Keynote Systems 10Q 2010 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2010


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

For the transition period from ___________ to ___________

Commission File Number: 000-27241

KEYNOTE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESþ NOo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): YESo NOþ

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



	Class			Shares outstanding as of August 4, 2010
	Common Stock, $.001 par value			14,931,559 shares

PART I—FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
Index to Unaudited Condensed Consolidated Financial Statements


	Page
Condensed Consolidated Balance Sheets as of June 30, 2010 and September 30, 2009		4
Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2010 and 2009		5
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2010 and 2009		6
Notes to Condensed Consolidated Financial Statements		7

KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)


	June 30,			September 30,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	23,480		$	51,383
Short-term investments		36,883			6,585

Total cash, cash equivalents and short-term investments		60,363			57,968
Accounts receivable, less allowance for doubtful accounts of $5 and $112, respectively, and less billing reserve of $399 and $150, respectively		8,347			6,403
Prepaids, deferred costs and other current assets		3,625			3,517
Inventories		1,232			1,222
Deferred tax assets		2,631			2,913

Total current assets		76,198			72,023
Deferred costs and other long-term assets		1,848			3,024
Property, equipment and software, net		33,850			34,778
Goodwill		59,069			66,078
Identifiable intangible assets, net		4,356			6,255
Long-term deferred tax assets		227			61

Total assets	$	175,548		$	182,219


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,319		$	1,147
Accrued expenses		8,393			8,466
Deferred revenue		16,748			17,661

Total current liabilities		26,460			27,274
Deferred rent and other long-term liabilities		3,394			3,344
Long-term deferred revenue		1,712			1,167
Long-term deferred tax liability		457			414

Total liabilities		32,023			32,199

Commitments and contingencies (see Note 14)
Stockholders’ equity:
Common stock		15			14
Additional paid-in capital		286,054			282,653
Accumulated deficit		(139,092	)		(139,614	)
Accumulated other comprehensive income (loss)		(3,452	)		6,967

Total stockholders’ equity		143,525			150,020

Total liabilities and stockholders’ equity	$	175,548		$	182,219

See accompanying notes to the condensed consolidated financial statements.

KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Net revenue:
Subscription services	$	11,950		$	11,455		$	35,831		$	34,269
Ratable licenses		5,159			6,390			16,906			18,348
Professional services		2,164			2,324			6,601			7,753

Total net revenue		19,273			20,169			59,338			60,370
Costs and expenses:
Costs of revenue:
Direct costs of subscription services		2,109			2,098			6,446			6,673
Direct costs of ratable licenses		1,677			1,424			5,129			4,551
Direct costs of professional services		1,457			1,293			4,275			4,466
Development		2,968			2,863			9,084			9,137
Operations		1,935			1,943			5,761			6,353
Amortization of intangible assets — software		433			290			1,166			866

Total costs of revenue		10,579			9,911			31,861			32,046
Sales and marketing		6,296			5,665			19,000			18,162
General and administrative		2,652			2,346			7,830			7,717
Excess occupancy income		(323	)		(258	)		(942	)		(729	)
Amortization of intangible assets — other		146			259			484			791

Total costs and expenses		19,350			17,923			58,233			57,987

Income (loss) from operations		(77	)		2,246			1,105			2,383
Interest income		96			157			299			744
Other income (expense), net		(143	)		(53	)		(93	)		403

Income (loss) before provision for income taxes		(124	)		2,350			1,311			3,530
Provision for income taxes		(191	)		(258	)		(789	)		(810	)

Net income (loss)	$	(315	)	$	2,092		$	522		$	2,720


Net income (loss) per share:
Basic	$	(0.02	)	$	0.15		$	0.04		$	0.19

Diluted	$	(0.02	)	$	0.15		$	0.04		$	0.19

Shares used in computing basic and diluted net income (loss) per share:
Basic		14,799			14,378			14,640			14,274
Diluted		14,799			14,403			14,905			14,321

Cash dividends declared per common share	$	0.05		$	—		$	0.15		$	—

See accompanying notes to the condensed consolidated financial statements.

KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


	Nine Months Ended
	June 30,
	2010			2009
Cash flows from operating activities:
Net income	$	522		$	2,720
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,381			3,864
Stock-based compensation		2,547			3,400
Amortization of identifiable intangible assets		1,650			1,657
Amortization of prepaid tax asset		542			326
Charges to bad debt and billing reserves		218			254
Amortization of debt investment premium		500			3
Deferred tax provision (benefit)		(313	)		40
Collection of tax credit receivable within deferred tax assets		—			489
Loss on disposal of equipment		8			—
Changes in operating assets and liabilities:
Accounts receivable		(2,827	)		907
Inventories		(252	)		198
Prepaids, deferred costs and other assets		(131	)		(1,442	)
Accounts payable and accrued expenses		481			(6,441	)
Deferred revenue		1,600			1,445

Net cash provided by operating activities		7,926			7,420

Cash flows from investing activities:
Purchases of short-term investments		(45,791	)		(15,918	)
Maturities and sales of short-term investments		14,062			12,364
Purchases of property, equipment and software		(2,389	)		(2,596	)
Payment of acquisition costs for Zandan S.A.		—			(170	)

Net cash used in investing activities		(34,118	)		(6,320	)

Cash flows from financing activities:
Repayment of capital lease obligation		(14	)		(12	)
Repayment of notes payable		—			(248	)
Proceeds from issuance of common stock and exercise of stock options		2,993			2,282
Cash dividends declared and paid		(2,201	)		—

Net cash provided by financing activities		778			2,022

Effect of exchange rate changes on cash and cash equivalents		(2,489	)		(388	)

Net change in cash and cash equivalents		(27,903	)		2,734
Cash and cash equivalents at beginning of the period		51,383			42,546

Cash and cash equivalents at end of the period	$	23,480		$	45,280


Supplemental cash flow disclosure:
Income taxes paid (net of refunds)	$	339		$	4,276
Noncash operating and investing activities:
Exercise of non-employee stock options	$	81		$	—
Acquisition of property, equipment and software on account	$	307		$	23

See accompanying notes to the condensed consolidated financial statements.

KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated balance sheets, and condensed consolidated statements of operations and cash flows reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position of Keynote Systems, Inc. and subsidiaries (the “Company”) as of June 30, 2010, and the results of operations and cash flows for the interim periods ended June 30, 2010 and 2009.

The results of operations and cash flows for any interim period are not necessarily indicative of the results to be expected for any other future interim period or for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended September 30, 2009 included in the Company’s Report on Form 10-K as filed with the SEC. The condensed consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries. Intercompany balances have been eliminated in consolidation.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates made in preparing the condensed consolidated financial statements relate to revenue recognition, the allowance for doubtful accounts and billing reserve, inventories and inventory valuation, allocation of purchase price for business combinations, useful lives of property, equipment, software and identifiable intangible assets, asset impairments, the fair values of options granted under the Company’s stock-based compensation plans and valuation allowances for deferred tax assets. Actual results could differ from those estimates, and such differences may be material to the financial statements. Certain prior year amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period’s presentation, including classifying the current portion of capital lease obligation in accrued expenses (see Note 7 and Note 15).

Recently Adopted Accounting Pronouncements

In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-09,Subsequent Events (Topic 855)—Amendments to certain Recognition and Disclosure Requirements(ASU 2010-09) to remove the requirement of disclosing the date through which subsequent events have been evaluated in order to remedy potential conflicts with other requirements. However, in accordance with ASC 855 and existing SEC rules, subsequent events are still required to be evaluated through the date the financial statements are issued.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll-forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the Company with the reporting period beginning January 1, 2010, except for the disclosure on the roll-forward activities for Level 3 fair value measurements, which will become effective for its reporting period beginning July 1, 2011. Adoption of this new guidance had no impact on the Company’s condensed consolidated financial position, results of operations and cash flows.

During the first quarter of 2009, the Company adopted FASB Accounting Standards Codification (“ASC”) 820,Fair Value Measurements and Disclosures(formerly referenced as Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurements),which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. In February 2008, the FASB issued supplemental guidance that delays the effective date of this new fair value accounting standard to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), which the Company adopted in the first quarter of 2010. Adoption of this supplemental guidance to the accounting standard had no material impact on the Company’s condensed consolidated financial position, results of operations and cash flows.

During the first quarter of 2010, the Company adopted FASB ASC 805,Business Combinations (formerly referenced as SFAS No. 141 (revised 2007),Business Combinations), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree in a business combination. This new accounting standard also establishes principles regarding how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature and financial impact of the business combination. In April 2009, the FASB amended this new accounting standard to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, if the fair value can be determined during the measurement period. This new business combination accounting standard will apply prospectively to any future business combinations. The effect of adoption of this new accounting pronouncement on the Company’s financial condition or operating results will depend on the nature of acquisitions completed after the date of adoption.

Recently Issued Accounting Pronouncements

In September 2009, the FASB amended the ASC as summarized in ASU 2009-14,Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry specific revenue accounting guidance for software and software related transactions, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price; and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. The Company is currently assessing the impact of these amendments to the ASC, which will be adopted on the first day of fiscal 2011, on its accounting and reporting systems and processes; however, at this time the Company is unable to quantify the impact on its financial statements of its adoption or determine the timing and method of its adoption.

Stock Based Compensation

(a) Summary of Plans

As of June 30, 2010, the Company was authorized to issue up to approximately 8.3 million shares of common stock under its 1999 Equity Incentive Plan (“Incentive Plan”) to employees, directors, and consultants, including nonqualified and incentive stock options, restricted stock units (“RSUs”), and stock bonuses. Options expire ten years after the date of grant. Vesting periods are determined by the Board of Directors and generally, in the case of stock options, provide for shares to vest over a period of four years with 25% of the shares vesting one year from the date of grant and the remainder vesting monthly over the next three years. RSUs generally vest in full three years from the date of grant. As of June 30, 2010, options to purchase approximately 4.3 million shares and approximately 430,000 RSUs were outstanding under the Incentive Plan. Approximately 1.2 million shares were available for future issuance under the Incentive Plan as of June 30, 2010.

As of June 30, 2010, the Company had reserved a total of approximately 1.4 million shares of common stock for issuance under its 1999 Employee Stock Purchase Plan (“Purchase Plan”). Under the Purchase Plan, eligible employees may defer an amount not to exceed 10% of the employee’s compensation, as defined in the Purchase Plan, to purchase common stock of the Company. The purchase price per share is 85% of the lesser of the fair market value of the common stock on the first day of the applicable offering period or the last day of each purchase period. The Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. As of June 30, 2010, approximately 1.2 million shares had been issued under the Purchase Plan, and approximately 210,000 shares remain for future issuance.

(b) Restricted Stock Units

Prior to fiscal 2009, the Company used equity awards in the form of stock options as one of the means for recruiting and retaining highly skilled talent. In fiscal 2009, the Company began issuing primarily RSUs rather than stock options for eligible employees as the primary type of long-term equity-based award. Stock-based compensation cost for RSUs is measured based on the value of the Company’s stock on the grant date, reduced by the present value of the dividend yield expected to be paid on the Company’s common

stock. Upon vesting, the RSUs are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock.

There were approximately 37,000 RSUs cancelled due to departures during the nine months ended June 30, 2010. Approximately 430,000 and 470,000 RSUs were outstanding at June 30, 2010 and September 30, 2009, respectively, with a weighted average grant date fair value of $9.06 and $8.88 per unit, respectively.

As of June 30, 2010, there was approximately $2.0 million of total unrecognized compensation cost (net of estimated forfeitures) related to nonvested RSUs that is expected to be recognized over a weighted average period of 2.0 years.

(c) Stock Options

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. Weighted-average assumptions for options granted under the Incentive Plan are as follows:


	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2010		2009			2010		2009
Volatility		—		46.8	%		—		42.9	%
Risk free interest rate		—		1.9	%		—		2.2	%
Expected life (in years)		—		4.5			—		4.5
Dividend yield		—		—			—		—

A summary of option activity for the nine months ended June 30, 2010 is presented below (in thousands except per share and term amounts):


						Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Shares			Exercise Price		Term (years)		Value
Outstanding at September 30, 2009		4,802		$	11.65		5.8	$	820
Granted		—			—
Exercised		(269	)		8.96
Forfeited or canceled		(61	)		12.44
Expired		(193	)		13.70

Outstanding at June 30, 2010		4,279		$	11.72		4.9	$	376

Vested and expected to vest at June 30, 2010		4,225		$	11.72		4.9	$	373
Exercisable at June 30, 2010		3,757		$	11.68		4.6	$	355

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been received by the options holders had they exercised all their options on June 30, 2010. The aggregate intrinsic value of options exercised during the three and nine months ended June 30, 2010 was approximately $558,000 and $604,000, respectively.

As of June 30, 2010, there was approximately $1.1 million of total unrecognized compensation cost (net of estimated forfeitures) related to nonvested stock options that are expected to be recognized over a weighted average period of 1.4 years.

(d) Employee Stock Purchase Plan

The Company’s Purchase Plan provides for twenty-four month offering periods with four six-month purchase periods. The six-month purchase periods end on the earlier of January 31st and July 31st of each year or the last business day prior to those dates. The fair value of each stock purchase right is estimated on the first day of the offering period using the Black-Scholes option pricing model. Weighted-average assumptions for stock purchase rights under the Purchase Plan are as follows:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Volatility		64.8	%		58.4	%		63.6	%		53.4	%
Risk free interest rate		0.5	%		0.6	%		0.6	%		1.2	%
Expected life (in years)		1.25			1.25			1.25			1.25
Dividend yield		0.1	%		—			—			—

(e) Stock based Compensation Expense

Stock based compensation under ASC 718,Compensation – Stock Compensation,related to employee stock options, restricted stock units and employee stock purchase rights was reflected in the condensed consolidated statements of operations as follows (in thousands):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Direct costs of ratable licenses	$	12	$	27	$	61	$	51
Direct costs of professional services		81		65		258		391
Development		199		171		604		745
Operations		102		91		328		424
Sales and marketing		299		285		936		1,216
General and administrative		64		123		360		573

Total	$	757	$	762	$	2,547	$	3,400

For the nine months ended June 30, 2009, stock-based compensation expense included a $601,000 expense related to the cancellation in March 2009 of the Company’s Chief Executive Officer’s option to purchase 400,000 shares of its common stock at $14.99 per share, which was approximately 67% vested at the date of cancellation. Another option granted to the Company’s Chief Executive Officer to purchase 300,000 shares of common stock at an exercise price of $70.00 per share was also cancelled in March 2009. No expense was recorded for this cancellation given that the option was fully vested at the date of the cancellation.

Excess Occupancy Income

Excess occupancy income consists of rental income from the leasing of space not occupied by the Company in its headquarters building, net of related fixed costs, such as property taxes, insurance, building depreciation, leasing broker fees and tenant improvement amortization. Property taxes, insurance and building depreciation are based upon actual square footage available to lease to third parties, which was approximately 75% for the three and nine months ended June 30, 2010 and 2009. Rental income was approximately $695,000 and $652,000 for the three months ended June 30, 2010 and 2009, respectively. Rental income was approximately $2.1 million and $1.9 million for the nine months ended June 30, 2010 and 2009, respectively. As of June 30, 2010, the Company had leased space to 12 tenants, of which 11 had noncancellable operating leases, which expire on various dates through 2014. At June 30, 2010 future minimum rents receivable under the leases, are as follows (in thousands):


	Total
Fiscal years:
2010 (remaining three months)	$	672
2011		2,599
2012		1,823
2013		430
2014		89
Thereafter		—

Total future minimum rents receivable	$	5,613

(2) Revenue Recognition

Revenue consists of subscription services revenue, ratable licenses revenue and professional services revenue and is recognized when all of the following criteria have been met:

	•		Persuasive evidence of an arrangement exists.The Company considers a customer signed quote, contract, or purchase order 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 or 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.

The Company does not generally grant refunds. All discounts granted reduce revenue. Free trials are occasionally provided to prospective customers who would like to try certain of the Company’s subscription services before they commit to purchasing the services. The services provided during the trial period are typically stand-alone transactions and are not bundled with other services. Revenue is not recognized for these free trial periods.

Subscription Services Revenue:Subscription services revenue consists of fees from sales of subscriptions to the Company’s Perspective family of services, and Global Roamer.

Subscription services revenue is recognized in accordance with ASC 605-25-30 (formerly referenced as Staff Accounting Bulletin (“SAB”) 104,Revenue Recognition) and ASC 605-25-30 (formerly referenced as Emerging Issues Task Force (“EITF”) Issue 00-21,Revenue Arrangements with Multiple Deliverables).

The Company has entered into multiple element arrangements where sufficient objective evidence of fair value does not exist for the allocation of revenue. As a result, the elements within its subscription arrangements do not qualify for treatment as separate units of accounting. Accordingly, the Company accounts for fees received under subscription arrangements as a single unit of accounting and recognizes the entire arrangement fee as revenue either ratably over the service period, generally over twelve months, or based upon actual monthly usage.

For customers that are billed the entire amount of their subscription in advance, subscription services revenue is deferred upon invoicing and is recognized ratably over the service period, generally ranging from one to twelve months, commencing on the day service is first provided. For customers that are billed on a monthly basis, revenue is recognized monthly based upon actual service usage for the month. Regardless of when billing occurs, the Company recognizes revenue as services are provided and defers any revenue that is unearned.

WebEffective service can be sold on a subscription basis or as part of a professional services engagement. The Company recognizes revenue from the use of its WebEffective service that is sold on a subscription basis ratably over the subscription period, commencing on the day service is first provided, and such revenue is recorded as subscription services revenue. The Company recognizes revenue from the use of its WebEffective service as part of a professional services engagement at the time the professional services revenue is recognized and is recorded as professional services revenue.

Ratable Licenses Revenue:Ratable licenses revenue consists of fees from the sale of mobile automated test equipment, maintenance, engineering and consulting services associated with Keynote SIGOS System Integrated Test Environment (“SITE”). The Company frequently enters into multiple element arrangements with mobile customers for the sale of its automated test equipment, including software licenses, hardware, consulting services to configure the hardware and software (implementation or integration services), post contract support (maintenance) services, training services and minor other consulting services. These multiple element arrangements are within the scope of ASC 985-605-15 and ASC 985-605-15-3 (formerly referenced as Statement of Position No. 97-2,Software Revenue Recognitionand EITF Issue 03-5,Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software, respectively). This determination is based on the hardware component of the Company’s multiple element arrangements being deemed to include a software related element. In addition, customers do not purchase the hardware without also purchasing the software. In other words, the software and hardware are sold together as a package, with payments due from customers upon delivery.

None of the Keynote SIGOS implementation/integration services provided by the Company are considered to be essential to the functionality of the licensed products. This assessment is due to the implementation/integration services being performed during a relatively short period (generally within two to three months) compared to the length of the arrangement which typically ranges from twelve to thirty-six months. Additionally, the implementation/integration services are general in nature and the Company has a history of successfully gaining customer acceptance.

The Company cannot allocate the arrangement consideration to the multiple elements based on vendor specific objective evidence (“VSOE”) of fair value because sufficient evidence of VSOE does not exist for the undelivered elements of the arrangement, typically

maintenance. Therefore, the Company recognizes the entire arrangement fee into revenue ratably over the maintenance period, historically ranging from twelve to thirty-six months, once the implementation and integration services are completed, usually within two to three months following the delivery of the hardware and software. Where acceptance provisions exist, the ratable recognition of revenue begins when evidence of customer acceptance of the software and hardware has occurred as intended under the respective arrangement’s contractual terms.

Professional Services Revenue:Professional services revenue consists of fees generated from LoadPro, Customer Experience Management (“CEM”) and professional consulting services that are purchased as part of a professional service project. Revenue from these services is recognized as the services are performed, typically over a period of one to three months. For professional service projects that contain milestones, the Company recognizes revenue once the services or milestones have been delivered, based on input measures. Payment occurs either up-front or over time.

The Company also enters into multiple element arrangements, which generally consist of either: 1) the combination of subscription and professional services, or 2) multiple professional services. For these arrangements, the Company recognizes revenue in accordance with ASC 605-25-30. The Company has been unable to establish objective evidence of fair value of the undelivered elements for such arrangements. Consequently, the entire arrangement fee is recognized ratably over the applicable performance period.

Deferred Revenue:Deferred revenue is comprised of all unearned revenue that has been collected in advance, primarily unearned subscription services and ratable licenses revenue, and is recorded as deferred revenue on the balance sheet until the revenue is earned. Any unpaid deferred revenue reduces the balance of accounts receivable. Short-term deferred revenue represents the unearned revenue that has been collected in advance that will be earned within twelve months of the balance sheet date. Correspondingly, long-term deferred revenue represents the unearned revenue that will be earned after twelve months from the balance sheet date and primarily relates to ratable licenses revenue.

Deferred Costs:Deferred costs are mainly comprised of hardware costs associated with Keynote SIGOS SITE revenue arrangements. Deferred costs are categorized as short-term for any arrangement for which the original service contracts are one year or less in length. Correspondingly, deferred costs associated with arrangements for which the original service contracts are greater than one year are classified as noncurrent deferred costs in the condensed consolidated balance sheets. These deferred costs are amortized to cost of ratable licenses over the life of the customer contract, generally one to three years. Amortization of these deferred costs commences when revenue recognition begins, which is typically the later of delivery or acceptance.

(3) Other Comprehensive Income (Loss) and Foreign Currency Translation

The Company reports comprehensive income (loss) in accordance with the provisions of ASC 220 (formerly referenced as SFAS No. 130,Reporting Comprehensive Income),which establishes standards for reporting comprehensive income and its components in the financial statements. The components of comprehensive income consist of net income (loss), unrealized gains and losses on available-for-sale investments and foreign currency translation. The unrealized gains and losses on available-for-sale investments and foreign currency translation are excluded from earnings and reported as a component of stockholders’ equity. The foreign currency translation adjustment results from subsidiaries not using the United States dollar as their functional currency since the majority of their economic activities are primarily denominated in their applicable local currency. The Company’s subsidiaries located in Germany, the Netherlands and France have a functional currency other than the United States dollar. Accordingly, all assets and liabilities related to these operations are translated at the current exchange rates at the end of each period. Revenues and expenses are translated at average exchange rates in effect during the period. The resulting cumulative translation adjustments are recorded directly to the accumulated other comprehensive income (loss) account in stockholders’ equity. Gains (losses) from foreign currency transactions are reflected in other income (expense), net in the condensed consolidated statements of operations as incurred and were approximately ($143,000) and ($51,000) for the three months ended June 30, 2010 and 2009, respectively. Gains (losses) from foreign currency transactions were ($93,000) and $379,000 for the nine months ended June 30, 2010 and 2009, respectively.

The components of other comprehensive income (loss) are as follows (in thousands):


	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2010			2009		2010			2009
Net income (loss)	$	(315	)	$	2,092	$	522		$	2,720
Net unrealized gain (loss) on available-for-sale investments		(6	)		1		(39	)		13
Foreign currency translation gain (loss)		(5,473	)		3,518		(10,379	)		(465	)

Other comprehensive income (loss)	$	(5,794	)	$	5,611	$	(9,896	)	$	2,268

The Company did not record deferred taxes on unrealized losses on its investments due to the full valuation allowance on deferred tax assets in the United States. There is no tax effect on the foreign currency translation because it is management’s intent to reinvest the undistributed earnings of its foreign subsidiaries indefinitely.

(4) Financial Instruments and Concentration of Risk

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair market value due to their short-term nature. Under ASC 820,Fair Value Measurements and Disclosures,the Company presents its short-term investments at fair market value (see Note 6). Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable.

Credit risk is concentrated in North America, but exists in Europe as well. The Company generally requires no collateral from customers; however, throughout the collection process, it conducts an ongoing evaluation of customers’ ability to pay. The Company’s accounting for its allowance for doubtful accounts is determined based on historical trends, experience and current market and industry conditions. Management regularly reviews the adequacy of the Company’s allowance for doubtful accounts by considering the age of each invoice, each customer’s expected ability to pay and the Company’s collection history with each customer. Management reviews invoices greater than 60 days past due to determine whether an allowance is appropriate. In addition, the Company maintains a reserve for all other invoices, which is calculated by applying a percentage based on historical collection trends to the outstanding accounts receivable balance.

In addition to the allowance for doubtful accounts, the Company maintains a billing reserve that represents the reserve for potential billing adjustments and which is recorded as a reduction of revenue. The Company’s billing reserve is calculated as a percentage of revenue based on historical trends and experience.

The allowance for doubtful accounts and billing reserve represent management’s best estimate as of the balance sheet dates, but changes in circumstances, including unforeseen declines in market conditions, actual collection rates and the number of billing adjustments, may result in additional allowances or recoveries in the future.

For the three and nine months ended June 30, 2010 and 2009 no single customer accounted for 10% or more of total net revenue. As of June 30, 2010, no customer accounted for more than 10% of total net accounts receivable. As of September 30, 2009, one customer accounted for more than 10% of total net accounts receivable, of which the entire amount has been collected.

(5) Cash, Cash Equivalents, and Short-Term Investments

The Company considers all highly liquid investments held at major banks, commercial paper, money market funds and other securities with original maturities of three months or less to be cash equivalents in accordance with ASC 230-10,Statement of Cash Flows(formerly referenced as SFAS No. 95).

The Company classifies all of its investments as available-for-sale at the time of purchase since it is management’s intent that these investments are available for current operations, and includes these investments on its balance sheet as short-term investments. These investments consist of fixed-term deposits with original maturities longer than three months and investment-grade corporate and government debt securities with Moody’s ratings of A2 or better. Investments classified as available-for-sale are recorded at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses are recorded based on specific identification.

The following table summarizes the Company’s cash and cash equivalents and short-term investments as of June 30, 2010 (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Market Value
Cash	$	15,470	$	—	$	—		$	15,470
Money market funds		8,010		—		—			8,010

Total cash and cash equivalents	$	23,480	$	—	$	—		$	23,480

Fixed-term deposits	$	8,560	$	—	$	—		$	8,560
Treasuries and agencies		4,604		2		—			4,606
Municipal and corporate bonds		23,758		11		(52	)		23,717

Total short-term investments	$	36,922	$	13	$	(52	)	$	36,883

The following table summarizes the Company’s cash and cash equivalents and short-term investments as of September 30, 2009 (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Market Value
Cash	$	20,492	$	—	$	—	$	20,492
Money market funds		30,891		—		—		30,891

Total cash and cash equivalents	$	51,383	$	—	$	—	$	51,383

Fixed-term deposits	$	6,585	$	—	$	—	$	6,585

Total short-term investments	$	6,585	$	—	$	—	$	6,585

The Company utilized the guidance and procedures in ASC 820-10 and ASC 820-10-15 to determine the fair value of financial instruments. The Company determined that the gross unrealized loss on investments represents a temporary impairment based on the guidance in ASC 320-10-35-18 through 35-34E,Investments—Debt and Equity Securities, Recognition and Measurement, Impairment. ASC 320-10-35-33A through 35-33I provide three conditions for evaluating whether an impairment of a debt security is other than temporary each reporting period:

	•		If management intends to sell an impaired debt security, the impairment is considered other than temporary. If the entity does not intend to sell the impaired debt security, it must still assess whether it is more likely than not that it will be required to sell the security.

	•		If management determines that it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis of the security, the impairment is considered other than temporary.

•

If management determines that it does not intend to sell an impaired debt security and, that it is not more likely than not that it will be required to sell such a security before recovery of the security’s amortized cost basis, the entity must assess whether it expects to recover the entire amortized cost basis of the security.

The Company has the intent and ability to hold these securities until their value recovers, and have not sold any at a loss.

Contractual maturities of available-for-sale securities at June 30, 2010 were as follows (in thousands):


			Estimated
	Cost		Fair Value
Due in less than one year	$	23,400	$	23,371
Due in more than one year and less than two years		13,522		13,512

Total	$	36,922	$	36,883

(6) Fair Value Measurements

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

	•		Level 1 inputs are based on quoted prices in active markets for identical assets or liabilities.

	•		Level 2 inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•		Level 3 inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

The following table presents the Company’s assets measured at fair value on a recurring basis as of June 30, 2010 (in thousands):


	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Cash and cash equivalents:
Money market funds	$	8,010	$	—	$	—	$	8,010
Short-term investments:
Fixed- term deposits		—		8,560		—		8,560
Municipal and corporate bonds		23,717		—		—		23,717
Treasuries and agencies		4,606		—		—		4,606

Total assets measured at fair value	$	36,333	$	8,560	$	—	$	44,893

Fixed-term deposits are valued at cost, which approximates fair value as of June 30, 2010.

(7) Consolidated Financial Statement Details

Prepaids, Deferred Costs and Other Current Assets


	June 30, 2010		September 30, 2009
Prepaid expenses	$	1,621	$	1,554
Deferred costs of revenue		838		580
Income tax receivable		695		971
Security deposits, advances, and interest receivable		361		43
Other assets		110		369

Total	$	3,625	$	3,517

Property, equipment and software


	June 30, 2010			September 30, 2009
Land	$	14,150		$	14,150
Computer equipment and software		31,239			29,551
Building		21,908			21,875
Furniture and fixtures		2,105			2,169
Leasehold and building improvements		1,110			1,179
Construction in progress		630			383

		71,142			69,307
Less accumulated depreciation and amortization		(37,292	)		(34,529	)

Total	$	33,850		$	34,778

Deferred Costs and Other Long-Term Assets


	June 30, 2010		September 30, 2009
Prepaid tax asset	$	944	$	1,710
Deferred costs of revenue		251		421
Tenant rent receivable		197		280
Deposits		235		264
Prepaid expenses		221		349

Total	$	1,848	$	3,024

Accrued Expenses


	June 30, 2010		September 30, 2009
Accrued employee compensation	$	3,828	$	4,417
Accrued audit and professional fees		1,000		429
Income and other taxes		864		844
Other accrued expenses*		2,701		2,776

Total	$	8,393	$	8,466

* The current portion of capital lease obligation has been included in other accrued expenses. Additionally, certain amounts in other accrued expenses at September 30, 2009 have been reclassified to the other components of accrued expenses to correct their classification.

(8) Inventories

Inventories primarily relate to direct costs associated with SIGOS SITE systems hardware and are stated at the lower of cost (determined on a first-in, first-out basis) or market. If the cost of the inventories exceeds their market value, provisions are made currently for the difference between the cost and the market value. The Company evaluates inventories for excess quantities and obsolescence on a quarterly basis. This evaluation includes analysis of historical and forecasted sales of the Company’s products, competitiveness of product offerings, market conditions, and product life cycles. Any adjustment for market value decreases, inventories on hand in excess of forecasted demand or obsolete inventories are charged to cost of ratable licenses in the period that management identifies the adjustment. Inventories related to SIGOS SITE systems were approximately $1.2 million as of June 30, 2010 and September 30, 2009.

(9) Goodwill and Identifiable Intangible Assets

The Company tests for impairment at least annually, in the fourth quarter of each fiscal year, and whenever events or changes in circumstances indicate that the carrying amount of goodwill or indefinite lived intangible assets may not be recoverable. These tests are performed at the reporting unit level using a two-step, fair-value based approach. The Company has determined that it has only one reporting unit. The first step determines the fair value of the reporting unit using the market capitalization value and compares it to the reporting unit’s carrying value. The Company determines its market capitalization value based on the number of shares outstanding, its stock price and other relevant market factors, such as merger and acquisition multiples and control premiums. If the fair value of the reporting unit is less than its carrying amount, a second step is performed to measure the amount of impairment loss, if any. The second step allocates the fair value of the reporting unit to the Company’s tangible and intangible assets and liabilities. This derives an implied fair value for the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized equal to that excess.

Based on the results of the first step of the Company’s impairment test performed at September 30, 2009, the fair value of its reporting unit exceeded its carrying value by approximately 2.2% and the Company passed Step 1 of the goodwill impairment test. Accordingly, the Company did not recognize any impairment of its goodwill in the September 30, 2009 consolidated financial statements. The Company continuously monitors for events and circumstances that could negatively impact the key assumptions in determining fair value, including long-term revenue growth projections, discount rates, recent market valuations from transactions by comparable companies, volatility in the Company’s market capitalization and general industry, market and macro-economic conditions. It is possible that changes in such circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of the reporting unit, would require the Company to record a non-cash impairment charge.

During the quarter ended June 30, 2010, the Company concluded that there were no triggering events which would require a formal impairment analysis of the carrying value of goodwill, primarily due to the Company’s market capitalization and cash flows during the period. The Company is continuing to monitor its economic situation and the need to perform an impairment analysis in light of recent macro-economic indications in the equity markets as well as recent volatility of its market capitalization. To the extent the Company concludes that there are any indicators of impairment prior to the date of the next annual goodwill impairment test, management will perform an impairment analysis under ASC 350-20,Goodwill and Other Intangible Assets, (formerly referenced as SFAS No. 142), to determine if an impairment charge should be recorded to write down goodwill to its fair value. If the results of any impairment testing indicate that a write down of goodwill is necessary, such charge could be significant and, accordingly, could have a material impact on the Company’s financial position and results of operations, but would not be expected to have a material adverse effect on the Company’s cash flows from operations.

The following table presents the changes in goodwill during the nine months ended June 30, 2010 (in thousands):


Balance at September 30, 2009	$	66,078
Translation adjustments		(7,009	)

Balance at June 30, 2010	$	59,069

The components of identifiable intangible assets are as follows (in thousands):


	Technology			Technology
	Based-			Based-			Customer
	Software			Other			Based			Trademark			Covenant			Backlog			Total
As of June 30, 2010:
Gross carrying value	$	7,756		$	11,845		$	7,930		$	1,347		$	34		$	103		$	29,015
Accumulated amortization		(4,413	)		(11,845	)		(7,454	)		(853	)		(23	)		(71	)		(24,659	)

Net carrying value	$	3,343		$	—		$	476		$	494		$	11		$	32		$	4,356

As of September 30, 2009:
Gross carrying value	$	8,125		$	11,845		$	8,190		$	1,407		$	40		$	121		$	29,728
Accumulated amortization		(3,422	)		(11,834	)		(7,391	)		(733	)		(23	)		(70	)		(23,473	)

Net carrying value	$	4,703		$	11		$	799		$	674		$	17		$	51		$	6,255

Amortization of developed technology related to software was recorded to costs of revenue. Amortization of all other identifiable intangible assets was recorded to operating expenses. The following table presents amortization of identifiable intangible assets for the three and nine months ended June 30, 2010 and 2009 (in thousands):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Amortization of intangible assets — software	$	433	$	290	$	1,166	$	866
Amortization of intangible assets — other		146		259		484		791

Total amortization of intangible assets	$	579	$	549	$	1,650	$	1,657

The estimated future amortization expense for existing identifiable intangible assets as of June 30, 2010 is as follows (in thousands):


	Total
Fiscal years:
2010 (remaining three months)	$	555
2011		2,192
2012		1,324
2013		285

Total	$	4,356

Weighted-average remaining useful life as of June 30, 2010 (years)		2.5


(10)		Lease Abandonment Accrual

The Company leases a facility in New York under an operating lease that expires in October 2015. The Company ceased using the facility in the fourth quarter of fiscal 2009 and, effective October 1, 2009, subleased the facility to a third party for the remainder of its lease term. In the fourth quarter of fiscal 2009, the Company recorded lease abandonment expense of $635,000 related to its discontinuance of this facility. The changes in the lease abandonment liability, for the nine months ended June 30, 2010, are as follows (in thousands):


Lease abandonment liability, September 30, 2009	$	696
Lease payments to lessor		(200	)
Sublease proceeds		58
Payment of lease termination costs		(63	)

Lease abandonment liability, June 30, 2010	$	491


(11)		Net Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding options, shares to be purchased under the employee stock purchase plan and unvested RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):


	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2010			2009		2010		2009
Numerator:
Net income (loss)	$	(315	)	$	2,092	$	522	$	2,720

Denominator:
Weighted average shares outstanding		14,799			14,378		14,640		14,274
Effect of dilutive stock options, RSUs and employee stock purchase rights		—			25		265		47

Denominator for diluted net income (loss) per share		14,799			14,403		14,905		14,321

Basic and diluted net income (loss) per share	$	(0.02	)	$	0.15	$	0.04	$	0.19

Potentially dilutive securities representing 3.8 million shares of common stock for the three months ended June 30, 2010 were excluded from the computation of diluted net loss per share since they were considered antidilutive due to the net loss the Company experienced during the period. Potentially dilutive securities representing 4.6 million shares of common stock for the three months ended June 30, 2009 were excluded from the computation of diluted net income per share since their effect would be anti-dilutive, as their exercise price was greater than the average market price of the common stock. Potentially dilutive securities representing 4.0 million and 5.0 million shares of common stock for the nine months ended June 30, 2010 and 2009, respectively, were excluded from the computation of diluted net income per share since their effect would be anti-dilutive, as their exercise price was greater in each of those periods than the average market price of the common stock.

(12) Stockholders’ Equity

Dividends

During the nine months ended June 30, 2010, the Company paid the following cash dividends:


Record Date	Payment Date	Dividend Per Share		Total Dividend Paid
December 1, 2009	December 15, 2009	$	0.05	$	727,000
March 1, 2010	March 15, 2010	$	0.05	$	731,000
June 1, 2010	June 15, 2010	$	0.05	$	743,000

(13) Income Taxes

The Company’s effective tax rate for the three months ended June 30, 2010 and 2009 was (154)% and 11%, respectively. The Company’s effective tax rate for the nine months ended June 30, 2010 and 2009 was 60% and 23%, respectively. The rate for the three and nine months ended June 30, 2010 and 2009 differs from the 35% United States federal statutory rate primarily due to the relative mix of foreign and domestic earnings, enacted tax rates, and the fact that a portion of the earnings are being taxed in the United States where the Company has a low effective tax rate due to utilization of net operating loss carryforwards. Through October 2011, the Company is also amortizing approximately $200,000 of prepaid tax per quarter recorded on the sale of intangible assets from its German entity to the United States entity. Excluding the amortization of prepaid tax, the Company’s effective tax rate would have been (34)% and 6% for the three months ended June 30, 2010 and 2009, respectively. Excluding the amortization of this prepaid tax, the Company’s effective tax rate would have been 20% and 13% for the nine months ended June 30, 2010 and 2009, respectively.

The effective tax rate is highly dependent upon the geographic distribution of the Company’s worldwide earnings or loss, tax regulations in each geographic region, the availability of tax credits and net operating loss carryforwards, and the effectiveness of the Company’s tax planning strategies. Management regularly monitors the assumptions used in estimating its annual effective tax rate and adjusts its estimates accordingly. If actual results differ from management’s estimates, future income tax expense could be materially affected.

At September 30, 2007, the Company determined that the projected sources of future taxable income in the United States were not considered to be sufficient to support any of the deferred tax assets located in the United States. Therefore, the Company established a valuation allowance against all of the deferred tax assets related to the United States. In future quarters, the projected taxable income will be evaluated for this purpose, and it is possible that the valuation allowance would be reduced, which would affect the effective tax rate, deferred tax expense, and additional paid-in-capital. In the event that management determines that the valuation allowance should be reduced, the tax effect would be recorded as a discrete event in the quarter in which the determination was made. This analysis is applied to United States domestic taxes and to foreign, in particular German, taxes separately.

ASC 718 has the effect of increasing the effective tax rate due to the charge to earnings from incentive stock options and shares purchased from the employee stock purchase plan, which have no associated tax benefit to the Company. In a future period it is possible that a tax benefit would be realized on these options and employee stock purchase rights, at which time the tax rate may be reduced as a result.

The Company has adopted the provisions of ASC 740-10 (formerly referenced as FASB’s Financial Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109). As of June 30, 2010, the total amount of gross unrecognized benefits was $7.1 million. Included in this balance was approximately $2.6 million of unrecognized tax benefits that, if recognized, would affect the effective income tax rate. The gross unrecognized tax benefits increased by $34,000 during the three months ended June 30, 2010.

It is possible that the amount of liability for unrecognized tax benefits may change within the next three months. However, an estimate of the range of possible changes cannot be made at this time. In addition, over the next three months, the Company’s existing tax positions will continue to generate an increase in liabilities for unrecognized tax benefits. In accordance with the Company’s accounting policy, it recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. Interest and penalties were insignificant for the three and nine months ended June 30, 2010 and 2009.

Although the Company files United States federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, Canada, the United Kingdom, the Netherlands and Germany. Tax years 1994 through 2008 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.

(14) Commitments and Contingencies

Leases

The Company leases certain of its facilities and equipment under noncancelable leases, which expire on various dates through October 2017. As of June 30, 2010, future minimum payments under these operating and capital leases are as follows (in thousands):


	Operating		Capital
	Leases		Leases
Fiscal year:
2010 (remaining three months)	$	242	$	2
2011		761		—
2012		548		—
2013		450		—
2014		338		—
Thereafter		473		—

Total minimum lease payments (a)	$	2,812		2

Less amounts representing interest				—

Present value of minimum lease payments				2
Less current portion of capital lease obligation				(2	)

Long-term portion of capital lease obligation			$	—


(a)		Future minimum lease payments exclude sublease proceeds of approximately $1.1 million.

Rent expense for the three months ended June 30, 2010 and 2009 was approximately $236,000 and $303,000, respectively. Rent expense for the nine months ended June 30, 2010 and 2009 was approximately $723,000 and $937,000, respectively.

Commitments

The Company had, as of June 30, 2010, $1.6 million of contingent commitments, which have a remaining term of between one to twenty-three months, to bandwidth and co-location providers,which commitments become due if the Company terminates any of these agreements prior to their expiration.

As of June 30, 2010, the Company, through one of its foreign subsidiaries, has outstanding guarantees totaling $121,000 to customers and vendors as a form of security. The guarantees can only be executed upon agreement by both the customer or vendor and the Company. The guarantees are secured by an unsecured line of credit of $1.2 million as of June 30, 2010.

Legal Proceedings

In August 2001, the Company and certain of its current and former officers were named as defendants in two securities class-action lawsuits based on alleged errors and omissions concerning underwriting terms in the prospectus for the Company’s initial public offering. A Consolidated Amended Class Action Complaint for Violation of the Federal Securities Laws (“Consolidated Complaint”) was filed on or about April 19, 2002, and alleged claims against the Company, certain of its officers, and underwriters of the Company’s September 24, 1999 initial public offering (“underwriter defendants”), under Sections 11 and 15 of the Securities Act of 1933, as amended, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The lawsuit alleged that the defendants participated in a scheme to inflate the price of the Company’s stock in its initial public offering and in the

aftermarket through a series of misstatements and omissions associated with the offering. The lawsuit is one of several hundred similar cases pending in the Southern District of New York that have been consolidated by the court.

The Company was a party to a global settlement with the plaintiffs that would have disposed of all claims against it with no admission of wrongdoing by the Company or any of its present or former officers or directors. The settlement agreement had been preliminarily approved by the Court. However, while the settlement was awaiting final approval by the District Court, in December 2006 the Court of Appeals reversed the District Court’s determination that six focus cases could be certified as class actions. In April 2007, the Court of Appeals denied plaintiffs’ petition for rehearing, but acknowledged that the District Court might certify a more limited class. At a June 26, 2007 status conference, the Court approved a stipulation withdrawing the proposed settlement. On August 14, 2007, plaintiffs filed amended complaints in the focus cases, and a motion for class certification in the focus cases on September 27, 2007. On November 13, 2007, defendants in the focus cases filed a motion to dismiss the amended complaints for failure to state a claim, which the District Court denied on March 2008. Plaintiffs, the issuer defendants (including the Company), the underwriter defendants, and the insurance carriers for the defendants, have engaged in mediation and settlement negotiations. The parties reached a settlement agreement, which was submitted to the District Court for preliminary approval on April 2, 2009. As part of this settlement, the Company’s insurance carrier has agreed to assume the Company’s entire payment obligation under the terms of the settlement. On June 10, 2009, the District Court granted preliminary approval of the proposed settlement. After a September 10, 2009 hearing, the District Court gave final approval to the settlement on October 5, 2009. Several objectors have filed notices of appeal to the United States Court of Appeals for the Second Circuit from the District Court’s October 5, 2009 order approving the settlement. Although the District Court has granted final approval of the settlement, there can be no guarantee that it will not be reversed on appeal. The Company believes that it has meritorious defenses to these claims. If the settlement is not implemented and the litigation continues against the Company, the Company would continue to defend against this action vigorously.

In addition, in October 2007, a lawsuit was filed in the United States District Court for the Western District of Washington by Vanessa Simmonds, captionedSimmonds v. JPMorgan Chase & Co., et al., No. 07-1634, alleging that the underwriters violated section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78p(b), by engaging in short-swing trades, and seeks disgorgement to the Company of profits from the underwriters in amounts to be proven at trial. On February 28, 2008, Ms. Simmonds filed an amended complaint. The suit names the Company as a nominal defendant, contains no claims against the Company, and seeks no relief from the Company. This lawsuit is one of more than fifty similar actions filed in the same court. On July 25, 2008, the underwriter defendants in the various actions filed a joint motion to dismiss the complaints for failure to state a claim. The parties entered into a stipulation, entered as an order by the Court, that the Company is not required to answer or otherwise respond to the amended complaint. Accordingly, the Company did not join the motion to dismiss filed by certain issuers. On March 12, 2009, the Court dismissed the complaint in this lawsuit with prejudice. On April 10, 2009, the plaintiff filed a notice of appeal of the District Court’s order, and thereafter the underwriter defendants’ filed a cross appeal to a portion of the District Court’s order that dismissed thirty (30) of the cases without prejudice following the moving issuers’ motion to dismiss. On May 27, 2009, the Ninth Circuit issued an order stating that the cases were not selected for inclusion in the mediation program, and on June 22, 2009 issued an order granting the parties’ joint motion filed on May 22, 2009 to consolidate the 54 appeals and 30 cross-appeals. Briefing on the appeal was completed on November 17, 2009. No date has been set for oral argument in the Ninth Circuit. No amount has been accrued as of June 30, 2010 and September 30, 2009 since management believes that the Company’s liability, if any, is not probable and cannot be reasonably estimated.

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

Warranties

The Company’s products are generally warranted to perform for a period of one year. In the event there is a failure of such warranties, the Company generally is obliged to correct or replace the product to conform to the warranty provision. No amount has been accrued for warranty obligations as of June 30, 2010 or September 30, 2009, as costs to replace or correct are generally reimbursable under the manufacturer’s warranty.

Indemnification

The Company does not generally indemnify its customers against legal claims that its services infringe third-party intellectual property rights. Other agreements entered into by the Company may include indemnification provisions that could subject the Company to costs and/or damages in the event of an infringement claim against the Company or an indemnified third-party. However,

the Company has never been a party to an infringement claim and its management is not aware of any liability related to any infringement claims subject to indemnification. As such, no amount is accrued for infringement claims as of June 30, 2010 and September 30, 2009 in the condensed consolidated balance sheets.

(15) Geographic and Segment Information

The Company operates in a single reportable segment encompassing the development and sale of services, hardware and software to measure, test, assure and improve the quality of service for Internet and mobile communications. While the Company operates under one operating segment, management reviews revenue under two categories — Internet and Mobile services.

The following table identifies which services are categorized as Internet and Mobile services and where they are recorded in the Company’s condensed consolidated statements of operations.


	Subscription	Ratable	Professional
	Services	Licenses	Services
Internet Test and Measurement:
Internet Subscriptions — Web Measurement
Application Perspective	X
Streaming Perspective	X
Transaction Perspective	X
Web Site Perspective	X
Internet Subscriptions — Other
Diagnostic Services	X
Enterprise Adapters	X
NetMechanic	X
Performance Scoreboard	X
Red Alert	X
Test Perspective	X
Financial Industry Scorecards	X
LoadPro	X
Voice Perspective	X
WebEffective	X
Internet Engagements
Professional Services			X
Financial Industry Scorecards			X
LoadPro			X
Voice Perspective			X
WebEffective			X
Mobile Test and Measurement:
Mobile Subscription
Mobile Device Perspective	X
Mobile Application Perspective	X
SIGOS Global Roamer	X
Mobile Ratable Licences
SIGOS SITE		X

The following table summarizes Internet and Mobile services net revenue (in thousands):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Internet Subscriptions — Web Measurement	$	6,584	$	6,621	$	19,347	$	20,402
Internet Subscriptions — Other		2,648		2,782		8,882		7,998
Internet Engagements		2,164		2,324		6,601		7,753

Total Internet net revenue		11,396		11,727		34,830		36,153

Mobile Subscription		2,718		2,052		7,602		5,869
Mobile Ratable Licenses		5,159		6,390		16,906		18,348

Total Mobile net revenue		7,877		8,442		24,508		24,217

Total net revenue	$	19,273	$	20,169	$	59,338	$	60,370

Internet Subscriptions – Web Measurement and Internet Subscriptions – Other were previously presented as one category, Internet Subscriptions.

Information regarding geographic areas from which the Company’s net revenues are generated, based on the location of the Company’s customers, is as follows (in thousands):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
United States	$	10,818	$	10,969	$	32,386	$	33,949
Europe*		5,401		6,623		17,995		18,962
Other**		3,054		2,577		8,957		7,459

Total net revenue	$	19,273	$	20,169	$	59,338	$	60,370


*		No individual country represents more than 10% of total net revenue for the three and nine months ended June 30, 2010 and for the nine months ended June 30, 2009. One individual country represents 10% of total net revenue for the three months ended June 30, 2009.

**		No individual country represents more than 10% of total net revenue.

Information regarding geographic areas which the Company has long lived assets (includes all tangible assets) is as follows (in thousands):


	June 30,		September 30,
	2010		2009
United States	$	32,734	$	33,685
Europe		1,116		1,093

Total	$	33,850	$	34,778

(16) Subsequent Events

In July 2010, the Board of Directors approved the payment of a quarterly dividend of $0.05 per share to stockholders of record as of September 1, 2010. In the future, the Company intends to pay a similar dividend on a quarterly basis; however, its ability to continue to do so will be affected by its future results of operations, financial position, business and the various other factors that may affect its overall business.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of Keynote Systems, Inc. (referred to herein as “we,” “us,” “Keynote” or “the Company”) should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto included in this report as well as in our Annual Report onForm 10-K for the year ended September 30, 2009, and subsequent filings with the Securities and Exchange Commission.

Except for historical information, thisForm 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our anticipated costs and expenses and revenue mix. These forward-looking statements include, among others, statements including the words “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 these differences include, but are not limited to, those discussed in this section, the section entitled “Risk Factors” in Item 1A of Part II of this report, and in our annual report onForm 10-K for the fiscal year ended September 30, 2009 and elsewhere in that report. You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the quarterly reports onForm 10-Q and current reports onForm 8-K that we may file during the current year. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this quarterly report onForm 10-Q. 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

We develop and sell technology solutions to measure, test, assure and improve the quality of service for Internet and mobile communications. We offer Internet test and measurement (“Internet”) software-as-a-service solutions, mobile test and measurement (“Mobile”) software-as-a-service solutions and Mobile licensed solutions. Our Internet category includes all of our geographically distributed “on demand” web site and transaction/application monitoring and measurement services, voice-over-IP (VoIP) and streaming measurement services, load testing services, customer experience management services, competitive research and industry scorecard services, and custom professional services. The Mobile category consists of our on-demand Mobile monitoring and testing services, our Global Roamer services and our SIGOS System Integrated Test Environment (“SITE”) systems.

Our Internet solutions consist primarily of measurement services that are based on an extensive network of strategically-located measurement and testing computers running our proprietary software that measure online business performance from the viewpoint of a geographically dispersed user base. Our over 3,000 measurement computers and mobile devices are connected to over 240 major Internet backbone and last mile locations around the world via a sophisticated operations center for collecting, analyzing and disseminating web application response time and availability data, along with diagnostic tools to uncover the source of performance problems. Keynote’s “on demand” network infrastructure together with our consulting services, and in some cases, with Keynote-managed “private agent” appliances placed on a customer’s premises, provide our customers the ability to manage the technical performance of their online and mobile systems in real-time — 24 hours a day, 7 days a week. As of June 30, 2010, we had approximately 2,800 customers in over 80 countries for which we measured approximately 22,900 Internet pages, and managed 210 web and mobile private agent appliances. Subscription fees range from monthly to annual commitments, and vary based on the type of service selected, the number of pages, transactions or devices monitored, the number of measurement locations and/or appliances, the frequency of the measurements and any additional features ordered.

We also offer Internet solutions consisting of custom engagements that combine our proprietary software technology with our consulting expertise to provide online businesses with research and actionable insight about their websites with respect to load and capacity problems, online customer satisfaction and usability issues, and industry/competitive comparisons and trends. We conduct load and capacity tests on our customer’s websites by driving web traffic generated by our load testing agent infrastructure, measuring performance under load and diagnosing capacity bottlenecks. We conduct online customer satisfaction and usability research using “private panels” recruited for specific customer projects. Through task-based testing, observation of natural customer behavior, online surveys and remote usability testing, Keynote consultants enable our customers to answer important questions regarding customer behavior. We perform online tests on multiple web sites within an industry and we create proprietary competitive studies that we market to our customers to help them improve their competitive position.

We offer our Internet professional services either on a subscription or on an engagement basis although, in some cases, we also offer Internet professional services on a per incident or per study basis. Engagements typically involve fixed price contracts based on the complexity of the project, the size of a panel, and/or the type of testing to be conducted.

Our Mobile services are based on a worldwide infrastructure of distributed mobile devices, both simulated and real, placed on behalf of key mobile service providers and content companies that benchmark, monitor and test the performance and quality of those services from multiple regional markets. We license the SIGOS SITE system, which consists of hardware “probes” built by us along with our proprietary testing and monitoring software, to major mobile providers and telecommunications carriers for the purpose of testing the end-to-end quality of a mobile network, content and services, and for diagnosing problems that need to be fixed by our customers or their partners in order to ensure a satisfactory user experience for their mobile users. In addition, we offer the SIGOS Global Roamer “on demand” solution of our SIGOS SITE system to major mobile providers and telecommunications carriers to actively test and monitor the quality of their mobile roaming partners’ voice and data networks.

Our Mobile solutions are offered on both a subscription basis and a license basis. The subscriptions typically are for a fixed period, usually annually, and are based on the number of locations and devices from which monitoring and testing is performed, and the number of mobile operators and services covered by such monitoring and testing. The SIGOS SITE system is usually offered via a software license fee model, but because it is bundled with ongoing maintenance and support for a fixed contract period, with no vendor specific objective evidence of fair value on this undelivered element, the license fees are amortized over the length of the contract and included in ratable licenses revenue. The SIGOS Global Roamer service is offered via a subscription fee model, typically for a three to twelve month period, and is included in subscription services revenue.

For the three months ended June 30, 2010 and 2009, our 10 largest customers accounted for approximately 32% and 34% of total net revenue, respectively. For the nine months ended June 30, 2010 and 2009, our 10 largest customers accounted for approximately 33% of total net revenue. We cannot be certain that customers that have accounted for significant revenue in past periods, individually or in aggregate, will renew our services and continue to generate revenue in any future period. In addition, our customers that have monthly renewal arrangements may terminate their services at any time with little or no penalty. If we lose a major customer or a group of significant customers, our revenue could significantly decline if we are not able to otherwise replace their revenues either from selling additional services to or increased usage by existing customers or from obtaining new customers.

Approximately 40% of our net revenue is invoiced in currencies other than the U.S. Dollar, primarily the Euro. Our results of operations are influenced by changes in foreign currency exchange rates. Increases or decreases in the value of the U.S. Dollar, compared to other currencies, will directly affect our reported results as we translate those currencies into U.S. Dollars at the end of each fiscal period.

Our net income (loss) decreased from net income of $2.1 million for the three months ended June 30, 2009 to net loss of $315,000 for the three months ended June 30, 2010. The change was primarily attributable to lower ratable license revenue as a result of the weakening of the Euro and an increase in customers renewing maintenance on existing systems rather than purchasing new systems, higher sales and marketing expenses due to increased external marketing expenses to grow mobile revenues and higher general and administrative expenses due to increased professional fees.

Our net income decreased by $2.2 million, or 81%, from net income of $2.7 million for the nine months June 30, 2009 to net income of $522,000 for the nine months ended June 30, 2010. The decrease was primarily attributable to increased sales and marketing expenses of $838,000 to grow mobile revenues and a decrease in interest and other income (expense), net of $941,000 due to the weakening of the Euro.

Our gross deferred revenue, which is primarily unearned license and subscription services revenue, was $25.2 million at June 30, 2010, which increased by $2.9 million from September 30, 2009 primarily due to the timing of payments from Mobile license customers.

We believe that important trends and challenges for our business include:

	•		continuing to drive growth in our Internet and Mobile revenue, as we believe that these areas represent the greatest growth opportunities for our business in light of the decline in revenues from our legacy single page measurement services;

	•		growing multiple page/broadband related revenue (such as Transaction Perspective and Application Perspective which remained stable after increasing in the second fiscal quarter) without corresponding reductions in unit price (which has showed signs of stabilizing in recent quarters) in order to increase Internet revenues and margins, as growth in these services will be important to growing our Internet revenue;

	•		maintaining and growing the overall size of our customer base to support the growth of our Internet and Mobile revenue;

	•		continuing to control our expenses in fiscal 2010 to maintain and improve profitability, particularly because of the economic uncertainties that continue to exist in the current fiscal year; and

	•		the challenges faced due to the current economic global downturn as this affects our customers’ ability to purchase our services.

Refer to “Results of Operations,” “Non-GAAP Financial Measures and Other Operational Data,” “Liquidity and Capital Resources,” and “Commitments” elsewhere in this section for a further discussion of the risks, uncertainties and trends in our business.

We were incorporated in 1995. Our headquarters is located at 777 Mariners Island Blvd., San Mateo, CA and our telephone at that location is (650) 403-2400. Our company Web site iswww.keynote.comalthough information on that Web site shall not be deemed incorporated in this report. Through a link on the Investor Relations section of our Web site, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports of Form 8-K, and all amendments to those reports filed with the Securities and Exchange Commission.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements and accompanying notes included elsewhere in this quarterly report on Form 10-Q are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

	•		Revenue recognition

	•		Allowance for doubtful accounts and billing allowance

	•		Inventories and inventory valuation

	•		Allocation of purchase price for business combinations

	•		Goodwill, identifiable intangible assets and long-lived assets

	•		Stock-based compensation

	•		Income taxes, deferred income taxes and deferred income tax liabilities

Management believes that there have been no significant changes during the nine months ended June 30, 2010 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a description of those critical accounting policies and estimates, please refer to our 2009 Annual Report on Form 10-K.

Results of Operations

The following table sets forth, as a percentage of total net revenue, certain condensed consolidated statements of operations data for the periods indicated. All information is derived from our condensed consolidated financial statements included in this report. The operating results are not necessarily indicative of the results for any future period.


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Net revenue:
Subscription services		62.0	%		56.8	%		60.4	%		56.8	%
Ratable licenses		26.8			31.7			28.5			30.4
Professional services		11.2			11.5			11.1			12.8

Total net revenue		100.0			100.0			100.0			100.0
Costs and expenses:
Costs of revenue:
Direct costs of subscription services		10.9			10.4			10.9			11.1
Direct costs of ratable licenses		8.7			7.1			8.6			7.5
Direct costs of professional services		7.6			6.4			7.2			7.4
Operations		10.0			9.6			9.7			10.6
Development		15.4			14.2			15.3			15.1
Amortization of intangible assets — software		2.2			1.4			2.0			1.4
Sales and marketing		32.7			28.1			32.0			30.1
General and administrative		13.8			11.6			13.2			12.8
Excess occupancy income		(1.7	)		(1.3	)		(1.6	)		(1.2	)
Amortization of intangible assets — other		0.8			1.3			0.8			1.3

Total costs and expenses		100.4			88.8			98.1			96.1

Income (loss) from operations		(0.4	)		11.2			1.9			3.9
Interest income and other, net		(0.2	)		0.5			0.3			1.9

Income (loss) before provision for income taxes		(0.6	)		11.7			2.2			5.8
Provision for income taxes		(1.0	)		(1.3	)		(1.3	)		(1.3	)

Net income (loss)		(1.6	)%		10.4	%		0.9	%		4.5	%

Net Revenue


	For the three months ended June 30,							For the nine months ended June 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Subscription services	$	11,950	$	11,455		4	%	$	35,831	$	34,269		5	%
Ratable licenses		5,159		6,390		(19	)%		16,906		18,348		(8	)%
Professional services		2,164		2,324		(7	)%		6,601		7,753		(15	)%

Total net revenue	$	19,273	$	20,169		(4	)%	$	59,338	$	60,370		(2	)%

Subscription Services. Net revenue from subscription services increased by $495,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009. The increase in subscription services revenue for the three months ended June 30, 2010 was mainly attributable to increased sales of our mobile services of $666,000 and our multipage broadband subscription services of $29,000, offset by a decrease in our single-page device subscription services of $71,000 and in our WebEffective subscription services of $137,000.

Net revenue from subscription services increased by $1.6 million for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009. The increase in subscription services revenue for the nine months ended June 30, 2010 was mainly attributable to increases sales of our mobile services of $1.7 million and our multiple page/broadband subscription services of $490,000, offset by a decrease in our single-page device subscription services of $352,000 and in our WebEffective subscription services of $318,000. The increase in our mobile services is primarily due to an increase in the number of Global Roamer customers and the increase in our multiple page/broadband subscription services was due primarily to an increase in multi-quarter load testing subscription contracts.

Ratable Licenses.Net revenue from ratable licenses decreased by $1.2 million for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009. Net revenue from ratable licenses decreased by $1.4 million for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009. The decrease in ratable licenses revenue for the three and nine months ended June 30, 2010 was mainly attributable to an increase in customers renewing maintenance on existing systems rather than purchasing new systems. Ratable licenses revenue is generated by our SIGOS subsidiary located in Germany and is denominated in Euros. As such, this revenue was also affected by foreign exchange fluctuations, primarily a weakening of the Euro against the United States Dollar.

Professional Services. Net revenue from professional services decreased by $160,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009. Net revenue from professional services decreased by $1.2 million for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009. The decrease in professional services revenue for

the three and nine months ended June 30, 2010 was mainly attributable to our customers using fewer professional services personnel as they purchased more of our self-service load testing subscription services.

Our business experiences seasonal fluctuations, primarily higher sales of our LoadPro services in the first quarter of each fiscal year due to customers preparing their web sites for the holiday buying season.

In addition to analyzing revenue for subscription services, ratable licenses and professional services, management also internally analyzes revenue categorized as Internet Test and Measurement (“Internet”) and Mobile Test and Measurement (“Mobile”).

The following table identifies which services are categorized as Internet and Mobile services and where they are recorded in our condensed consolidated statements of operations.

Subscription

Ratable

Professional

Services

Licenses

Services

Internet Test and Measurement:

Internet Subscriptions — Web Measurement

Application Perspective

Streaming Perspective

Transaction Perspective

Web Site Perspective

Internet Subscriptions — Other

Diagnostic Services

Enterprise Adapters

NetMechanic

Performance Scoreboard

Red Alert

Test Perspective

Financial Industry Scorecards

LoadPro

Voice Perspective

WebEffective

Internet Engagements

Professional Services

Financial Industry Scorecards

LoadPro

Voice Perspective

WebEffective

Mobile Test and Measurement:

Mobile Subscription

Mobile Device Perspective

Mobile Application Perspective

SIGOS Global Roamer

Mobile Ratable Licences

SIGOS SITE

The following table summarizes Internet and Mobile services net revenue:


	For the three months ended June 30,							For the nine months ended June 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Internet Web Measurement Subscriptions	$	6,584	$	6,621		(1	)%	$	19,347	$	20,402		(5	)%
Internet Subscriptions Other		2,648		2,782		(5	)%		8,882		7,998		11	%
Internet Engagements		2,164		2,324		(7	)%		6,601		7,753		(15	)%

Total Internet net revenue		11,396		11,727		(3	)%		34,830		36,153		(4	)%

Mobile Subscription		2,718		2,052		32	%		7,602		5,869		30	%
Mobile Ratable Licenses		5,159		6,390		(19	)%		16,906		18,348		(8	)%

Total Mobile net revenue		7,877		8,442		(7	)%		24,508		24,217		1	%

Total net revenue	$	19,273	$	20,169		(4	)%	$	59,338	$	60,370		(2	)%

Internet Revenue.Internet net revenue decreased by $331,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Internet net revenue represented 59% and 58% of total net revenue for the three months ended June 30, 2010 and 2009, respectively. The decrease in Internet net revenue for the three months ended June 30, 2010 was mainly attributable to a decrease of $37,000 in our Internet Web Measurement Subscriptions, a decrease of $160,000 from our professional services engagements, and a decrease of $134,000 in our Internet Subscriptions Other primarily due to lower WebEffective subscription services.

Internet net revenue decreased by $1.3 million for the nine months ended June 30, 2010 compared to the nine months ended June 30, 2009. Internet net revenue represented 59% and 60% of total net revenue for the nine months ended June 30, 2010 and 2009, respectively. The decrease in Internet net revenue for the nine months ended June 30, 2010 was mainly attributable to a decrease of $1.1 million in our Internet Web Measurement Subscriptions primarily due to pricing pressures as a result of economic conditions and competition and a decrease of $1.2 million from our professional services engagements, partially offset by an increase of $884,000 in our Internet Subscriptions Other.

Mobile Revenue.Mobile net revenue decreased by $565,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Mobile net revenue represented 41% and 42% of total net revenue for the three months ended June 30, 2010 and 2009, respectively. The decline in our Mobile net revenue is primarily due to a $1.2 million decrease in Mobile Ratable Licences revenue as a result of an increase in customers renewing maintenance on existing systems rather than purchasing new SITE systems and the weakening of the Euro against the United States dollar, partially offset by a $666,000 increase in Mobile Subscription revenue as a result of an increase in the number of Global Roamer customers.

Mobile net revenue increased by $291,000 for the nine months ended June 30, 2010 compared to the nine months ended June 30, 2009. Mobile net revenue represented 41% and 40% of total net revenue for the nine months ended June 30, 2010 and 2009, respectively. The increase is primarily attributable to an increase in the number of Global Roamer, Mobile Device Perspective and Mobile Application Perspective subscriptions, partially offset by the weakening of the Euro to the United States dollar during the quarter.

For the three and nine months ended June 30, 2010 and 2009, no customer accounted for more than 10% of total net revenue. As of June 30, 2010, no customer accounted for more than 10% of total accounts receivable. As of September 30, 2009, one customer accounted for 10% of total accounts receivable, of which the entire amount has been collected. International sales were approximately 44% and 46% of total net revenue for the three months ended June 30, 2010 and 2009, respectively. International sales were approximately 45% and 44% of total net revenue for the nine months ended June 30, 2010 and 2009, respectively.

Costs and Expenses

Direct Costs of Subscription Services, Ratable Licenses and Professional Services


	For the three months ended June 30,							For the nine months ended June 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Direct costs of subscription services	$	2,109	$	2,098		1	%	$	6,446	$	6,673		(3	)%
Direct costs of ratable licenses	$	1,677	$	1,424		18	%	$	5,129	$	4,551		13	%
Direct costs of professional services	$	1,457	$	1,293		13	%	$	4,275	$	4,466		(4	)%

Direct Costs of Subscription Services. Direct costs of subscription services consist of connection fees to telecommunication and internet access providers for bandwidth usage of our measurement computers, which are located around the world, and depreciation, maintenance and other equipment charges for our measurement and data collection infrastructure and mobile subscription services. Direct costs of subscription services for the three months ended June 30, 2010 remained consistent compared to the three months ended June 30, 2009 and represented 18% of subscription services net revenue for each of the three months ended June 30, 2010 and 2009.

Direct costs of subscription services decreased by $227,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009 and represented 18% and 19% of subscription services net revenue for the nine months ended June 30, 2010 and 2009, respectively. The decreases were primarily due to lower provider connection fees of $335,000 and depreciation expense of $243,000, partially offset by increases in Global Roamer expenses of $395,000 to increase the network capacity of the system.

Direct Costs of Ratable Licenses.Direct costs of ratable licenses include cost of materials, supplies, maintenance, support personnel related costs and consulting costs related to the sale of our SIGOS SITE systems. The cost of the test equipment as part of each new customer contract is expensed ratably over the same initial twelve to thirty-six month period as the ratable licenses revenue to which it is associated. Direct costs of ratable licenses increased by $253,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 and represented 33% and 22% of ratable licenses revenue for the three months ended June 30, 2010 and 2009, respectively. Direct costs of ratable licenses increased by $578,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009 and represented 30% and 25% of ratable licenses revenue for the nine months ended June 30, 2010 and 2009, respectively. The increase in direct costs of ratable licenses is mainly attributable to increased personnel costs as a result of higher headcount to support new SITE contracts and the cost of test equipment that is recognized ratably with revenue.

Direct Costs of Professional Services.Direct costs of professional services consist of compensation expenses, including stock based compensation and other benefits, for professional services personnel, external consulting expenses to deliver our professional services revenue, panel and reward costs associated with our CEM engagements, all load-testing bandwidth costs and related network infrastructure costs. Direct costs of professional services increased by $164,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009, and represented 67% and 56% of professional services revenue for the three months ended June 30, 2010 and 2009, respectively. The increase in costs of professional services for the three months ended June 30, 2010 was primarily due to a $135,000 increase in consulting fees to provide services to customers.

Direct costs of professional services decreased by $191,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009, and represented 65% and 58% of professional services revenue for the nine months ended June 30, 2010 and 2009, respectively. The decreases in costs of professional services for the nine months ended June 30, 2010 were primarily due to lower stock-based compensation of $133,000 and depreciation expense of $106,000, partially offset by increased panel and reward costs.

Development


	For the three months ended June 30,							For the nine months ended June 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Development	$	2,968	$	2,863		4	%	$	9,084	$	9,137		(1	)%

Development expenses consist primarily of compensation, including stock based compensation and other benefits, and other costs incurred by our development personnel. Development expenses increased by $105,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009. The increase was primarily due to an increase of $96,000 in consulting costs.

Development expenses decreased by $53,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009.

Operations


	For the three months ended June 30,							For the nine months ended June 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Operations	$	1,935	$	1,943		—	%	$	5,761	$	6,353		(9	)%

Operations expenses consist primarily of compensation, including stock based compensation and other benefits, for management and technical support personnel, who manage and maintain our field measurement and collection infrastructure and headquarters data center, and provide basic and extended customer support. Our operations personnel also work closely with other departments to assure the reliability of our services. Our operations expenses decreased by $8,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009.

Our operations expenses decreased by $592,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009. The decrease was due to lower employee cost of $301,000 primarily due to domestic salary reductions implemented April 1, 2009, lower repair and maintenance expense for equipment of $110,000 and lower stock-based compensation expense of $96,000.

Sales and Marketing


	For the three months ended June 30,							For the nine months ended June 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Sales and marketing	$	6,296	$	5,665		11	%	$	19,000	$	18,162		5	%

Sales and marketing expenses consist primarily of salaries, benefits, commissions and bonuses earned by sales and marketing personnel, stock based compensation, lead-referral fees, marketing programs and travel expenses. Our sales and marketing expenses increased by $631,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 primarily due to an increase of $432,000 in external marketing expenses, and $151,000 in consulting expenses. Our sales and marketing expenses increased by $838,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009 primarily due to an increase of $978,000 in external marketing expenses. The increase in sales and marketing expenses over these periods was primarily due to increased efforts to grow our Mobile revenues.

General and Administrative


	For the three months ended June 30,							For the nine months ended June 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
General and administrative	$	2,652	$	2,346		13	%	$	7,830	$	7,717		1	%

General and administrative expenses consist primarily of compensation, including stock based compensation and other benefits; professional service fees, including accounting, auditing, legal and bank fees; insurance; and other general corporate expenses. General and administrative expenses increased by $306,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 primarily due to higher professional service fees. General and administrative expenses increased by $113,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009 primarily due to an increase of $350,000 in professional service fees, partially offset by lower stock-based compensation expense of $213,000.

Excess Occupancy Income


	For the three months ended June 30,									For the nine months ended June 30,
	2010			2009			% Change			2010			2009			% Change
	(In thousands)									(In thousands)
Rental income	$	(695	)	$	(652	)		7	%	$	(2,058	)	$	(1,926	)		7	%
Rental and other expenses		372			394			(6	)%		1,116			1,197			(7	)%

Excess occupancy income	$	(323	)	$	(258	)		25	%	$	(942	)	$	(729	)		29	%

Excess occupancy income consists of rental income from the leasing of space not occupied by us in our headquarters building, net of related fixed costs, such as property taxes, insurance, building depreciation, leasing broker fees and tenant improvement amortization. Property taxes, insurance and building depreciation are based on the actual square footage available for lease to third parties, which was approximately 75% for each of the three and nine months ended June 30, 2010 and 2009, respectively. The increase was primarily due to an increase in the leased square footage.

Amortization of Identifiable Intangible Assets


	For the three months ended June 30,							For the nine months ended June 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Amortization of identifiable intangible assets — software	$	433	$	290		49	%	$	1,166	$	866		35	%
Amortization of identifiable intangible assets — other		146		259		(44	)%		484		791		(39	)%

Total amortization of identifiable intangible assets	$	579	$	549		5	%	$	1,650	$	1,657		—	%

Amortization of intangible assets — software mainly relates to developed and purchased technology related to our mobile products and is reflected in direct costs of revenue in our condensed consolidated statements of operations. All other intangibles, including customer lists, are included in amortization of intangible assets — other and are reflected in operating expenses in our condensed consolidated statement of operations. Total amortization of identifiable intangible assets increased by $30,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 due to beginning the amortization of Fonjax technology in fiscal 2010. Total amortization of identifiable intangible assets decreased by $7,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009. See Note 9 to the condensed consolidated financial statements for the schedule of future amortization charges.

We annually review our identifiable intangible assets for impairment, or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The identifiable intangible assets will be fully amortized by fiscal 2013. At June 30, 2010, the type and remaining carrying amount of the identifiable intangible assets was as follows (in thousands):


Technology		Technology
Based-		Based-		Customer
Software		Other		Based		Trademark		Covenant		Backlog		Total
$	3,343	$	—	$	476	$	494	$	11	$	32	$	4,356

Interest Income and Other Income (Expense), Net


	For the three months ended June 30,									For the nine months ended June 30,
	2010			2009			% Change			2010			2009		% Change
	(In thousands)									(In thousands)
Interest income	$	96		$	157			(39	)%	$	299		$	744		(60	)%
Other income (expense), net		(143	)		(53	)		(170	)%		(93	)		403		(123	)%

Interest income and other income (expense), net	$	(47	)	$	104			(145	)%	$	206		$	1,147		(82	)%

Other income (expense), net primarily consists of foreign currency transaction gains and losses and interest expense. Interest income and other income (expense), net decreased $151,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009. Interest income decreased $61,000 for the three months ended June 30, 2010 in comparison to the three months ended June 30, 2009, primarily due to lower interest rates on invested funds. Other income (expense), net decreased $90,000 for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009, primarily due to changes in foreign exchange rates.

Interest income and other income (expense), net decreased $941,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009. Interest income decreased $445,000 for the nine months ended June 30, 2010 in comparison to the nine months ended June 30, 2009, primarily due to lower interest rates on invested funds. Other income (expense), net decreased $496,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009, primarily due to changes in foreign exchange rates.

Provision for Income Taxes


	For the three months ended June 30,							For the nine months ended June 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Provision for income taxes	$	191	$	258		(26	)%	$	789	$	810		(3	)%

Our effective tax rate for the nine months ended June 30, 2010 and 2009 was 60% and 23%, respectively. The rate for the nine months ended June 30, 2010 and 2009 differs from the 35% United States federal statutory rate primarily due to the relative mix of foreign and domestic earnings, enacted tax rates, amortization of our prepaid tax asset, and the fact that a portion of the earnings are being taxed in the United States where we have a low effective tax rate due to utilization of net operating loss carryforwards. Through October 2011, we are amortizing approximately $200,000 of prepaid tax per quarter recorded on the sale of intangible assets from our German entity to the United States entity. Excluding the amortization of this prepaid tax, our effective tax rate would have been 20% and 13% for the nine months ended June 30, 2010 and 2009, respectively.

Stock based Compensation Expense

Stock based compensation expense, which is included in total costs and expenses by category, was approximately $757,000 and $762,000 for each of the three months ended June 30, 2010 and 2009, respectively.

Stock based compensation expense was approximately $2.5 million and $3.4 million for each of the nine months ended June 30, 2010 and 2009, respectively. Stock based compensation expense decreased by $853,000 for the nine months ended June 30, 2010 as compared to the nine months ended June 30, 2009.

Stock-based compensation expense during the nine months ended June 30, 2009 reflects an expense of $601,000 related to the cancellation in March 2009 of our Chief Executive Officer’s option to purchase 400,000 shares of our common stock at $14.99 per share, which was approximately 67% vested at the date of cancellation. Another option granted to our Chief Executive Officer to purchase 300,000 shares of common stock at an exercise price of $70.00 per share was also cancelled in March 2009. No expense was recorded for this cancellation given that the option was fully vested at the date of the cancellation.

Stock based compensation under ASC 718,Compensation — Stock Compensation,related to employee stock options, restricted stock units and employee stock purchase rights was reflected in the condensed consolidated statements of operations as follows (in thousands):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Direct costs of ratable licenses	$	12	$	27	$	61	$	51
Direct costs of professional services		81		65		258		391
Development		199		171		604		745
Operations		102		91		328		424
Sales and marketing		299		285		936		1,216
General and administrative		64		123		360		573

Total	$	757	$	762	$	2,547	$	3,400

Non-GAAP Financial Measures and Other Operational Data

We also consider certain financial measures that are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), including Non-GAAP net income, Non-GAAP earnings per share, Adjusted EBITDA, free cash flow and gross deferred revenues, and other operational data in managing and measuring the performance of our business. The Non-GAAP measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. However, we believe that this non-GAAP information is useful as an additional means for investors to evaluate our operating performance, when reviewed in conjunction with our GAAP financial statements. Therefore, these measures should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP, and because these amounts are not determined in accordance with GAAP, they should not be used exclusively in evaluating our business and operations.

Non-GAAP Net Income and Non-GAAP Net Income Per Share.Non-GAAP net income is calculated by adjusting GAAP net income (loss) for the provision for income taxes less cash taxes from on-going operations, stock based compensation expense and amortization of purchased intangibles. Non-GAAP earnings per share is calculated by dividing Non-GAAP net income by the weighted average number of diluted shares outstanding for the period. The following table details our calculation (and reconciliation to GAAP) of non-GAAP net income and non-GAAP net income per share (in thousands, except per share amounts):


	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2010			2009		2010			2009
GAAP net income (loss)	$	(315	)	$	2,092	$	522		$	2,720
Stock based compensation		757			762		2,547			3,400
Amortization of intangible assets — software		433			290		1,166			866
Amortization of intangible assets — other		146			259		484			791
Provision for income taxes		191			258		789			810
Cash taxes from on-going operations*		(50	)		265		(339	)		(190	)

Non-GAAP net income	$	1,162		$	3,926	$	5,169		$	8,397

Weighted average diluted common shares outstanding:		15,062			14,403		14,905			14,321
Non-GAAP net income per share	$	0.08		$	0.27	$	0.35		$	0.59


*		Cash taxes from on-going operations for the nine months ended June 30, 2009 excludes a onetime cash payment of $4.1 million related to an agreement to purchase certain intangible assets from our German subsidiary. Cash taxes from on-going operations differs from the amounts previously publicly announced as a result of reconciling these amounts to the cash flow statements.

Adjusted EBITDA.Adjusted EBITDA is defined as earnings before interest income, taxes, stock based compensation, depreciation, amortization and other income (expense), net. The following table details our calculation (and reconciliation to GAAP) of Adjusted EBITDA (in thousands):


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
GAAP net income (loss)	$	(315	)	$	2,092		$	522		$	2,720
Stock based compensation		757			762			2,547			3,400
Amortization of intangible assets — software		433			290			1,166			866
Amortization of intangible assets — other		146			259			484			791
Depreciation		1,064			1,363			3,381			3,864
Provision for income taxes		191			258			789			810
Interest income and other income (expense), net		47			(104	)		(206	)		(1,147	)

Adjusted EBITDA	$	2,323		$	4,920		$	8,683		$	11,304

Free Cash Flow.Free cash flow is defined as cash flow from operations less cash used for purchases of property, equipment and software. The following table details our calculation (and reconciliation to GAAP) of free cash flow (in thousands):


	Nine Months Ended
	June 30,
	2010			2009
Cash flow provided by operations	$	7,926		$	7,420
Purchases of property, equipment and software		(2,389	)		(2,596	)

Free cash flow	$	5,537		$	4,824

Gross Deferred Revenue.Deferred revenue is comprised of all unearned revenue that has been collected in advance, primarily unearned license and subscription services revenue, and is recorded as deferred revenue on the balance sheet until the revenue is earned. Deferred revenue is reduced to the extent that there are any accounts receivable balances associated with the deferred revenue (“unpaid deferred revenue”) at the balance sheet date and may change at any point in time based upon the timing of when invoices are collected. Gross deferred revenue is defined as the sum of net deferred revenue and unpaid deferred revenue. The following table details our calculation of gross deferred revenue (in thousands):


	June 30, 2010		September 30, 2009		June 30, 2009
Net deferred revenue	$	18,460	$	18,828	$	21,419
Unpaid deferred revenue		6,760		3,475		4,219

Gross deferred revenue	$	25,220	$	22,303	$	25,638

Other Operational Data.The following table provides certain other operational data that management uses to manage and measure our performance:


	June 30, 2010		June 30, 2009
Worldwide customers (approximately)		2,800		2,800
Quarterly internet web measurement subscription net revenue (in thousands)	$	6,584	$	6,621
Average monthly internet pages measured		22,900		17,500
Average monthly revenue per internet page*	$	96	$	126


*		Average monthly revenue per internet page is calculated as: (quarterly internet web measurement subscription net revenue/3 months)/ average monthly internet pages measured. Internet web measurement subscription net revenue consists of our Application Perspective, Transaction Perspective, Streaming Perspective and Web Site Perspective subscription services.

While the total number of customers has remained relatively constant at June 30, 2010 as compared to June 30, 2009 due to our sales and marketing efforts to replace lost customers with new customers, our total number of internet pages measured has increased as the complexity of our customers’ websites continue to increase and they rely on our measurements to monitor their website performance. However, at the same time, our average monthly revenue per internet page has decreased due to a decline in our average price per internet page measured as a result of the recent economic environment and other competitive pressures. If we cannot increase

or maintain our revenue per internet page measured which stabilized in the second quarter of 2010 after several quarters of decline, we will need to further increase our customer base and/or number of internet pages measured to grow our subscription revenue.

Liquidity and Capital Resources


	June 30,		September 30,
	2010		2009
	(In thousands)
Cash, cash equivalents and short-term investments	$	60,363	$	57,968
Accounts receivable, net	$	8,347	$	6,403
Working capital	$	49,738	$	44,749
Days sales outstanding (DSO) for the three months ended (a)		39		30


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

Days sales outstanding increased by 9 days, from September 30, 2009 to June 30, 2010, primarily due to increased payment terms given to customers, primarily in Europe. Management does not believe the payment terms will have an effect on future collectability.


	Nine Months Ended
	June 30,
	2010			2009
	(In thousands)
Cash provided by operating activities	$	7,926		$	7,420
Cash used in investing activities	$	(34,118	)	$	(6,320	)
Cash provided by financing activities	$	778		$	2,022

Cash, cash equivalents and short-term investments

At June 30, 2010, we had approximately $23.5 million in cash and cash equivalents and approximately $36.9 million in short-term investments, for a total of approximately $60.4 million. Cash and cash equivalents consist of highly-liquid investments held at major banks, money market funds and fixed- term deposits with original maturities of three months or less. Short-term investments consist of fixed-term deposits with original maturities longer than three months and investment-grade corporate and government debt securities with a Moody’s ratings of A2 or better. As of June 30, 2010, approximately $39.5 million of our cash, cash equivalents and short-term investments was held in the United States. The remainder of our cash, cash equivalents and short-term investments were held in foreign countries by our subsidiaries, which, if distributed to the United States in the form of dividends or otherwise, would be subject to United States income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.

Cash provided by operating activities

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, accounts receivable collections, and the timing and amount of tax and other payments. Our largest source of operating cash flow is cash collections from our customers. Payments from subscription services customers are generally collected either at the beginning of the subscription period, ranging from one to twelve months, or monthly during the life of the subscription period. Payments from our ratable licenses customers are generally collected at delivery or acceptance of the SIGOS SITE system. Payments from our professional services customers are collected either at the end of the monthly service period or as milestones are completed. Our primary use of cash from operating activities are for personnel related expenditures, measurement and data collection infrastructure costs, professional fees, insurance, regulatory compliance and other expenses associated with operating our business.

For the nine months ended June 30, 2010, net cash provided by our operating activities was $7.9 million. Net cash provided was mainly due to net income of $522,000, increased by $8.5 million for non-cash adjustments and decreased by $1.1 million for the net change in operating assets and liabilities. The non-cash adjustments primarily consist of depreciation, amortization, stock-based compensation and bad debt and billing reserves. The change in operating assets and liabilities was primarily due to an increase in accounts receivable of $2.8 million and an increase in inventory of $252,000, partially offset by an increase in deferred revenue of $1.6 million due to the timing of receipts from customers that affect deferred revenue and an increase in accounts payable and accrued expenses of $481,000.

Cash used in investing activities

The change in cash flows from investing activities primarily consists of purchases of property, equipment and software to support our growth and infrastructure and maturities and purchases of investments. For the nine months ended June 30, 2010, net cash used by our investing activities was approximately $34.1 million. We paid approximately $45.8 million for the purchase of short-term investments and received approximately $14.1 million from maturities and sales of short-term investments. We also utilized $2.4 million to purchase property, equipment, and software primarily for our production infrastructure, information systems, and tenant improvements associated with space that we have leased in our headquarters building.

Cash provided by financing activities

The change in cash flows from financing activities primarily relate to payments made for dividends declared and proceeds received from the issuance of common stock associated with our equity incentive plan and employee stock purchase plan. For the nine months ended June 30, 2010, net cash provided by our financing activities was $778,000, which was primarily due to proceeds from the issuance of common stock associated with our equity incentive plan and employee stock purchase plan of $3.0 million, partially offset by the payment of cash dividends in the amount of $2.2 million.

Commitments

As of June 30, 2010, our principal commitments consisted of approximately $2.8 million in real property and equipment operating leases. These leases expire at various times through October 2017. Additionally, we had $1.6 million of contingent commitments, with a remaining term of between one to twenty-three months, to bandwidth and collocation providers, which commitments become due if we terminate any of these agreements prior to their expiration. At present, we do not intend to terminate any of these agreements prior to their expiration. We expect to continue to invest in capital and other assets to support our growth.

As of June 30, 2010, we have outstanding guarantees totaling $121,000 to customers and vendors of one of our foreign subsidiaries. The guarantees can only be executed upon agreement by both the customer or vendor and us. At June 30, 2010, the guarantees are secured by a $1.2 million unsecured line of credit.

We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Factors that could affect our cash position include potential acquisitions, additional stock repurchases, cash dividends, decreases in customers or renewals, decreases in revenue or changes in the value of our short-term investments. If, after some period of time, cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the terms of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in dilution to our stockholders, and we may not be able to obtain additional financing on acceptable terms, if at all. If we are unable to obtain this additional financing, our business may be harmed.

Off Balance Sheet Arrangements

We did not enter into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in a unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us.

Recently Issued Accounting Pronouncements

In September 2009, the Financial Accounting Standards Boards (“FASB”) amended the Accounting Standards Codification (“ASC”) as summarized in Accounting Standards Update (“ASU”) 2009-14,Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry specific revenue accounting guidance for software and software related transactions, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement using estimated

selling prices of deliverables if a vendor does not have vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price; and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. We are currently assessing the impact of these amendments to the ASC, which will be adopted on the first day of fiscal 2011, on our accounting and reporting systems and processes; however, at this time we are unable to quantify the impact on our financial statements of our adoption or determine the timing and method of our adoption.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity.Our interest income is sensitive to changes in the general level of interest rates, particularly because most of our short-term investments are invested in debt instruments. If market interest rates were to change immediately and uniformly by ten percent (10%) from their current levels, the interest earned on those cash, cash equivalents, and short-term investments could increase or decrease by approximately $38,000 on an annualized basis.

Foreign Currency Fluctuations.We operate internationally and are exposed to potentially adverse movements in foreign currency rate changes. A majority of our revenue and expenses are transacted in United States dollars. However, we do enter into transactions in other currencies, primarily the Euro and British Pound. Revenues derived from customers outside of the United States, which are billed in United States dollars, are typically collected in foreign currencies. Revenues derived from customers outside of the United States are typically billed in Euros. Similarly, substantially all of the expenses of operating our international subsidiaries are incurred in foreign currencies. As a result, our United States dollar earnings and net cash flows from international operations may be adversely affected by changes in foreign currency exchange rates. Net foreign exchange transaction gains (losses) included in “Other income (expense), net” in the accompanying condensed consolidated statements of operations, primarily due to fluctuations in the Euro and the British Pound, totaled $(143,000) and $(51,000) for the three months ended June 30, 2010 and 2009, respectively. Net foreign exchange transaction gains (losses) totaled $(92,000) and $379,000 for the nine months ended June 30, 2010 and 2009, respectively. We currently do not hedge or enter into currency exchange contracts against foreign currency exposures.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies, including our Company, to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and timely communicated to management, including our Chief Executive Officer and Chief Financial Officer, recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our Chief Executive Officer and Chief Financial Officer, based on their evaluation of our disclosure controls and procedures as of the end of the period covered by of this report, concluded that our disclosure controls and procedures were effective for this purpose.

Changes in Internal Control Over Financial Reporting

Regulations under the Exchange Act require public companies, including our company, to evaluate any change in our “internal control over financial reporting,” which is defined as a process to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting during the three months ended June 30, 2010, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

In August 2001, we and certain of its current and former officers were named as defendants in two securities class-action lawsuits based on alleged errors and omissions concerning underwriting terms in the prospectus for the Company’s initial public offering. A Consolidated Amended Class Action Complaint for Violation of the Federal Securities Laws (“Consolidated Complaint”) was filed on or about April 19, 2002, and alleged claims against us, certain of its officers, and underwriters our September 24, 1999 initial public offering (“underwriter defendants”), under Sections 11 and 15 of the Securities Act of 1933, as amended, and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The lawsuit alleged that the defendants participated in a scheme to inflate the price of our stock in its initial public offering and in the aftermarket through a series of misstatements and omissions associated with the offering. The lawsuit is one of several hundred similar cases pending in the Southern District of New York that have been consolidated by the court.

We were a party to a global settlement with the plaintiffs that would have disposed of all claims against it with no admission of wrongdoing by us or any of our present or former officers or directors. The settlement agreement had been preliminarily approved by the Court. However, while the settlement was awaiting final approval by the District Court, in December 2006 the Court of Appeals reversed the District Court’s determination that six focus cases could be certified as class actions. In April 2007, the Court of Appeals denied plaintiffs’ petition for rehearing, but acknowledged that the District Court might certify a more limited class. At a June 26, 2007 status conference, the Court approved a stipulation withdrawing the proposed settlement. On August 14, 2007, plaintiffs filed amended complaints in the focus cases, and a motion for class certification in the focus cases on September 27, 2007. On November 13, 2007, defendants in the focus cases filed a motion to dismiss the amended complaints for failure to state a claim, which the District Court denied on March 2008. Plaintiffs, the issuer defendants (including the Company), the underwriter defendants, and the insurance carriers for the defendants, have engaged in mediation and settlement negotiations. The parties reached a settlement agreement, which was submitted to the District Court for preliminary approval on April 2, 2009. As part of this settlement, our insurance carrier has agreed to assume our entire payment obligation under the terms of the settlement. On June 10, 2009, the District Court granted preliminary approval of the proposed settlement. After a September 10, 2009 hearing, the District Court gave final approval to the settlement on October 5, 2009. Several objectors have filed notices of appeal to the United States Court of Appeals for the Second Circuit from the District Court’s October 5, 2009 order approving the settlement. Although the District Court has granted final approval of the settlement, there can be no guarantee that it will not be reversed on appeal. We believe that we have meritorious defenses to these claims. If the settlement is not implemented and the litigation continues against us, we would continue to defend against this action vigorously.

In addition, in October 2007, a lawsuit was filed in the United States District Court for the Western District of Washington by Vanessa Simmonds, captionedSimmonds v. JPMorgan Chase & Co., et al., No. 07-1634, alleging that the underwriters violated section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78p(b), by engaging in short-swing trades, and seeks disgorgement to us of profits from the underwriters in amounts to be proven at trial. On February 28, 2008, Ms. Simmonds filed an amended complaint. The suit names us as a nominal defendant, contains no claims against us, and seeks no relief from us. This lawsuit is one of more than fifty similar actions filed in the same court. On July 25, 2008, the underwriter defendants in the various actions filed a joint motion to dismiss the complaints for failure to state a claim. The parties entered into a stipulation, entered as an order by the Court, that we are not required to answer or otherwise respond to the amended complaint. Accordingly, we did not join the motion to dismiss filed by certain issuers. On March 12, 2009, the Court dismissed the complaint in this lawsuit with prejudice. On April 10, 2009, the plaintiff filed a notice of appeal of the District Court’s order, and thereafter the underwriter defendants’ filed a cross appeal to a portion of the District Court’s order that dismissed thirty (30) of the cases without prejudice following the moving issuers’ motion to dismiss. On May 27, 2009, the Ninth Circuit issued an order stating that the cases were not selected for inclusion in the mediation program, and on June 22, 2009 issued an order granting the parties’ joint motion filed on May 22, 2009 to consolidate the 54 appeals and 30 cross-appeals. Briefing on the appeal was completed on November 17, 2009. No date has been set for oral argument in the Ninth Circuit. No amount has been accrued as of June 30, 2010 and September 30, 2009 since management believes that the Company’s liability, if any, is not probable and cannot be reasonably estimated.

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

Item 1A. Risk Factors

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.

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

	•		Fluctuations of foreign exchange rates;

	•		The effect of global economic conditions on customers and partners;

	•		The rate of new and renewed subscriptions for our services, particularly large customers;

	•		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 our existing customers in a particular quarter;

	•		The timing and service period of orders received during a quarter, especially from new customers;

	•		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 some of our Internet services;

	•		The level of sales of our Mobile products and services and the timing of customer acceptance during the period;

	•		The timing and amount of professional services revenue, which is difficult to predict because of its dependence 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;

	•		The timing and amount of operating costs, including unforeseen or unplanned operating expenses, sales and marketing investments, and capital expenditures;

	•		Seasonal factors, such as our LoadPro services, which are typically higher in our first fiscal quarter due to customers preparing their web sites for the holiday buying season;

	•		Future accounting pronouncements and changes in accounting policies;

	•		Future macroeconomic conditions in our domestic and international markets, as well as the level of discretionary IT spending generally;

	•		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; and

	•		The cost associated with and the integration of future acquisitions or divestures.

Due to these and other factors, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of our future performance. It is possible that in some future periods, our results of operations may be below the expectations of public-market analysts and investors. If this occurs, the price of our common stock may decline.

Our business, which includes our operating results and financial condition, is susceptible to additional risks associated with international operations.

Our financial condition and operating results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including United States taxes on foreign subsidiaries and the negative tax implications related to moving cash from international locations to the United States), and changes in the value of the United States dollar versus foreign currencies. Margins on sales of our products and services in foreign countries could be materially

adversely affected by foreign currency exchange rate fluctuations, particularly the Euro as a significant portion of our revenues are denominated in Euros.

Our primary exposure to movements in foreign currency exchange rates relate mainly to non-United States dollar denominated sales in Europe, as well as non-United States dollar denominated operating expenses incurred throughout the world. As was the case in the most recent quarter, weakening of foreign currencies relative to the United States dollar will adversely affect the United States dollar value of our foreign currency-denominated sales and earnings. Conversely, a strengthening of foreign currencies would generally be beneficial to our foreign currency-denominated sales and earnings.

International sales in dollars were approximately 45% and 44% of our total net revenue for the nine months ended June 30, 2010 and 2009, respectively. We expect to continue to commit significant resources to our international activities. Conducting international operations subjects us to risks we do not face in the United States. These include:

	•		currency exchange rate fluctuations, primarily the Euro;

	•		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;

	•		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.

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

We have incurred in the past and may, in the future, incur losses, and we may not sustain profitability.

While we were profitable in fiscal 2009 and the nine months ended June 30, 2010, we incurred net losses in fiscal 2008, fiscal 2007 and in other prior fiscal years. As of June 30, 2010, we had an accumulated deficit of approximately $139 million. If we are not able to increase our revenues, it may be difficult to sustain profitability. In addition, we are required under generally accepted accounting principles to review our goodwill and identifiable intangible assets for impairment when events or circumstances indicate that the carrying value may not be recoverable. As of June 30, 2010, we had approximately $4.4 million of net identifiable intangible assets and approximately $59.1 million of goodwill. We have in the past and may in the future, incur impairment charges in connection with a write-down of goodwill and identifiable intangible assets due to changes in market conditions. In addition, we have deferred tax assets which may not be fully realized, which may contribute to additional losses. We are also required to record as compensation expense, in accordance with Accounting Standards Codification (“ASC”) 718 (formerly referenced as SFAS No. 123R,Share-Based Payment), the cost of stock-based awards. As a result of these and other conditions, we may not be able to sustain profitability in the future.

The success of our business depends on maintaining a large customer base, either by customers renewing their subscriptions for our services and purchasing additional services or by obtaining new customers.

To maintain and grow our revenue, we must maintain or increase the overall size of our customer base, either through maintaining high customer renewal rates, obtaining new customers for our services, and/or selling additional services to existing customers. Our customers have no obligation to renew our services after the contract term and, therefore, they could cease using our services at any time. In addition, customers that renew may contract for fewer services or at lower prices. Further, our customers may reduce their use of our services during the term of their subscription or purchase lower levels of service. We cannot project the level of renewal rates or the prices at which customers renew subscriptions. The size of our customer base and prices may decline as a result of a number of factors, including competition, consolidations in the Internet or mobile industries or if a significant number of our customers cease operations.

Additionally, sales of our services may decline as companies evaluate their technology spending in response to the significant global economic downturn. We have experienced and could continue to experience reduced spending, cancellations, non-renewals, reduced renewal rates, and/or reductions in service levels by our customers. If we experience reduced renewal rates or if customers renew for a lesser amount of our services, or if customers, at any time, reduce the amount of products or services they purchase from us for any reason, our revenue could decline unless we are able to obtain additional customers or sources of revenue, sufficient to replace lost revenue.

If our Mobile services decline, we may not be able to grow our revenue and our results of operations will be harmed.

Revenue from our Mobile services has increased from approximately $24.2 million for the nine months ended June 30, 2009 to approximately $24.5 million for the nine months ended June 30, 2010. We cannot assure you that we will continue to experience similar growth rates for this business in future periods. Future growth for these services could be adversely affected by a number of factors, including, but not limited to, the level of demand for these services is difficult to predict; currency rate fluctuations; adverse global economic conditions; and our ability to successfully compete against current or new competitors in this market. Our business and our operating results could be harmed if we are not able to continue to grow revenue from our Mobile services.

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 ten largest customers accounted for approximately 33% of our total net revenue for the nine months ended June 30, 2010 and 2009. We cannot be certain that customers that have accounted for significant revenue in past periods, individually or as a group, will renew, will not cancel or will not reduce their services and, therefore, continue to generate revenue in any future period. In addition, our customers that have monthly renewal arrangements may terminate their services at any time with little or no penalty. If we lose a major customer or group of customers, our revenue could decline.

Our investment in sales and marketing may not yield increased customers or revenue.

We have invested in our sales and marketing activities to help grow our business, including hiring additional sales personnel. Typically, additional sales personnel can take time before they become productive, and our marketing programs may also take time before they yield additional business, if any. We cannot assure you that these efforts will be successful, or that these investments will yield significantly increased sales in the near or long-term.

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

Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about current global economic conditions poses a risk as consumers and businesses have reduced and may continue to reduce spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products and services. A decrease in consumer demand could have a variety of negative effects on our customers’ demand for our products. Other factors that could influence demand include labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting spending behavior including recent economic events in Europe. These and other economic factors could have a material adverse effect on our financial results, and in certain cases, may reduce our revenue, increase our costs, and lower our gross margin percentage, or require us to recognize impairments of our assets. In addition, real estate values across the United States have been adversely affected by the global economic downturn and tighter credit conditions, and we cannot assure you that the value of our building will not be adversely affected by these conditions.

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

We may be unable to retain our key employees, namely our management team and experienced engineers, or to attract, assimilate or retain other highly qualified employees. There is substantial competition for highly skilled employees. If we fail to attract and retain key employees, our business could be harmed.

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.

To increase sales worldwide, we must complement our direct sales force with relationships with companies to help market and sell our services to their customers. If we are unable to maintain our existing marketing and distribution relationships, or fail to enter into additional relationships, we may have to devote substantially more resources to the direct sale and marketing of our services. We would also lose anticipated revenue from customer referrals and other co-marketing benefits.

In the past, we have had to terminate relationships with some of our international resellers, and we may be required to terminate other reseller relationships in the future. As a result, we may have to commit resources to supplement our direct sales effort to find additional resellers in foreign countries.

Our success depends in part on the ability of these companies to help market and sell our services. Our existing relationships do not, and any future relationships may not, afford us any exclusive marketing or distribution rights. Therefore, these companies could reduce their commitment to us at any time in the future. Many of these companies have multiple relationships and they may not regard us as significant for their business. In addition, these companies generally may terminate their relationships with us, pursue other relationships with our competitors, or develop or acquire products or services that compete with our services. Even if we succeed in entering into these relationships, they may not result in additional customers or revenue.

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

We offer complex services, which may not perform at the level our customers expect. Despite our testing, our existing, upgrades to our existing or future services may not perform as expected due to unforeseen problems, which could result in loss of or delay in revenue, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, increased insurance costs or increased service costs. In addition, we have in the past, and may in the future, acquire, rather than develop internally, some of our services.

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

A disruption to our network infrastructure could impair our ability to serve and retain existing customers or attract new customers.

All data collected from our measurement computers are generally stored in and distributed from our operations center, which we maintain at a single location. Our operations depend upon our ability to maintain and protect our computer systems, most of which are located at our corporate headquarters in San Mateo, California, which is an area susceptible to earthquakes and possible power outages. We have occasionally experienced outages of our services in the past and, if we experience power outages at our operations centers in the future, we might not be able to promptly receive data from our measurement computers and we might not be able to deliver our services to our customers on a timely basis.

Although we maintain insurance against fires, earthquakes and general business interruptions, the amount of coverage may not be adequate in any particular case. If our operations center is damaged, this could disrupt our services, which could impair our ability to retain existing customers or attract new customers.

Any outage for any period of time or loss of customer data could cause us to lose customers. Our operations systems are also vulnerable to damage from break-ins, computer viruses, unauthorized access, vandalism, fire, floods, earthquakes, power loss, telecommunications failures and similar events. Our insurance may not be adequate in any particular case.

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

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

Professional services revenue represented approximately 11% and 13% of total net revenue for the nine months ended June 30, 2010 and 2009, respectively. We will need to successfully market these services in order to maintain or increase professional services revenue. The market for these services is very competitive. Each professional services engagement typically spans a one- to twelve-month period and, therefore, it is more difficult for us to predict the amount of professional services revenue recognized in any particular quarter. Our business and operating results could be harmed if we cannot increase our professional services revenue.

We face competition that could make it difficult for us to acquire and retain customers.

The market for our services is rapidly evolving. Our competitors vary in size and in the scope and breadth of their products and services. We face competition from companies that offer Internet software and services with features similar to our services such as Compuware (which acquired Gomez), Hewlett-Packard (which acquired Mercury Interactive), Micro Focus (which acquired Segue Software via its acquisition of Borland Software) and a variety of other Internet and mobile companies that offer a combination of testing, market research capabilities and data collection. Customers could choose to use these companies’ services or these companies could enhance their services to offer all of the features we offer. As we expand the scope of our products and services, we expect to encounter many additional market-specific competitors.

In addition, Compuware’s acquisition of Gomez, Inc. could result in additional competition for us depending on which products and services the combined company offers in the future. Furthermore, Compuware may find additional uses for services provided by Gomez, Inc. which compete with our services.

We could also face competition from other companies, which currently do not offer services similar to our services, but offer software or services related to web analytics services, such as Webtrends, Adobe Systems (which acquired Omniture) and IBM (which acquired Coremetrics), and free services that measure web site availability. In addition, companies that sell systems management software, such as BMC Software, Compuware, CA NSM, HP Software, Quest Software, Attachmate, Precise Software, and IBM’s Tivoli Unit, may decide to offer services similar to ours. While we have relationships with some of these companies, they could choose to develop services similar to ours or to offer our competitors’ services. We face competition for our mobile services from companies such as Argogroup (acquired by Ascom), Casabyte (acquired by JDS Uniphase), Agilent, Datamat and Mobile Complete.

In the future, we intend to expand our service offerings and continue to measure and manage the performance of emerging technologies which could face competition from other companies. Some of our existing and future competitors have or may have longer operating histories, larger customer bases, greater brand recognition in similar businesses, and significantly greater financial, marketing, technical and other resources. In addition, some of our competitors may be able to devote greater resources to marketing and promotional campaigns, to adopt more aggressive pricing policies, and to devote substantially more resources to technology and systems development.

There are many experienced firms that offer computer network and Internet-related consulting services. These consulting services providers include consulting companies, such as Accenture, as well as consulting divisions of large technology companies, such as IBM. Because we do not have an established reputation for delivering professional services, because this area is very competitive, and because we have limited experience in delivering professional services, we may not succeed in selling these services.

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

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.

The ongoing evolution of the Internet and mobile networks has led to the development of new technologies such as Internet telephony, wireless devices, wireless fidelity, and WI-FI networks, as well as increased use of various applications, such as VoIP and video. These developing technologies require us to continually improve the functionality, features and reliability of our services, particularly in response to offerings by our competitors. If we do not succeed in developing and marketing new services that respond to competitive and technological developments and changing customer needs, we may encounter difficulties retaining existing customers and attracting new customers.

The success of new services depends on several factors, including proper definition of the scope of the new services and timely completion, introduction and market acceptance of the new services. If new Internet, networking or telecommunication technologies or standards are widely adopted or if other technological changes occur, we may need to expend significant resources to adapt our services to these developments or we could lose market share or some of our services could become obsolete.

The market price of our common stock can be volatile.

The stock market in recent years has experienced significant price and volume fluctuations, and has recently experienced substantial volatility that has affected the market prices of technology companies. These fluctuations have often been unrelated to or disproportionately impacted by the operating performance of these companies. The market for our common stock has been subject to similar fluctuations. Factors such as fluctuations in our operating results, announcements of events affecting other companies in the technology industry, currency fluctuations and general market conditions may cause the market price of our common stock to decline. In addition, because of the relatively low trading volume and the fact that we only have approximately 14.9 million shares outstanding at June 30, 2010, our stock price could be more volatile than companies with higher trading volumes and larger numbers of shares available for trading in the public market.

If we were required to write down all or part of our goodwill, our net income and net worth could be materially adversely affected.

We had $59.1 million of goodwill recorded on our condensed consolidated balance sheet as of June 30, 2010. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. If our market capitalization drops significantly below the amount of net equity recorded on our balance sheet, it could indicate a decline in our value and would require us to further evaluate whether our goodwill has been impaired. At September 30th of each year, we perform an annual review of our goodwill to determine if it has become impaired, in which case we would write down the impaired portion of our goodwill. We also evaluate goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If we were required to write down all or a significant part of our goodwill, our operating results and net worth could be materially adversely affected.

Our cash, cash equivalents and short-term investments are managed through various banks around the world.

We maintain our cash, cash equivalents and short-term investments with a number of financial institutions around the world. Our results could also vary materially from expectations depending on gains or losses realized on the sale or exchange of investments; impairment charges related to debt securities as well as other investments; and interest rates. The volatility in the financial markets and overall economic conditions increases the risk that the actual amounts realized in the future on our investments could differ significantly from the fair values currently assigned to them. Uncertainty about current global economic conditions could also continue to increase the volatility of our stock price.

Industry consolidation may lead to stronger competition and may harm our operating results.

There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. In prior years, Compuware acquired Gomez, HP acquired Mercury Interactive, and Micro Focus acquired Seque Software via its acquisition of Borland Software. We believe that industry consolidation may result in stronger competitors that are better able to compete for customers. This could lead to more variability in operating results and could have a material adverse effect on our business, operating results, and financial condition. Furthermore, rapid consolidation could also lead to fewer customers and partners, with the effect that the loss of a major customer could harm our revenue.

If the protection of our proprietary technology is inadequate, our competitors may gain access to our technology, and our market share could decline.

Our success is heavily dependent on our ability to create proprietary technology and to protect and enforce our intellectual property rights in that technology, as well as our ability to defend against adverse claims of third parties with respect to our technology and intellectual property. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, copyright and trademark laws, and patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary.

Policing unauthorized use of our products is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and unauthorized third parties, including our competitors, may independently develop similar or superior technology, duplicate or reverse engineer aspects of our products, or design around our patented technology or other intellectual property.

There can be no assurance or guarantee that any products, services or technologies that we are presently developing, or will develop in the future, will result in intellectual property that is subject to legal protection under the laws of the United States or a foreign jurisdiction and that produces a competitive advantage for us.

Others might bring infringement claims which could harm our business.

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

Our 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.

Our measurement computers and mobile devices that we use to provide many of our services are located at facilities that are not owned by our customers or us. Instead, these devices are installed at locations near various worldwide Internet access points. We do not own or operate the facilities, and we have little control over how these devices are maintained on a day-to-day basis. We do not have long-term contractual relationships with the companies that operate the facilities where our measurement computers are located. We may have to find new locations for these computers if we are unable to maintain relationships with these companies or if these companies cease their operations as some have done due to bankruptcies or being acquired. In addition, if our measurement computers and mobile devices cease to function properly, we may not be able to repair or service these computers on a timely basis, as we may not have immediate access to our measurement computers and measurement devices. Should performance problems arise, our ability to collect data in a timely manner could be impaired if we are unable to quickly maintain and repair our computers and devices.

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.

Because our business is based on providing Internet and Mobile services, the Internet and mobile networks must continue to be used as a means of electronic business and communications. In addition, we believe that the use of the Internet and mobile networks for conducting business could be hindered for a number of reasons, including, but not limited to:

	•		security concerns, including the potential for fraud or theft of stored data and information communicated over the Internet 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.

Improvements to the infrastructure of the Internet and mobile networks could reduce or eliminate demand for our Internet and Mobile services.

The demand for our services could be reduced or eliminated if future improvements to the infrastructure of the Internet or mobile networks lead companies to conclude that the measurement and evaluation of their performance is no longer important to their business. We believe that the vendors and operators that supply and manage the underlying infrastructure still look to improve the speed, availability, reliability and consistency of the Internet. If these vendors and operators succeed in significantly improving the performance of these networks, which would result in corresponding improvements in the performance of companies’ web sites, mobile networks and services, demand for our services would likely decline, which would harm our operating results.

If we need to raise additional capital and are unable to do so, our business could be harmed.

We believe that our available cash, cash equivalents and short-term investments will enable us to meet our capital and operating requirements for at least the next 12 months. However, if cash is required for unanticipated needs, we may need additional capital during that period. If the market for our products develops at a slower pace than anticipated, we could be required to raise substantial additional capital. We cannot be certain that additional capital will be available to us on favorable terms, or at all. If we were unable to raise additional capital when required, our business could be seriously harmed.

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

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

•

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

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

•

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

We have also adopted a stockholder rights plan that may discourage, delay or prevent a change of control and make any future unsolicited acquisition attempt more difficult. The rights will become exercisable only upon the occurrence of certain events specified in the rights plan, including the acquisition of 20% of our outstanding common stock by a person or group. In addition, it is the policy of our Board of Directors that a committee consisting solely of independent directors will review the rights plan at least once every three years to consider whether maintaining the rights plan continues to be in the best interests of Keynote and our stockholders. The Board may amend the terms of the rights without the approval of the holders of the rights.

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

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

	•		difficulties in assimilating acquired personnel, operations and technologies;

	•		difficulties in managing a larger organization with geographically dispersed operations;

	•		unanticipated costs associated with the acquisition or incurring of additional unknown liabilities;

	•		diversion of management’s attention from other business concerns;

	•		entry in new businesses in which we have little direct experience;

	•		difficulties in marketing additional services to the acquired companies’ customer base or to our customer base;

	•		adverse effects on existing business relationships with resellers of our services, our customers and other business partners;

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

•

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

•

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

•

use of substantial portions of our available cash, or dilution in equity if stock is used, to consummate the acquisition and/or operate the acquired business.

Failure to maintain effective internal controls may cause us to delay filing our periodic reports with the SEC and adversely affect our stock price.

The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on internal controls over financial reporting in their annual reports on Form 10-K that contain an assessment by management of the effectiveness of the Company’s internal controls over financial reporting. In addition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal controls over financial reporting. Although we review our internal controls over financial reporting in order to ensure compliance with the Section 404 requirements, our failure to maintain adequate internal controls over financial reporting could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.

Changes to existing accounting pronouncements or taxation rules or practices may cause adverse revenue fluctuations, affect our reported financial results or how we conduct our business.

Generally accepted accounting principles, or GAAP, are promulgated by, and are subject to the interpretation of the Financial Accounting Standards Board, or FASB, and the SEC. New accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practices have occurred and may occur in the future. Any future changes in accounting pronouncements or taxation rules or practices may have a significant effect on how we report our results and may even affect our reporting of transactions completed before the change is effective. In addition, a review of existing or prior accounting practices may result in a change in previously reported amounts. For example, the FASB has recently issued new accounting principles around revenue recognition and the SEC is considering adoption of international financial reporting standards. This change to existing rules, future changes, if any, or the questioning of current practices may adversely affect our reported financial results, our ability to remain listed on the Nasdaq Global Market, or the way we conduct our business and subject us to regulatory inquiries or litigation.

Our business is subject to changing regulations regarding corporate governance and public disclosure that will increase both our costs and the risk of noncompliance.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, the recently-enacted Dodd Act and rules subsequently implemented by the SEC and The NASDAQ Stock Market, have imposed and will impose a variety of requirements and restrictions on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. (Reserved)

Item 5. Other Information

Not applicable.

Item 6. Exhibits

EXHIBIT INDEX

Exhibit

Incorporated by Reference

Filed

No.

Exhibit

Form

File No.

Filing Date

Exhibit No.

Herewith

10.1

Employment Agreement dated as of May 21, 2010 between Keynote and Curtis Smith

31.1

Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32.1

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 *

32.2

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 *


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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Mateo, State of California, on this 5th day of August 2010.


	KEYNOTE SYSTEMS, INC.
	By:	/s/ UMANG GUPTA
		Umang Gupta
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)


	By:	/s/ CURTIS SMITH
		Curtis Smith
		Chief Financial Officer (Principal Financial Officer)


	By:	/s/ DAVID F. PETERSON
		David F. Peterson
		Chief Accounting Officer (Principal Accounting Officer)

EXHIBIT INDEX

Exhibit

Incorporated by Reference

Filed

No.

Exhibit

Form

File No.

Filing Date

Exhibit No.

Herewith

10.1

Employment Agreement dated as of May 21, 2010 between Keynote and Curtis Smith

31.1

Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32.1

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 *

32.2

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 *


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

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Keynote Systems (KEYN) Inactive 10-Q2010 Q3 Quarterly report

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