Keynote Systems 10Q 2008 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, 2008


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

For the transition period from to

Commission File Number: 000-27241

KEYNOTE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


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


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

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

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 5, 2008
Common Stock, $.001 par value		13,899,062

KEYNOTE SYSTEMS, INC.


	Page
PART I—FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risks		40
Item 4. Controls and Procedures		40
PART II—OTHER INFORMATION
Item 1. Legal Proceedings		40
Item 1A. Risk Factors		41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		49
Item 3. Defaults Upon Senior Securities		49
Item 4. Submission of Matters to a Vote of Security Holders		49
Item 5. Other Information		49
Item 6. Exhibits		50

Signatures		51

EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I—FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements.

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


	Page
Condensed Consolidated Balance Sheets as of June 30, 2008 and September 30, 2007		4
Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2008 and 2007		5
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2008 and 2007		6
Notes to Condensed Consolidated Financial Statements		7

KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)


	June 30,			September 30,
	2008			2007
ASSETS

Current assets:
Cash and cash equivalents	$	49,648		$	42,875
Short-term investments		4,291			65,060

Total cash, cash equivalents, and short-term investments		53,939			107,935
Accounts receivable, less allowance for doubtful accounts and billing adjustment of $291 and $284 as of June 30, 2008 and September 30, 2007, respectively		7,310			5,988
Prepaids, deferred costs and other current assets		3,834			2,703
Inventories		1,242			1,059
Deferred tax assets		4,064			3,922

Total current assets		70,389			121,607
Deferred costs and other long-term assets		1,765			1,301
Property and equipment, net		36,167			35,480
Goodwill		69,559			63,129
Identifiable intangible assets, net		7,028			7,963
Deferred tax assets		604			—

Total assets	$	185,512		$	229,480


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	1,614		$	2,285
Accrued expenses		14,863			11,656
Current portion of capital lease obligation		16			24
Notes payable		287			—
Deferred revenue		23,086			19,824

Total current liabilities		39,866			33,789
Income tax payable		1,694			—
Long-term portion of capital lease obligation		23			31
Deferred rent and other long-term liabilities		349			292
Long-term deferred revenue		1,083			2,136
Long-term deferred tax liability		1,503			2,347

Total liabilities		44,518			38,595


Commitments and contingencies — see Note 12
Stockholders’ equity:
Common stock		14			18
Treasury stock		—			(1,151	)
Additional paid-in capital		271,558			325,525
Accumulated deficit		(142,576	)		(140,188	)
Accumulated other comprehensive income		11,998			6,681

Total stockholders’ equity		140,994			190,885


Total liabilities and stockholders’ equity	$	185,512		$	229,480

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,
	2008			2007			2008			2007
Net revenue:
Subscription services	$	11,441		$	10,881		$	33,405		$	32,121
Ratable licenses		6,426			3,443			15,033			8,852
Professional services		2,631			3,063			7,414			8,943

Total net revenue		20,498			17,387			55,852			49,916

Costs and expenses
Costs of revenue
Direct costs of subscription services		2,235			2,175			6,571			6,343
Direct costs of ratable licenses		1,526			1,456			4,240			3,269
Direct costs of professional services		1,762			1,947			5,361			6,277
Development		3,232			2,950			9,525			8,699
Operations		2,270			1,853			6,297			5,643
Amortization of intangible assets — software		281			191			697			561


Total costs of revenue		11,306			10,572			32,691			30,792
Sales and marketing		6,697			5,243			18,993			14,909
General and administrative		2,834			2,490			7,822			7,247
Excess occupancy income		(297	)		(33	)		(887	)		(81	)
Amortization of intangible assets — other		568			522			1,647			1,671

Total costs and expenses		21,108			18,794			60,266			54,538


Loss from operations		(610	)		(1,407	)		(4,414	)		(4,622	)
Interest income and other, net		343			1,168			2,374			3,438

Loss before provision for income taxes		(267	)		(239	)		(2,040	)		(1,184	)
Provision for income taxes		(140	)		(1,294	)		(429	)		(55	)


Net loss	$	(407	)	$	(1,533	)	$	(2,469	)	$	(1,239	)

Net loss per share:
Basic	$	(0.03	)	$	(0.09	)	$	(0.15	)	$	(0.07	)

Diluted	$	(0.03	)	$	(0.09	)	$	(0.15	)	$	(0.07	)

Shares used in computing basic and diluted net loss per share:
Basic		13,747			17,662			16,039			17,353
Diluted		13,747			17,662			16,039			17,353

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,
	2008			2007
Cash flows from operating activities:
Net loss	$	(2,469	)	$	(1,239	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,808			3,311
Stock-based compensation		3,386			3,051
Impairment of short-term investment		98			—
Charges to bad debt and billing adjustment reserves		189			196
Accretion of debt investment discount		(423	)		(983	)
Amortization of identifiable intangible assets		2,344			2,232
Deferred tax provision		—			175
Changes in operating assets and liabilities:
Accounts receivable		(1,253	)		826
Inventories		(55	)		(349	)
Prepaids, deferred costs and other assets		(457	)		(1,049	)
Accounts payable and accrued expenses		(1,246	)		(1,718	)
Deferred revenue		457			12,957

Net cash provided by operating activities		4,379			17,410


Cash flows from investing activities:
Purchases of property and equipment		(3,987	)		(4,160	)
Purchase of businesses and assets, net of cash acquired of $19 in 2008		(640	)		(307	)
Earnout payment for acquisition of business		—			(10,587	)
Sales of short-term investments		84,260			39,226
Purchases of short-term investments		(23,101	)		(57,323	)

Net cash provided by (used in) investing activities		56,532			(33,151	)


Cash flows from financing activities:
Repayment of credit facilities		(21	)		(27	)
Proceeds from issuance of common stock and exercise of stock options		3,857			8,497
Repurchase of outstanding common stock		(60,070	)		—

Net cash provided by (used in) financing activities		(56,234	)		8,470


Effect of exchange rate changes on cash and cash equivalents		2,096			320

Net increase (decrease) in cash and cash equivalents		6,773			(6,951	)
Cash and cash equivalents at beginning of the period		42,875			45,662

Cash and cash equivalents at end of the period	$	49,648		$	38,711


Supplemental cash flow disclosure:
Income taxes paid (net of refunds)	$	1,068		$	518


Noncash operating and investing activities:
Acquisition of property, equipment and software on account	$	372		$	13

Retirement of treasury stock	$	61,073		$	21,150

See accompanying notes to the condensed consolidated financial statements

KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) Basis of Presentation

The accompanying interim 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, 2008, and the results of operations and cash flows for the interim periods ended June 30, 2008 and 2007.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and therefore, do not include all information and footnotes necessary for a complete presentation of the Company’s results of operations, financial position and cash flows. This report should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended September 30, 2007 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 results of operations and cash flows for any interim period are not necessarily indicative of the Company’s results of operations and cash flows for any other future interim period or for a full fiscal year.

The preparation of 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 allowance, inventories and inventory valuation, allocation of purchase price for business combinations, useful lives of property, equipment and 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 amounts in the condensed consolidated financial statements and notes to the condensed consolidated financial statements for the prior year have been reclassified to conform to the fiscal 2008 presentation. Net operating results have not been affected by these reclassifications. Specifically, (1) ratable licenses revenue has been reclassified from subscription services revenue along with the corresponding direct costs of revenue, (2) amortization of intangible assets for software related developed technology has been reclassified from amortization of intangible assets-other, (3) development and operations expenses have been reclassified from expenses and shown as separate line items within costs of revenue on the Company’s condensed consolidated statement of operations and (4) interest receivable has been reclassified from accretion of debt investment discount to prepaids, deferred costs and other assets in the condensed statements of cash flows.

Recently Adopted Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: The Company determines whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the “more-likely-than-not” recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: A tax position that meets the “more-likely-than-not” recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. FIN 48 is effective for the Company’s fiscal year beginning October 1, 2007.

Upon adoption of FIN 48 on October 1, 2007, the Company recognized a cumulative effect adjustment of $81,000, decreasing its income tax liability for unrecognized tax benefits, and decreasing the September 30, 2007 accumulated deficit balance. At June 30, 2008, the Company has recorded unrecognized tax benefits of approximately $5.0 million. Of this amount, approximately $1.7 million has been recorded in the income tax payable account and the remaining $3.3 million has been booked as a de-recognition of deferred tax

assets. The Company does not expect any material change in its unrecognized tax benefits over the next twelve months.

The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of its provision for income taxes. Upon adoption of FIN 48, the Company accrued $20,000 for payment of interest and penalties related to unrecognized tax benefits which was recorded as part of the Company’s provision for income taxes.

Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, Canada, United Kingdom, Netherlands and Germany. Tax years 1994 — 2006 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.

In June 2006, Emerging IssuesTask Force Issue 06-3 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is Gross versus Net Presentation)” (“EITF 06-3”) was ratified. This issue relates to any tax assessed by a governmental authority that is directly imposed on a revenue producing transaction between a seller and a customer and requires additional disclosures related to those taxes on either a gross (included in revenue) or a net (excluded from revenue) basis. This issue is effective for fiscal years beginning after December 15, 2006. The Company adopted EITF Issue 06-3 in its fiscal year beginning October 1, 2007 and such adoption did not have an impact on its consolidated results of operations and financial condition. The Company did not change its policy for presenting revenue on a net basis.

Stock Based Compensation

(a) Summary of Plans

As of June 30, 2008, 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 both nonqualified and incentive stock options. Options expire ten years after the date of grant. Vesting periods are determined by the Board of Directors and generally 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. As of June 30, 2008, options to purchase approximately 6.0 million shares were outstanding under the Incentive Plan, and approximately 715,000 shares were available for future issuance under the Incentive Plan.

As of June 30, 2008, 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 purchase 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, 2008, approximately 893,000 shares had been issued under the Purchase Plan, and approximately 530,000 shares remain for future issuance.

(b) Summary of Assumptions and Activity

The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model. Weighted-average assumptions for options granted and stock purchase rights under the equity incentive plans are as follows:


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

A summary of option activity for the nine months ended June 30, 2008, 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, 2007		5,723		$	14.21		6.8	$	15,482
Granted		730		$	13.61
Exercised		(388	)	$	8.38
Forfeited or canceled		(67	)	$	12.70
Expired		(19	)	$	12.26

Outstanding at June 30, 2008		5,979		$	14.53		6.6	$	9,951

Exercisable at June 30, 2008		3,906		$	15.73		5.5	$	7,643

The weighted average grant-date fair value of options granted during the nine months ended June 30, 2008 was $4.41 per share. The aggregate intrinsic value of options exercised during the nine months ended June 30, 2008 was approximately $1.7 million.

As of June 30, 2008, there was approximately $7.1 million of total unrecognized compensation cost (net of estimated forfeitures) related to nonvested share-based compensation (nonvested stock options) arrangements as determined using the Black-Scholes option valuation model. That cost is expected to be recognized over the next four fiscal years (or a weighted average period of 2.1 years).

Excess Occupancy Income

Excess occupancy income consists of rental income from the leasing of space not occupied by the Company in its headquarters building acquired in 2002, net of related fixed costs, such as property taxes, insurance, leasing broker fees and depreciation. These particular costs represent the fixed costs of operating the Company’s headquarters building and are based on the actual square footage unoccupied by the Company, which was determined to be approximately 60% during the three and nine months ended June 30, 2008 and 2007. Rental income was approximately $633,000 and $277,000 for the three months ended June 30, 2008 and 2007, respectively. For the nine months ended June 30, 2008 and 2007, rental income was approximately $1.9 million and $857,000, respectively. Rental income was greater than the excess occupancy costs, thus generating an excess occupancy income. As of June 30, 2008, the Company had leased space with fifteen tenants of which thirteen had noncancelable operating leases, which expire on various dates through 2014. As of June 30, 2008, future minimum rents receivable under the leases, are as follows (in thousands):


Fiscal years:
2008 (remaining three months)	$	673
2009		2,283
2010		1,805
2011		1,686
2012		1,408
Thereafter		306

Total future minimum rents receivable	$	8,161

(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 equivalent document to be evidence of an arrangement.

	•		Delivery of the product or service. For subscription services, delivery is considered to occur when the customer has been provided with access to the subscription services. The Company’s subscription services are generally delivered on a consistent basis over the period of the subscription. For professional services, delivery is considered to occur when the services or milestones are completed. For ratable licenses, delivery occurs when all elements of the arrangement have either been delivered or accepted, if acceptance language exists.

	•		Fee is fixed and determinable.The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard.

	•		Collection is deemed reasonably assured.Collection is deemed reasonably assured if it is expected that the customer will be able to pay amounts under the arrangement as payments become due. If it is determined that collection is not reasonably assured, then revenue is deferred and recognized upon cash collection.

The Company generally does not 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 Perspective and other 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.

Revenue is recognized in accordance with Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition” (“SAB 104”) and Emerging Issues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”).

The Company also enters 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.

The Customer Experience Management (CEM) category consists of the WebEffective service whether 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 and revenue 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 minor consulting services associated with Keynote SIGOS System Integrated Test Environment (“SITE”) as a result of the Company’s acquisition of SIGOS Systemintegration GmbH (“Keynote SIGOS”) in the third quarter of fiscal 2006. The Company frequently enters into multiple element arrangements with mobile customers, for the sale of its automated test equipment, including both hardware and software licenses, consulting services to configure the hardware and software (implementation or integration services), post contract support (maintenance) services, training services and other minor consulting services. These multiple element arrangements are within the scope of Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), and the EITF Issue 03-5, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software”. This determination is based on the hardware component of the Company’s multiple element arrangements being deemed to be a software related element. In addition, customers do not purchase the hardware without also purchasing the software, as well as the software and hardware being sold as a package, with payments due from customer upon delivery of this hardware and software package.

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 the vendor specific objective evidence (“VSOE”) of fair value since sufficient 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 language exists, 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, 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 EITF 00-21. The Company allocates and defers revenue for the undelivered items based on objective evidence of fair value of the undelivered elements, and recognizes the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue. When sufficient objective evidence of fair value does not exist for undelivered items when subscription and professional services are combined, 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 of 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 revenue arrangements involving hardware. 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 Sheet. Contract lives generally range from one to three years. These deferred costs are amortized to cost of ratable licenses over the life of the customer contract. Amortization of these deferred costs commences when revenue recognition commences which is typically when evidence of delivery or acceptance occurs.

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

The Company reports comprehensive income (loss) in accordance with the provisions of SFAS No. 130, “Reporting Comprehensive Income”, which establishes standards for reporting comprehensive income (loss) and its components in the financial statements. The components of comprehensive income (loss) consist of net income (loss), unrealized gains and losses on short-term investments in debt securities and foreign currency translation. The unrealized gains and losses on short-term investments in debt securities and foreign currency translation are excluded from earnings and reported as a component of stockholders’ equity. The foreign currency translation adjustment results from those subsidiaries not using the U.S. dollar as their functional currency since the majority of their economic activities are primarily denominated in their applicable local currency. The Company has subsidiaries located in Germany, United Kingdom, France and Canada. Accordingly, all assets and liabilities related to these operations are translated at the current exchange rates at the end of each period. The resulting cumulative translation adjustments are recorded directly to the accumulated other comprehensive income (loss) account in stockholders’ equity. Revenues and expenses are translated at average exchange rates in effect during the period. Gains (losses) from foreign currency transactions are reflected in interest and other expenses in the condensed consolidated statements of operations as incurred.

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


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Net loss	$	(407	)	$	(1,533	)	$	(2,469	)	$	(1,239	)
Net unrealized gain (loss) on available-for-sale investments		(36	)		7			18			120
Foreign currency translation gain (loss)		(119	)		586			5,299			2,264


Comprehensive income (loss)	$	(562	)	$	(940	)	$	2,848		$	1,145

The Company did not provide for taxes relating to the unrealized gain on its available for sale investments as the taxes related to this gain when sold would be fully offset through a reduction of the valuation allowance on deferred tax assets. In addition, 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 financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, and capital lease obligation, approximates fair market value due to their short-term nature. 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 aging of accounts receivable, the age of each invoice, each customer’s expected ability to pay and the Company’s collection history with each customer. Management reviews invoices greater than 60 days past due to determine whether an allowance is appropriate based on the receivable balance. In addition, the Company maintains a reserve for all other invoices, which is calculated by applying a percentage to the outstanding accounts receivable balance, based on historical collection trends. In addition to the allowance for doubtful accounts, the Company maintains a billing allowance that represents the reserve for potential billing adjustments that are recorded as a reduction of revenue. The Company’s accounting for billing allowance represents a percentage of revenue based on historical trends and experience.

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

(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 money market securities with original maturities of three months or less to be cash equivalents in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”).

The Company classifies all of its short-term investments as available-for-sale. These investments mature or reset in one year or less as of the balance sheet dates, and consist of investment-grade corporate and government debt securities with Moody’s ratings of Aa3 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, a component of stockholders’ equity. Realized gains and losses are recorded based on specific identification. There were no realized gains or losses during the three and nine months ended June 30, 2008 and 2007.

The following table summarizes the Company’s cash and cash equivalents as of June 30, 2008 (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Market Value
Cash	$	36,208	$	—	$	—	$	36,208
Money market mutual funds		13,440		—		—		13,440

Total	$	49,648	$	—	$	—	$	49,648

The following table summarizes the Company’s short-term investments in investment-grade debt securities as of June 30, 2008 (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Market Value
Corporate bonds and commercial paper	$	4,281	$	10	$	—	$	4,291

Total	$	4,281	$	10	$	—	$	4,291

The following is a summary of the cost and estimated fair value of available-for-sale securities at June 30, 2008, by contractual maturity (in thousands):


			Estimated
	Amortized		Market
	Cost		Value

Mature in one year or less	$	4,281	$	4,291

During the nine months ended June 30, 2008, the Company recorded an impairment charge of $98,000, related to one of its investments held by Keynote SIGOS. This particular investment has been sold in the three months ended June 30, 2008 at approximately its fair market value. There was no impairment charge for the three months ended June 30, 2008 and for the three and nine months ended June 30, 2007. As of June 30, 2008, the Company does not have any holdings in auction rate securities.

(6) Inventories

Inventories related to SIGOS SITE systems were approximately $1.2 million and $1.1 million as of June 30, 2008 and September 30, 2007, respectively. Inventories primarily relate to direct costs associated with finished goods hardware and are stated at the lower of cost (determined on a first-in, first-out basis) or market. Current selling prices are primarily used for measuring any potential declines in market value below cost. Any adjustment for market value decreases is charged to cost of ratable licenses at the point management deems that the market value has declined. 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. Inventories on hand in excess of forecasted demand or obsolete inventories are charged to cost of ratable licenses. Obsolescence is determined considering several factors, including competitiveness of product offerings, market conditions, and product life cycles.

(7) Goodwill and Identifiable Intangible Assets

The following table represents the changes in goodwill during the nine months ended June 30, 2008 (in thousands):


Balance at September 30, 2007	$	63,129
Goodwill from the acquisition of Zandan S.A.		2,320
Translation adjustments		4,110

Balance at June 30, 2008	$	69,559

Identifiable intangible assets amounted to approximately $7.0 million (net of accumulated amortization of approximately $22.7 million) at June 30, 2008, and approximately $8.0 million (net of accumulated amortization of approximately $19.7 million) at

September 30, 2007. The components of identifiable intangible assets excluding goodwill are as follows (in thousands):


	Technology			Technology
	Based-			Based-			Customer
	Software			Other			Based			Trademark			Covenant			Backlog			Total
As of June 30, 2008:
Gross carrying value	$	6,391		$	12,615		$	9,096		$	1,348		$	65		$	195		$	29,710
Accumulated amortization		(2,457	)		(11,689	)		(7,666	)		(718	)		(38	)		(114	)		(22,682	)


Net carrying value at June 30, 2008	$	3,934		$	926		$	1,430		$	630		$	27		$	81		$	7,028


As of September 30, 2007:
Gross carrying value	$	4,449		$	11,845		$	9,845		$	1,178		$	93		$	278		$	27,688
Accumulated amortization		(1,238	)		(11,072	)		(6,803	)		(509	)		(26	)		(77	)		(19,725	)


Net carrying value at September 30, 2007	$	3,211		$	773		$	3,042		$	669		$	67		$	201		$	7,963

Amortization expense for identifiable intangible assets for the three months ended June 30, 2008 and 2007 was $849,000 and $713,000, respectively. Amortization expense for identifiable intangible assets for the nine months ended June 30, 2008 and 2007 was $2.3 million and $2.2 million, respectively. Amortization of developed technology related to software was $281,000 and $191,000 for the three months ended June 30, 2008 and 2007, respectively. Amortization of developed technology related to software was $697,000 and $561,000 for the nine months ended June 30, 2008 and 2007, respectively. These amounts were recorded to costs of revenue.

The estimated future amortization expense for existing identifiable intangible assets as of June 30, 2008 is as follows (in thousands):


	Total
Fiscal years:
2008 (Remaining three months)	$	814
2009		2,385
2010		1,746
2011		1,498
2012		585

Total	$	7,028


Weighted-average remaining useful lives as of June 30, 2008 (years)		3.2

(8) Net Loss Per Share

Basic and diluted net loss per share is computed using the weighted-average number of outstanding shares of common stock outstanding during the period.

For the three months ended June 30, 2008 and 2007, approximately 6.0 million and 6.1 million options outstanding, respectively, were excluded from the computation of diluted net loss per share since their effect would have been antidilutive. For the nine months ended June 30, 2008 and 2007, approximately 5.8 million and 6.7 million options outstanding, respectively, were excluded from the computation of diluted net loss per share since their effect would have been antidilutive.

(9) Acquisitions

On April 16, 2008, the Company acquired all outstanding shares of Zandan S.A. (“Zandan”), a mobile data network testing and monitoring solutions provider, for approximately €1.3 million or $2.0 million which consists of the following (in thousands):


Cash consideration	$	1,455
Direct transaction costs		543

Total purchase price	$	1,998

Of the cash consideration, approximately€565,000 or $883,000 is withheld in escrow accounts for specified indemnity obligations. As of June 30, 2008, the Company had paid approximately $572,000 of cash consideration for the acquisition and $68,000 of the estimated $543,000 of direct transaction costs.

Zandan is a private French-based software company. The Company supplies active end-to-end customer simulation solutions used across the mobile service life cycle from interactive testing, service and handset acceptance to live monitoring, alerting, troubleshooting and service level agreement management. The Company believes the acquisition will enhance and broaden its mobile testing and monitoring solutions.

The purchase price for the acquisition of Zandan has been preliminarily allocated to assets and liabilities acquired based upon management’s estimate of their fair values. The excess of the purchase consideration over the fair value of the net assets acquired has been allocated to goodwill. The Company is in the progress of completing its fair value analysis for certain working capital items, intangible assets and deferred revenue. Any changes to those fair value estimates will be reflected in as an adjustment to goodwill. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition of April 16, 2008 (in thousands):


Cash and cash equivalents	$	19
Accounts receivable		148
Deferred tax assets		604
Other assets		732
Property, plant, equipment and software		81
Intangible assets:
Technology-based intangibles (amortization period of 2 years)		778
Customer-based intangibles (amortization period of 3 years)		302
Goodwill		2,320

Total assets acquired		4,984
Accounts payable and accrued liabilities		(1,834	)
Accrued compensation		(702	)
Deferred revenue		(163	)
Notes payable		(287	)

Total purchase price, including direct acquisition costs	$	1,998

The following summary, prepared on an unaudited pro-forma basis, reflects consolidated results of operations for the nine months ended June 30, 2008 and 2007, assuming Zandan had been acquired at the beginning of each period presented (in thousands, except per share data):


	Nine Months Ended			Nine Months Ended
	June 30, 2008			June 30, 2007

Revenue	$	56,614		$	51,411
Net loss	$	(4,554	)	$	(4,510	)
Net loss per share-basic and diluted	$	(0.28	)	$	(0.26	)
Shares used in pro forma per share computation-basic and diluted		16,039			17,353

As a result of acquiring all outstanding shares of Zandan, the Company assumed a legal settlement against Zandan involving a dispute alleging that Zandan had not complied with its Systems Support Agreement. The matter was taken to court where the Swiss federal court ruled that Zandan pay€242,000 or $381,000, plus interest. Zandan was not successful on appeal, and as such, an accrual of€265,000 or $417,000, was recorded in accrued expenses. As of June 30, 2008, this settlement still remains unpaid. However, as part of the purchase agreement, this legal liability is the responsibility of Zandan’s former shareholders, and as such, the amount has been set aside in escrow.

(10) Income Taxes

The Company’s effective tax rate for the three months ended June 30, 2008 and 2007 was (52%) and (541%), respectively. The Company’s effective tax rate for the nine months ended June 30, 2008 and 2007 was (21%) and (5%), respectively. The rate for the three months and nine months ended June 30, 2008 was primarily the result of the Company not benefiting from the losses incurred in the

United States. The high tax rate for the three months ended June 30, 2007 was due primarily to a change in the estimated effective tax rate for the year ended September 30, 2007. As required by FASB Interpretation No.18, “Accounting for Income Taxes in Interim Periods” (“FIN 18”), the impact of items of tax expense (or benefit) that do not relate to “ordinary income” in the current year generally should be accounted for discretely in the period in which it occurs and be excluded from the effective tax rate calculation. The Company also excludes the losses from jurisdictions in which the loss will not be benefited due to uncertainty of the realizability of the deferred tax assets created by the losses. The Company has determined that it is not able to project income for its operations in Germany with the precision necessary to estimate an annual effective rate for tax purposes. As such the Company has calculated the tax provision for its German operations on a discrete basis. The Company recorded a discrete tax provision for its operations in Germany of $92,000 and $203,000 during the three and nine months ended June 30, 2008, respectively.

During the three months ended December 31, 2007, the Company entered into an agreement whereby it purchased certain intangible assets from its German subsidiary. This transaction was treated as an inter-company sale and, as such, the tax consequences of the transaction are not recognized on the sale until the Company no longer benefits from the underlying assets. Therefore, the Company has recorded a long-term prepaid income tax asset in the amount of $253,000 which represents the income taxes that the German subsidiary will pay in the amount of $1.4 million, offset by the elimination of the deferred tax liability that was established on the transferred assets at the time of the acquisition of the German subsidiary. The deferred tax liability had a carrying amount of approximately $1.2 million at the time of the transfer. This remaining prepaid tax asset of $253,000 is being amortized through tax expense over the life of the underlying asset, which has been determined to be 48 months.

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 carry-forwards, 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 reduce the effective tax rate and deferred tax expense, the goodwill balance, and the 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 US domestic taxes and to foreign, in particular German, taxes separately. SFAS No. 123R has the effect of increasing the effective tax rate due to compensation expense from incentive stock options and employee stock purchase plan shares, 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, at which time the tax rate may be reduced as a result.

(11) Notes Payable

As a result of acquiring all outstanding shares of Zandan, the Company assumed a loan agreement that Zandan entered into in 2007, with Oseo BDPME, a French State Bank of Innovation, to borrow approximately€182,000 or $287,000 to meet general working capital requirements. Amounts borrowed under this agreement are secured by Zandan’s 2005 research tax credit receivable in the amount of approximately€288,000 or $453,000. Amounts borrowed bear a variable interest based upon the Euro Overnight Interest Average rate of the month plus 3.8%. Interest and principal are due when the research tax credit receivable is collected from the French Tax Authorities, which is expected to be in the second quarter of 2009.

(12) Commitments and Contingencies

(A) Leases

The Company leases certain of its facilities and equipment under noncancelable capital and operating leases, which expire on various dates through August 2015. As of June 30, 2008, future minimum payments under the leases are as follows (in thousands):


	Operating		Capital
	Leases		Leases
Fiscal year:
2008 (remaining three months)	$	287	$	6
2009		959		19
2010		830		17
2011		623		—
2012		446		—
Thereafter		913		—

Total minimum lease payments	$	4,058		42


Less amounts representing interest				(3	)

Present value of minimum lease payments				39
Less current portion of capital lease obligation				(16	)

Long-term portion of capital lease obligation			$	23

Rent expense for the three months ended June 30, 2008 and 2007 was approximately $343,000 and $253,000, respectively. Rent expense for the nine months ended June 30, 2008 and 2007 was approximately $842,000 and $688,000, respectively.

(B) Commitments

The Company has contingent commitments, which range in length from one to thirty-four months, to 79 bandwidth and collocation providers amounting to $1.5 million in the aggregate for 74 locations, which commitments become due if the Company terminates any of these agreements prior to their expiration.

(C) 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. Citing several press articles, the Consolidated Complaint alleged that the underwriter defendants used improper methods in allocating shares in initial public offerings, and claimed the underwriter defendants entered into improper commission agreements regarding aftermarket trading in the Company’s common stock purportedly issued pursuant to the registration statement for the initial public offering. The Consolidated Complaint also alleged market manipulation claims against the underwriter defendants based on the activities of their respective analysts, who were allegedly compromised by conflicts of interest. The claims made in the Consolidated Complaint are substantially similar to claims made in over three hundred other consolidated amended complaints filed in a coordinated matter captionedIn re Initial Public Offering Securities Litigation.

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. The District Court has yet to rule upon the motion for class certification is ongoing with respect to the six focus cases. 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 8, 2008. There can be no assurance that the parties will be able to reach a settlement in light of any new class definition that the Court approves, or that any such settlement would be on terms as favorable to the Company as the previous settlement. If no settlement is reached, the Company will defend the litigation on its merits.

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 compliant. The suit names the Company as a nominal defendant, contains no claims against the Company, and seeks no relief from the Company. No amount has been accrued at June 30, 2008 and September 30, 2007, since 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.

(D) 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. As of June 30, 2008 and September 30, 2007, the Company recorded no warranty liability because such liability is generally covered under the manufacturer’s warranty.

(E) Indemnification

The Company does not generally indemnify its customers against legal claims that its services infringe on 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, 2008 and September 30, 2007 in the condensed consolidated balance sheets.

(13) Stock Repurchase Program

During the first quarter of fiscal 2008, as part of its overall stock repurchase program, the Company entered into agreements with B. Riley & Company (“B. Riley”) and Ferris, Baker Watts (“Ferris Baker”) to establish Trading Plans intended to qualify under Rule 10b5-1 of the Securities Exchange Act of 1934 (the “Exchange Act”). Each Trading Plan instructed B. Riley and Ferris Baker to repurchase for the Company, in accordance with Rule 10b-18 of the Exchange Act, up to 1,000,000 shares each of the Company’s common stock, for an aggregate of up to 2.0 million shares. On February 1, 2008, the Trading Plans with B. Riley and Ferris Baker expired. The total repurchases under those plans was 1,432,051 shares for an aggregate price of approximately $19.2 million.

During the second quarter of fiscal 2008, the Board approved the repurchase of an additional 3.0 million shares of the Company’s common stock. The Company entered into a new agreement with Ferris Baker to establish another Trading Plan which instructed Ferris Baker to repurchase for the Company up to approximately 2 million shares in compliance with Rule 10b-18 of the Exchange Act. By April 30, 2008, the Trading Plan expired since all repurchases have been completed.

In accordance with the repurchase program and Trading Plans, the Company repurchased 707,220 shares for approximately $9.8 million during the first quarter of fiscal 2008, and 4,201,280 shares for approximately $49.2 million during the second quarter of fiscal 2008. During the second quarter of fiscal 2008, the Company retired approximately 1.6 million shares of treasury stock.

The remaining 91,500 authorized shares in the buyback program were purchased in the first week of April 2008 for approximately $1.1 million.

As of June 30, 2008, approximately 19.4 million shares of common stock had been repurchased for an aggregate price of approximately $196.5 million since the Board approved the first repurchase program in fiscal 2001. During the third quarter of fiscal 2008, the Company retired approximately 3.5 million shares of treasury stock.

(14) Geographic and Segment Information

The Company operates in a single industry segment encompassing the development and sale of services, hardware and software to measure, test, assure and improve the quality of service of the Internet and of mobile communications. While the Company operates under one operating segment, management reviews revenue under three categories — Internet (ITM) services, Mobile (MTM) services and Customer Experience Management (CEM).

The following table identifies which services are categorized as ITM, MTM and CEM services and where they are recorded in the Company’s condensed consolidated statements of operations (listed in alphabetical order). CEM service offerings are available as both custom engagements or as a subscription service. Accordingly, CEM engagements are recorded as professional services revenue and CEM subscription services are recorded as subscription services revenue.

Subscription

Ratable

Professional

Services

Licenses

Services

Internet Test and Measurement:

Application Perspective

Diagnostic Services

Enterprise Adapters

��

LoadPro

NetMechanic

Professional Services

Red Alert

Streaming Perspective

Test Perspective

Transaction Perspective

WebIntegrity

Web Site Perspective

Voice Perspective

Performance Scoreboard

Mobile Test and Measurement:

Mobile Device Perspective

Mobile Application Perspective

SIGOS SITE

SIGOS Global Roamer

Customer Experience Management:

WebEffective

Financial Services Scorecards

The following table summarizes ITM, MTM and CEM services revenue (in thousands):


	Three Months Ended June 30,
	2008		2007
Internet Subscriptions	$	8,908	$	9,129
Internet Engagements		1,374		1,720

Total Internet net revenue		10,282		10,849

Mobile Subscription		1,912		1,158
Mobile Ratable Licenses		6,426		3,443

Total Mobile net revenue		8,338		4,601

CEM Subscriptions		621		594
CEM Engagements		1,257		1,343

Total CEM net revenue		1,878		1,937

Total net revenue	$	20,498	$	17,387


	Nine Months Ended June 30,
	2008		2007
Internet Subscriptions	$	26,666	$	27,053
Internet Engagements		3,989		4,550

Total Internet net revenue		30,655		31,603

Mobile Subscription		4,906		3,268
Mobile Ratable Licenses		15,033		8,852

Total Mobile net revenue		19,939		12,120

CEM Subscriptions		1,833		1,700
CEM Engagements		3,425		4,393

Total CEM net revenue		5,258		6,193

Total net revenue	$	55,852	$	49,916

Information regarding geographic areas is as follows (in thousands):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Revenues:
United States	$	11,241	$	12,136	$	33,023	$	35,588
Europe*		7,844		4,113		18,955		10,673
Other*		1,413		1,138		3,874		3,655

	$	20,498	$	17,387	$	55,852	$	49,916


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


	June 30,		September 30,
	2008		2007

Long Lived Assets:
United States	$	34,873	$	34,543
Germany		1,201		905
Other		93		32

	$	36,167	$	35,480

Revenue is attributable to countries based on the geographic location of the customers. Long-lived assets are attributed to the geographic location in which they are located. The Company includes in long-lived assets all tangible assets. Long-lived assets in Germany include tangible assets related to the acquisition of SIGOS.

For the three months ended June 30, 2008, one customer accounted for approximately 13% of total net revenue. For the nine months ended June 30, 2008, no single customer accounted for 10% or more of total revenue. For the three and nine months ended June 30, 2007, no single customer accounted for 10% or more of total net revenue. As of June 30, 2008, one customer accounted for 10% of total accounts receivable. At September 30, 2007, one customer accounted for 11% of total accounts receivable.

(15) Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (“GAAP”). As a result of FAS 157, there is now a common definition of fair value to be used throughout GAAP, which is expected to make the measurement of fair value more consistent and comparable. Originally, FAS 157 was effective for the first fiscal year beginning after November 15, 2007. However, in February 2008, the FASB released FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157” which delayed the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until years beginning after November 15, 2008 which will be the Company’s fiscal year beginning October 1, 2009. The Company is currently evaluating the effects, if any, of the adoption of FAS 157 on its condensed consolidated financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. FAS 159 is effective for the Company beginning in the first quarter of fiscal year 2009, although earlier adoption is permitted. The Company is currently evaluating the impact of adopting FAS 159 on its condensed consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“FAS 141R”), which replaces FASB Statement No. 141. FAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be the Company’s fiscal year beginning October 1, 2009. The Company is currently evaluating the potential impact, if any,

of the adoption of FAS 141R on the Company’s consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“FAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. FAS 160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be the Company’s fiscal year beginning October 1, 2009. The Company is currently evaluating the potential impact, if any, of the adoption of FAS 160 on its consolidated financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 enhances financial disclosure by requiring that objectives for using derivative instruments be described in terms of underlying risk and accounting designation in the form of tabular presentation, requiring transparency with respect to the entity’s liquidity from using derivatives, and cross-referencing an entity’s derivative information within its financial footnotes. FAS161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that FAS 161 may have on its financial position or cash flows.

In April 2008, the FASB released FASB Staff Position 142-3, “Determination of the Useful Life of Intangible Assets” (“FAS142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. The intent of the statement is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007) and other U.S. generally accepted accounting principles. FAS 142-3 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be the Company’s fiscal year beginning October 1, 2009. The Company is currently evaluating the potential impact, if any, of the adoption of FAS 142-3 on the Company’s consolidated financial position, results of operations and cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). FAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with accounting principles generally accepted in the United States of America for nongovernmental entities. FAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. Any effect of applying the provisions of FAS 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3.” The Company will adopt FAS 162 once it is effective and is currently evaluating the effect that the adoption will have on its consolidated financial statements.

Item 2. Management 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 on Form 10-K for the year ended September 30, 2007, and subsequent filings with the Securities and Exchange Commission.

Except for historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our anticipated costs and expenses and revenue mix. These forward-looking statements include, among others, statements including the words “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 on Form 10-K for the fiscal year ended September 30, 2007 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 on Form 10-Q and current reports on Form 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 on Form 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 offer technology-based services and systems that enable enterprises to improve their mobile and online business performance and communications technologies. We offer Internet test and measurement services (“ITM”), customer experience test and measurement solutions (“CEM”), and mobile test and measurement services (“MTM”). Our ITM category includes all of our geographically- distributed web site and application monitoring and measurement services, voice over internet protocol and streaming measurement services, load testing services and professional services engagements. The CEM category consists of the WebEffective and Financial services scorecard services whether sold on a subscription basis, or as part of a professional services engagement. The MTM category consists of our on-demand mobile monitoring and testing services, our Global Roamer services and our SIGOS SITE systems. We believe all of these categories of services help our customers reduce costs, improve customer satisfaction and increase profitability.

We offer our ITM services primarily on a subscription basis and our CEM services primarily on an engagement basis although, in some cases, we offer ITM professional services on an incident and per engagement basis. We also offer the self-service use of our CEM technology for a fixed period of time on a subscription basis. 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. Engagements typically involve fixed price contracts based on the complexity of the project, the size of a CEM panel, and the type of testing to be conducted. Our MTM solutions are offered on a subscription basis or license basis. The subscriptions typically are for a fixed period over twelve months, 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, the license fees are amortized over the length of the contract and are therefore included in ratable license revenue. The SIGOS Global Roamer service is offered via a subscription fee model typically on a three to twelve month basis and included in subscription services revenue.

Our net loss decreased by approximately $1.1 million, or 73%, from a net loss of approximately $1.5 million for the quarter ended June 30, 2007 to a net loss of approximately $407,000 for the quarter ended June 30, 2008. Total net revenue increased approximately $3.1 million or 18%, from approximately $17.4 million for the quarter ended June 30, 2007 to approximately $20.5 million for the quarter ended June 30, 2008. The increase in total net revenue was mainly related to approximately $3.0 million in ratable licenses revenue and $754,000 in mobile subscription services revenue mainly as a result of sales of our SIGOS services, offset by decreased contribution from our ITM revenue of $567,000 and CEM revenue of $59,000. Total expenses increased by approximately $2.3 million from approximately $18.8 million for the quarter ended June 30, 2007 to approximately $21.1 million for the quarter ended June 30, 2008. The increase in total expenses was mainly attributable to a $1.5 million increase in our sales and marketing expenses due to continued investments in our sales force and increased costs associated with our sales and marketing events that occurred in the third quarter of fiscal 2008. Additional personnel and professional fees of $761,000 also contributed to an increase in operations and general and administrative expenses. Costs related to professional services decreased $185,000 or 10%, from approximately $1.9 million for the quarter ended June 30, 2007 to approximately $1.8 million for the quarter ended June

30, 2008 mainly due to lower personnel related costs due to stringent cost containment that had been implemented in the first quarter of fiscal 2008.

Our net loss increased by approximately $1.2 million, from net loss of $1.2 million for the nine months ended June 30, 2007 to a net loss of approximately $2.5 million for the nine months ended June 30, 2008. Total net revenue increased approximately $5.9 million, or 12%, from approximately $49.9 million for the nine months ended June 30, 2007 to approximately $55.9 million for the nine months ended June 30, 2008. The increase in revenue was mainly related to approximately $6.2 million in ratable licenses revenue as a result of sales of our SIGOS products and to a lesser extent, a slight increase of $1.6 million in our mobile subscription services revenue, offset by decreased contribution from our CEM revenue of $935,000 and $948,000 in ITM revenue. Total expenses increased by approximately $5.7 million, from approximately $54.5 million for the nine months ended June 30, 2007 to approximately $60.3 million for the nine months ended June 30, 2008. The increase in total expenses was mainly attributable to a $4.1 million increase in our sales and marketing expenses due to continued investments in our sales force and increased spending on sales and marketing events. Additional personnel and professional fees of approximately $1.2 million have also contributed to an increase in operations and general and administrative expenses. Additional expenses from increased headcount in development expenses were offset by a reduction of workforce in professional services. In addition, the increase was also attributable to an increase in costs of ratable licenses associated with higher ratable licenses revenue generated from new and existing customers purchasing additional SITE systems which revenue is being recorded as ratable licenses revenue.

At June 30, 2008 and 2007, we measured for revenue approximately 13,900 and 11,100 Internet pages, respectively.

For the three months ended June 30, 2008 and 2007, our 10 largest customers accounted for approximately 38% and 35% of total net revenue, respectively. For both the nine months ended June 30, 2008 and 2007, 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.

We believe that the challenges for our business include 1) continuing to drive growth in our ITM, MTM and CEM revenue, 2) growing multiple page/broadband related revenue, and 3) continuing to control our expenses in fiscal 2008.

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. Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007 describes the significant accounting policies and methods used in the preparation of our condensed consolidated financial statements. 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

Revenue Recognition

We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”, Emerging Issues Task Force (“EITF”) Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), and the Emerging Issues Task Force Issue 03-5, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software” (“EITF 03-5”). We generally recognize revenue when all of the following criteria have been met:

	•		Persuasive evidence of an arrangement,

	•		Delivery of the product or service,

	•		Fee is fixed and determinable and

	•		Collection is deemed reasonably assured.

One of the critical judgments that we make is the assessment that “collectibility is probable.” Our recognition of revenue is based on our assessment of the probability of collecting the related accounts receivable on a customer-by-customer basis. If we determine that collection is not reasonably assured, then revenue is deferred and recognized upon the receipt of cash from that arrangement.

Our revenue consists of subscription services revenue, ratable license revenue and professional services revenue.

Subscription Services Revenue:Subscription services revenue consists of fees from sales of subscriptions to our Perspective family of services and Global Roamer.

We also enter 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 our subscription arrangements do not qualify for treatment as separate units of accounting. Accordingly, we account 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, we recognize revenue as services are provided and defer any revenue that is unearned.

The CEM category consists of the WebEffective service whether sold on a subscription basis or as part of a professional services engagement. We recognize revenue from the use of our 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. We recognize revenue from the use of our WebEffective service as part of a professional services engagement and revenue 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 minor consulting services associated with Keynote SIGOS System Integrated Test Environment (“SITE”) as a result of our acquisition of SIGOS Systemintegration GmbH (“Keynote SIGOS”) in the third quarter of fiscal 2006. We frequently enters into multiple element arrangements with mobile customers, for the sale of our automated test equipment, including both hardware and software licenses, consulting services to configure the hardware and software (implementation or integration services), post contract support (maintenance) services, training services and other minor consulting services. These multiple element arrangements are within the scope of Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), and the EITF Issue 03-5, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.” This determination is based on the hardware component of our multiple element arrangements being deemed to be a software related element. In addition, customers do not purchase the hardware without also purchasing the software, as well as the software and hardware being sold as a package, with payments due from customer upon delivery of this hardware and software package.

None of the Keynote SIGOS implementation/integration services provided by us 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 we have a history of successfully gaining customer acceptance.

We cannot allocate the arrangement consideration to the multiple elements based on the vendor specific objective evidence (“VSOE”) of fair value since sufficient VSOE does not exist for the undelivered elements of the arrangement, typically maintenance. Therefore, we recognize 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 language exists, 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 our LoadPro, 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, we recognize revenue once the services or milestones have been delivered, based on input measures. Payment occurs either up-front or over time.

We also enter into multiple element arrangements that generally consist of either: 1) the combination of subscription and professional services or 2) multiple professional services. For these arrangements, we recognize revenue in accordance with Emerging Issues Task Force (“EITF”) Issue 00-21 “Revenue Arrangements with Multiple Deliverables.” We allocate and defer revenue for the undelivered items based on objective evidence of fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue. When sufficient objective evidence of fair value does not exist for undelivered items when subscription and professional services are combined, 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 revenue, and is recorded as deferred revenue on the balance sheet until the revenue is earned. For informational purposes, we have provided a reconciliation of the total net deferred revenue (both short-term and long-term), as reported on the Condensed Consolidated Balance Sheets as of June 30, 2008 and September 30, 2007 to total gross deferred revenue (in thousands):


	Domestic		International		Total
Net deferred revenue	$	6,300	$	17,869	$	24,169
Addback: unpaid deferred revenue		2,288		3,054		5,342

Gross deferred revenue at June 30, 2008	$	8,588	$	20,923	$	29,511


Net deferred revenue	$	7,511	$	14,449	$	21,960
Addback: unpaid deferred revenue		3,085		1,564		4,649

Gross deferred revenue at September 30, 2007	$	10,596	$	16,013	$	26,609

The addback of unpaid deferred revenue may change at any point in time as it is based upon the timing of when invoices are collected and whether there is any unpaid deferred revenue associated with such 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 of the balance sheet date and this primarily consists of SIGOS revenue.

We generally do not grant refunds. All discounts granted reduce revenue. Free trials are occasionally provided to prospective customers who would like to try certain of our Perspective and other 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.

Allowance for Doubtful Accounts and Billing Allowance

Accounts receivable are recorded net of an allowance for doubtful accounts receivable and billing allowance and unpaid deferred

revenue to the extent that there is any associated accounts receivable balance.

Our allowance for doubtful accounts is determined based on historical trends, experience and current market and industry conditions. We regularly review the adequacy of our accounts receivable allowance after considering the age of each invoice on the accounts receivable aging, each customer’s expected ability to pay and our collection history with each customer. We review invoices greater than 60 days past due to determine whether an allowance is appropriate based on the receivable balance. In addition, we maintain a reserve for all other invoices, which is calculated by applying a percentage, based on historical collection trends, to the outstanding accounts receivable balance as well as specifically identified accounts that are deemed uncollectible.

Billing allowance represents the reserve for potential billing adjustments that are recorded as a reduction of revenue and is calculated on a percentage of revenue based on historical trends and experience. The allowance for doubtful accounts and billing allowance represent management’s best estimate, but changes in circumstances relating to accounts receivable and billing adjustments, including unforeseen declines in market conditions and collection rates and the number of billing adjustments, may result in additional allowances in the future or reductions in allowances due to future recoveries or trends.

Inventories and Inventory Valuation

Inventories related to SIGOS SITE services were approximately $1.2 million as of June 30, 2008, and relate to direct costs associated with finished goods hardware. Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Market is based on estimated replacement value. Determining market value of inventories involves numerous judgments, including average selling prices and sales volumes of future periods. We primarily utilize current selling prices for measuring any potential declines in market value below cost. Any adjustment for market value decreases is charged to cost of ratable licenses at the point management deems that the market value has declined.

We evaluate our ending inventories for excess quantities and obsolescence on a quarterly basis. This evaluation includes analysis of historical and forecasted sales of our product. Inventories on hand in excess of forecasted demand are provided for. In addition, we write off inventories that are considered obsolete. Obsolescence is determined from several factors, including competitiveness of product offerings, market conditions, and product life cycles.

Our inventories include mainly computer hardware and mobile hardware and accessories that may be subject to technological obsolescence and which are sold in a competitive industry. If actual product demand or selling prices are less favorable than we estimate, we may be required to take inventory write-downs. For the quarter ended June 30, 2008, we did not experience any write-down of inventory.

Allocation of Purchase Price for Business Combinations

We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, as well as any in-process research and development (“IPR&D”), based on their estimated fair values. Our methodology for allocating the purchase price relating to acquisitions is usually determined based on valuations performed by an independent third party. Such valuations require making significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer contracts, customer lists and acquired developed technologies, expected costs to develop IPR&D into commercially viable products and estimating cash flows from projects when completed and discount rates. Estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Other estimates such as accruals associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

Goodwill, Identifiable Intangible Assets and Long-Lived Assets

Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed.

We evaluate our identifiable goodwill for impairment on an annual basis, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable for our single operating segment. In addition we evaluate our intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

•

significant changes in the manner of our use of the acquired assets or the strategy of our overall business;

	•		significant negative industry or economic trends;

	•		significant decline in our stock price for a sustained period; and

	•		our market capitalization relative to net book value.

Management continually applies its judgment when performing these evaluations to determine the timing of the testing, the undiscounted net cash flows used to assess recoverability of the intangible assets and the fair value of the asset group. If future events or circumstances indicate that an impairment assessment is required and an asset group is determined to be impaired, our financial results could be materially and adversely impacted in future periods.

We performed an annual impairment review during the fourth quarter in fiscal 2007. We did not record an impairment charge based on our review. The goodwill recorded on the Condensed Consolidated Balance Sheet as of June 30, 2008 was approximately $69.6 million as compared to $63.1 million as of September 30, 2007. The increase was due to the acquisition of Zandan and the fluctuation in foreign currency exchange rates.

If our estimates or the related assumptions change in the future, we may be required to record an impairment charge on goodwill to reduce its carrying amount to its estimated fair value. If future events or circumstances indicate that an impairment assessment is required on intangible or long-lived assets and an asset group is determined to be impaired, our financial results could be materially and adversely impacted in future periods.

Stock-Based Compensation

We issue stock options to our employees and outside directors and provide our employees the right to purchase common stock under employee stock purchase plans. Since October 1, 2005, we account for stock-based compensation in accordance with SFAS No. 123R. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service (vesting) period. The value of an option is estimated using the Black-Scholes option valuation model which requires the input of highly subjective assumptions. A change in our assumptions could materially affect the fair value estimate, and thus, the total calculated costs associated with the grant of stock options or issue of stock under employee stock purchase plans. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted. See Note 1 to the Notes to Condensed Consolidated Financial Statements for more detail.

Income Taxes, Deferred Income Tax Assets and Deferred Income Tax Liabilities

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax liabilities, including the impact, if any, of additional taxes resulting from tax examinations together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recoverable from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase the valuation allowance in a period, our deferred tax expense increases. If a valuation allowance is decreased, deferred tax expense may be reduced, goodwill may be reduced, or paid in capital may be increased, depending on the nature and source of the deferred tax assets. This analysis is applied on a jurisdiction by jurisdiction basis.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. Tax exposures can involve complex issues and may require an extended period to resolve. Tax planning strategies may be implemented which would affect the tax rate. Changes in the geographic mix or estimated level of annual income before taxes can affect the overall effective tax rate. We perform an analysis of our effective tax rate and we assess the need for a valuation allowance against our deferred tax assets quarterly.

The uncertainties which could affect the realization of our deferred tax assets include various factors such as the amount of deductions for tax purposes related to our stock options, potential successful challenges to the deferred tax assets by taxing authorities, and a mismatch of the period during which the type of taxable income and the deferred tax assets are realized or a mismatch in the tax jurisdiction in which taxable income is generated and the company with the deferred tax assets.

As of October 1, 2007, we adopted Financial Accounting Standards Board’s Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) to account for uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or

expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: we determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the “more-likely-than-not” recognition threshold, we presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: A tax position that meets the “more-likely-than-not” recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement.

During the three months ended December 31, 2007, we entered into an agreement whereby we purchased certain intangible assets from our German subsidiary. This transaction was treated as an inter-company sale and, as such, tax is not recognized on the sale until we no longer benefit from the underlying asset. Therefore, we have recorded a long-term prepaid tax asset in the amount of $253,000 which represents the tax that the German subsidiary will pay in the amount of approximately $1.4 million, offset by the elimination of the remaining carrying amount of the deferred tax liability that was established on the transferred assets at the time of the acquisition of the German subsidiary related to the sale of these intangible assets. The deferred tax liability had a carrying amount of approximately $1.2 million at the time of the transfer. This prepaid tax will be amortized through tax expense over the life of the underlying asset which we have deemed as 48 months.

We establish liabilities or reserves when we believe that certain tax positions are not probable of being sustained if challenged, despite our belief that our tax returns are fully supportable. We evaluate these tax reserves and related interest each quarter and adjust the reserves in light of changing facts and circumstances regarding the probability of realizing tax benefits, such as the progress of a tax audit or the expiration of a statute of limitations. We believe that our tax positions comply with applicable tax laws and that we have adequately provided for known material tax contingencies; however, due to the inherent complexity and uncertainty relating to tax matters, including the likelihood and potential outcome of any tax audits, management is not able to estimate the range of reasonably possible losses in excess of amounts recorded.

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,
	2008			2007			2008			2007
Net revenue:
Subscription services		55.8	%		62.6	%		59.8	%		64.4	%
Ratable licenses		31.4	%		19.8	%		26.9	%		17.7	%
Professional services		12.8	%		17.6	%		13.3	%		17.9	%

Total revenue, net		100.0	%		100.0	%		100.0	%		100.0	%

Costs and expenses:
Costs of revenue:
Direct costs of subscription services		10.9	%		12.5	%		11.8	%		12.7	%
Direct costs of ratable licenses		7.4	%		8.4	%		7.6	%		6.5	%
Direct costs of professional services		8.6	%		11.2	%		9.6	%		12.6	%
Development		15.8	%		17.0	%		17.1	%		17.4	%
Operations		11.1	%		10.7	%		11.3	%		11.3	%
Amortization of intangible assets — software		1.4	%		1.1	%		1.2	%		1.1	%
Sales and marketing		32.7	%		30.2	%		34.0	%		29.9	%
General and administrative		13.8	%		14.3	%		14.0	%		14.5	%
Excess occupancy income		(1.4	%)		(0.2	%)		(1.6	%)		(0.2	%)
Amortization of intangible assets — other		2.8	%		3.0	%		2.9	%		3.3	%

Total costs and expenses		103.1	%		108.2	%		107.9	%		109.1	%

Loss from operations		(3.1	%)		(8.2	%)		(7.9	%)		(9.1	%)

Interest income and other, net		1.7	%		6.7	%		4.3	%		6.9	%


Loss before provision for income taxes		(1.4	%)		(1.5	%)		(3.6	%)		(2.2	%)

Provision for income taxes		(0.7	%)		(7.4	%)		(0.8	%)		(0.1	%)


Net loss		(2.1	%)		(8.9	%)		(4.4	%)		(2.3	%)

Comparison of the Three and Nine Months Ended June 30, 2008 and 2007

Revenue


	2008		2007		% Change
	(in thousands)
For the three months ended June 30
Subscription services	$	11,441	$	10,881		5	%
Ratable licenses		6,426		3,443		87	%
Professional services		2,631		3,063		(14	)%

Total revenue, net	$	20,498	$	17,387		18	%


	2008		2007		% Change
For the nine months ended June 30
Subscription services	$	33,405	$	32,121		4	%
Ratable licenses		15,033		8,852		70	%
Professional services		7,414		8,943		(17	)%

Total revenue, net	$	55,852	$	49,916		12	%

Subscription Services. Revenue from subscription services increased by $560,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. The increase in subscription services revenue for the three months ended June 30, 2008 was mainly attributable to increased sales of our multiple page/broadband subscription services of approximately $1.3 million and mobile services of $754,000, offset by a decrease in our single-page device subscription services of approximately $1.6 million. We have been replacing single-page/single device subscriptions with our multiple page/broadband services and have achieved our goal of reducing single-page/single device subscriptions revenue to 10% of ITM subscription revenue.

Revenue from subscription services increased approximately $1.3 million for the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007. The increase in subscription services revenue for the nine months ended June 30, 2008 was mainly attributable to increased sales of our multiple page/broadband subscription services of approximately $3.7 million and mobile services of $1.6 million, offset by a decrease in our single-page device subscription services of approximately $4.1 million.

Ratable licenses.Revenue from ratable licenses increased by approximately $3.0 million for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. Revenue from ratable licenses increased by approximately $6.2 million for the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007. The increase in ratable licenses revenue for the three and nine months ended June 30, 2008 was mainly attributable to revenue growth from the sale of new SIGOS SITE systems and existing customers renewing maintenance agreements. Revenue from these sales is being recognized in revenue over the maintenance period for each contract which is typically twelve to thirty-six months. We expect the rate of revenue growth for ratable licenses will be less than experienced in prior quarters. This is primarily attributable to the amount of revenue being recognized from prior periods normalizing with new sales contracts that will be amortized over twelve to thirty-six months.

Professional Services. Revenue from professional services decreased by $432,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. The decrease in professional services revenue for the three months ended June 30, 2008 was mainly attributable to decreased contributions from our CEM and professional services engagements of $86,000 and $346,000, respectively. Revenue from professional services decreased by approximately $1.5 million for the nine months ended June 30, 2008 as compared to the three months ended June 30, 2007. The decrease in professional services revenue for the nine months ended June 30, 2008 was mainly attributable to decreased contributions from our CEM and ITM professional services engagements of $968,000 and $561,000, respectively.

In addition to analyzing revenue for subscription services, ratable licenses and professional services, management also internally analyzes revenue categorized as ITM, MTM and CEM. Our CEM service offerings are available as both custom engagements or as a subscription service. Accordingly, CEM engagements are recorded as professional services revenue and CEM subscription services are recorded as subscription services revenue.

The following table identifies which services are categorized as ITM, MTM and CEM services and where they are recorded in our condensed consolidated statements of operations (listed in alphabetical order).

Subscription

Ratable

Professional

Services

Licenses

Services

Internet Test and Measurement:

Application Perspective

Diagnostic Services

Enterprise Adapters

LoadPro

NetMechanic

Professional Services

Red Alert

Streaming Perspective

Test Perspective

Transaction Perspective

WebIntegrity

Web Site Perspective

Voice Perspective

Performance Scoreboard

Mobile Test and Measurement:

Mobile Device Perspective

Mobile Application Perspective

SIGOS SITE

SIGOS Global Roamer

Customer Experience Management:

WebEffective

Financial Services Scorecards

The following table summarizes ITM, MTM and CEM revenue (in thousands):


					%
	2008		2007		change
	(In thousands)
For the Three Months Ended June 30:
Internet Subscriptions	$	8,908	$	9,129		(2	)%
Internet Engagements		1,374		1,720		(20	)%

Total Internet net revenue		10,282		10,849		(5	)%


Mobile Subscriptions		1,912		1,158		65	%
Mobile Ratable Licenses		6,426		3,443		87	%

Total Mobile net revenue		8,338		4,601		81	%


CEM Subscriptions		621		594		5	%
CEM Engagements		1,257		1,343		(6	)%

Total CEM net revenue		1,878		1,937		(3	)%


Total net revenue	$	20,498	$	17,387		18	%


For the Nine Months Ended June 30:
Internet Subscriptions	$	26,666	$	27,053		(1	)%
Internet Engagements		3,989		4,550		(12	)%

Total Internet net revenue		30,655		31,603		(3	)%


Mobile Subscriptions		4,906		3,268		50	%
Mobile Ratable Licenses		15,033		8,852		70	%

Total Mobile net revenue		19,939		12,120		65	%


CEM Subscriptions		1,833		1,800		2	%
CEM Engagements		3,425		4,393		(22	)%

Total CEM net revenue		5,258		6,193		(15	)%


Total net revenue	$	55,852	$	49,916		12	%

Total internet net revenue decreased by $567,000 for the three months ended June 30, 2008 compared to three months ended June 30, 2007. Total internet net revenue represented 50% and 62% of total net revenue for the three months ended June 30, 2008 and 2007, respectively. Total internet net revenue decreased by $948,000 for the nine months ended June 30, 2008 compared to nine months ended June 30, 2007. Total internet net revenue represented 55% and 63% of total revenue for the nine months ended June 30, 2008 and 2007, respectively. The decreases in total internet net revenue in absolute dollars for the three and nine months ended June 30, 2008 was mainly attributable to decline of approximately $1.6 million and $4.1 million, respectively, from our single-page/single device subscriptions and by a decrease of

$346,000 and $561,000, respectively, from our ITM engagements which consists of our load testing, VOIP and enterprise solutions engagements. The decrease in total ITM revenue was offset by an increased contribution of approximately $1.3 million and $3.7 million for the three and nine months ended June 30, 2008, respectively, from our multiple-page/broadband services.

Total mobile net revenue increased by approximately $3.7 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Mobile revenue represented 41% and 26% of total revenue for the three months ended June 30, 2008 and 2007, respectively. Mobile revenue increased by approximately $7.8 million for the nine months ended June 30, 2008 compared to the nine months ended June 30, 2007. Mobile revenue represented 36% and 24% of total revenue for the nine months ended June 30, 2008 and 2007, respectively. The increase for the three and nine months ended June 30, 2008 was mainly attributable to revenue growth from the sale of new SIGOS SITE systems and existing customers renewing maintenance agreements. The increase was also attributable to increased contribution from our mobile subscription services.

Total CEM net revenue decreased by $59,000 for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Total CEM net revenue represented 9% and 11% of total revenue for the three months ended June 30, 2008 and 2007, respectively. The decrease in total CEM net revenue for the three months ended June 30, 2008 was mainly attributable to decreased professional services contribution of approximately $86,000 from our customer engagements, and partially by increased contribution of $27,000 from subscriptions to our CEM technology. Total CEM net revenue decreased by $935,000 for the nine months ended June 30, 2008 compared to the nine months ended June 30, 2007. Total CEM net revenue represented 9% and 12% of total net revenue for the nine months ended June 30, 2008 and 2007, respectively. The decrease in total CEM net revenue for the nine months ended June 30, 2008 was mainly attributable to decreased professional services contribution of approximately $968,000 from our customer engagements.

For the three months ended June 30, 2008, one customer accounted for approximately 13% of total net revenue. For the nine months ended June 30, 2008, no single customer accounted for 10% or more of total revenue. For the three and nine months ended June 30, 2007, no single customer accounted for 10% or more of total net revenue. International sales were approximately 45% and 30% of our total net revenue for the three months ended June 30, 2008 and 2007, respectively. International sales were approximately 41% and 29% of our total net revenue for the nine months ended June 30, 2008 and 2007, respectively. No country outside the United States accounted for more than 10% of total net revenue.

Expenses:

Direct Costs of Subscription Services, Ratable Licenses and Professional Services


	2008		2007		% Change
	(In thousands)
For the three months ended June 30:
Direct costs of subscription services	$	2,235	$	2,175		3	%
Direct costs of ratable licenses	$	1,526	$	1,456		5	%
Direct costs of professional services	$	1,762	$	1,947		(10)	%

For the nine months ended June 30:
Direct costs of subscription services	$	6,571	$	6,343		4	%
Direct costs of ratable licenses	$	4,240	$	3,269		30	%
Direct costs of professional services	$	5,361	$	6,277		(15)	%

Direct Costs of Subscription Services. Direct costs of subscription services consist of connection fees to major 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 increased by $60,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 and represented 20% of subscription services revenue for the three months ended June 30, 2008 and 2007. Direct costs of subscription services increased by $228,000 for the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007 and represented 20% of subscription services revenue for the nine months ended June 30, 2008 and 2007.

The increase for the three and nine months ended June 30, 2008 was mainly attributable to the increase in bandwidth and connection fees related to the continued build out of our public and private agents located around the world. We do not anticipate that direct costs of subscription services for the fourth quarter of fiscal 2008 will change significantly in absolute dollars compared to the third quarter of fiscal 2008.

Direct Costs of Ratable Licenses.Direct costs of ratable licenses include cost of materials, supplies, maintenance, support personnel related costs and consulting costs mainly related to the sale of our SIGOS SITE systems. Direct costs of ratable licenses increased by $70,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 and represented 24% and 42% of ratable licenses revenue for the three months ended June 30, 2008 and 2007, respectively.

Direct costs of ratable licenses increased by $971,000 for the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007 and represented 28% and 37% of ratable licenses revenue for the nine months ended June 30, 2008 and 2007, respectively.

The increase in direct costs of ratable licenses for the three and nine months ended June 30, 2008 was mainly due to test equipment sold as part of each SITE system contract. The cost of this equipment is being expensed ratably over the same twelve to thirty-six month periods as the revenue to which it is associated. The decrease in direct costs of ratable licenses as a percentage of the ratable license revenue is due primarily to the fact that there was higher revenue being recognized in fiscal 2008 for maintenance renewals that did not have any significant associated direct costs.

Direct Costs of Professional Services.Direct costs of professional services consist of compensation expenses and related costs 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 decreased by $185,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007, and represented 67% and 64% of professional services revenue for the three months ended June 30, 2008 and 2007, respectively.

Direct costs of professional services decreased by $916,000 for the nine months ended June 30, 2008 as compared to the three months ended June 30, 2007, and represented 72% and 70% of professional services revenue for the nine months ended June 30, 2008 and 2007, respectively.

The decrease in costs of professional services for the three months and nine months ended June 30, 2008 was primarily due to lower personnel related costs associated with our CEM services due to stringent cost containment. In addition, the decrease in costs of professional services was due to lower consulting expenses that were incurred in fiscal 2007 that did not recur in fiscal 2008 due to a specific customer engagement. We do not anticipate that direct costs of professional services for the fourth quarter of fiscal 2008 will change significantly in absolute dollars compared to the third quarter of fiscal 2008.

Development


	2008		2007		% Change
	(In thousands)
For the three months ended June 30:
Development	$	3,232	$	2,950		10	%

For the nine months ended June 30:
Development	$	9,525	$	8,699		9	%

Development expenses consist primarily of compensation and related costs for development personnel. Development expenses increased by $282,000 for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Development expenses increased by $826,000 for the nine months ended June 30, 2008 compared to the nine months ended June 30, 2007. The increase in development costs for the three and nine months ended June 30, 2008 was primarily due to higher consulting expenses, and to a lesser extent, an increase in personnel from 59 in the third quarter of fiscal 2007 to 62 in the third quarter of fiscal 2008. To date, all internal development expenses have been expensed as incurred. We do not anticipate that development expenses for the fourth quarter of fiscal 2008 will change significantly in absolute dollars compared to the third quarter of fiscal 2008.

Operations


	2008		2007		% Change
	(In thousands)
For the three months ended June 30:
Operations	$	2,270	$	1,853		23	%

For the nine months ended June 30:
Operations	$	6,297	$	5,643		12	%

Operations expenses consist primarily of compensation and related expenses 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 increased by $417,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. Our operations expenses increased by $654,000 for the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007. The increase in operations expenses for the three and nine months ended June 30, 2008 was primarily attributable to higher consulting expenses, and to a lesser extent, an increase in personnel from 51 in the third quarter of fiscal 2007 to 55 in the third quarter of fiscal 2008. We do not anticipate that operations expenses for the fourth quarter of fiscal 2008 will change significantly in absolute dollars compared to the third quarter of fiscal 2008.

Sales and Marketing


	2008		2007		% Change
	(In thousands)
For the three months ended June 30:
Sales and marketing	$	6,697	$	5,243		28	%

For the nine months ended June 30:
Sales and marketing	$	18,993	$	14,909		27	%

Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, lead-referral fees, marketing programs and travel expenses. Our sales and marketing expenses increased by approximately $1.5 million for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. Sales and marketing expenses increased by approximately $4.1 million for the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007. The increase in sales and marketing costs for the three and nine months ended June 30, 2008 was mainly attributable to our continued investment in sales and marketing, primarily related to an increase in personnel from 80 in the third quarter of fiscal 2007 to 104 in the third quarter of fiscal 2008.

We do no anticipate that sales and marketing expenses for the fourth quarter of fiscal 2008 will change significantly in absolute dollars compared to the third quarter of fiscal 2008.

General and Administrative


	2008		2007		% Change
	(In thousands)
For the three months ended June 30:
General and administrative	$	2,834	$	2,490		14	%

For the nine months ended June 30:
General and administrative	$	7,822	$	7,247		8	%

General and administrative expenses consist primarily of compensation and related costs, accounting, legal and administrative expenses, insurance, professional service fees and other general corporate expenses. General and administrative expenses increased $344,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. General and administrative expenses increased $575,000 for the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007. The increase in expenses was mainly attributable to higher consulting and professional fees, and to a lesser extent, an increase in personnel from 36 in the third quarter of fiscal 2007 to 37 in the third quarter of fiscal 2008.

We believe that general and administrative expenses for the fourth quarter of fiscal 2008 will decrease in absolute dollars compared to the third quarter of fiscal 2008 due to decreased costs in professional fees.

Excess Occupancy Income


	2008			2007			% Change
	(In thousands)
For the three months ended June 30:
Rental income	$	(633	)	$	(277	)		129	%
Rental and other expenses		336			244			38	%

Excess occupancy income	$	(297	)	$	(33	)		800	%


For the nine months ended June 30:
Rental income	$	(1,882	)	$	(857	)		120	%
Rental and other expenses		995			776			28	%

Excess occupancy income	$	(887	)	$	(81	)		995	%

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. The costs are based on the actual square footage available for lease to third parties, which was approximately 60% for the three and nine months ended June 30, 2008 and 2007. The increase in excess occupancy income for the three and nine months ended June 30, 2008 as compared to the three and nine months ended June 30, 2007 was primarily due to the increase in tenant income of $356,000 and approximately $1.0 million, respectively, due to the leasing of additional space, offset by a net increase in expenses of $92,000 and $219,000, respectively. We expect the excess occupancy income will be approximately the same in the fourth quarter, as the third quarter, of fiscal 2008.

Amortization of Identifiable Intangible Assets


	2008		2007		% Change
	(In thousands)
For the three months ended June 30:
Amortization of identifiable intangible assets — software	$	281	$	191		47	%
Amortization of identifiable intangible assets — other		568		522		9	%

Total amortization of identifiable intangible assets	$	849	$	713		19	%


For the nine months ended June 30:
Amortization of identifiable intangible assets — software	$	697	$	561		24	%
Amortization of identifiable intangible assets — other		1,647		1,671		(1)	%

Amortization of identifiable intangible assets	$	2,344	$	2,232		5	%

The increase in total amortization of identifiable intangible assets for the three and nine months ended June 30, 2008 as compared to the three and nine months ended June 30, 2007 was primarily due to intangible assets purchased in the Zandan acquisition. Amortization of intangible assets - software mainly relates to our Keynote SIGOS developed technology related to our SIGOS SITE system and to a lesser extent to Zandan’s developed technology related to Test Builder and Test Runner, and is reflected in direct costs of revenue in our condensed consolidated statements of operations.

We review our identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. At June 30, 2008, we had a remaining balance of approximately $7.0 million of identifiable intangible assets that are being amortized over a three to six and one half-year expected life. We expect the amortization of identifiable intangible assets will be approximately the same in the fourth quarter, as the third quarter, of fiscal 2008. We expect the remaining carrying value of the identifiable intangible assets as of June 30, 2008 will be fully amortized in 2012.

Interest Income and Interest and Other Expenses


	2008			2007			% Change
	(In thousands)
For the three months ended June 30:
Interest income	$	463		$	1,170			(60	)%
Interest expense and other		(120	)		(2	)		5900	%

Interest income, interest and other expenses, net	$	343		$	1,168			(71	)%


For the nine months ended June 30:
Interest income	$	2,555		$	3,425			(25	)%
Interest expense and other		(181	)		13			1,492	%

Interest income, interest and other expenses, net	$	2,374		$	3,438			(31	)%

Interest income and interest and other expenses, net decreased $825,000 for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. Interest income and interest and other expenses, net decreased approximately $1.1 million for the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007. The decrease for the three and nine months ended June 30, 2008 was due to interest income earned on lower cash balances. We expect that interest income, and interest and other expenses, net, for the fourth quarter of fiscal 2008 will be approximately $500,000, absent any additional transactions, and assuming no material changes in interest rates.

Provision for Income Taxes


	2008			2007			% Change
	(In thousands)
For the three months ended June 30:
Provision for income taxes	$	(140	)	$	(1,294	)		(89	)%

For the nine months ended June 30:
Provision for income taxes	$	(429	)	$	(55	)		680	%

Our effective tax rate for the three months ended June 30, 2008 and 2007 was approximately (52%) and (541%), respectively. Our effective tax rate for the nine months ended June 30, 2008 and 2007 was approximately (21%) and (5%), respectively. The income tax provisions were calculated based on the estimated annual effective tax rate for our company and the impact of items of tax expense that are accounted for discretely in the period in which they occur. The tax provision for the third quarter of fiscal 2008 differed from the U.S. statutory rate primarily due to the fact that we do not receive a benefit from the losses incurred in the U.S. as we feel that it is more likely than not that we will realize the deferred tax assets recorded in the U.S. The high tax rate for the three months ended June 30, 2007 was due primarily to a change in our estimated effective tax rate for the year ended September 30, 2007.

Stock-based Compensation Expense

Stock-based compensation expense, which is included in cost of revenues and operating expenses by category, was approximately $1.1 million for the three months ended June 30, 2008 and 2007. Stock-based compensation expense increased by $335,000 for the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007. The increase for the nine months ended June 30, 2008 was due to an increase in grants of stock options to existing as well as to new employees. The following table summarizes stock-based compensation related to employee stock options and employee stock purchase plan purchases under SFAS 123R which was allocated as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2008		2007		2008		2007
Direct costs of ratable licenses	$	68	$	64	$	183	$	145
Direct costs of professional services		108		99		347		363
Development		237		265		741		684
Operations		158		148		481		438
Sales and marketing		393		356		1,133		952
General and administrative		162		195		501		469


Stock-based compensation expense related to stock options and employee stock purchase plans	$	1,126	$	1,127	$	3,386	$	3,051

Liquidity and Capital Resources


	June 30,		September 30,
	2008		2007
	(In thousands)
Cash, cash equivalents and short-term investments	$	53,939	$	107,935
Accounts receivable, net	$	7,310	$	5,988
Working capital	$	30,523	$	87,818
Days sales in accounts receivable (DSO) (a)		32		35


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

		The DSO’s presented in the table above reflect the three months ended June 30, 2008 and September 30, 2007.


	2008			2007
	(In thousands)
For the nine months ended June 30
Cash provided by operating activities	$	4,379		$	17,410
Cash provided by (used in) investing activities	$	56,532		$	(33,151	)
Cash provided by (used in) financing activities	$	(56,234	)	$	8,470

Cash, cash equivalents and short-term investments

As of June 30, 2008, we had approximately $49.6 million in cash and cash equivalents and approximately $4.3 million in short-term investments, for a total of approximately $53.9 million. Cash and cash equivalents consist of highly liquid investments held at major banks, money market mutual funds and other money market securities with original maturities of three months or less. Short-term investments consist of investment-grade corporate and government debt securities and issuances with Moody’s ratings of Aa3 or better. We do not hold auction rate securities.

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. For the nine months ended June 30, 2008, net cash provided by operating activities was approximately $4.4 million. Net cash provided was mainly due to net loss of approximately $2.5 million, adjusted for approximately $9.4 million of non-cash adjustments to reconcile net loss to net cash provided by operating activities and approximately $2.6 million net decrease in operating assets and liabilities. The non-cash adjustments primarily consist of depreciation, amortization and stock-based compensation expense. The net decrease in operating assets and liabilities was primarily due to an increase in accounts receivable of approximately $1.3 million and decrease in accrued expense mainly due to payment of liabilities associated with Zandan.

Cash provided by investing activities

The changes in cash flows from investing activities primarily relate to the timing of purchases and maturities of investments and acquisitions. We also use cash to invest in capital and other assets to support our growth and infrastructure. For the nine months ended June 30, 2008, net cash provided by our investing activities was approximately $56.5 million. We received approximately $61.2 million of cash from the net sales of short-term investments. We also utilized approximately $4.0 million to purchase property and equipment, primarily for our production infrastructure and information systems, and tenant improvements associated with space that we have leased in our headquarters building. We utilized $640,000 during the third quarter for the acquisition of Zandan.

Cash used in financing activities

The changes in cash flows from financing activities primarily relate to payments made for stock repurchases and proceeds received from the issuance of common stock associated with our employee stock option plan and employee stock purchase plan. For the nine months ended June 30, 2008, net cash used in financing activities was approximately $56.2 million, which was primarily due to the repurchases of common stock of $60.1 million, offset by proceeds from the issuance of common stock and the exercise of stock options of approximately $3.9 million.

Our Board of Directors previously approved a plan to repurchase shares of our common stock. The Board has expanded the repurchase program several times by either increasing the authorized number of shares to be repurchased or by authorizing a fixed dollar amount expansion. From the inception of the stock repurchase program in January 2001 to June 30, 2008, a total of approximately 19.4 million shares have been repurchased in the open market for approximately $196.5 million. We have no current plans to repurchase shares in the foreseeable future.

Commitments

As of June 30, 2008, our principal commitments consisted of approximately $4.1 million in real property operating leases and equipment capital and operating leases, with various lease terms, the longest of which expires in August 2015. Additionally, we had contingent commitments ranging in length from one to thirty-four months to 79 bandwidth and collocation providers amounting to $1.5 million in the aggregate for 74 locations, 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.

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

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 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (“GAAP”). As a result of FAS 157, there is now a common definition of fair value to be used throughout GAAP, which is expected to make the measurement of fair value more consistent and comparable. Originally, FAS 157 was effective for the first fiscal year beginning after November 15, 2007. However, in February 2008, the FASB released FASB Staff Position FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, which delayed the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until years beginning after November 15, 2008. FAS 157 is effective for us beginning in the first quarter of fiscal year 2010. We are currently evaluating the effects, if any, of the adoption of FAS 157 on our condensed consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. FAS 159 is effective for us beginning in the first quarter of fiscal year 2009, although earlier adoption is permitted. We are currently evaluating the impact of adopting FAS 159 on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“FAS 141R”), which replaces FASB Statement No. 141. FAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be our fiscal year beginning October 1, 2009. We are currently evaluating the potential impact, if any, of the adoption of FAS 141R on our condensed consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“FAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. FAS 160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be our fiscal year beginning October 1, 2009. We are currently evaluating the potential impact, if any, of the adoption of FAS 160 on our consolidated financial position, results of operations and cash flows.

In April 2008, the FASB released FASB Staff Position 142-3, “Determination of the Useful Life of Intangible Assets” (“FAS142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. The intent of the statement is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007) and other U.S. generally accepted accounting principles. FAS 142-3 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be the our fiscal year beginning October 1, 2009. We are currently evaluating the potential impact, if any, of the adoption of FAS 142-3 on our consolidated financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 enhances financial disclosure by requiring that objectives for using derivative instruments be described in terms of underlying risk and accounting designation in the form of tabular presentation, requiring transparency with respect to the entity’s liquidity from using derivatives, and cross-referencing an entity’s derivative information within its financial footnotes. FAS161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating the impact, if any, that FAS 161 may have on our consolidated financial position and cash flows.

Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. Any effect of applying the provisions of FAS 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3.” We will adopt FAS 162 once it is effective and is currently evaluating the effect that the adoption will have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risks.

Interest Rate Sensitivity.Our interest income and expense is sensitive to changes in the general level of U.S. interest rates, particularly because most of our cash, cash equivalents and short-term investments are invested in short-term debt instruments. If market interest rates were to change immediately and uniformly by ten percent (10%) from levels as of June 30, 2008, the interest earned on those cash, cash equivalents, and short-term investments could increase or decrease by $340,000 on an annualized basis.

Foreign Currency Fluctuations and Derivative Transactions.A substantial majority of our revenue and expenses are transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the Euro. Movements in the currency exchange rate of the Euro could cause variability in our revenues, expenses or other income (expenses), net. We do not enter into derivative transactions for trading or speculative purposes.

Item 4. Controls and Procedures

(a) Changes in Internal Controls

As of September 30, 2007, we had a material weakness in our internal controls over financial reporting with respect to the lack of a sufficient complement of personnel with an appropriate level of accounting knowledge and training in the application of U.S. generally accepted accounting principles and SEC reporting matters to ensure that financial information (both routine and non-routine) is adequately analyzed and reviewed on a timely basis to detect misstatements. We are taking steps to remediate this material weakness primarily through the hiring of additional accounting and finance personnel with technical accounting and financial reporting experience. The actions we plan to take are subject to continued management review as well as audit committee oversight. During the second quarter of fiscal 2008, we hired a Director of Revenue and Director of Finance with technical accounting and financial reporting experience. In addition, we intend to implement cross-functional training for personnel in the finance department. During the third quarter of fiscal 2008, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. While we are working on remediating this material weakness, we cannot assure that we will be able to do so in a timely manner, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows.

(b) Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 require public companies 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 Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective in reaching a level of reasonable assurance in achieving our desired control objectives because of the material weakness at September 30, 2007 that was not remediated by June 30, 2008.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Keynote have been detected.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

In August 2001, the company and certain of our 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 our 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 our officers, and underwriters of 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. Citing several press articles, the Consolidated Complaint

alleged that the underwriter defendants used improper methods in allocating shares in initial public offerings, and claimed the underwriter defendants entered into improper commission agreements regarding aftermarket trading in our common stock purportedly issued pursuant to the registration statement for the initial public offering. The Consolidated Complaint also alleged market manipulation claims against the underwriter defendants based on the activities of their respective analysts, who were allegedly compromised by conflicts of interest. The claims made in the Consolidated Complaint are substantially similar to claims made in over three hundred other consolidated amended complaints filed in a coordinated matter captionedIn re Initial Public Offering Securities Litigation.

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. The District Court has yet to rule upon the motion for class certification is ongoing with respect to the six focus cases. 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 8, 2008. There can be no assurance that the parties will be able to reach a settlement in light of any new class definition that the Court approves, or that any such settlement would be on terms as favorable to us as the previous settlement. If no settlement is reached, we will defend the litigation on its merits.

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. The suit names us as a nominal defendant, contains no claims against us, and seeks no relief from us. No amount has been accrued as of June 30, 2008 and September 30, 2007 since our 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

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

We may not be able to achieve or sustain profitability in the future. We have incurred net losses in each of our last two fiscal years. As of June 30, 2008, we had an accumulated deficit of approximately $142.6 million. 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, 2008, we had approximately $7.0 million of net identifiable intangible assets and approximately $69.6 million of goodwill. We have in the past and may in the future, incur expenses in connection with a write-down of goodwill and identifiable intangible assets due to changes in market conditions. During the nine months ended June 30, 2008, we did not incur any impairment charges. 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 Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share Based Payment” (“SFAS 123R”), the cost of stock-based awards. As a result, we may not be able to achieve and sustain profitability.

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

To maintain and grow our revenue, we must achieve and maintain high customer renewal rates for our ITM and MTM services. Our customers have no obligation to renew our services after the term and therefore, they could cease using our services at any time. In addition, our customers may renew for fewer services or at lower prices. Further, our customers may reduce their use of our services during the term of their subscription. We cannot project the level of renewal rates or the prices at which customers renew subscriptions. Our customer renewal rates and renewal 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.

Further, we depend on sales of MTM products to new customers and sales of additional services to our existing customers. Renewals by existing customers or purchases of our services by new customers may be limited as companies limit or reduce their technology spending in response to uncertain economic conditions. We have experienced, and may in the future experience, cancellations, non-renewals and/or reductions in service levels. If we experience reduced renewal rates or if customers renew for a lesser amount of our services, or if customers, at any time, reduce the amount of services they purchase from us for any reason, our revenue could decline unless we are able to obtain additional customers or sources of revenue, sufficient to replace lost revenue.

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 operating results fall below our expectations, we may not be able to reduce our spending rapidly in response to the shortfall. Other factors that could affect our quarterly operating results include those described below and elsewhere in this report:

	•		The rate of new and renewed subscriptions to our services;

	•		The effect of any unforeseen or unplanned operating expenses;

	•		The amount and timing of any reductions by our customers in their usage of our services;

	•		Our ability to increase the number of Web sites we measure and the scope of services we offer for our existing customers in a particular quarter;

	•		Our ability to attract and retain new customers in a quarter, particularly larger enterprise customers;

	•		The timing and service period of orders received during a quarter;

	•		Our ability to successfully introduce new products and services to offset any reductions in revenue from services that are not as widely used or that are experiencing decreased demand such as our CEM services;

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

	•		The timing and amount of professional services revenue, which is difficult to predict because this is dependent on the number of professional services engagements in any given period, the size of these engagements, and our ability to continue our existing engagements and secure new engagements from customers;

	•		Our ability to increase sales of each of our three service lines;

	•		The timing and amount of operating costs, including sales and marketing, investments and capital expenditures relating to changes of our domestic and international operations infrastructure; and

	•		The timing and amount, if any, of impairment charges related to potential write-down of acquired assets in acquisitions or charges related to the amortization of intangible assets from acquisitions.

	•		Future accounting pronouncements and changes in accounting policies;

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

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

Our operating results could be harmed if sales of ITM subscriptions decline.

Sales of our ITM subscription services, primarily our Web Site Perspective-Business Edition, Application Perspective and Transaction Perspective services have generated a majority of our total revenue in the past. Therefore, the success of our business currently depends, and for the immediate future will continue to substantially depend, on sales and renewals of these ITM services. Revenues from our Web site Perspective Services have been decreasing. If revenues from our Application Perspective and Transaction Perspective Services do not increase, we may not be able to increase our ITM revenues and our operating results could suffer if we are not able to increase revenue from other services.

If our MTM services do not continue to grow as rapidly, we may not be able to grow our revenue and our profitability could be harmed.

Revenue from our MTM services has increased from approximately $4.6 million for the quarter ended June 30, 2007 to approximately $8.3 million for the quarter ended June 30, 2008. We also experienced increased bookings during the same period. 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: we have little experience operating in Germany where Keynote SIGOS is located; the market for mobile services is an emerging market and therefore it is difficult to predict the level of demand for the types of services we offer; and we may not be able to successfully compete against current or new competitors in this area. Our business and our operating results could be harmed if we are not able to continue to grow revenue from our MTM services.

Improvements to the infrastructure of the Internet and mobile networks could reduce or eliminate demand for our ITM and MTM 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 the performance of their Web sites and services 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 and services, demand for our services would likely decline, which would harm our operating results.

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. These developing technologies require us to continually improve the functionality, features and reliability of our services, particularly in response to offerings of our competitors. If we do not succeed in developing and marketing new services that respond to competitive and technological developments and changing customer needs, we may encounter difficulties retaining existing customers and attracting new customers.

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

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 the products and services that they offer. We face competition from companies that offer Internet software and services with features similar to our services such as Gomez, Hewlett-Packard, Segue Software (recently acquired by Borland Software) and a variety of other CEM and mobile companies that offer a combination of testing, market research capabilities and data. Customers could choose to use these services or these companies could enhance their services to offer all of the features we offer. As we expand the scope of our products and services, we expect to encounter many additional market-specific competitors.

In addition, the acquisition of Mercury Interactive by Hewlett-Packard with whom we had a relationship could result in additional competition for us depending on which products and services the combined company offers in the future. Furthermore, Hewlett-Packard may find additional uses for services of Mercury Interactive which compete with our services, and as a result of its acquisition of Mercury Interactive, it may not promote our services at the same level as it had in the past which could result in a decrease in our ITM revenue.

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, Omniture and Coremetrics, and free services that measure Web site availability. In addition, companies that sell systems Management software, such as BMC Software, CompuWare, CA-Unicenter, HP-Openview, Quest Software, Attachmate, Precise Software, and IBM’s Tivoli Unit, with some of whom we have strategic relationships, could choose to offer services similar to ours. We also face competition for our wireless services from

companies such as Argogroup, 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 such as Internet telephony, wireless devices, and wireless fidelity, or WI-FI, networks and, as a result, could face competition from other companies. Some of our existing and future competitors have or may have longer operating histories, larger customer bases, greater brand recognition in similar businesses, and significantly greater financial, marketing, technical and other resources. In addition, some of our competitors may be able to devote greater resources to marketing and promotional campaigns, to adopt more aggressive pricing policies, and to devote substantially more resources to technology and systems development.

There are also 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.

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 38% and 35% of our total net revenue for the nine months ended June 30, 2008 and 2007, respectively. We cannot be certain that customers that have accounted for significant revenue in past periods, individually or as a group, will renew, will not cancel or will not reduce their services and, therefore, continue to generate revenue in any future period. In addition, our customers that do not have written contracts or 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 revenues.

We have recently begun investing and are continuing to invest 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 additional 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 business depends on the overall demand for information technology. The purchase of our services could be discretionary and may involve a significant commitment of capital and other resources. Economic conditions, or a reduction in information technology spending, would likely adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices and reduced sales.

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 of services worldwide, we must complement our direct sales force with relationships with companies to help market and sell our services to their customers. If we are unable to maintain our existing marketing and distribution relationships, or fail to enter into additional relationships, we may have to devote substantially more resources to the direct sale and marketing of our services. We would also lose anticipated revenue from customer referrals and other co-marketing benefits. In 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, they could reduce their commitment to us at any time in the future. Many of these companies have multiple relationships and they may not regard us as significant for their business. In addition, these companies generally may terminate their relationships with us, pursue other relationships with our competitors or develop or acquire products or services that compete with our services. Even if we succeed in

entering into these relationships, they may not result in additional customers or revenue.

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

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

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

Professional services revenue represented approximately 13% and 18% of total net revenue for the nine months ended June 30, 2008 and 2007. Professional services revenue has decreased in absolute dollars in the past, as was the case in fiscal 2007 and during 2008, and this trend could continue. We will need to successfully market these services in order to increase professional services revenue. The market for these services is very competitive. Each professional services engagement typically spans a one- to three-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 which includes our operating results could be harmed if we cannot increase our professional services revenue.

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 ITM, MTM, and CEM 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.

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

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

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

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 service in the past and if experience power outages at our operations center, 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.

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 Internet access points worldwide. 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 develop relationships with these companies or if these companies cease their operations as some have done due to bankruptcies or are acquired. In addition, if our measurement computers 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. Our ability to collect data in a timely manner could be impaired if we are unable to maintain and repair our computers and devices should performance problems arise.

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 also 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 and to develop noninfringing technology, obtain a license or cease selling the services that contain the infringing intellectual property. We may be unable to develop non-infringing technology or to obtain a license on commercially reasonable terms, or at all.

Our business which includes our operating results and financial conditions will be susceptible to additional risks associated with international operations.

We are continuing to seek to expand the sales of our services outside the United States. Although we completed our acquisition of SIGOS Systemsintegration GmbH in April 2006 and Zandan in April 2008, to date, we have relatively little experience with operating outside the United States, and we may not succeed in these efforts. International sales were approximately 41% and 29% our total net revenue for the nine months ended June 30, 2008 and 2007, respectively. We expect to continue to commit our resources to expand our international sales and marketing activities. Conducting international operations subjects us to risks we do not face in the United States. These include:

	•		currency exchange rate fluctuations;

	•		seasonal fluctuations in purchasing patterns;

	•		unexpected changes in regulatory requirements;

	•		maintaining and servicing computer hardware in distant locations;

	•		costs associated with repatriating funds from outside the U.S.;

	•		longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

	•		difficulties in managing and staffing international operations;

	•		potentially adverse tax consequences, including restrictions on the repatriation of earnings;

	•		the burdens of complying with a wide variety of foreign laws;

	•		reduced protection for intellectual property rights in some countries; and

	•		political or economic instability, war or terrorism in the countries where we are doing business.

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.

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. For example, HP acquired Mercury Interactive, one of our prior competitors. 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 loss of a major customer could harm our revenue.

We failed to maintain the adequacy of our internal controls, consequently, our ability to provide accurate financial statements could be impaired and any failure to maintain our internal controls and provide accurate financial statements could cause our stock price to decrease substantially.

One or more material weaknesses in our internal controls over financial reporting could occur or be identified in the future. For example, for the fiscal year ended September 30, 2007 we had a material weakness regarding the lack of a sufficient complement of personnel with an appropriate level of accounting knowledge and training in the application of U.S. generally accepted accounting principles and SEC matters. Because of inherent limitations, our internal controls over financial reporting may not prevent or detect misstatements, and any projections of any evaluation of the effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, we could fail to be able to provide reasonable assurance as to our financial results or meet our reporting obligation and there could be a material adverse effect on the price of our securities.

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

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

	•		difficulties in assimilating acquired personnel, operations and technologies;

	•		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.

The market price of our common stock is volatile.

The stock market in recent years has experienced significant price and volume fluctuations that have 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 may be 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 have 13.8 million shares outstanding, 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.

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

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

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

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

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

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

If we are unable to raise additional capital, our business could be harmed.

We believe that our available cash, cash equivalents and short term investments will enable us to meet our capital 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.

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.

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

Common stock repurchases in the third quarter of fiscal year 2008 were as follows:


							Dollar Value of
					Total		Shares That
	Total				Number of Shares		May Yet be
	Number of		Average		Purchased as Part of		Purchased
	Shares		Price Paid		Publicly Announced		Under the Plans
Period	Purchased		per Share		Plans or Programs		or Programs
							(In thousands)
April 1, 2008 to April 30, 2008		91,500	$	12.01		—	$	44,563

May 1, 2008 to May 31, 2008		—	$	—		—	$	—

June 1, 2008 to June 30, 2008		—	$	—		—	$	—


Balance as of June 30, 2008		91,500	$	12.01		—	$	44,563

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

In August 2008, Umang Gupta entered into a trading plan intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, covering the proposed sale of up to 1,000,000 shares of common stock over a 12 month period.

Item 6. Exhibits

EXHIBIT INDEX


	Incorporated by Reference
					Filed
Exhibit	For	File No.	Filing Date	Exhibit No.	Herewith
31.1 Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002					X

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

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 *					X

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 *					X


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

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 11th day of August 2008.


		KEYNOTE SYSTEMS, INC.

By:		/s/ UMANG GUPTA Umang Gupta
		Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)

By:		/s/ ANDREW HAMER
		Andrew Hamer
		Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX


	Incorporated by Reference
					Filed
Exhibit	For	File No.	Filing Date	Exhibit No.	Herewith
31.1 Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002					X

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

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 *					X

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 *					X


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

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Keynote Systems (KEYN) Inactive 10-Q2008 Q3 Quarterly report

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