Prepaids, deferred costs and other current assets


2,909



2,703Inventories


1,081



1,059Deferred tax assets


1,042



3,922Total current assets


61,679



121,607Deferred costs and other long term assets


2,788



1,301Property, equipment and software, net


36,405



35,480Goodwill


64,396



63,129Identifiable intangible assets, net


8,430



7,963Deferred tax assets


2,146



Total assets

$
175,844


$
229,480LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,505


$
2,285Accrued expenses


12,767



11,656Current portion of capital lease obligation


14



24Notes payable


256



Deferred revenue


19,029



19,824Total current liabilities


34,571



33,789Long-term portion of capital lease obligation


17



31Deferred rent and other long-term liabilities


2,605



292Long-term deferred revenue


904



2,136Long-term deferred tax liability


236



2,347Total liabilities


38,333



38,595Commitments and contingencies (See Note 9)Stockholders equity:Common stock, $0.001 par value; 100,000,000 shares
    authorized; 14,095,181 and 18,436,648 shares issued and
    outstanding as of September 30, 2008 and 2007, respectively


14



18Treasury stock, zero and 92,000 shares as of
    September 30, 2008 and 2007, respectively






(1,151
)Additional paid-in capital


275,316



325,525Accumulated deficit


(143,207
)


(140,188
)Accumulated other comprehensive income


5,388



6,681Total stockholders equity


137,511



190,885Total liabilities and stockholders equity

$
175,844


$
229,480    55




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Consolidated
    Statements of Operations
  Years Ended September 30,2008


2007


2006(In thousands, except pershare amounts)Net revenue:Subscription services

$
45,314


$
42,662


$
40,826Ratable licenses


21,820



13,220



2,541Professional services


9,774



11,872



12,141Total revenue, net


76,908



67,754



55,508Costs and expensesCosts of revenueDirect costs of subscription services


8,324



8,389



6,953Direct costs of ratable licenses


6,558



4,598



1,233Direct costs of professional services


7,113



8,164



8,975Development


12,608



11,559



9,452Operations


8,576



7,673



7,203Amortization of intangible assets  software


1,000



754



360Total costs of revenue


44,179



41,137



34,176Sales and marketing


25,705



20,127



16,856General and administrative


10,142



9,856



9,840Excess occupancy income


(1,210
)


(265
)


(13
)Amortization of intangible assets  other


2,148



2,195



2,024In-process research and development










840Total costs and expenses*


80,964



73,050



63,723Loss from operations


(4,056
)


(5,296
)


(8,215
)Interest income


3,025



4,759



4,634Interest and other expenses


(1,035
)


(9
)


(76
)Net loss before provision for income taxes


(2,066
)


(546
)


(3,657
)Provision for income taxes


(1,034
)


(4,145
)


(3,877
)Net loss

$
(3,100
)

$
(4,691
)

$
(7,534
)Net loss per share:Basic

$
(0.20
)

$
(0.27
)

$
(0.41
)Diluted

$
(0.20
)

$
(0.27
)

$
(0.41
)Shares used in computing basic and diluted net loss per share:Basic


15,522



17,533



18,278Diluted


15,522



17,533



18,278     *
    
    Stock-based compensation by category:  Direct cost of ratable licenses

$
246


$
190


$
94Direct cost of professional services


462



470



518Development


993



921



887Operations


644



584



662Sales and marketing


1,532



1,280



1,100General and administrative


680



633



458    56




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Consolidated
    Statements of Stockholders Equity and Comprehensive Income
    (Loss)
  AccumulatedAdditional





Other


TotalCommon Stock


Treasury Stock


Paid-in


Accumulated


Comprehensive


Stockholders


ComprehensiveShares


Amount


Shares


Amount


Capital


Deficit


Income (Loss)


Equity


Income (Loss)(In thousand, except share amounts)Balance as of September 30, 2005


19,606,698


$
20



(852,200
)

$
(11,037
)

$
335,350


$
(130,044
)

$
(371
)

$
193,918


$
7,315Repurchase of common stock










(2,121,716
)


(22,732
)


(64
)










(22,796
)Issuance of common stock


439,567















3,685











3,685Tax benefit related to stock options


















326











326Retirement of treasury stock


(973,916
)


(1
)


973,916



12,619



(12,618
)










Stock-based compensation


















3,719











3,719Net loss






















(7,534
)






(7,534
)


(7,534
)Foreign currency translation


























1,763



1,763



1,763Unrealized gain on available-for sale investments


























308



308



308Balance as of September 30, 2006


19,072,349



19



(2,000,000
)


(21,150
)


330,398



(137,578
)


1,700



173,389



(5,463
)Cumulative effect of the adoption of SAB No. 108 (See
    Note 2(Q))






















2,081







2,081



Adjusted balances, October 1, 2006


19,072,349



19



(2,000,000
)


(21,150
)


330,398



(135,497
)


1,700



175,470



(5,463
)Repurchase of common stock










(92,000
)


(1,151
)


(3
)










(1,154
)Issuance of common stock


1,364,299



1











12,192











12,193Retirement of treasury stock


(2,000,000
)


(2
)


2,000,000



21,150



(21,148
)










Stock-based compensation


















4,086











4,086Net loss






















(4,691
)






(4,691
)


(4,691
)Foreign currency translation


























4,828



4,828



4,828Unrealized gain on available-for sale investments


























153



153



153Balance as of September 30, 2007


18,436,648



18



(92,000
)


(1,151
)


325,525



(140,188
)


6,681



190,885



290Cumulative effect of the adoption of FIN 48 (See
    Note 2(M))






















81







81



Adjusted balances, October 1, 2007


18,436,648



18



(92,000
)


(1,151
)


325,525



(140,107
)


6,681



190,966



290Repurchase of common stock










(5,000,000
)


(59,919
)


(151
)










(60,070
)


Issuance of common stock


750,533



1











6,450











6,451



Retirement of treasury stock


(5,092,000
)


(5
)


5,092,000



61,070



(61,065
)














Stock-based compensation


















4,557











4,557



Net loss






















(3,100
)






(3,100
)


(3,100
)Foreign currency translation


























(1,306
)


(1,306
)


(1,306
)Unrealized gain on available-for sale investments


























13



13



13Balance as of September 30, 2008


14,095,181


$
14






$



$
275,316


$
(143,207
)

$
5,388


$
137,511


$
(4,393
)    57




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Consolidated
    Statements of Cash Flows
  Years Ended September 30,2008


2007


2006(In thousands)Cash flows from operating activities:Net loss

$
(3,100
)

$
(4,691
)

$
(7,534
)Adjustments to reconcile net loss to net cash provided by
    operating activities:Depreciation and amortization


5,139



4,581



3,997Stock-based compensation


4,557



4,078



3,719Charges to bad debt and billing adjustment reserves


240



355



272Impairment of short-term investment


98



42



(Accretion)/amortization of debt investment (discount)/ premium


(464
)


(1,327
)


460Amortization of identifiable intangible assets


3,148



2,949



2,384Amortization of prepaid tax asset


418







In-process research and development










840Tax benefit from stock options










326Excess income tax benefit from stock options










(61
)Deferred tax assets and liabilities, net


(26
)


12



2,200Changes in operating assets and liabilities, net of acquired
    assets and assumed liabilities:Accounts receivable


(1,622
)


1,138



314Inventories


(23
)


(69
)


34Prepaids, deferred costs and other current assets


294



(846
)


176Accounts payable and accrued expenses


96



4,103



694Deferred revenue


(2,067
)


10,055



2,794Prepaid tax asset


(1,744
)






Net cash provided by operating activities


4,944



20,380



10,615Cash flows from investing activities:Purchases of property, equipment, and software


(5,865
)


(5,540
)


(3,058
)Acquired technology


(2,557
)






Purchases of businesses and assets, net


(1,697
)


(393
)


(32,042
)Earnout payment for acquisition of business






(10,587
)


Purchases of short-term investments


(23,098
)


(93,765
)


(60,883
)Maturities and sales of short-term investments


85,960



75,077



103,121Net cash provided by (used in) investing activities


52,743



(35,208
)


7,138Cash flows from financing activities:Repayment of credit facilities


(26
)


(32
)


(46
)Excess income tax benefit from stock options










61Proceeds from issuance of common stock and exercise of stock
    options


6,450



12,193



3,685Repurchase of outstanding common stock


(60,070
)


(1,154
)


(22,796
)Net cash provided by (used in) financing activities


(53,646
)


11,007



(19,096
)Effect of exchange rate changes on cash and cash equivalents


(147
)


1,034



71Net (decrease) increase in cash and cash equivalents


3,894



(2,787
)


(1,272
)Cash and cash equivalents at beginning of the year


42,875



45,662



46,934Cash and cash equivalents at end of the year

$
46,769


$
42,875


$
45,662Supplemental cash flow disclosure:Income taxes paid (net of refunds) during the year

$
1,670


$
911


$
839Noncash operating and investing activities:Acquisition of property, equipment and software on account

$
113


$
110


$
Retirement of treasury stock

$
61,070


$
21,150


$
12,619    58




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes
    to Consolidated Financial Statements
  (1)
    The
    Company    (2)
    Summary
    of Significant Accounting Policies  (A)
    Basis
    of Presentation    (B)
    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.
    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:
  00-21, (EITF 00-21).
   59




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
        Ratable Licenses Revenue: No. 97-2, (SOP 97-2), 03-5, 97-2
      Professional Services Revenue:
 60




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  EITF 00-21.
    Deferred Revenue:
  Deferred Costs:
  (C)
    Use of
    Estimates    (D)
    Cash
    and Cash Equivalents    (E)
    Short-Term
    Investments   61




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    (F)
    Inventories  first-in,
  (G)
    Property
    and Equipment    (H)
    Accumulated
    Other Comprehensive Income and Foreign Currency
    Translation   62




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
      2008


2007Unrealized gain (loss) on investments

$
10


$
(3
)Cumulative translation adjustments


5,378



6,684$
5,388


$
6,681     (I)
    Financial
    Instruments and Concentration of Credit Risk          Write-Offs/Balance at


Charged to


Credit





Balance atBeginning


Operations/


Memos





End ofPeriod

of Period


Revenue


Issued


Adjustments(1)


Period(2)For the year ended:September 30, 2008

$
284


$
240


$
(256
)

$



$
268September 30, 2007

$
473


$
355


$
(304
)

$
(240
)

$
284September 30, 2006

$
534


$
272


$
(333
)

$



$
473  63




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    (1)
    
    SAB 108 adjustment for $240,000 to fiscal 2007 beginning
    balance, charged to retained earnings. (See note 2(Q))(2)
    
    Included in the balance at the end of the period is an amount of
    $150,000, $165,000, and $418,000 in billing adjustments as of
    September 30, 2008, 2007 and 2006, respectively.    (J)
    Excess
    Occupancy Income    Year ending September 30:2009

$
2,4492010


1,9772011


1,8662012


1,4702013


217Thereafter


89Total future minimum rents receivable

$
8,068   (K)
    Goodwill
    and Identifiable Intangible Assets     64




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
      (L)  Stock-Based
    Compensation
    Determining Fair Value under
    SFAS No. 123R:
  Expected Volatility:
  Risk-free Interest Rate:
  Expected Term:
  Estimated Forfeitures:
  paid-in-capital
  (M)  Income
    Taxes
   65




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
      (N)
    Development    98-1, (SOP 98-1). SOP 98-1
  (O)
    Net
    Loss Per Share   66




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    September 30,2008


2007


2006Numerator:Net loss

$
(3,100
)

$
(4,691
)

$
(7,534
)Denominator:Denominator for basic net loss per share  weighted
    average shares


15,522



17,533



18,278Incremental common shares attributable to shares issuable under
    employee stock option plans










Denominator for diluted net loss per share  weighted
    average shares


15,522



17,533



18,278Basic net loss per share

$
(0.20
)

$
(0.27
)

$
(0.41
)Diluted net loss per share

$
(0.20
)

$
(0.27
)

$
(0.41
)     September 30,2008


2007


2006Shares outstanding under stock options


5,611



5,739



6,754     (P)
    Advertising
    Costs    (Q)
    Adoption
    of Staff Accounting Bulletin No. 108       67




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    (R)  Recent
    Accounting Pronouncements
  , No. 157-1, No. 157-2, No. 157-1 FSP 157-2 No. 157-3, No. 157-3
       68




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
      No. 142-3, No. 142-3), No. 142-3 No. 142-3
   69




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (3)  Cash,
    Cash Equivalents and Short-Term Investments
    Gross


EstimatedAmortized


Unrealized


MarketCost


Gains


ValueAs of September 30, 2008:Cash

$
33,519


$



$
33,519Money market funds


13,250







13,250Total

$
46,769


$



$
46,769As of September 30, 2007:Cash

$
21,677


$



$
21,677Commercial paper


10,720



1



10,721Money market funds


10,477







10,477Total

$
42,874


$
1


$
42,875     Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


MarketCost


Gains


Losses


ValueAs of September 30, 2008:Corporate bonds

$
2,552


$
10


$



$
2,562Total

$
2,552


$
10


$



$
2,562   Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


MarketCost


Gains


Losses


ValueAs of September 30, 2007:State government agency securities

$
7,600


$



$



$
7,600FNMA and FHLB securities


8,961



5







8,966Corporate bonds and commercial paper


48,504



11



(21
)


48,494Total

$
65,065


$
16


$
(21
)

$
65,060     EstimatedAmortized


MarketCost


ValueYear ending September 30, 2009

$
2,552


$
2,562Total

$
2,552


$
2,562  70




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Less than 12 Months


12 Months or Greater


TotalUnrealized





Unrealized





UnrealizedSecurity Description

Fair Value


Loss


Fair Value


Loss


Fair Value


LossAs of September 30, 2008:Corporate bonds

$
2,562


$



$



$



$
2,562


$
Total

$
2,562


$



$



$



$
2,562


$
As of September 30, 2007:U.S. federal and state government agencies

$
1,000


$



$



$



$
1,000


$
Corporate bonds


22,071



(21
)










22,071



(21
)Total

$
23,071


$
(21
)

$



$



$
23,071


$
(21
)     (4)
    Consolidated
    Financial Statement Details    Property,
    equipment, and software:
  UsefulLives


September 30,(Years)


2008


2007Computer equipment and software


3-5


$
27,094


$
25,319Furniture and fixtures


5



1,839



1,712Land






14,150



14,150Building


30



21,639



10,750Leasehold and building improvements


5-30



1,170



9,380Construction in progress






288



66,180



61,311Less accumulated depreciation and amortization






(29,775
)


(25,831
)Total





$
36,405


$
35,480    71




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Prepaids,
    Deferred Costs and Other Current
    Assets :
  September 30,2008


2007Prepaid expenses

$
1,332


$
1,516Deferred costs of revenue


749



677Security deposits, advances, and interest receivable


252



428Other current assets


576



82Total

$
2,909


$
2,703   Deferred
    Costs and Other Long-Term Assets:
  September 30,2008


2007Prepaid tax asset

$
1,429


$
Deferred costs of revenue


563



609Tenant rent receivable


312



195Deposits


162



145Prepaid expenses


322



352Total

$
2,788


$
1,301   Accrued
    Expenses:
  September 30,2008


2007Accrued employee compensation

$
3,476


$
2,904Accrued audit and professional fees


641



770Income and other taxes


3,635



4,227Other accrued expenses


5,015



3,755$
12,767


$
11,656   Notes
    Payable:
  September 30,2008

2007Notes payable

$
256


$
    72




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (5)
    Goodwill
    and Identifiable Intangible Assets    Balance at September 30, 2006

$
48,676Additional goodwill for Vividence


26Additional goodwill for the acquisition of Keynote SIGOS
    Systemintegration GmbH (Note 7)


10,561Adjustments to goodwill for Keynote SIGOS Systemintegration GmbH
    (Note 7)


(42
)Translation adjustments and other


3,908Balance at September 30, 2007


63,129Additional goodwill for the acquisition of Zandan S.A.
    (Note 7)


2,102Translation adjustments and other


(835
)Balance at September 30, 2008

$
64,396     Technology


TechnologyBased-


Based-


CustomerSoftware


Other


Based


Trademark


Covenant


Backlog


TotalAs of September 30, 2008:Gross carrying value

$
8,039


$
11,845


$
8,104


$
1,392


$
39


$
117


$
29,536Accumulated amortization


(1,790
)


(11,767
)


(6,952
)


(532
)


(16
)


(49
)


(21,106
)Net carrying value at September 30, 2008

$
6,249


$
78


$
1,152


$
860


$
23


$
68


$
8,430As 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    73




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Fiscal Years:

Total2009

$
2,6892010


2,5002011


2,2642012


977Total

$
8,430Weighted-average remaining useful life as of September 30,
    2008 (years)


3.4   (6)
    Stockholders
    Equity  (A)
    1999
    Equity Incentive Plan      (B)
    1999
    Employee Stock Purchase Plan   74




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (C)
    Stock-Based
    Compensation    AverageWeighted


Remaining


AggregateAverage


Contractual


IntrinsicShares


Exercise Price


Term (Years)


ValueOutstanding at September 30, 2005


6,236


$
13.42



7.5Granted


2,247



11.25Exercised


(359
)


8.09Forfeited, canceled or expired


(1,370
)


12.16Outstanding at September 30, 2006


6,754


$
13.24



7.1Granted


761



12.63Exercised


(1,259
)


9.00Forfeited or cancelled


(444
)


12.06Expired


(89
)


12.62Outstanding at September 30, 2007


5,723


$
14.21



6.8Granted


957



13.39Exercised


(598
)


8.66Forfeited or canceled


(108
)


12.42Expired


(26
)


12.76Outstanding at September 30, 2008


5,948


$
14.67



6.5


$
10,820Vested and expected to vest


5,546


$
14.84



6.3


$
10,300Exercisable at September 30, 2008


3,941


$
15.89



5.5


$
8,220       Options OutstandingWeightedAverage





Options ExercisableRemaining


Weighted





WeightedNumber of


Contractual


Average


Number of


AverageShares


Life


Exercise


Shares


ExerciseRange of Exercise Prices

Outstanding


(In Years)


Price


Exercisable


Price$ 1.60-$ 4.42


22,500



0.51


$
2.85



22,500


$
2.85$ 7.27-$10.91


1,629,423



4.19



9.20



1,221,789



8.80$10.92-$16.90


3,944,812



6.84



12.50



2,346,772



12.33$22.31-$33.75


12,375



2.00



24.66



12,375



24.66$35.88-$54.75


34,000



1.84



38.10



34,000



38.10$58.88-$81.13


304,500



1.30



69.99



304,000



69.995,947,610



5.50


$
14.67



3,941,436


$
15.89    75




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
        2008


2007


2006Volatility


33.4
%


29.4
%


30.2
%Risk-free interest rates


3.29
%


4.61
%


4.93
%Expected life (in years)


4.4



3.8



3.7Dividend yield










     2008


2007


2006Volatility


37.8
%


25.0
%


29.0
%Risk-free interest rates


2.81
%


4.91
%


4.84
%Expected life (in years)


1.25



1.25



1.25Dividend yield










       (D)
    Stock
    Repurchase Plan  Rule 10b5-1 Rule 10b-18
   76




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (E)
    Stockholder
    Rights Plan    (7)
    Acquisitions    93-7,
        Cash consideration

$
1,455Direct transaction costs


533Total purchase price

$
1,988    77




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Cash and cash equivalents

$
19Accounts receivable


146Deferred tax assets


601Other assets


718Property, plant, equipment and software


18Identifiable intangible assets


1,096Goodwill


2,102Total assets acquired


4,700Accounts payable and accrued liabilities


(1,668
)Other liabilities


(591
)Deferred revenue


(164
)Notes payable


(289
)Total purchase price, including direct acquisition costs

$
1,988     (8)
    Income
    Taxes    Year Ended September 30,2008


2007


2006United States

$
(2,656
)

$
(1,484
)

$
(252
)Foreign


590



938



(3,405
)Loss before income taxes

$
(2,066
)

$
(546
)

$
(3,657
)  78




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Year Ended September 30,2008


2007


2006Current:Federal

$



$



$
(125
)Foreign


(947
)


(4,007
)


(1,306
)State


7



(120
)


(345
)Total current tax expense

$
(940
)

$
(4,127
)

$
(1,776
)Deferred:Federal

$
(67
)

$
(2,955
)

$
(3,407
)Foreign


(18
)


3,362



1,963State


(9
)


(425
)


(657
)Total deferred tax expense

$
(94
)

$
(18
)

$
(2,101
)Total provision for income taxes

$
(1,034
)

$
(4,145
)

$
(3,877
)     Year Ended September 30,2008


2007


2006Federal tax benefit at statutory rate

$
723


$
191


$
1,280State tax expense net of federal tax effect


(1,590
)


(564
)


(154
)Write off of IPR&D










(334
)Non-deductible expenses and other


(1,058
)


(1,198
)


(830
)Change in valuation allowance for federal and state deferred tax
    assets


1,650



(3,039
)


(3,936
)Reduction of foreign deferred tax assets related to change in
    foreign statutory rate






(490
)


Foreign tax differential


(759
)


955



97Total expense

$
(1,034
)

$
(4,145
)

$
(3,877
)  79




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    As of September 30,2008


2007Deferred tax assets:Accruals, reserves and other

$
5,633


$
6,114Capitalized research and development


1,957



2,343Intangibles related to acquisition


4,403



4,251Property and equipment


23,562



23,947Net operating loss carryforwards


27,442



20,687Tax credit carryforwards


1,907



4,510Gross deferred tax assets


64,904



61,852Valuation allowance


(61,008
)


(57,930
)Total deferred tax assets

$
3,896


$
3,922Deferred tax liabilities:Intangible assets


(944
)


(2,347
)Total net deferred tax asset

$
2,952


$
1,575Reported as:Current deferred tax assets

$
1,042


$
3,922Non-current deferred tax assets


2,146



Non-current deferred tax liabilities


(236
)


(2,347
)Net deferred tax asset

$
2,952


$
1,575          80




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
                 81




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
        Beginning balance as of October 1, 2007 (upon adoption)

$
5,049Increases related to prior year tax positions


76Increases related to current year tax positions


1,287Decreases related to lapse of statute of limitations


(6
)Ending balance at September 30, 2008

$
6,406        82




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (9)
    Commitments
    and Contingencies  (A)
    Leases    Operating


CapitalYear ending September 30:2009

$
939


$
172010


859



152011


673



2012


509



2013


427



Thereafter


812



Total minimum lease payments

$
4,219



32Less amounts representing interest






(1
)Present value of minimum lease payments






31Less current portion of obligation under capital lease






(14
)Obligations under capital leases, less current portion





$
17       (B)
    Legal
    Proceedings  class-action
   83




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Simmonds v. JPMorgan
    Chase & Co., et al. No. 07-1634,
    (C)
    Warranties    (D)
    Indemnification  and/or
  (E)
    Other   84




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (10)
    Geographic
    and Segment Information      Subscription


Ratable


ProfessionalServices


Licenses


ServicesInternet Test and Measurement:Application Perspective


XDiagnostic Services


XEnterprise Adapters


XLoadPro










XNetMechanic


XProfessional Services










XRed Alert


XStreaming Perspective


XTest Perspective


XTransaction Perspective


XWeb Site Perspective


XVoice Perspective


X







XPerformance Scoreboard


XWebEffective


X







XFinancial Industry Scorecards


X







XMobile Test and Measurement:Mobile Device Perspective


XMobile Application Perspective


XSIGOS SITE






XSIGOS Global Roamer


X     2008


2007


2006For the year ended September 30:Internet Subscriptions

$
38,432


$
38,313


$
37,982Internet Engagements


9,774



11,873



12,141Total Internet net revenue


48,206



50,186



50,123Mobile Subscription


6,882



4,348



2,844Mobile Ratable Licenses


21,820



13,220



2,541Total Mobile Subscriptions net revenue


28,702



17,568



5,385Total net revenue

$
76,908


$
67,754


$
55,508  85




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Year Ended September 30,2008


2007


2006Revenues:United States

$
43,896


$
46,897


$
47,985Europe*


28,774



16,291



6,238Other*


4,238



4,566



1,285$
76,908


$
67,754


$
55,508     *
    
    No individual country represents more than 10% of revenue.  September 30,2008


2007Long Lived Assets:United States

$
35,317


$
34,543Germany


1,062



905Other


26



32$
36,405


$
35,480     (11)
    Supplementary
    Data (Unaudited)    2008Quarter Ended


Year EndedDecember 31,


March 31,


June 30,


September 30,


September 30,2007


2008


2008


2008


2008(In thousands, except per share data)Net revenue

$
17,720


$
17,634


$
20,498


$
21,056


$
76,908Gross profit


6,860



7,109



9,192



9,568



32,729Net loss


(744
)


(1,318
)


(407
)


(631
)


(3,100
)Basic net loss per share

$
(0.04
)

$
(0.08
)

$
(0.03
)

$
(0.05
)

$
(0.20
)Diluted net loss per share

$
(0.04
)

$
(0.08
)

$
(0.03
)

$
(0.05
)

$
(0.20
)   86




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  2007Quarter Ended


Year EndedDecember 31,


March 31,


June 30,


September 30,


September 30,2006


2007


2007


2007


2007(In thousands, except per share data)Revenue

$
15,815


$
16,714


$
17,387


$
17,838


$
67,754Gross profit


5,654



6,655



6,815



7,493



26,617Net (loss) income


264



30



(1,533
)


(3,452
)


(4,691
)Basic net (loss) income per share

$
0.02


$



$
(0.09
)

$
(0.19
)

$
(0.27
)Diluted net (loss) income per share

$
0.01


$



$
(0.09
)

$
(0.19
)

$
(0.27
)    87




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
      Internal Control  Integrated
    Framework
        Internal Control Integrated Framework
    DELOITTE &
    TOUCHE LLP
    88




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Changes
    in Internal Control over Financial Reporting
    Rule 13a-15(d) Rule 13a-15(f)
  Managements
    Annual Report on Internal Control over Financial
    Reporting
  Rules 13a-15(f) 15d-15(f)
     89




---



##### Table of Contents



Item 9B.
    Other
    Information.   PART III  Item 10.
    Directors,
    Executive Officers and Corporate
    Governance.  www.keynote.com
  Item 11.
    Executive
    Compensation.    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accountant Fees and Services.   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules.  (a)  Documents to be filed as part of this
    report:
         90




---



##### Table of Contents



Incorporated by ReferenceExhibit







Filing

Exhibit

FiledNo.

Exhibit

Form

File No.

Date

No.

Here-With3
.01

Amended and Restated Certificate of Incorporation.

S-1

333-94651

01-14-00

3.043
.02

Bylaws, as amended.

8-K

000-27241



3.013
.03

Certificate of Designations specifying the terms of the
    Series A Junior Participating Preferred Stock of
    registrant, as filed with the Secretary of State of the State of
    Delaware on October 28, 2002

8-A

000-27241

10-29-02

3.024
.01

Form of Specimen Stock Certificate for Keynote common stock.

S-1

333-82781

09-22-99

4.0110
.01

Form of Indemnity Agreement between Keynote and each of its
    directors and executive officers.

S-1

333-94651

01-14-00

10.01A10
.03

1999 Stock Option Plan.

S-1

333-82781

07-13-99

10.0310
.04

1999 Equity Incentive Plan and related forms of stock option
    agreement and stock option exercise agreement.

S-1

333-82781

08-23-99

10.0410
.05

1999 Employee Stock Purchase Plan and related forms of
    enrollment form, subscription agreement, notice of withdrawal
    and notice of suspension.

S-1

333-82781

08-23-99

10.0510
.06

401(k) Plan.

S-1

333-82781

07-13-99

10.0610
.07*

Employment Agreement dated as of December 9, 1997 between
    Keynote and Umang Gupta.

S-1

333-82781

07-13-99

10.0810
.08*

Amendment Agreement dated as of November 12, 2001 between
    Keynote and Umang Gupta.

10-Q

000-27241

02-14-02

10.0110
.09*

Promotion Agreement dated December 21, 2005 between Keynote
    Systems, Inc. and Andrew Hamer.

10-Q

000-27241

02-09-06

10.110
.10*

Addendum to Stock Option Agreement dated January 1, 2006
    between Keynote Systems, Inc. and Andrew Hamer.

10-Q

000-27241

02-09-06

10.210
.11*

1999 Equity Incentive Plan, as amended, dated March 23, 2006

10-Q

000-27241

05-10-06

10.310
.12

Agreement with UBS Securities LLC dated February 3, 2006

10-Q

000-27241

05-10-06

10.410
.13*

Promotion Letter Agreement dated as of April 4, 2006
    between Keynote Systems, Inc. and Jeffrey Kraatz*

10-Q

000-27241

08-09-06

10.510
.14*

Addendum to Stock Option Agreement dated as of April 1,
    2006 between Keynote Systems, Inc. and Jeffrey Kraatz*

10-Q

000-27241

08-09-06

10.610
.15*

Promotion Letter Agreement dated as of April 12, 2006
    between Keynote Systems, Inc. and Eric Stokesberry

10-Q

000-27241

08-09-06

10.7 91




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##### Table of Contents



Incorporated by ReferenceExhibit







Filing

Exhibit

FiledNo.

Exhibit

Form

File No.

Date

No.

Here-With10
.16*

Addendum to Stock Option Agreement dated as of April 4,
    2006 between Keynote Systems, Inc. and Eric Stokesberry*

10-Q

000-27241

08-09-06

10.810
.17*

Promotion Letter Agreement dated as of April 12, 2006
    between Keynote Systems, Inc. and Krishna Khadloya*

10-Q

000-27241

08-09-06

10.910
.18*

Addendum to Stock Option Agreement dated as of April 4,
    2006 between Keynote Systems, Inc. and Krishna Khadloya*

10-Q

000-27241

08-09-06

10.1010
.20

Share Purchase and Transfer Agreement to acquire SIGOS
    Systemintegration GmbH (SIGOS) and the Shareholders
    of SIGOS dated April 3, 2006 among Keynote Systems+

10-Q

000-27241

08-09-06

10.1210
.21

Agreement with UBS Securities LLC dated June 8, 2006

10-Q

000-27241

08-09-06

10.1310
.22

Agreement with B. Riley & Co., Inc. dated
    December 1, 2006

10-Q

000-27241

02-09-07

10.2210
.23

Agreement with Craig-Hallum Capital Group LLC dated
    February 1, 2007

10-Q

000-27241

02-09-07

10.2310
.24*

Separation Agreement and Business Advisor Agreement between
    Keynote Systems, Inc. and Johannes Reis









X21
.01

Subsidiaries of Keynote Systems, Inc.









X23
.01

Consent of Deloitte & Touche LLP Independent
    Registered Public Accounting Firm









X23
.02

Consent of KPMG LLP Independent Registered Public Accounting Firm









X31
.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 Financial 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 Executive Officer Pursuant to
    18 U.S.C. Section 1350 as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002**









X     *
    
    Management contract or compensatory plan.**
    
    As contemplated by SEC Release
    No. 33-8212,
    these exhibits are furnished with this Annual Report on
    Form 10-K
    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.+
    
    Confidential treatment has been requested with regards to
    certain portions of this document. Such portions were filed
    separately with the Commission. 92




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##### Table of Contents



SIGNATURES    KEYNOTE SYSTEMS INC.
  By:
    /s/  UMANG
    GUPTA  Umang Gupta
    Form 10-K
    Name

Title

DatePrincipal Executive Officer:/s/  UMANG
    GUPTAUmang
    Gupta

Chairman of the Board, Chief Executive Officer and Director

December 12, 2008Principal Financial and Accounting Officer:/s/  ANDREW
    HAMERAndrew
    Hamer

Vice President and Chief Financial Officer

December 12, 2008Additional Directors:/s/  JENNIFER
    BOLTJennifer
    Bolt

Director

December 12, 2008/s/  CHARLES
    BOESENBERGCharles
    Boesenberg

Director

December 12, 2008 93




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##### Table of Contents



Name

Title

Date/s/  DAVID
    COWANDavid
    Cowan

Director

December 12, 2008/s/  MOHAN
    GYANIMohan
    Gyani

Director

December 12, 2008/s/  RAYMOND
    L OCAMPO JRRaymond
    L Ocampo Jr

Director

December 12, 2008/s/  DR. DEBORAH
    RIEMANDr. Deborah
    Rieman

Director

December 12, 2008  94