##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, 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, 2006ORo

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(Address of principal executive
    offices)

(Zip
    Code)       Registrants telephone number, including area code:
 (650) 403-2400
  Securities registered pursuant to Section 12(b) of the
    Act:
 None
  Securities registered pursuant to Section 12(g) of the
    Act:
    Common Stock, $0.001 Par Value Per Share, and the
    Associated Stock Purchase Rights
      o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  o þ 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, 2006
  TABLE OF CONTENTS
  PagePART IITEM 1:


Business


4ITEM 1A:


Risk
    Factors


13ITEM 1B:


Unresolved Staff
    Comments


21ITEM 2:


Properties


21ITEM 3:


Legal
    Proceedings


21ITEM 4:


Submission of
    Matters to a Vote of Security Holders


22ITEM 4A:


Executive
    Officers


22PART IIITEM 5:


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


24ITEM 6:


Selected
    Consolidated Financial Data


26ITEM 7:


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


27ITEM 7A:


Qualitative and
    Quantitative Disclosures About Market Risks


50ITEM 8:


Financial
    Statements and Supplementary Data


51ITEM 9:


Changes In and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


85ITEM 9A:


Controls and
    Procedures


85ITEM 9B:


Other
    Information


87PART IIIITEM 10:


Directors and
    Executive Officers of the Registrant


87ITEM 11:


Executive
    Compensation


87ITEM 12:


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


87ITEM 13:


Certain
    Relationships and Related Transactions


87ITEM 14:


Principal
    Accountant Fees and Services


87PART IVITEM 15:


Exhibits and
    Financial Statement Schedules


87Signatures


90EXHIBIT 21.01EXHIBIT 23.01EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   2




---



##### Table of Contents



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




---



##### Table of Contents



PART I  Item 1.
    Business.  Overview
        end-to-end
   4




---



##### Table of Contents



(650) 403-2400. www.keynote.com Form 10-K, Form 10-Q, Form 8-K,
  Internet
    Test and Measurement Subscriptions and Professional
    Services
  and/or
    Application Perspective
  Application Perspective Private Edition
  Streaming Perspective
 5




---



##### Table of Contents



Test Perspective
  Transaction Perspective
  Web Site Perspective
  Voice Perspective
    Diagnostic Services per-incident
  Enterprise Adapters
  LoadPro
  NetMechanic
  Performance Scoreboard
  Red Alert
  WebIntegrity
 6




---



##### Table of Contents



Mobile
    Test and Measurement Services and Systems
  Mobile Device Perspective
  Mobile Application Perspective
  SIGOS SITE
  SIGOS Global Roamer
  Customer
    Experience Management (CEM) Solutions and Engagements
    WebEffective
  WebExcellence Scorecards
    Open Web Research
  Site Research
  Competitive Research
  Keynote Competitive Intelligence Studies
 7




---



##### Table of Contents



Technology
    and Infrastructure
    Measurement
    and Data Collection Infrastructure
  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. 8




---



##### Table of Contents




    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.  CEM
    Infrastructure
      Customers
      Sales,
    Marketing and Customer Support
  Sales
    e-business
 9




---



##### Table of Contents



Marketing
  e-business
    Professional
    Services
    Customer
    Support and Maintenance
    Research
    and Development
      Competition
   10




---



##### Table of Contents



Intellectual
    Property
    Intellectual
    Property Assets
  ® ® ® ® ® ® ® ® ® ® ®
   11




---



##### Table of Contents



Protection
    of Our Intellectual Property
          Licensed
    Technology
    Foreign
    and Domestic Operations and Geographic Data
   12




---



##### Table of Contents



Employees
    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.
  write-down
  The
    success of our business depends on customers renewing their
    subscriptions for our services and purchasing additional
    services.
    and/or 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.
    
    The rate of new and renewed subscriptions to our services;
    The effect of any unforeseen or unplanned operating expenses; 13




---



##### Table of Contents




    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;
    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 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.  period-to-period
  Our
    operating results could be harmed if sales of Internet
    subscriptions decline.
    Our
    mobile services may not continue to grow as rapidly, which could
    harm our business.
    Improvements
    to the infrastructure of the Internet and mobile networks could
    reduce or eliminate demand for our Internet and mobile
    services.
   14




---



##### Table of Contents



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.
      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.
    Hewlett-Packard
 15




---



##### Table of Contents



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.
    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.
     16




---



##### Table of Contents



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 by business and consumers for
    e-business
    and communications.
  e-business,
  
    security concerns including the potential for fraud or theft of
    stored data and information communicated over the Internet;
    inconsistent quality of service, including well-publicized
    outages of popular Web sites;
    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.  Our
    network infrastructure could be disrupted by a number of
    different occurrences, which could impair our ability to serve
    and retain existing customers or attract new
    customers.
     17




---



##### Table of Contents



back-up
    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.
  day-to-day
  Others
    might bring infringement claims against us, our customers or our
    suppliers that could harm our business.
    Our
    business will be susceptible to additional risks associated with
    international operations.
   18




---



##### Table of Contents




    currency exchange rate fluctuations;
    seasonal fluctuations in purchasing patterns;
    unexpected changes in regulatory requirements;
    maintaining and servicing computer hardware in distant locations;
    longer accounts receivable payment cycles and difficulties in
    collecting accounts receivable;
    difficulties in managing and staffing international operations;
    potentially adverse tax consequences, including restrictions on
    the repatriation of earnings;
    the burdens of complying with a wide variety of foreign
    laws; and
    reduced protection for intellectual property rights in some
    countries.  e-business
  Compliance
    with new rules and regulations concerning corporate governance
    may increase our costs and could harm our results of
    operations.
      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.   19




---



##### Table of Contents



Industry
    consolidation may lead to increased competition and may harm our
    operating results.
    If we
    fail to maintain the adequacy of our internal controls, 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.
  Form 10-K
  Our
    future operating results could be harmed if tax audits result in
    material differences between that which is reflected in
    historical income tax provisions and recorded assets and
    liabilities.
    We may
    face difficulties assimilating our acquisitions 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; 20




---



##### Table of Contents




    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.  Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.      ApproximateLocation

Square Footage


Business Purpose

Lease ExpirationPlano, Texas


8,000


Red Alert, NetMechanic, inside
    sales and support and operations

February 2007Austin, Texas


1,200


Engineering and operations support

February 2007New York, New York


7,600


Consulting operations

August 2015Nuremberg, Germany


16,000


Wireless operations, including
    sales, operations, and general and administrative

December 2010Seattle, Washington


2,100


Wireless operations

April 2008Cambridge, Massachusetts


2,650


Consulting operations

June 2011   month-to-month month-to-month out-of-town
  Item 3.
    Legal
    Proceedings.   21




---



##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Security Holders.    Item 4A.
    Executive
    Officers.    Name

Age

PositionUmang Gupta


57


Chairman of the Board and Chief
    Executive OfficerJohannes Reis


50


President Keynote SIGOSDonald Aoki


49


Senior Vice President and General
    Manager of Customer Experience ManagementAndrew Hamer


42


Vice President of Finance and
    Chief Financial OfficerJeffrey Kraatz


52


Vice President of SalesKrishna Khadloya


47


Vice President of EngineeringEric Stokesberry


38


Vice President of OperationsVik Chaudhary


40


Vice President of MarketingHaran Sold


38


Vice President and Managing
    Director EMEA   Umang Gupta
  Johannes Reis
  Donald Aoki
 22




---



##### Table of Contents



Andrew Hamer
  Jeffrey Kraatz e-commerce
  Krishna Khadloya
  Eric Stokesberry
  Vik Chaudhary
  Haran Sold
 23




---



##### Table of Contents



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


LowFiscal Year ended
    September 30, 2006Fourth Quarter

$
11.02


$
10.07Third Quarter


11.28



9.70Second Quarter


12.95



10.13First Quarter


13.63



12.06Fiscal Year ended
    September 30, 2005Fourth Quarter

$
14.61


$
11.49Third Quarter


12.19



10.02Second Quarter


14.21



11.00First Quarter


14.40



12.24       
    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;
    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; 24




---



##### Table of Contents




    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.  period-to-period
  Dividend
    Policy
    Purchases
    of Equity Securities
    Number of


Average


Purchased as Part ofShares


Price Paid


Publicly Announced


Purchased Under thePeriod

Purchased


per Share


Plans or Programs(1)


Plans or Programs(1)(In thousands)July 1, 2006 to July 31,
    2006


624,153


$
10.63



2,000,000


$
57,764Balance as of September 30,
    2006


624,153


$
10.63



2,000,000


$
57,764     (1)
    
    Our Board of Directors approved a program to repurchase shares
    of our common stock in January 2001. On both February 3,
    2006 and June 8, 2006, we entered into agreements with UBS
    Securities LLC (UBS) to establish a trading plan
    (the Trading Plan) intended to qualify under
    Rule 10b5-1
    of the Securities Exchange Act of 1934 (the Exchange
    Act). Each of the Trading Plans instructed UBS to
    repurchase for us, in accordance with
    Rule 10b-18
    of the Exchange Act, up to 1 million shares of our common
    stock. As of September 30, 2006, we had repurchased the
    2.0 million shares under these Trading Plans. For the three
    and twelve months ended September 30, 2006, we repurchased
    624,153 and 2.1 million shares for approximately
    $6.6 million and $22.8 million, respectively. As of
    September 30, 2006, a total of approximately
    14.3 million shares of our common stock had been
    repurchased for $135.3 million, and we had remaining Board
    of Director authorization to repurchase up to approximately
    $57.8 million. 25




---



##### Table of Contents



Item 6.
    Selected
    Consolidated Financial Data.  Form 10-K. Form 10-K.
  Year Ended September 30,2006(3)


2005(2)


2004


2003


2002(1)(In thousands, except per share data)Statement of Operations
    Data:Total revenue

$
55,508


$
53,692


$
42,403


$
38,262


$
37,940(Loss) income from operations
    before cumulative effect of a change in accounting principle


(8,215
)


1,727



2,015



(10,194
)


(74,366
)Net (loss) income before
    cumulative effect of a change in accounting principle


(7,534
)


7,365



4,647



(4,725
)


(62,367
)Cumulative effect of a change in
    accounting principle


















(3,160
)Net (loss) income


(7,534
)


7,365



4,647



(4,725
)


(65,527
)Basic net (loss) income per share
    before cumulative effect of a change in accounting principle


(0.41
)


0.37



0.24



(0.21
)


(2.24
)Diluted net (loss) income per
    share before cumulative effect of a change in accounting
    principle


(0.41
)


0.35



0.22



(0.21
)


(2.24
)Cumulative effect on basic net
    (loss) income per share


















(0.11
)Cumulative effect on diluted net
    (loss) income per share


















(0.11
)Basic net (loss) income per share


(0.41
)


0.37



0.24



(0.21
)


(2.35
)Diluted net (loss) income per share


(0.41
)


0.35



0.22



(0.21
)


(2.35
)Shares used in computing basic and
    diluted net (loss) income per share:Basic


18,278



19,677



19,397



22,080



27,864Diluted


18,278



20,860



20,886



22,080



27,864   As of September 30,2006(3)


2005(2)


2004


2003


2002(1)(In thousands)Balance Sheet Data:Cash, cash equivalents, and
    short-term investments

$
90,751


$
133,803


$
148,117


$
160,214


$
239,287Total assets


199,152



209,828



221,730



202,368



285,781Long-term obligations


50



27



35







Total stockholders equity


173,389



193,918



201,994



190,280



271,455  26




---



##### Table of Contents



(1)
    
    The results of operations for fiscal 2002 include: (a) a
    non-recurring lease termination charge of approximately
    $52.0 million we recorded in connection with the purchase
    of our headquarters building, and (b) a non-cash charge of
    approximately $3.2 million to reflect the cumulative effect
    of a change in accounting principle for the write-off of the
    remaining goodwill as of October 1, 2001. The results of
    operations for fiscal 2002 exclude the amortization of goodwill
    in accordance with SFAS No. 142 which we adopted
    effective October 1, 2001, but includes approximately
    $1.7 million related to the amortization of identifiable
    intangible assets, stock-based compensation and a charge for
    in-process research and development.(2)
    
    The results of operations for fiscal 2005 include a non-cash
    benefit of approximately $3.1 million associated with the
    partial recognition of our net deferred tax assets, offset by a
    provision for income taxes for the year of $791,000, resulting
    in approximately $2.3 million of net tax benefits.(3)
    
    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
    assets, and a $840,000 charge for in-process research and
    development in connection with the acquisition of SIGOS. For
    information regarding comparability of this data as it may
    relate to future periods, see the discussion in Item 7,
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations and Notes 8 and 9
    of the Notes to Consolidated Financial Statements under
    Item 8 of this report.  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
     27




---



##### Table of Contents



28




---



##### Table of Contents



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 More-Than-Incidental 03-5).
  
    Evidence of an arrangement,
    Delivery,
    Fixed or determinable fee, and
    Collection is deemed reasonably assured. 29




---



##### Table of Contents



customer-by-customer
    Subscription Services Revenue:
    No. 97-2, 03-5.
    Professional Services Revenue:
  00-21 00-21),
 30




---



##### Table of Contents



Deferred Revenue.
  Domestic


International


TotalNet deferred revenue

$
5,918


$
299


$
6,217Add back: unpaid deferred revenue


1,308



18



1,326Gross deferred revenue at
    September 30, 2005

$
7,226


$
317


$
7,543Net deferred revenue

$
5,936


$
4,713


$
10,649Add back: unpaid deferred revenue


804



1,453



2,257Gross deferred revenue at
    September 30, 2006

$
6,740


$
6,166


$
12,906       Allowance
    for Doubtful Accounts and Billing Allowance
       31




---



##### Table of Contents



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;
    significant decline in our stock price for a sustained
    period; and
    our market capitalization relative to net book value.   32




---



##### Table of Contents



Stock-based
    Compensation
    Income
    Taxes Deferred Income Tax Assets and Deferred Income Tax
    Liabilities
       33




---



##### Table of Contents



Results
    of Operations
    Year Ended September 30,2006


2005


2004Revenue:Subscription services


78.1
%


73.8
%


88.6
%Professional services


21.9



26.2



11.4Total revenue


100.0



100.0



100.0Expenses:Costs of subscription services


14.7



9.9



12.9Costs of professional services


16.2



17.1



9.5Research and development


17.0



14.2



16.6Sales and marketing


30.4



24.3



25.0Operations


13.0



11.4



12.9General and administrative


17.7



14.5



11.8Excess occupancy costs


0.0



0.8



2.0Amortization of identifiable
    intangible assets


4.3



4.5



4.0Amortization of in-process
    research and development


1.5



0.0



0.6Total operating expenses


114.8



96.7



95.3(Loss) income from operations


(14.8
)


3.3



4.7Interest income


8.3



6.2



6.4Interest and other expenses


(0.1
)


0.0



(0.1
)(Provision) benefit for income
    taxes


(7.0
)


4.3



(0.1
)Net (loss) income


(13.6
)%


13.8
%


10.9
%   Comparison
    of Fiscal Years Ended September 30, 2006 and 2005
  Revenue
  Revenue

2006


2005


% Change(In thousands)Subscription services

$
43,367


$
39,618



9
%Professional services


12,141



14,074



(14
)%Total Revenue

$
55,508


$
53,692



3
%   Subscription Services.
 34




---



##### Table of Contents



Professional Services.
   35




---



##### Table of Contents



Subscription


ProfessionalServices


ServicesInternet Test and
    Measurement:Application Perspective


XDiagnostic Services


XEnterprise Adapters


XLoadPro






XNetMechanic


XPerformance Scoreboard


XProfessional Services






XRed Alert


XStreaming Perspective


XTest Perspective


XTransaction Perspective


XWebIntegrity


XWeb Site Perspective


XVoice Perspective


XMobile Test and
    Measurement:Mobile Application Perspective


XMobile Device Perspective


XSIGOS Global Roamer


XSIGOS SITE


XCustomer Experience
    Management:WebEffective


X



XWebExcellence Scorecards


X



X     2006


2005


% changeFor the year ended
    September 30:Internet Subscriptions

$
35,663


$
35,451



1
%Internet Engagements


3,849



3,811



1
%Total Internet Revenue


39,512



39,262



1
%Total Mobile Subscriptions


5,385



2,168



148
%CEM Subscriptions


2,319



1,999



16
%CEM Engagements


8,292



10,263



(19
)%Total CEM Revenue


10,611



12,262



(13
)%Total Revenue

$
55,508


$
53,692



3
%    36




---



##### Table of Contents



Expenses:
  Costs of
    Subscription Services and Professional Services
  2006


2005


% Change(In thousands)Costs of subscription services

$
8,186


$
5,340



53
%Costs of professional services

$
8,975


$
9,171



(2
)%   Costs of Subscription Services.
  Costs of Professional Services.
 37




---



##### Table of Contents



Research
    and Development
  2006


2005


% Change(In thousands)Research and development

$
9,452


$
7,615



24
%     Sales
    and Marketing
  2006


2005


% Change(In thousands)Sales and marketing

$
16,856


$
13,060



29
%     Operations
  2006


2005


% Change(In thousands)Operations

$
7,203


$
6,114



18
%     General
    and Administrative
  2006


2005


% Change(In thousands)General and administrative

$
9,840


$
7,796



26
%  38




---



##### Table of Contents



Excess
    Occupancy (Income) Costs
  2006


2005


% Change(In thousands)Excess occupancy (income) costs

$
(13
)

$
434



(103
)%     Amortization
    of Identifiable Intangible Assets and In-process Research and
    Development
  2006


2005


% Change(In thousands)Amortization of identifiable
    intangible assets

$
2,384


$
2,435



(2
)%In-process research and
    development costs


840







100
%Total amortization of identifiable
    intangible assets and in-process research and development

$
3,224


$
2,435



32
%      39




---



##### Table of Contents



Technology


CustomerBased


Based


Trademark


Covenant


Backlog


TotalNet carrying value at
    September 30, 2006

$
5,342


$
3,749


$
715


$
69


$
230


$
10,105   Interest
    Income, and Interest and other Expenses
  2006


2005


% Change(In thousands)Interest income

$
4,634


$
3,344



39
%Interest and other expenses


(76
)


(15
)


407
%Interest income, interest and
    other expenses, net

$
4,558


$
3,329



37
%     (Provision
    for) Benefit from Income Taxes
  2006


2005


% Change(In thousands)(Provision for) benefit from
    income taxes

$
(3,877
)

$
2,309



(268
)%     
    Net loss incurred in fiscal 2006 and in the second, third, and
    fourth quarters of fiscal 2006, and
    Updating of our estimates for future taxable income.     40




---



##### Table of Contents



Comparison
    of Fiscal Years Ended September 30, 2005 and 2004
  Revenue
  2005


2004


% Change(In thousands)Subscription services

$
39,618


$
37,574



5
%Professional services


14,074



4,829



191
%Total Revenue

$
53,692


$
42,403



27
%   Subscription Services.
 41




---



##### Table of Contents



Professional Services.
      2005


2004


% changeFor the year ended
    September 30:Internet Subscriptions

$
35,451


$
34,425



3
%Internet Engagements


3,811



3,629



5
%Total Internet Revenue


39,262



38,054



3
%Total Mobile Subscriptions


2,168



2,027



7
%CEM Subscriptions


1,999



1,122



78
%CEM Engagements


10,263



1,200



755
%Total CEM Revenue


12,262



2,322



428
%Total Revenue

$
53,692


$
42,403



27
%          42




---



##### Table of Contents



Expenses:
  Costs of
    Subscription Services and Professional Service
  2005


2004


% Change(In thousands)Costs of subscription services

$
5,340


$
5,455



(2
)%Costs of professional services

$
9,171


$
4,023



128
%   Costs of Subscription Services.
  Costs of Professional Services.
  Research
    and Development
  2005


2004


% Change(In thousands)Research and development

$
7,615


$
7,051



8
%     Sales and
    Marketing
  2005


2004


% Change(In thousands)Sales and marketing

$
13,060


$
10,598



23
%     Operations
  2005


2004


% Change(In thousands)Operations

$
6,114


$
5,462



12
%    43




---



##### Table of Contents



General
    and Administrative
  2005


2004


% Change(In thousands)General and administrative

$
7,796


$
5,022



55
%     Excess
    Occupancy Costs
  2005


2004


% Change(In thousands)Excess occupancy costs

$
434


$
840



(48
)%     Amortization
    of Identifiable Intangible Assets and In-process Research and
    Development
  2005


2004


% Change(In thousands)Amortization of identifiable
    intangible assets

$
2,435


$
1,696



44
%In-process research and
    development costs






241



(100
)%Total amortization of identifiable
    intangible assets and in-process research and development

$
2,435


$
1,937



26
%       Interest
    Income, and Interest and other Expenses
  2005


2004


% Change(In thousands)Interest income

$
3,344


$
2,728



23
%Interest and other expenses


(15
)


(37
)


(59
)%Interest income, interest and
    other expenses, net

$
3,329


$
2,691



24
%    44




---



##### Table of Contents



Benefit
    from/(Provision) for Income Taxes
  2005


2004


% Change(In thousands)Benefit from/(provision) for
    income taxes

$
2,309


$
(59
)


(4,014
)%         Liquidity
    and Capital Resources
  As of September 30,2006


2005


2004(In thousands)Cash, cash equivalents and
    short-term investments

$
90,751


$
133,803


$
148,117Accounts receivable, net

$
7,122


$
6,387


$
6,138Working capital

$
80,765


$
127,335


$
136,883Days sales in accounts receivable
    (DSO)(a)


43



44



46     (a)
    
    DSO is calculated as: ((ending net accounts receivable) / net
    sales for the three months period) multiplied by number of days
    in the period  2006


2005


2004(In thousands)For the year ended
    September 30:Cash provided by operating
    activities

$
10,615


$
10,961


$
15,163Cash provided by (used in)
    investing activities

$
7,138


$
41,987


$
(31,972
)Cash provided by (used in)
    financing activities

$
(19,096
)

$
(15,946
)

$
7,099   Cash,
    cash equivalents and short-term investments and working
    capital
   45




---



##### Table of Contents



Cash
    flows from operating activities
      Comparison
    of Years Ended September 30, 2006 and 2005
    Comparison
    of Years Ended September 30, 2005 and 2004
    Cash
    flow from investing activities
    Comparison
    of Years Ended September 30, 2006 and 2005
    Comparison
    of Years Ended September 30, 2005 and 2004
    Cash
    flows from financing activities
   46




---



##### Table of Contents



Comparison
    of Years Ended September 30, 2006 and 2005
    Comparison
    of Years Ended September 30, 2005 and 2004
    Commitments
    and Contractual Obligations
      Payment Due by Period2 3


4 5


More ThanTotal


1 Year


Years


Years


5 YearsContractual Obligations: Leases

$
3,880


$
736


$
1,133


$
896


$
1,115Commercial Commitments: Bandwidth
    and Collocation


765



448



317







Total

$
4,645


$
1,184


$
1,450


$
896


$
1,115      47




---



##### Table of Contents



Off
    Balance Sheet Arrangements
    Indemnification
  and/or
  Recent
    Accounting Pronouncements
      06-3 06-3
 48




---



##### Table of Contents




    Registrants should quantify errors using both the
    rollover approach (current year statement of
    operations effect) and iron curtain approaches (year
    end balance sheet effect) and evaluate whether either approach
    results in quantifying a misstatement that, when all relevant
    quantitative and qualitative factors are considered, is material.
    If correcting the item in the current year materially affects
    the current year but the item was not material in any prior
    year, the prior year financial statements should be
    corrected, even though such revision previously was and
    continues to be immaterial to the prior year financial
    statements. However, in this circumstance, correcting
    prior year financial statements for immaterial errors does not
    require amending previously filed financial statements. The
    correction can be made the next time the prior year financial
    statements are filed.
    For purposes of evaluating materiality under the iron
    curtain approach, all uncorrected errors on the balance
    sheet are presumed to be reversed into the statement of
    operations in the current period even though some or all of the
    uncorrected difference may relate to periods prior to the latest
    statement of operations presented and, therefore, would only
    impact opening accumulated earnings (deficit). If the amount of
    the uncorrected difference(s) is determined to be material to
    the current period statement of operations, then such amount
    would be deemed material and would have to be corrected for in
    the manner set forth above.    
    Restatement of prior years is not required if the registrant
    properly applied its previous approach, either
    rollover or iron curtain approach, so
    long as all relevant qualitative factors were considered.
    The SEC Staff will not object if a registrant records a one-time
    cumulative effect adjustment to correct errors existing in prior
    years that previously had been considered immaterial,
    quantitatively and qualitatively, based on the appropriate use
    of the registrants previous approach.
    If prior years are not restated, the cumulative effect
    adjustment is recorded in opening accumulated earnings (deficit)
    as of the beginning of the fiscal year of adoption (e.g.
    October 1, 2006 would be the beginning of our fiscal year
    2007).
    At transition, registrants electing not to restate prior periods
    are required to disclose the nature and amount of each
    individual error being corrected for in the cumulative
    adjustment. The disclosure should also include when and how each
    error being corrected arose and the fact that the errors had
    previously been considered immaterial.     49




---



##### Table of Contents



Item 7A.
    Qualitative
    And Quantitative Disclosures About Market Risks.  Interest Rate Sensitivity.
  Foreign Currency Fluctuations and Derivative
    Transactions.
 50




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data.  Keynote
    Systems, Inc. and Subsidiaries
  Index to
    Consolidated Financial Statements
  Consolidated
    Balance Sheets


52Consolidated
    Statements of Operations


53Consolidated
    Statements of Stockholders Equity and Comprehensive Income
    (Loss)


54Consolidated
    Statements of Cash Flows


55Notes to
    Consolidated Financial Statements


56Supplementary Data
    (Unaudited)


83Reports of
    Independent Registered Public Accounting


84 and 86Managements
    Report on Internal Control Over Financial Reporting


85  51




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Consolidated Balance Sheets
  September 30,2006


2005(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
45,662


$
46,934Short-term investments


45,089



86,869Total cash, cash equivalents, and
    short-term investments


90,751



133,803Accounts receivable, less
    allowance for doubtful accounts of $55 and $153, at
    September 30, 2006 and 2005, respectively, and less billing
    adjustment of $418 and $381, at September 2006 and 2005,
    respectively


7,122



6,387Prepaid and other current assets


2,655



2,623Inventories


876



Deferred tax assets


1,389



405Total current assets


102,793



143,218Property and equipment, net


34,464



34,669Goodwill


48,676



21,186Identifiable intangible assets, net


10,105



3,760Deferred tax assets


3,114



6,995Total assets

$
199,152


$
209,828LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,558


$
538Accrued expenses


10,748



9,088Current portion of capital lease
    obligation


31



40Deferred revenue


9,691



6,217Total current liabilities


22,028



15,883Long-term portion of capital lease
    obligation


50



27Long-term deferred revenue


958



Long-term deferred tax liability


2,727



Total liabilities


25,763



15,910Commitments and contingencies (See
    Note 10)Stockholders equity:Common stock, $0.001 par
    value; 100,000,000 shares authorized; 19,072,349 and
    19,606,698 shares issued and outstanding as of
    September 30, 2006 and 2005, respectively


19



20Treasury stock, 2,000,000 and
    852,200 shares as of September 30, 2006 and 2005,
    respectively


(21,150
)


(11,037
)Additional paid-in capital


330,398



335,350Accumulated deficit


(137,578
)


(130,044
)Accumulated other comprehensive
    gain (loss)


1,700



(371
)Total stockholders equity


173,389



193,918Total liabilities and
    stockholders equity

$
199,152


$
209,828    52




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Consolidated Statements of Operations
  Years Ended September 30,2006


2005


2004(In thousands, except per share amounts)Revenue:Subscription services

$
43,367


$
39,618


$
37,574Professional services


12,141



14,074



4,829Total revenue


55,508



53,692



42,403Expenses:Costs of subscription services


8,186



5,340



5,455Costs of professional services


8,975



9,171



4,023Research and development


9,452



7,615



7,051Sales and marketing


16,856



13,060



10,598Operations


7,203



6,114



5,462General and administrative


9,840



7,796



5,022Excess occupancy (income) costs


(13
)


434



840Amortization of identifiable
    intangible assets


2,384



2,435



1,696In-process research and development


840







241Total expenses*


63,723



51,965



40,388(Loss) income from operations


(8,215
)


1,727



2,015Interest income


4,634



3,344



2,728Interest and other expenses


(76
)


(15
)


(37
)Net (loss) income before
    (provision for) benefit from income taxes


(3,657
)


5,056



4,706(Provision for) benefit from
    income taxes


(3,877
)


2,309



(59
)Net (loss) income

$
(7,534
)

$
7,365


$
4,647Net (loss) income per share:Basic

$
(0.41
)

$
0.37


$
0.24Diluted

$
(0.41
)

$
0.35


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


18,278



19,677



19,397Diluted


18,278



20,860



20,886* Stock-based compensation by
    category:Costs of subscription
    services

$
94


$



$
Costs of professional
    services


518







Research and
    development


887







Sales and marketing


1,100







Operations


662







General and
    administrative


458







    53




---



##### Table of Contents



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











Other


TotalPaid-In








Accumulated


Comprehensive


Stockholders


ComprehensiveShares


Amount


Capital


Shares


Amount


Deficit


Income (Loss)


Equity


Income (Loss)(In thousands, except share amounts)Balance as of September 30,
    2003


18,819,976


$
19


$
331,912



(2,556
)

$
(29
)

$
(142,056
)

$
434


$
190,280Repurchase of common stock










(19
)


















(19
)Issuance of common stock


988,334







7,841



















7,841Net income






















4,647







4,647


$
4,647Foreign currency translation


























24



24



24Unrealized loss on available-for
    sale investments


























(779
)


(779
)


(779
)Balance as of September 30,
    2004


19,808,310


$
19


$
339,734



(2,556
)

$
(29
)

$
(137,409
)

$
(321
)

$
201,994


$
3,892Repurchase of common stock










(56
)


(1,878,284
)


(22,697
)










(22,753
)Issuance of common stock


827,028



1



7,361



















7,362Retirement of treasury stock


(1,028,640
)






(11,689
)


1,028,640



11,689











Net income






















7,365







7,365


$
7,365Foreign currency translation


























(66
)


(66
)


(66
)Unrealized gain on available-for
    sale investments


























16



16



16Balance as of September 30,
    2005


19,606,698


$
20


$
335,350



(852,200
)

$
(11,037
)

$
(130,044
)

$
(371
)

$
193,918


$
7,315Repurchase of common stock










(64
)


(2,121,716
)


(22,732
)










(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
)


(12,618
)


973,916



12,619











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


$
330,398



(2,000,000
)

$
(21,150
)

$
(137,578
)

$
1,700


$
173,389


$
(5,463
)    54




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Consolidated Statements of Cash Flows
  2006


2005


2004(In thousands)Cash flows from operating
    activities:Net income (loss)

$
(7,534
)

$
7,365


$
4,647Adjustments to reconcile net
    income (loss) to net cash provided by operating activities:Depreciation and amortization


3,997



3,406



3,580Stock-based compensation


3,719







Charges to bad debt and billing
    adjustment reserves


272



171



216Amortization of debt investment
    premium


460



2,843



3,904Amortization of identifiable
    intangible assets


2,384



2,435



1,696In-process research and development


840







241Tax benefit from stock options


326







Excess income tax benefit from
    stock options


(61
)






Deferred tax assets and liabilities


2,200



(2,663
)


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


314



(299
)


(1,018
)Inventories


34







Prepaids and other current assets


176



39



(125
)Accounts payable and accrued
    expenses


694



(989
)


1,066Deferred revenue


2,794



(1,347
)


956Net cash provided by operating
    activities


10,615



10,961



15,163Cash flows from investing
    activities:Purchases of property, equipment
    and software


(3,058
)


(3,634
)


(4,015
)Purchases of businesses and
    assets, net


(32,042
)


(2,802
)


(25,685
)Purchases of short-term investments


(60,883
)


(105,077
)


(135,164
)Sale of short-term investments


103,121



153,500



132,892Net cash provided by (used in)
    investing activities


7,138



41,987



(31,972
)Cash flows from financing
    activities:Repayment of credit facilities


(46
)


(48
)


(723
)Excess income tax benefit from
    stock options


61







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


3,685



7,362



7,841Repurchase of outstanding common
    stock


(22,796
)


(23,260
)


(19
)Net cash provided by (used in)
    financing activities


(19,096
)


(15,946
)


7,099Effect of exchange rate changes on
    cash and cash equivalents


71







Net (decrease) increase in cash
    and cash equivalents


(1,272
)


37,002



(9,710
)Cash and cash equivalents at
    beginning of the year(1)


46,934



9,932



19,642Cash and cash equivalents at end
    of the year(1)

$
45,662


$
46,934


$
9,932Cash paid for income taxes, net

$
839


$
268


$
160     (1)
    
    Excludes $45.1 million, $86.9 million, and
    $138.2 million of short-term investments at
    September 30, 2006, 2005, and 2004, respectively.   55




---



##### 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
    
    Evidence of an arrangement.  The Company
    considers a customer signed quote, contract, or equivalent
    document to be evidence of an arrangement.
    Delivery.  For non-SIGOS 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 SIGOS services,
    delivery occurs when services are either delivered or accepted,
    if acceptance language exists.
    Fixed or determinable fee.  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 client 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 00-21).
 56




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  No. 97-2, (SOP 97-2), 03-5, 97-2 More-Than-Incidental
    Professional Services Revenue:
  00-21,
     57




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (C)  Use
    of Estimates
    (D)  Cash
    and Cash Equivalents
    (E)  Short-Term
    Investments
  available-for-sale. available-for-sale.
  (F)  Inventories
  first-in,
  (G)  Property
    and Equipment
   58




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    (H)  Comprehensive
    Income (Loss) and Foreign Currency Translation
      2006


2005


2004Unrealized losses on investments

$
(156
)

$
(464
)

$
(480
)Cumulative translation adjustments


1,856



93



159$
1,700


$
(371
)

$
(321
)     (I)  Financial
    Instruments and Concentration of Credit Risk
     59




---



##### Table of Contents



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


Charged


Write-offs/


Balanceat


to


Credit


atBeginning


Operations/


Memos


End ofClassification Period

of Period


Revenue


Issued


Period(1)For the year ended:September 30, 2006

$
534


$
272


$
(333
)

$
473September 30, 2005

$
758


$
171


$
(395
)

$
534September 30, 2004

$
1,048


$
216


$
(506
)

$
758     (1)
    
    Included in the balance at the end of the period is an amount of
    $419,000, $381,000, and $541,000 in billing adjustments as of
    September 30, 2006, 2005 and 2004, respectively.    (J)  Excess
    Occupancy (Income) Costs
    Year ending September 30:2007

$
1,1362008


1,0602009


8032010


2712011


98Thereafter


294Total future minimum rents
    receivable

$
3,662  60




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (K)  Goodwill
    and Identifiable Intangible Assets
  three-to-six
        (L)  Stock-Based
    Compensation
     61




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
      Year Ended September 30,2005


2004Net income, as reported

$
7,365


$
4,647Less: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards, net of related tax effects*


(3,569
)


(5,922
)Pro forma net income (loss)

$
3,796


$
(1,275
)Net income (loss) per share:Basic  as reported

$
0.37


$
0.24Basic  pro forma


0.19



(0.07
)Diluted  as reported


0.35



0.22Diluted  pro forma


0.19



(0.07
)     *
    
    No tax effects were included in the determination of pro forma
    net income (loss) because the deferred tax asset resulting from
    stock-based employee compensation would be offset by an
    additional valuation allowance for deferred tax assets.  (M)  Income
    Taxes
    (N)  Research
    and Development
   62




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (O)  Net
    (Loss) Income Per Share
      Year Ended September 30,2006


2005


2004Numerator:Net (loss) income

$
(7,534
)

$
7,365


$
4,647Denominator:Denominator for basic net (loss)
    income per share  weighted average shares


18,278



19,677



19,397Incremental common shares
    attributable to shares issuable under employee stock option plans






1,183



1,489Denominator for diluted net (loss)
    income per share  weighted average shares


18,278



20,860



20,886Basic net (loss) income per share

$
(0.41
)

$
0.37


$
0.24Diluted net (loss) income per share

$
(0.41
)

$
0.35


$
0.22     Year Ended September 30,2006


2005


2004Shares outstanding under stock
    options


6,754



1,442



1,670Shares of restricted stock subject
    to repurchase










2     (P)  Advertising
    Costs
    (Q)  Recent
    Accounting Pronouncements
   63




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
      06-3 06-3
    
    Registrants should quantify errors using both the
    rollover approach (current year statement of
    operations effect) and iron curtain approaches (year
    end balance sheet effect) and evaluate whether either approach
    results in quantifying a misstatement that, when all relevant
    quantitative and qualitative factors are considered, is material.
    If correcting the item in the current year materially affects
    the current year but the item was not material in any prior
    year, the prior year financial statements should be
    corrected, even though such revision previously was and
    continues to be immaterial to the prior year financial
    statements. However, in this circumstance, correcting
    prior year financial statements for immaterial errors does not
    require amending previously filed financial statements. The
    correction can be made the next time the prior year financial
    statements are filed.
    For purposes of evaluating materiality under the iron
    curtain approach, all uncorrected errors on the balance
    sheet are presumed to be reversed into the statement of
    operations in the current period even though some or all of the
    uncorrected difference may relate to periods prior to the latest
    statement of operations presented and, therefore, would only
    impact opening accumulated earnings (deficit). If the amount of
    the uncorrected difference(s) is determined to be material to
    the current period statement of operations, then such amount
    would be deemed material and would have to be corrected for in
    the manner set forth above.    
    Restatement of prior years is not required if the registrant
    properly applied its previous approach, either
    rollover or iron curtain approach, so
    long as all relevant qualitative factors were considered. 64




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
   
    The SEC Staff will not object if a registrant records a one-time
    cumulative effect adjustment to correct errors existing in prior
    years that previously had been considered immaterial,
    quantitatively and qualitatively, based on the appropriate use
    of the registrants previous approach.
    If prior years are not restated, the cumulative effect
    adjustment is recorded in opening accumulated earnings (deficit)
    as of the beginning of the fiscal year of adoption (e.g. October
    2006 for the Company).
    At transition, registrants electing not to restate prior periods
    are required to disclose the nature and amount of each
    individual error being corrected for in the cumulative
    adjustment. The disclosure should also include when and how each
    error being corrected arose and the fact that the errors had
    previously been considered immaterial.      (3)  Cash,
    Cash Equivalents and Short-Term Investments
    Gross


EstimatedAmortized


Unrealized


MarketCost


Gains


ValueAs of September 30, 2006:Cash

$
7,124


$



$
7,124Commercial paper


12,404



2



12,406Money market funds


2,147







2,147Other money market securities


23,985







23,985Total

$
45,660


$
2


$
45,662As of September 30, 2005:Cash

$
5,702


$



$
5,702Commercial paper


20,057



3



20,060Money market funds


1,611







1,611Other money market securities


19,561







19,561Total

$
46,931


$
3


$
46,934  65




---



##### Table of Contents



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


Gross


EstimatedAmortized


Unrealized


Unrealized


MarketCost


Gains


Losses


ValueState government agency securities

$
6,714


$



$



$
6,714FNMA and FHLMC securities


4,039







(5
)


4,034Other U.S. government agency
    securities


9,096



1



(23
)


9,074Corporate bonds and commercial
    paper


25,398







(131
)


25,267Total

$
45,247


$
1


$
(159
)

$
45,089     EstimatedAmortized


MarketCost


ValueYear ending September 30,2007

$
35,272


$
35,1362008


9,975



9,953Total

$
45,247


$
45,089     Less Than 12 Months


12 Months or Greater


TotalUnrealized





Unrealized





UnrealizedSecurity Description

Fair Value


Loss


Fair Value


Loss


Fair Value


LossAs of September 30, 2006:U.S. federal and state
    government agencies

$
6,978


$
(18
)

$
2,990


$
(10
)

$
9,968


$
(28
)Corporate bonds


11,472



(96
)


8,069



(35
)


19,541



(131
)Total

$
18,450


$
(114
)

$
11,059


$
(45
)

$
29,509


$
(159
)As of September 30, 2005:U.S. federal and state
    government agencies

$
3,954


$
(39
)

$
11,916


$
(73
)

$
15,870


$
(112
)Corporate bonds


14,672



(142
)


25,125



(212
)


39,797



(354
)Commercial paper


5,197



(1
)










5,197



(1
)Total

$
23,823


$
(182
)

$
37,041


$
(285
)

$
60,864


$
(467
)    66




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  other-than-temporarily
  (4)  Property
    and Equipment
    UsefulLives


September 30,(Years)


2006


2005Computer equipment and software


3-5


$
23,322


$
25,925Furniture and fixtures


5



1,751



1,556Land






14,150



14,150Building


30



10,750



10,750Leasehold and building improvements


5-30



8,384



8,09958,357



60,480Less accumulated depreciation and
    amortization






23,893



25,811Total





$
34,464


$
34,669     (5)  Goodwill
    and Identifiable Intangible Assets
    Balance at September 30, 2004

$
24,442Adjustment to goodwill for the
    acquisition of NetRaker Corporation


1,659Adjustment to goodwill for the
    acquisition of Vividence Corporation


(5,205
)Additional goodwill for the
    acquisition of the business of Hudson Williams Europe


290Balance at September 30, 2005


21,186Additional goodwill for the
    GomezPro business of Watchfire Corporation (Note 8)


2,379Additional goodwill for the
    acquisition of SIGOS Systemintegration GmbH (Note 8)


23,788Adjustment to goodwill for the
    acquisition of Hudson Williams Europe (Note 8)


(23
)Translation adjustments


1,346Balance at September 30, 2006

$
48,676    67




---



##### Table of Contents



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


CustomerBased


Based


Trademark


Covenant


Backlog


TotalAs of September 30, 2005:Gross carrying value

$
11,623


$
6,064


$
250


$



$



$
17,937Accumulated amortization


(9,263
)


(4,664
)


(250
)










(14,177
)Net carrying value at
    September 30, 2005

$
2,360


$
1,400


$



$



$



$
3,760As of September 30, 2006:Gross carrying value

$
15,913


$
9,385


$
1,038


$
76


$
254


$
26,666Accumulated amortization


(10,571
)


(5,636
)


(323
)


(7
)


(24
)


(16,561
)Net carrying value at
    September 30, 2006

$
5,342


$
3,749


$
715


$
69


$
230


$
10,105     (6)  Accrued
    Expenses
    September 30,2006


2005Accrued employee compensation

$
2,339


$
2,337Accrued audit and professional fees


1,443



1,030Income and other taxes


1,093



853Other accrued expenses


5,873



4,868$
10,748


$
9,088   (7)  Stockholders
    Equity
  (A)  1999
    Equity Incentive Plan
   68




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
        (B)  1999
    Employee Stock Purchase Plan
     69




---



##### Table of Contents



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


Remaining


AggregateAverage


Contractual


IntrinsicShares


Exercise Price


Term (Years)


ValueOutstanding at September 30,
    2003


5,581


$
12.61



7.7Granted


1,477



13.26Exercised


(866
)


8.26Forfeited, canceled or expired


(303
)


12.76Outstanding at September 30,
    2004


5,889


$
13.39



7.6Granted


2,011



12.07Exercised


(741
)


8.78Forfeited, canceled or expired


(923
)


14.02Outstanding 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



7.1


$
6,146Exercisable at September 30,
    2006


3,872


$
14.52



5.6


$
6,011         2006


2005*


2004*Volatility


30.2
%


32.8
%


33.6
%Risk-free interest rates


4.93



3.66



2.59Expected life (in years)


3.7



2.8



2.5Dividend yield










  70




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    2006


2005*


2004*Volatility


29.0
%


28.0
%


34.0
%Risk-free interest rates


4.84



2.12



1.97Expected life (in years)


1.25



1.25



1.25Dividend yield










     *
    
    The assumptions used in the twelve months ended
    September 30, 2005 and 2004 were used to calculate pro
    forma compensation expense per SFAS 123 as disclosed in
    Note 1(L) Pro-Forma Disclosure for Twelve Months
    ended September 30, 2005 and 2004.    Weighted-AverageGrant-DateShares


Fair ValueStock option awards:Nonvested balance at
    September 30, 2005


2,886


$
2.99Stock options granted


2,247



3.41Vested


(1,113
)


3.03Forfeited


(1,138
)


3.05Nonvested balance at
    September 30, 2006


2,882


$
3.25         Year Ended September 30,2006


2005


2004Shares available at the beginning
    of the year


2,954



4,042



5,216Options granted


(2,247
)


(2,011
)


(1,477
)Options canceled


1,138



840



240Plan shares expired


(603
)






Options expired


232



83



63Shares available for grant at end
    of the year


1,474



2,954



4,042  71




---



##### Table of Contents



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


Options ExercisableWeighted-Average


Weighted-





Weighted-Number of


Remaining


Average





AverageOptions


Contractual


Exercise


Number


ExerciseExercise Prices

Outstanding


Life (Years)


Price


of Shares


PriceFrom $ 1.60 to $ 2.06


13



2.4



1.63



13



1.63From $ 3.20 to $ 4.42


16



2.6



3.95



16



3.95From $ 6.22 to $ 9.30


2,082



4.9



7.75



2,068



7.75From $ 9.35 to $13.98


4,170



8.5



11.61



1,349



11.86From $14.19 to $16.13


110



7.0



14.31



63



14.36From $22.31 to $26.00


23



4.0



24.80



23



24.80From $33.75 to $35.88


32



3.9



35.77



32



35.77From $54.75 to $81.13


308



3.3



69.79



308



69.79From $ 1.60 to $81.13


6,754



7.1


$
13.24



3,872


$
14.52   (D)  Stock
    Repurchase Plan
  Rule 10b5-1 Rule 10b-18
        (E)  Stockholder
    Rights Plan
   72




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
  (8)  Acquisitions
      Cash paid

$
30,078Direct transaction costs


1,186$
31,264      73




---



##### Table of Contents



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

$
1,800Short-term investments


489Accounts receivable


1,244Prepaid expenses


178Inventories


863Property, plant, equipment and
    software


691Deferred taxes


64Intangible Assets:Customer-based intangibles
    (amortization period of 6.5 years)


3,008Technology-based intangibles
    (amortization period of 5.5 years)


3,754Trademarks (amortization period of
    3.5 years)


745Covenant-based intangibles
    (amortization period of 3 years)


72Backlog-based intangibles
    (weighted-average amortization period of 3.5 years)


241In-process research and development


840Goodwill


23,788Total assets acquired


37,777Liabilities assumed


(1,709
)Capital lease obligation


(56
)Deferred revenue


(1,444
)Long-term deferred tax liability


(3,304
)Total purchase price, including
    direct acquisition costs

$
31,264    74




---



##### Table of Contents



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


Twelve Months EndedSeptember 30, 2006


September 30, 2005Revenue

$
62,417


$
67,934Net (loss) income*

$
(6,004
)

$
10,593Net (loss) income per share-basic

$
(0.33
)

$
0.54Net (loss) income per share-fully
    diluted

$
(0.33
)

$
0.51Shares used in pro forma per share
    computation-basic


18,278



19,677Shares used in pro forma per share
    computation-fully diluted


18,278



20,860     *
    
    Included in the unaudited pro-forma net loss for the twelve
    months ended September 30, 2006 is a charge of
    approximately $840,000 related to acquired in-process research
    and development costs. For the twelve months ended
    September 30, 2005, there were no
    acquired-in-process
    research and development costs.  e-business
    Accounts receivable

$
8Prepaid and other assets


25Customer-based intangible assets
    (weighted-average amortization period of 3.3 years)


150Technology-based intangible assets
    (weighted-average amortization period of 3.2 years)


319Goodwill


2,379Liabilities assumed


(163
)Deferred revenue


(127
)Total purchase price, including
    direct acquisition costs

$
2,591    75




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
      (9)  Income
    Taxes
    Year Ended September 30,2006


2005


2004United States

$
(252
)

$
4,988


$
4,525Foreign


(3,405
)


68



181(Loss) income before income taxes

$
(3,657
)

$
5,056


$
4,706     Year Ended September 30,2006


2005


2004Current:Federal

$
(125
)

$
(76
)

$
(101
)Foreign


(1,306
)


(100
)


44State


(345
)


(178
)


(2
)Total current tax expense

$
(1,776
)

$
(354
)

$
(59
)Reduction in goodwill for the tax
    benefit from utilization of acquired companys tax
    attributes

$



$
(437
)

$
Deferred:Federal

$
(3,407
)

$
3,100


$
Foreign


1,963







State


(657
)






Total deferred tax expense

$
(2,101
)

$
3,100


$
Total (provision) benefit for
    income taxes

$
(3,877
)

$
2,309


$
(59
)  76




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Year Ended September 30,2006


2005


2004Federal tax benefit (expense) at
    statutory rate

$
1,280


$
(1,770
)

$
(1,647
)State tax expense net of federal
    tax effect


(154
)


(116
)


(5
)Net operating loss










755Write off of IPR&D


(334
)






(85
)Non-deductible expenses and other


(830
)


(123
)


(144
)Provision for tax for use of
    acquired net operating losses






(437
)


Change in valuation allowance for
    federal and state


(3,936
)


4,831



944Foreign tax differential


97



(76
)


123Total (expense) benefit

$
(3,877
)

$
2,309


$
(59
)     September 30,2006


2005


2004Deferred tax assets:Accruals, reserves and other

$
3,484


$
1,208


$
1,544Capitalized research and
    development


2,689



3,276



526State taxes






31



39Intangibles related to acquisition


4,905



5,552



5,790Property and equipment


23,599



23,729



23,495Net operating loss carryforwards


20,213



21,379



22,891Tax credit carryforwards


3,247



2,288



2,789Gross deferred tax assets


58,137



57,463



57,074Valuation allowance


(52,441
)


(48,742
)


(55,231
)Total deferred tax assets

$
5,696


$
8,721


$
1,843Deferred tax liabilities:Intangible assets


(3,920
)


(1,321
)


(1,843
)Total net deferred tax

$
1,776


$
7,400


$
      77




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
        
    The Company incurred a net loss in fiscal 2006 and in the
    second, third and fourth quarters of fiscal 2006, and
    The Company updated its estimates for its future taxable income.               78




---



##### Table of Contents



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


CapitalYear ending September 30:2007

$
702


$
342008


570



252009


523



152010


506



142011


376



Thereafter


1,115



Total minimum lease payments

$
3,792



88Less amounts representing interest






(7
)Present value of minimum lease
    payments






81Less current portion of obligation
    under capital lease






(31
)Obligations under capital leases,
    less current portion





$
50    79




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    (B)  Legal
    Proceedings
      (C)  Warranties
    (D)  Indemnification
  and/or
  (11)  Geographic
    and Segment Information
   80




---



##### Table of Contents



Keynote
    Systems, Inc. and Subsidiaries
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Year Ended September 30,2006


2005


2004Revenues:United States

$
47,985


$
48,709


$
39,179Europe*


6,238



4,351



2,539Other*


1,285



632



685$
55,508


$
53,692


$
42,403   September 30,2006


2005Long Lived Assets:United States

$
33,775


$
34,665Germany


667



Other


22



4$
34,464


$
34,669     *
    
    No individual country represents more than 10% of revenue.   81




---



##### Table of Contents



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


ProfessionalServices


ServicesInternet Test and
    Measurement:Application Perspective


XDiagnostic Services


XEnterprise Adapters


XLoadPro






XNetMechanic


XPerformance Scoreboard


XProfessional Services






XRed Alert


XStreaming Perspective


XTest Perspective


XTransaction Perspective


XWebIntegrity


XWeb Site Perspective


XVoice Perspective


XMobile Test and
    Measurement:Mobile Application Perspective


XMobile Device Perspective


XSIGOS Global Roamer


XSIGOS SITE


XCustomer Experience
    Management:WebEffective


X



XWebExcellence Scorecards


X



X     2006


2005


2004For the year ended
    September 30:Internet

$
39,512


$
39,262


$
38,054Mobile subscriptions


5,385



2,168



2,027Customer experience management


10,611



12,262



2,322Total Revenue

$
55,508


$
53,692


$
42,403   (12)  Subsequent
    Event
  Rule 10b5-1 Rule 10b-18
 82




---



##### Table of Contents



Supplementary
    Data (Unaudited)    2006Quarter Ended


Year EndedDecember 31,


March 31,


June 30,


September 30,


September 30,2005


2006


2006


2006


2006(In thousands, except per share data)Revenue

$
13,716


$
12,739


$
13,867


$
15,186


$
55,508Total operating expenses


13,505



13,800



18,068



18,350



63,723Income (loss) from operations


211



(1,061
)


(4,201
)


(3,164
)


(8,215
)Net income (loss)


587



(154
)


(1,988
)


(5,979
)


(7,534
)Basic net income (loss) per share

$
0.03


$
(0.01
)

$
(0.11
)

$
(0.35
)

$
(0.41
)Diluted net income (loss) per share

$
0.03


$
(0.01
)

$
(0.11
)

$
(0.35
)

$
(0.41
)   2005Quarter Ended


Year EndedDecember 31,


March 31,


June 30,


September 30,


September 30,2004


2005


2005


2005


2005(In thousands, except per share data)Revenue

$
13,588


$
13,165


$
13,465


$
13,474


$
53,692Total operating expenses


13,445



12,882



12,970



12,668



51,965Income from operations


143



283



495



806



1,727Net income


791



997



1,235



4,342



7,365Basic net income per share

$
0.04


$
0.05


$
0.06


$
0.23


$
0.37Diluted net income per share

$
0.04


$
0.05


$
0.06


$
0.21


$
0.35  83




---



##### Table of Contents



Report
    of Independent Registered Public Accounting Firm           Share Based Payment.
  in Internal Control 
    Integrated Framework
   
   84




---



##### Table of Contents



Item 9.
    Changes
    In and Disagreements with Accountants on Accounting and
    Financial Disclosure.     Item 9A.
    Controls
    and Procedures  (a)
    Managements
    Report on Internal Control over Financial Reporting  Rules 13a-15(f) 15d-15(f) Internal Control  Integrated Framework
  Internal
    Control  Integrated Framework
  (b)
    Changes
    in Internal Control and Financial Reporting    (c)
    Evaluation
    of Disclosure Controls and Procedures    (d)
    Limitations
    on the Effectiveness of Controls     85




---



##### Table of Contents



Report
    of Independent Registered Public Accounting Firm
     Internal Control 
    Integrated Framework
        Internal Control  Integrated Framework Internal Control 
    Integrated Framework .
  .
     
   86




---



##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers of the Registrant.    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.    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:            87




---



##### Table of Contents



Incorporated by ReferenceExhibit








Filing

Exhibit

FiledNo.


Exhibit

Form

File No.

Date

No.

Here-with2.01


Agreement and Plan of
    Reorganization by and between Keynote, Vivid Acquisition
    Corporation, Vividence Corporation and the Shareholders
    Representative named therein

8-K

000-27241

11-29-04

2.013.01


Amended and Restated Certificate
    of Incorporation.

S-1

333-94651

01-14-00

3.043.02


Bylaws.

14A

000-27241

01-19-00

Annex B3.03


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

10.01A10.02


1996 Stock Option Plan.

S-1

333-82781

07-13-99

10.0210.03


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

10.6 88




---



##### Table of Contents



Incorporated by ReferenceExhibit








Filing

Exhibit

FiledNo.


Exhibit

Form

File No.

Date

No.

Here-with10.15
*

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

10-Q

000-27241

08-09-06

10.710.16
*

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

10.1010.19
*

Separation Agreement with Patrick
    Quirk dated April 7, 2006*

10-Q

000-27241

08-09-06

10.1110.20
*

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

10.1321.01


Subsidiaries of Keynote Systems,
    Inc.









X23.01


Consent of 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 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     *
    
    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. 89




---



##### Table of Contents



SIGNATURES    KEYNOTE SYSTEMS INC.
  /s/  UMANG
    GUPTA  Umang Gupta
    attorneys-in-fact Form 10-K attorneys-in-fact attorneys-in-fact
    Name

Title

DatePrincipal Executive
    Officer:/s/  UMANG
    GUPTAUmang
    Gupta

Chairman of the Board, Chief
    Executive Officer and Director

December 13, 2006Principal Financial and
    Accounting Officer:/s/  ANDREW
    HAMERAndrew
    Hamer

Vice President and Chief Financial
    Officer

December 13, 2006Additional Directors:/s/  JENNIFER
    BOLTJennifer
    Bolt

Director

December 13, 2006David
    Cowan

Director/s/  MOHAN
    GYANIMohan
    Gyani

Director

December 13, 2006 90




---



##### Table of Contents



Name

Title

Date/s/  GEOFFREY
    PENNEYGeoffrey
    Penney

Director

December 13, 2006/s/  RAYMOND
    L OCAMPO
    JR.Raymond
    L Ocampo Jr

Director

December 13, 2006/s/  Dr. DEBORAH
    RIEMANDr. Deborah
    Rieman

Director

December 13, 2006/s/  CHARLES
    BOESENBERGCharles
    Boesenberg

Director

December 13, 2006  91




---



##### Table of Contents



EXHIBIT INDEX
  Incorporated by ReferenceExhibit








Filing

Exhibit

FiledNo.


Exhibit

Form

File No.

Date

No.

Here-with2.01


Agreement and Plan of
    Reorganization by and between Keynote, Vivid Acquisition
    Corporation, Vividence Corporation and the Shareholders
    Representative named therein

8-K

000-27241

11-29-04

2.013.01


Amended and Restated Certificate
    of Incorporation.

S-1

333-94651

01-14-00

3.043.02


Bylaws.

14A

000-27241

01-19-00

Annex B3.03


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

10.01A10.02


1996 Stock Option Plan.

S-1

333-82781

07-13-99

10.0210.03


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

10.6 92




---



##### Table of Contents



Incorporated by ReferenceExhibit








Filing

Exhibit

FiledNo.


Exhibit

Form

File No.

Date

No.

Here-with10.15
*

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

10-Q

000-27241

08-09-06

10.710.16
*

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

10.1010.19
*

Separation Agreement with Patrick
    Quirk dated April 7, 2006*

10-Q

000-27241

08-09-06

10.1110.20
*

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

10.1321.01


Subsidiaries of Keynote Systems,
    Inc.









X23.01


Consent of 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 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     *
    
    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. 93