KEYNOTE SYSTEMS INC - 10-K Annual Report

Common Stock, $0.001 Par Value Per Share, and the Associated Stock Purchase Rights

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. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ¨

As of March 31, 2003, the aggregate market value of voting stock held by non-affiliates of the Registrant was $189 million.

The number of shares of the Registrant’s common stock outstanding as of December 19, 2003 was 19,241,459.

Documents incorporated by reference: Part III incorporates information by reference to portions of the Registrant’s proxy statement for its 2004 annual meeting of stockholders.

Except for historical information, this annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our anticipated revenue, margins, costs and expenses. These forward-looking statements include, among others, statements including the words “expect,” “anticipate,” “intend,” “believe” 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 the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Impact Future Operating Results” and elsewhere in this 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 in fiscal 2004. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this annual report on Form 10-K. 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.

The trademarks of Keynote Systems, Inc. in the United States and other countries include Keynote^®, Perspective^®, the Internet Performance Authority^®, MyKeynote^™ and all related trademarks, trade names, logos, characters, design and trade dress are trademarks or registered trademarks of Keynote Systems, Inc. in the United States and other countries and may not be used without written permission.

Keynote offers web performance measurement and management services that enable corporate enterprises to monitor, benchmark, test and tune, diagnose and optimize their e-business systems both inside and outside the firewall. Keynote’s services provide enterprise customers with Total Performance Management solutions enabling them to increase return on investment, save money and efficiently link information technological resources to e-business goals. Total Performance Management includes a broad portfolio of cost-effective measurement, monitoring, performance management, load testing, content quality testing and usability testing services. Keynote’s goal is to empower customers to deliver an optimal experience to end users and to gain competitive advantage, while helping them reduce unnecessary capital expenditures and leverage enterprise management software they already own.

The foundation of our web performance measurement and management services is an extensive network of strategically located measurement computers, running our proprietary software, connected to the major Internet backbones in over 50 cities worldwide, plus a sophisticated operations center for collecting, analyzing and disseminating Web site response time and availability data. Keynote’s infrastructure, together with our services, and in some cases, with Keynote-managed appliances placed within a customer’s infrastructure, provide customers the ability to access their results in real-time over the Internet through any standard web browser.

Our web performance measurement and management services help customers mange their web performance 24 hours a day, 7 days a week from an end-user perspective. We had over 1,750 measurement computers deployed in over 50 cities and in 120 locations as of September 30, 2003. As of September 30, 2003, our measurement computers measured the performance of 7,429 universal resource locators, or URLs, 7,741 Red Alert devices connected to the Internet, and 17,100 URLs through our NetMechanic service.

We offer our web performance measurement services and management solution services primarily on a subscription basis. Subscription fees vary based on the type of service selected, the number of URLs and transactions measured, the number of measurement locations, the number of devices monitored, the frequency of the measurements and the additional features ordered. We offer consulting and support configured around our portfolio of services on an incident and per engagement basis. Consulting and support services revenue has represented 10% or less of total revenue in all periods to date.

Keynote’s web performance measurement solutions consist of subscription-based benchmarking, measurement and monitoring services.

Keynote’s measurement services monitor and diagnose page download performance of public and secure Web pages, transaction performance (defined as measuring the response time and availability of each page of a multi-step transaction) across T-1 and T-3 connections, broadband connections (DSL and cable-modem) and dial-up connections from over 50 metropolitan areas worldwide. Our wireless and streaming services measure the quality of audio, video and wireless quality of service delivered across the Internet. Enterprises rely on Keynote’s measurement and monitoring services for accurate and timely information to compare and trend total performance and enforce service level agreements and to detect, diagnose and repair performance problems in their e-business infrastructure.

Keynote Web Site Perspective is a completely outsourced, subscription-based service that measures Web site performance from multiple points on the Internet, providing insight into the end-user experience. We offer two editions of this service:

Keynote Transaction Perspective uses the Microsoft Internet Explorer browser to take the measurements from Keynote’s worldwide infrastructure to deliver full network-level and user-level statistics and error messages for each element of each page in the transaction. It enables transaction performance problems to be quickly and accurately identified, diagnosed and repaired, ensuring an optimal experience for end-users.

Keynote Red Alert is a real-time Internet monitoring service that tests devices connected to the Internet every five minutes. Red Alert tests the availability of any Internet server or other Transmission Control Protocol-enabled Internet devices including web servers, secure web servers, domain name servers, mail servers, File Transfer Protocol servers and network gateways.

Keynote Streaming Perspective measures, compares and assures the performance of audio and video streams, diagnosing performance problems before they impact the end-user. Streaming Perspective supports the latest media players, including Real Media and Windows Media.

Keynote NetMechanic uses automated tools that test site integrity, optimize page visualization, and improve search engine rankings.

Keynote Red Alert Performance Tracker (RAPT) is a cost effective, self-service performance monitoring solution. RAPT provides the tools to understand web site performance, including alarms on both performance and availability. RAPT has the ability to monitor transaction performance up to every 20 seconds and provides alerts when problems do occur. It is designed to meet the demanding needs of operations staff monitoring in a wide variety of Web transactions from multiple global geographies, in real time.

Keynote’s performance management services include Enterprise Solutions such as Application Perspective, Performance Scoreboard, Enterprise Adapters, Private Agents, Data Pulse, Network Perspective and Traffic Perspective. Keynote’s performance management services also include testing and tuning services such as LoadPro, PerformanceTune, Test Perspective, Wireless Perspective, WebEffective, and WebIntegrity^™.

With Keynote’s Web performance management services, enterprises can actively test and manage the total performance of their e-business systems. Using Keynote’s services and appliances, customers can leverage their existing Information Technology (IT) investments in systems management software to monitor, identify, diagnose and repair e-business performance problems end-to-end.

Keynote Professional Services. Our professional services organization provides engagement-based and ongoing customer services to our customers. When certain data is not available from our standard measurement services, our professional services organization can create and deploy agents to gather the specific performance data a customer wants. Some of the services our professional services organization can provide include:

Keynote Private Agents enable enterprises to actively measure and manage the performance of their internal networks, system architecture, and other local processes and Web-based applications, as well as Web performance from unique locations not already covered by Keynote’s worldwide infrastructure of computers using cost-effective and easy-to-deploy appliances.

Keynote Enterprise Adapters are flexible solutions that integrate with any Simple Network Management Protocol (SNMP) capable application, such as CA Unicenter, HP Openview and IBM Tivoli, and securely incorporate performance alarms on external or internal Web-based events. Keynote SNMP Adapter requires no changes to a company’s security policies; security is assured through a standard outbound Hyper Text Transfer Protocol over Secure Socket Layer connection from inside the network.

Keynote LoadPro models actual user behavior on a Web site and then scales that load up across multiple geographies enabling e-businesses to predict business and performance outcomes.

Keynote Data Pulse is a highly flexible Extensible Markup Language (XML)-based, real-time data feed service that simplifies Web application performance management for operations departments, giving the network operations center immediate access to actionable data in order to identify and troubleshoot problems. Customers can customize polling frequencies as frequently as every minute.

Keynote Test Perspective is an easy-to-use, cost-effective and self-service solution for IT personnel that need to initiate on-demand load tests of e-business applications from one or multiple geographic locations. IT personnel now have the ability to run on-demand load tests and diagnostic tests and receive immediate feedback on modifications made to the Web site or any other aspect of the infrastructure to ensure that overall performance has not degraded.

Keynote Wireless Perspective measures the availability and performance of wireless data services from actual end user devices enabling carriers and enterprises to improve the quality of wireless data services. The latest version (3.0) supports camera phones, push-to-talk and multimedia message services.

Keynote Diagnostic Services provide advanced diagnostic assistance and service capabilities across all of Keynote’s performance measurement and management services.

Keynote Traffic Perspective combines passive monitoring of real-time end user traffic from Keynote partners with data collected by Keynote’s measurement services to create a unique solution to quantify, isolate, diagnose and resolve Web performance issues.

Keynote WebEffective is an user experience testing service that provides an understanding of how real users are interacting with key business processes and why users complete transactions or why they leave a site or abandon a transaction.

Keynote WebIntegrity provides a self-service, on-demand quality testing solution that allows companies to find content related problems quickly after each site or content update. Companies can now manage and enforce content quality standards in their organizations. WebIntegrity tests link integrity, diagnoses and repairs Hypertext Markup Language (HTML) code problems, as well as tests for compliance with the latest HTML standards.

Keynote Application Perspective is a monitoring and root cause diagnostics solution for e-business applications. Application Perspective offers e-business application performance management solutions that previously have been delivered with more complex software implementations.

Keynote Performance Scoreboard is a customized portal for the visual management of service level objectives (SLOs) for multi-property, multi-location e-businesses. Performance Scoreboard is designed for customers with complex e-business environments and displays the overall health of a company’s multiple data centers, properties, Virtual Private Networks (VPN) and suppliers. Keynote Performance Scoreboard enables customers to track SLOs, quickly identify application and network latency issues and analyze trends and infrastructure details using on-demand drill-down diagnostic tools. Performance Scoreboard can be used with Keynote Application Perspective, Keynote Private Agents and other Keynote measurements.

Keynote PerformanceTune is an outsourced tuning service that combines Keynote’s load testing infrastructure with detailed back-end monitoring metrics to isolate and repair performance bottlenecks.

Keynote Test Perspective for Siebel 7 is a load testing service that utilizes Keynote’s load-generation infrastructure to help companies validate the performance of their entire Siebel 7 application infrastructure. Test Perspective for Siebel 7 allows enterprise customers to cost-effectively optimize the performance and scalability of Siebel eBusiness Applications using Keynote’s services-based approach, rather than more costly and complex load testing software.

Keynote Network Perspective is targeted at network engineers to ensure optimal network and Service Level Agreement performance. Network Perspective leverages Keynote’s worldwide network of measurement computers placed on the Internet, or anywhere within a company’s private network, to measure Internet transit and Web site performance from many different Internet Service Providers and geographical locations. Its performance measurement infrastructure collects over 500 million Internet measurements a day and delivers Internet diagnostic data, down to the router and load balancer level. The service helps customers quickly identify and resolve network performance problems (whether on the Internet or on a company’s VPN) that are affecting critical Web-based applications.

Our performance measurement infrastructure consists of three key components: measurement and data collection infrastructure, our operations and data center, and reporting and analysis tools.

Our measurement computers are Windows-based computers that run Keynote proprietary software to replicate the experience of a user accessing web sites through a standard web browser. We designed our measurement-computer software to perform thousands of download measurements concurrently without distorting or affecting the integrity of any single measurement. The measurement computers are colocated at the data center facilities of major telecommunication and internet access providers that are selected to be statistically representative of Internet users. At some locations, we employ multiple Internet connections and install equipment racks that can accommodate multiple measurement computers. The hosting arrangements for our

measurement computers typically have terms ranging from three months to one year. We typically pay a small set-up fee and pay monthly fees to continue to locate the measurement computers at these locations. We also pay additional monthly fees for communications lines.

These measurement computers access a web site to download web pages and execute multi-page transactions, while taking measurements of every component in the process. The computers take measurements continually throughout the day, at intervals as short as three minutes, depending on the customer’s requirements and subscription service level.

As of September 30, 2003, we had deployed more than 1,750 measurement computers in 63 domestic and 57 international telecommunication and internet access provider locations, with most locations having multiple measurement computers in order to provide different types of measurement services or to accommodate changes in measurement volume. We continually upgrade and balance our network capacity to meet the needs of our customers.

Our operations centers, located in San Mateo, California, and Plano, Texas, are designed to be scalable to support large numbers of measurement computers and to store, analyze and manage large amounts of data from these computers. Our measurement computers receive instructions from, and return collected data to, our operations center. The data are stored in large databases that incorporate a proprietary transaction-processing system that we designed to be efficient in storing and delivering measurement data with fast response times. We also employ proprietary, high-performance application server computers that manage the collection of measurement data, the insertion of the data into our databases and the dissemination of this data to our customers in a variety of forms and delivery methods.

We offer the following tools for reporting and analysis of performance measurement data:

For the year ended September 30, 2003, no one customer accounted for more than 10% of our total revenue. As of September 30, 2003, we provided services to approximately 2,200 companies including over half of the Fortune 100 companies.

Our 10 largest customers, based on revenue for the fiscal year ended September 30, 2003, were American Express, AT&T Wireless, Cable & Wireless, Hewlett-Packard, IBM, Intermedia Communications/Digex,

Microsoft, Overture Services (acquired by Yahoo! Inc. in October 2003), SBC Communications and Sprint. These customers generated approximately 30% of our revenue for the year ended September 30, 2003.

We sell our services through our field sales and telesales organization. Our field sales teams consist of direct sales representatives and sales engineers, located in 10 metropolitan areas across the United States, and concentrate on our web performance management products. In addition to the field sales teams across the country, we have telesales personnel located in Plano, Texas. These telesales personnel focus primarily on selling our web performance measurement services and also provide telephone and email sales support and customer service to our enterprise customers. We believe that through the combined use of our enterprise sales teams and telesales personnel, we are able to efficiently focus our sales resources on interfacing with a variety of customers, which is designed to ensure customer satisfaction. We also market and sell some of our services through our self-service web site, where customers can sign up and try, purchase, and use our services.

In addition, domestically, we distribute our services through web-hosting and Internet service providers such as IBM Global Services and EDS, who manage e-business web sites for other companies. These companies sell or bundle our services to their customer base as a value-added service and as a management tool for their customers’ web sites. We also sell to content distribution providers, such as Akamai and Cable & Wireless, who use our services as a pre-sales tool for their potential customers or in service level agreements with their existing customers. We also market our services through several other technology companies, such as VeriSign, on a “lead referred” basis. Internationally, we use both direct and indirect sales approaches in the United Kingdom and Germany and sell indirectly through reseller partners throughout the rest of Europe, the Middle East, Africa and Asia.

We maintain an active marketing program designed to demonstrate to Fortune 1000 companies the breadth and depth of our web performance measurement and management services. We have established and continue to strengthen our brand through multiple means including the public availability on our Web site of top level details for our web performance indices (both page download and transaction), and through our regular reporting and commentary to the media regarding Internet performance-related events. We are actively expanding our services to provide our customers with “total performance management” which is designed to encompass all aspects of user experience as it relates to e-business.

Our marketing programs include advertising, Internet marketing, trade events, public relations, and our annual Global Internet Performance Conferences. Our Global Internet Performance Conference event, held in New York, provides an opportunity for us and our partners to brief chief information officers, chief technology officers, information technology executives and network administrators on emerging solutions, new methodologies and best practices to help customers optimize e-business performance. We use these conferences to update customers on our latest performance measurement and management services, and to deliver a broader understanding of the role our services can play in optimizing e-business. We also sponsor a series of regional Web Performance Briefings to give executives in vertical markets insight into our “total performance management” strategy.

An important element of our marketing strategy is our industry benchmark and transaction indices that evaluate and rank the relative performance of various web sites. Our indices include:

We believe that a high quality of customer support is important to our success. We believe our customers view our services as a way to improve their ability to provide a high quality of service in their e-business. Therefore, we provide customer support by email and telephone. We develop and expand our customer support services based on feedback received from our existing customers and formal customer satisfaction surveys conducted by an independent third party.

Basic support for all our products is available during the business day. Advanced support is available for a fee through our Keynote Diagnostic Services, for customers who want analytical or diagnostic support, or who require access 24 hours per day, 7 days per week to Keynote expertise to assist them with their questions.

The Internet is characterized by rapid technological developments, frequent new application or service introductions and evolving industry standards. The ongoing evolution of the Internet requires us to continually improve the functionality, features and reliability of our web performance measurement and web performance management services, particularly in response to competing offerings. Therefore, we believe that our future success will depend in large part on our ability to maintain and enhance our current services and to develop or acquire new services and technologies that achieve market acceptance. The success of service introductions depends on several factors, including properly defining 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.

Our research and development expenses were $7.4 million for the fiscal year ended September 30, 2003, $8.9 million for the fiscal year ended September 30, 2002, and $7.3 million for the fiscal year ended September 30, 2001.

a combination of testing, market research capabilities and data. While we believe these services are not as comprehensive as ours, customers could still 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.

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 performance measurement and web performance management, such as WebCriteria, a division of Coremetrics, Inc., and INS INSoft Division, a unit of Lucent Technologies, 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, NetIQ, Veritas’ Precise Software, and IBM’s Tivoli Unit, with some of whom we have strategic relationships, could choose to offer services similar to ours.

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.

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.

We are a technology company whose success depends on developing, acquiring and protecting our intellectual property assets.

Our principal intellectual property assets consist of our trademarks, our trade names, our logos, our characters, our design, our trade dress, our service marks, our patents, our patent applications and the proprietary software we developed or acquired to provide our services. Trademarks are important to our business because they represent our brand name and we use them in our marketing and promotional activities as well as in the delivery of our services. Our trademarks include our registered trademark Keynote, Perspective, and The Internet Performance Authority. Our trademark on Keynote is pending registration outside of the United States. We have other trademarks that are currently pending registration with the U.S. Patent and Trademark Office or have not been registered.

We currently have two issued U.S. patent and no foreign patents. We have six pending U.S. patent applications and no pending foreign patent applications related to our web performance management and web performance testing services. It is possible that no patents will be issued from our currently pending patent applications and that our issued patents or potential future patents may be found invalid or unenforceable, or otherwise be successfully challenged. It is also possible that any patent issued to us may not provide us with any competitive advantages, that we may not develop future proprietary products or technologies that are can be patented, and that the patents of others may seriously limit our ability to do business. In this regard, we have not performed any comprehensive analysis of patents of others that may limit our ability to do business.

Our proprietary software consists of the software we developed or acquired that is an integral part of our testing and performance management services as well as that which collects, stores, and delivers our measurement data to customers. We have also developed software that we use to provision and process customer orders and billings.

The intellectual property we use in our business is important to us. Despite our efforts, we may be unable to prevent others from infringing upon or misappropriating our intellectual property, which could harm our business.

Legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving, and the future viability or value of any of our intellectual property rights is uncertain. Effective trademark, copyright and trade secret protection may not be available in every country in which our products are distributed or made available. Furthermore, our competitors may independently develop similar technology that substantially limits the value of our intellectual property, or they may design around patents issued to us.

The use of our services by many of our customers is governed by a web-based subscription agreement, but for some of our larger customers, additional terms and conditions may be added by means of a formal, written contract. Each time customers use our services, they “click” on a web page to agree to terms and conditions that are posted on our web site, and our relationship with these customers is then governed by these terms and conditions and any written agreements that may exist. There is a possibility that a court, arbiter or regulatory body could deem this type of agreement to be invalid or determine that the terms and conditions governing the agreement do not fully protect our intellectual property rights. If that were to occur, our business could be harmed.

Although we are not currently engaged in any intellectual property litigation, we may, in the future, need to initiate a lawsuit to enforce our intellectual property rights and to protect our patents, trademarks and copyrights. Any litigation could result in substantial costs and diversion of resources and could seriously harm our business. To date, we have not been notified that our technologies infringe the proprietary rights of anyone. We cannot assure you that others will not claim that we have infringed proprietary rights with respect to past, current or future technologies. We expect that we could become subject to intellectual property infringement claims as the number of our competitors grows and our services overlap with competitive offerings. These claims, even if not meritorious, could be expensive and divert management’s attention from operating our company. If we become liable for infringing the intellectual property rights of others, we would be required to pay a substantial damage award and to develop non-infringing 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, if at all.

We license certain statistical, graphical and database technologies from third parties. We cannot assure you that these technology licenses will not infringe the proprietary rights of others or will continue to be available to us on commercially reasonable terms, if at all. The loss of this technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost. If we do not obtain or develop substitute technology, we could be unable to offer all of the features or functionality that we desire to include in our services.

As of September 30, 2003, we had a total of 158 employees, of which 153 were based in the United States, and 5 were based internationally. None of our employees are represented by a collective bargaining agreement nor have we experienced any work stoppage. We believe that our relationships with our employees are good. Our future success depends on our ability to attract, motivate and retain our key personnel. We may be unable to retain our key employees, including our management team, and experienced engineers, or to attract, assimilate or retain other highly qualified employees. Although a number of technology companies have implemented

workforce reductions, there remains substantial competition for highly skilled employees with experience in the Internet industry. None of our key employees are bound by agreements that could prevent them from terminating their employment at any time.

As of September 30, 2003, our facilities primarily consisted of our headquarters building in San Mateo, California, a 188,000 square foot building, which we own. We currently occupy approximately 56,000 square feet of this facility, which is our principal sales/marketing, product development and administrative location and contains our operations personnel and data center. We believe that our facilities are adequate for our current and future needs. We also have a five-year lease, expiring in December 2005, for approximately 8,000 square feet of office space in Plano, Texas, for our Red Alert, NetMechanic, inside sales and support and operations. We also have a month to month lease for 1,615 square feet of office space in Seattle, Washington, for our wireless operations and a month-to-month lease for 1,500 square feet of office space in West Toronto, Ontario. See Note 12 of the Notes to Consolidated Financial Statements for additional information regarding our lease agreements.

Beginning on August 16, 2001, a number of class action lawsuits were filed in the United States District Court for the Southern District of New York against us, certain of our officers, and the underwriters of our initial public offering. These lawsuits were essentially identical, and were brought on behalf of those who purchased our securities between September 24, 1999 and August 19, 2001. These complaints alleged generally that the underwriters in certain initial public offerings, including ours, allocated shares in those initial public offerings in unfair or unlawful ways, such as requiring the purchaser to agree to buy in the aftermarket at a higher price or to buy shares in other companies with higher than normal commissions. The complaint also alleged that we had a duty to disclose the activities of the underwriters in the registration statement relating to our initial public offering. In June 2003, the plaintiffs’ counsel and the issuer defendants’ counsel reached a settlement agreement whereby the issuers and individual defendants were dismissed from the case, without any payments by us. The settlement awaits approval by the Court.

We are subject to 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.

The following table presents information regarding our executive officers as of December 20, 2003:

Umang Gupta has served as one of our directors since September 1997 and as our chief executive officer and chairman of the board of directors since December 1997. Previously, he was a private investor and an advisor to high-technology companies and the founder and chairman of the board and chief executive officer of Centura Software Corporation. He previously held various positions with Oracle Corporation and IBM. Mr. Gupta holds a B.S. degree in chemical engineering from the Indian Institute of Technology, Kanpur, India, and an M.B.A. degree from Kent State University.

Peter Maloney has served as our chief financial officer since October 2003 and as our vice president of finance since January 2002. Mr. Maloney joined Keynote in October 2001 as Vice President and Controller and served in that position until January 2002. From May 1998 to September 2001, Mr. Maloney served at Adaptive Broadband Corporation, a fixed wireless broadband company, in senior management positions including Senior Vice President of Finance and Senior Vice President of Corporate Development. Prior to Adaptive, he served at Republic Industries, Inc. , a diversified consumer products and services company, in senior financial positions including Vice President of Investor Relations. Prior to Republic, Mr. Maloney served in financial management positions at Dole Food Company and Arthur Andersen LLP. Mr. Maloney holds an M.B.A. degree in corporate finance from the University of Southern California and a B.B.A. in economics from Temple University.

Donald Aoki has served as our vice president of engineering since May 1997. From December 1994 to May 1997, he served as a business unit general manager of Aspect Telecommunications, a supplier of customer relational management solutions. Mr. Aoki holds a B.S. degree in computer science from the University of Southern California and a M.S. degree in electrical engineering and computer science from the Massachusetts Institute of Technology.

Lloyd Taylor has served as our vice president of operations since January 1999. From January 1997 to December 1998, he served as vice president of technical operations of the Web Site Management Group of Digex, Inc., a web site management services company. Mr. Taylor holds an M.S.E.E. degree in electrical engineering from Johns Hopkins University and a B.S.E.E. degree in electrical engineering and a B.S.C.S. degree in computer science, each from Washington University.

Richard Rudolph has served as our vice president of worldwide sale since December 2001. From February 2001 to December 2001, he served as senior vice president of global sales and business development for webHancer Corporation, a provider of web performance measurement and analysis. From April 1999 to January 2001, he served as vice president of sales at WebTrends, a web site performance measurement and analysis company. From June 1997 to April 1999, he held sales positions at Extensis Corporation, a provider of products and services for electronic publishing. Mr. Rudolph holds a B.S. degree in economics from Oregon State University.

Arnold Waldstein has served as our vice president of marketing and business development since April 2002. From May 1999 to March 2002, Mr. Waldstein served as vice president of marketing and strategic alliances for Moai Technologies, an online strategic sourcing company. From March 1998 to May 1999, he founded and served as chief executive officer of Waldstein Consulting, a boutique consulting firm. From February 1996 to February 1998, he served as vice president of marketing and business development at Electric Communities, an online services company. Mr. Waldstein holds a B.A. degree in English from Ohio University.

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters.

Our common stock has traded on the Nasdaq National Market under the symbol “KEYN” since our initial public offering on September 24, 1999. Prior to this time, there was no public market for our common stock. On December 19, 2003, we had 19,241,459 shares of our common stock outstanding held by 106 stockholders of record. Because many brokers and other institutions hold our stock on behalf of stockholders, we believe the total number of beneficial holders is greater than that represented by these record holders. The following table presents the high and low sales price per share of our common stock for the period indicated, as reported on the Nasdaq National Market:

The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future. In addition, the market prices of securities of other technology companies, particularly Internet-related companies, have been highly volatile. This volatility is often unrelated to the operating performance of these companies. Factors that may have a significant effect on the market price of our common stock include:

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.

We have never declared or paid any cash dividends on our common stock or other securities. We do not anticipate paying cash dividends in the foreseeable future.

The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and related Notes appearing in Item 8, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Item 7 in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended September 30, 2003, 2002, and 2001, and the consolidated balance sheet data as of September 30, 2003 and 2002, are derived from and are qualified in their entirety by our Consolidated Financial Statements, which have been audited by KPMG LLP, independent auditors, and which are included in Item 8 in this Annual Report on Form 10-K. The consolidated statement of operations data for the year ended September 30, 2000 and 1999, and the consolidated balance sheet data as of September 30, 2001, 2000 and 1999, are derived from our audited consolidated financial statements which do not appear in this report. The historical results presented below are not necessarily indicative of the results to be expected for any future fiscal year.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We offer Web performance measurement and management services that enable corporate enterprises to monitor, benchmark, test and tune, diagnose and optimize their e-business systems both inside and outside the firewall. Keynote’s services provide enterprise customers with Total Performance Management solutions enabling them to increase return on investment, save money and efficiently link information technological resources to e-business goals. Total Performance Management includes a broad portfolio of cost-effective measurement, monitoring, performance management, load testing, content quality testing and usability testing services. Keynote’s goal is to empower customers to deliver an optimal experience to end-users and to gain competitive advantage, while helping them reduce unnecessary capital expenditures and leverage enterprise management software they already own.

Revenue consists of subscription services revenue and consulting and support services revenue. Subscription services revenue consists of fees from subscriptions to our Internet measurement, monitoring, testing and diagnostic services. Our subscription services revenue is deferred upon invoicing and is recognized ratably over the service period, generally ranging from one to twelve months. For some customers, subscription services revenue is invoiced monthly upon completion of the services. Deferred revenue is comprised of all unearned revenue, primarily unearned subscription services revenue and is recorded as deferred revenue on our balance sheet until the revenue is earned. As of September 30, 2003, we had recorded approximately $4.4 million of deferred revenue. We do not generally grant refunds. All discounts granted reduce revenue. Revenue is not recognized during free trial periods. Revenue from our consulting and support services, which includes revenue from our load testing services, is recognized as the services are performed, typically over a period of one to three months. For longer consulting projects that span more than one month, we recognize revenue as milestones or deliverables are completed.

A majority of our subscription revenue comes from our web performance benchmarking services, which include our Perspective services. Subscription revenue also includes our Red Alert and NetMechanic monitoring and alarm services, Test Perspective subscription services, WebEffective subscription services, performance management subscription services and our private agent application performance management services. Our customers purchase these services for an initial term of three to twelve months and then may renew on an annual, semi-annual, or month-to-month basis.

Subscription services fees can vary based on the number of URLs measured, the number of devices monitored, the number of measurement locations, the number of users, the number of hours, the frequency of the measurements, the number of private agents, the additional features ordered, and the type of services purchased.

We offer our consulting and support services on a per engagement basis. Consulting and support services revenue amounted to approximately 10% of total revenue for the years ended September 30, 2003 and 2002. We believe that consulting and support services revenue may increase somewhat in the future as a percentage of total

revenue, as our existing consulting and support services become more widely used and we introduce additional services that require consulting expertise. However, we cannot assure you that this revenue will increase in absolute dollars in future periods.

We had total revenue of $38.3 million for the year ended September 30, 2003, $37.9 million for the year ended September 30, 2002 and $45.6 million for the year ended September 30, 2001. We incurred net losses of $4.7 million for the year ended September 30, 2003, $65.5 million for the year ended September 30, 2002 and $56.4 million for the year ended September 30, 2001. During fiscal 2003, we continued to experience a reduction in revenue from Internet service provider customers, e-commerce and other Internet businesses.

For the year ended September 30, 2003, our 10 largest customers accounted for approximately 30% of total 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.

The following table sets forth our revenue, expenses, interest income (expense) and net loss as a percentage of total revenue for each of the three years ended September 30, 2003:

Subscription Services. Revenue from subscription services increased slightly by $147,000, during the year ended September 30, 2003 as compared to the year ended September 30, 2002. Subscription services represented 90% of total revenue for both of the years ended September 30, 2003 and September 30, 2002. The increase in revenue in absolute dollars was primarily attributable to increased revenue from our wireless perspective, NetMechanic, WebEffective, and private agent services, offset by a decrease in our benchmarking revenue.

Consulting and Support Services. Revenue from consulting and support services increased by $175,000, or 5%, during the year ended September 30, 2003 as compared to the year ended September 30, 2002. Revenue from consulting and support services represented approximately 10% of total revenue for the years ended September 30, 2003 and 2002. The increase in revenue in absolute dollars resulted primarily due to the increased contribution from Keynote Diagnostic Services and the additional product offering of WebEffective, which was introduced in the first quarter of fiscal 2003. Because our consulting and support services are provided on a per engagement basis, revenue depends on the number of engagements and the size of such engagements. As a result, consulting and support services revenue are less predictable than subscription services revenue and, may vary from period to period.

For the years ended September 30, 2003 and 2002, no single customer accounted for more than 10% of total revenue. At September 30, 2003, no customer accounted for more than 10% of total accounts receivable. At September 30, 2002, one customer accounted for more than 10% of total accounts receivable, which receivable was collected subsequent to September 30, 2002.

Costs of Subscription Services. Costs of subscription services consist of connection fees to Internet service 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. Costs of subscription services decreased by approximately $3.3 million, or 29%, during the year ended September 30, 2003 as compared to the year ended September 30, 2002 and represented 24% and 34% of subscription services revenue for the year ended September 30, 2003 and 2002, respectively. This decrease was primarily due to reduced costs for bandwidth and, to a lesser extent, lower depreciation expenses. We intend to continue our efforts to reduce costs of subscription services in future periods. We believe that costs of subscription services in absolute dollars for the first quarter of fiscal 2004 will remain comparable compared to the fourth quarter of fiscal 2003.

Costs of Consulting and Support Services. Costs of consulting and support services consist of compensation expenses and related costs for consulting and support service personnel, all load-testing bandwidth costs and related network infrastructure costs. Costs of consulting and support services increased by $302,000, or 9%, during the year ended September 30, 2003 as compared to the year ended September 30, 2002 and represented 98% and 95% of consulting and support service revenue for the years ended September 30, 2003 and 2002, respectively. The increase was primarily due to costs associated with our WebEffective service, which we

acquired in October 2002, offset, in part, by a decrease in bandwidth costs. We expect that the costs of consulting services as a percentage of consulting services revenue will continue to be greater than the costs of subscription services as a percentage of subscription service revenue. We expect that costs of consulting and support services in absolute dollars and as a percentage of revenue for the first quarter of fiscal 2004 will be higher than the fourth quarter of fiscal 2003 due to costs related to the acquisition of certain assets of Xaffire, Inc. completed in December 2003.

Research and development expenses consist primarily of compensation and related costs for research and development personnel. Research and development expenses decreased by $1.5 million, or 17%, during the year ended September 30, 2003 as compared to the year ended September 30, 2002. This decrease was primarily attributable to lower costs resulting from a reduced number of research and development personnel and reduced salaries, offset, in part, by additional personnel costs related to acquisitions. To date, all research and development expenses have been expensed as incurred. We anticipate that research and development expenses in absolute dollars for the first quarter of fiscal 2004 will increase from the fourth quarter of fiscal 2003 due to additional personnel costs related to the acquisition of certain assets of Xaffire, Inc. completed in December 2003.

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 decreased by $6.2 million, or 31%, during the year ended September 30, 2003 as compared to the year ended September 30, 2002. The decrease primarily resulted from a reduced number of sales and marketing personnel, and to a lesser extent, from reduced spending on certain marketing programs. We believe that continued investments in our sales and marketing efforts are essential for us to maintain our market position and to further increase acceptance of our services. We anticipate that sales and marketing expenses in absolute dollars for the first quarter of fiscal 2004 will increase compared to the fourth quarter of fiscal 2003 due to expenses associated with our 2003 Global Internet Performance Conference.

Operations expenses consist primarily of compensation and related costs for management and technical support personnel who manage and maintain our field measurement and collection infrastructure and headquarters data center, and provide basic customer support 24 hours per day, 7 days a week. Our operations personnel also work closely with other departments to assure the reliability of our services and to support our sales and marketing activities. Our operations expenses decreased by $1.2 million, or 16%, during the year ended September 30, 2003 as compared to the year ended September 30, 2002. The decrease in operations expenses was primarily the result of improving operating efficiencies and to lower personnel costs from reducing the number of personnel in the operations group, and, to a lesser extent, to reduced salaries. We anticipate that operations expenses in absolute dollars for the first quarter of fiscal 2004 will remain comparable to the fourth quarter of fiscal 2003.

General and administrative expenses consist primarily of salaries and related expenses, accounting, legal and administrative expenses, insurance, professional services fees and other general corporate expenses. Our general and administrative expenses decreased by $903,000, or 13%, during the year ended September 30, 2003 as compared to the year ended September 30, 2002. The decrease in our general and administrative expenses was primarily attributable to a reduced number of general and administrative personnel, reduced salaries, and lower bad debt provisions, and, to a lesser extent, to lower spending on professional service fees. We anticipate that general and administrative expenses in absolute dollars for the first quarter of fiscal 2004 will decrease slightly compared to the fourth quarter of fiscal 2003 due to reduced personnel costs associated with a reduction in personnel.

Excess occupancy costs are fixed expenses associated with the unoccupied portion of our headquarters’ building, acquired in September 2002, such as property taxes, insurance, and depreciation. The costs are based on the actual unoccupied square footage, which was 60% for the first nine months and 70% for the last three months for the year ended September 30, 2003.

In July 2000, we entered into a five-year synthetic lease agreement for our corporate headquarters building in San Mateo, California. On September 30, 2002, we terminated the lease and purchased the property for a total of $85.7 million. The lease, which was due to expire in 2005, provided for a residual guarantee of a total of $85.0 million due at the end of the lease term or upon lease termination. Our obligation was fully collateralized with restricted cash of $85.0 million.

After we entered into the lease in July 2000, real estate market conditions worsened, including a significant increase in available space for lease and significant declines in corresponding lease rates for commercial property. Accordingly, a loss on termination of this lease was recognized in connection with the purchase of the building in September 2002. The loss was calculated by comparing the purchase price of the building to its fair value. To determine the fair value of the building, we had an independent real estate appraisal conducted, which indicated that the fair value of the property was approximately $25.0 million. The calculated loss of approximately $60.7 million was recorded in the fourth quarter of fiscal 2002. The $60.7 million loss on termination was adjusted for the reversal of the remaining excess facility charge accrual and costs associated with the acquisition of the building, resulting in a net charge to the consolidated statements of operations of approximately $52.0 million for the year ended September 30, 2002.

Amortization of Identifiable Intangible Assets, Amortization of Stock-Based Compensation and In-process Research and Development

For the year ended September 30, 2003, we recorded approximately $1.6 million for the amortization of identifiable intangible assets and for the year ended September 30, 2002, we recorded approximately $1.1 million for the amortization of identifiable intangible assets. Amortization of identifiable intangible assets increased by approximately $474,000 for the year ended September 30, 2003 in connection with our acquisitions of NetMechanic in May 2002, Enviz in October 2002, and Streamcheck in July 2003.

At September 30, 2003, we had a remaining balance of approximately $2.2 million of identifiable intangible assets that are being amortized over a three-year period from the date of acquisition. The remaining balance will be fully amortized by July 2006.

Certain options granted prior to June 30, 1999, have been considered to be compensatory, as the estimated fair value for accounting purposes was greater than the stock price as determined by the board of directors on the date of grant. As a result, we recorded amortization of deferred compensation expense of $31,000 during the year ended September 30, 2003, compared to $421,000 for the year ended September 30, 2002. The decrease in the amortization of deferred compensation from fiscal 2002 to fiscal 2003 was a result of our discontinuing to amortize costs associated with former employees that had been terminated. Deferred compensation was amortized on a straight line basis over the vesting period of the options and was fully amortized as of September 30, 2003.

The in-process research and development charge of $200,000 for the year ended September 30, 2002 related to the estimated fair value of an acquired in-process research and development project, which we acquired in connection with our acquisition of NetMechanic, that had not yet reached technological feasibility and had no alternative future use, related to NetMechanic’s technology for web site testing. The estimated fair value of this project was determined based on the actual costs incurred as of the acquisition date. This amount was immediately expensed as of the acquisition date.

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.

We expect the amortization of identifiable intangible assets to be approximately $400,000 for the first quarter of fiscal 2004, assuming no additional acquisitions or impairment charges. We expect the remaining carrying value of the identifiable intangible assets as of September 30, 2003, as listed in the table below, will be fully amortized by July 2006 (in thousands):

Net interest income, interest and other expenses decreased by $6.5 million, or 54%, during the year ended September 30, 2003 as compared to the year ended September 30, 2002. The majority of the interest income was earned on our invested cash. The decrease in interest income was primarily attributable to a lower level of invested cash due to the use of $85.0 million of restricted cash to purchase our headquarters’ building in September 2002, the use of approximately $79.2 million of cash used to repurchase our common stock primarily in our two issuer tender offers in November 2002 and May 2003, and the continued decline in interest rates. Substantially all of the interest income represents interest earned from our cash, short-term investments and restricted cash. We expect that net interest income for the first quarter of fiscal 2004 will be approximately $650,000, absent any additional transactions, and assuming no material changes in interest rates.

No benefit for federal, state, and foreign income taxes was recorded for the years ended September 30, 2003 and 2002, because we provided a valuation allowance against the deferred tax assets generated from the operating loss. As of September 30, 2003, we had net operating loss carryforwards for U.S. federal and foreign income tax reporting purposes of approximately $41.5 million, and $1.8 million, respectively, available to reduce future income subject to income taxes. As of September 30, 2003, we had net operating loss carryforwards for state income tax purposes of approximately $18.5 million available to reduce future income subject to income taxes. The U.S. federal net operating loss carryforwards will begin to expire, if not utilized in 2010. The foreign net operating loss carryforwards will begin to expire in the year 2005. State net operating loss carryforwards will begin to expire if not utilized in 2003. In addition, as of September 30, 2003, we had research credit carryforwards for both federal and California income tax purposes of approximately $1.2 million, respectively, available to reduce future income taxes. The federal research credit carryforwards begin to expire in the year 2010. The California research credit carryforwards are available indefinitely.

Deferred tax liabilities have not been recognized for undistributed earnings of foreign subsidiaries because it is management’s intention to reinvest such undistributed earnings outside the United States.

Federal and California tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue Code. The Company has not yet determined whether an ownership change occurred due to significant stock transactions in each of the reporting years disclosed. If an ownership change occurred, the utilization of the net operating loss and credit carryforwards could be reduced significantly.

As discussed in Note 3 of the Notes to the Consolidated Financial Statements, “Cumulative Effect of a Change in Accounting Principle”, as a result of the implementation of Statement of Financial Accounting Standard No. 142, for fiscal 2002, we recorded a charge of approximately $3.2 million as a cumulative effect of a change in accounting principle for the write-off of all the remaining goodwill associated with acquisitions prior to September 30, 2002. In the year ended September 30, 2003, there was no charge for the cumulative effect of a change in accounting principle.

Subscription Services. Revenue from subscription services decreased by $9.1 million, or 21%, during the year ended September 30, 2002 as compared to the year ended September 30, 2001. Subscription services represented 90% and 95% of total revenue in the year ended September 30, 2002 and 2001, respectively. The decrease in revenue was primarily attributable to lower sales to two types of customers – Internet Service Providers and e-commerce websites – which declined from 30% of total revenue for fiscal 2001 to 14% for fiscal 2002. We also experienced an increase in cancellations and nonrenewals. The decrease in revenue was partially offset by an increase in the prices of some of our subscription services during fiscal 2002.

For the year ended September 30, 2002 and 2001, no single customer accounted for more than 10% of total revenues. At September 30, 2002, one customer accounted fo more than 10% of total accounts receivable, which receivable was collected subsequent to September 30, 2002.

Consulting and Support Services. Revenue from consulting and support services increased by $1.4 million, or 64%, during the year ended September 30, 2002 as compared to the year ended September 30, 2001. Revenue from consulting and support services represented approximately 10% and 5% of total revenue for the years ended September 30, 2002 and 2001, respectively. The increase in revenue in absolute dollars resulted primarily from an increased number of large testing and consulting engagements, during fiscal 2002 and our new product offering, Keynote Diagnostic Services, introduced in November 2001.

Costs of Subscription Services. Costs of subscription services decreased by approximately $1.8 million, or 14%, during the year ended September 30, 2002 as compared to the year ended September 30, 2001. This decrease was primarily due to reduced costs for bandwidth and a reduction in our excess bandwidth capacity.

Costs of Consulting and Support Services. Costs of consulting and support services increased by $437,000, or 15%, during the year ended September 30, 2002 as compared to the year ended September 30, 2001. The increase was primarily due to increased costs associated with large testing and consulting engagements during fiscal 2002 and the introduction of our program of Keynote Diagnostic.

Research and development expenses increased by approximately $1.4 million, or 19%, during the year ended September 30, 2002 as compared to the year ended September 30, 2001. This increase was due to the increase in personnel to support our new offerings in our Test Perspective, Wireless Perspective and NetMechanic services as well as costs incurred to enhance and expand other services.

Our sales and marketing expenses decreased by $2.4 million, or 11%, during the year ended September 30, 2002 as compared to the year ended September 30, 2001. The decrease was primarily a result of the restructuring of our sales organization to focus more resources on our large corporate customers and reduced spending on certain marketing programs.

Our operations expenses increased by $281,000, or 4%, during the year ended September 30, 2002 as compared to the year ended September 30, 2001. The increase in operations expenses was primarily related to higher personnel costs.

Our general and administrative expenses increased by $658,000, or 10%, during the year ended September 30, 2002 as compared to the year ended September 30, 2001. The increase in our general and administrative expenses was primarily related to hiring additional personnel to support our business as well as higher insurance, personal property taxes, and occupancy costs.

In April 2001, we incurred restructuring costs of $271,000 relating to a reduction in our workforce by approximately 36 employees or 13% from March 31, 2001. The restructuring costs consisted of severance payments, which were paid in full by June 30, 2001. We had no restructuring costs in fiscal 2002.

For the year ended September 30, 2001, we recorded a charge of $11.0 million for certain costs related to the unoccupied portion of our headquarters building in San Mateo, California. For the year ended September 30, 2002, we occupied approximately 40% of the building, and actively sought tenants for the remaining 60%. The $11.0 million charge included certain lease costs such as lease expense, insurance, and property taxes. Other operating costs associated with the unoccupied space were reported as incurred as operating expenses in fiscal 2002 and 2001. On September 30, 2002, we terminated the synthetic lease arrangement for our headquarters’ building by purchasing the property for a total of $85.7 million before the expiration of the lease term in 2005. The remaining amount of the excess facility costs accrual of approximately $9.3 million was reversed and offset the loss on termination of the lease we recorded in connection with the purchase of the building, as described above in “Lease Termination Charge”.

Amortization of Deferred Compensation, Amortization and Impairment of Goodwill and Identifiable Intangible Assets, Amortization of Stock-Based Compensation and In-process Research and Development

In connection with the purchase of Velogic Inc. in June 2000, Digital Content, L.L.C. in August 2000, the assets of the management service provider business of Envive Corporation in July 2001, the business of onDevice Corporation in October 2001, and the acquisition of NetMechanic in May 2002, we recorded an aggregate amount of approximately $44.1 million of goodwill and approximately $11.2 million of identifiable intangible assets in fiscal 2000, 2001, and 2002.

We no longer amortize goodwill as of October 1, 2001, and, at September 30, 2002, have no remaining goodwill on our balance sheet, as discussed in Note 3, “Cumulative Effect of a Change in Accounting Principle”, and Note 6, “Goodwill and Identifiable Intangible Assets”, of the Notes to the Consolidated Financial Statements. For the year ended September 30, 2001, we recorded approximately $10.6 million in amortization of goodwill, approximately $26.1 million in impairment of goodwill and approximately $4.4 million in impairment of identifiable intangible assets.

We also recorded a charge of $3.2 million as a cumulative effect of a change in accounting principle for the write-off of the remaining goodwill, as of October 1, 2001, associated with our Digital Content, Velogic, and Envive acquisitions. This is discussed below in greater detail under “Cumulative Effect of a Change in Accounting Principle”.

For the year ended September 30, 2002, we recorded approximately $1.1 million in amortization of identifiable intangible assets. For the year ended September 30, 2001, we recorded approximately $2.1 million in amortization of identifiable intangible assets. Amortization of identifiable intangible assets decreased by approximately $1.0 million in fiscal 2002 due to the impairment charge of approximately $4.4 million that we recorded in fiscal 2001. As a result of the impairment charge, we had a lower identifiable intangible balance that

was amortized in fiscal 2002. At September 30, 2002, we had a remaining balance of approximately $2.9 million of identifiable intangible assets that was being amortized over a three-year period from the date of acquisition.

The in-process research and development charge of $200,000 for the year ended September 30, 2002 related to the estimated fair value of an acquired in-process research and development project that had not yet reached technological feasibility and had no alternative future use, related to NetMechanic’s technology for web site testing. The estimated fair value of this project was determined based on the actual costs incurred as of the acquisition date. This amount was immediately expensed as of the acquisition date.

A portion of the consideration for the Digital Content acquisition, in the aggregate amount of $6.4 million, was attributed to deferred compensation, and was fully amortized by June 30, 2001. Total amortization of this amount for fiscal 2001 was $4.8 million.

Net interest income, interest and other expenses decreased by $6.3 million, or 34%, during the year ended September 30, 2002 as compared to the year ended September 30, 2001. Substantially all of the balance represents interest income from our cash, short-term investments and restricted cash. This decrease was primarily due to the decline in interest rates earned on our invested cash during fiscal 2002.

No benefit for federal, state, and foreign income taxes was recorded for the year ended September 30, 2002, because we provided a valuation allowance against the deferred tax assets generated from the operating loss. A provision for state and foreign income taxes of $600,000 was recorded during the year ended September 30, 2001. As of September 30, 2002, we had net operating loss carryforwards for U.S. federal and foreign income tax reporting purposes of approximately $31.7 million, and $1.8 million, respectively, available to reduce future income subject to income taxes. As of September 30, 2002, we had net operating loss carryforwards for state income tax purposes of approximately $16.1 million available to reduce future income subject to income taxes. The U.S. federal net operating loss carryforwards will begin to expire, if not utilized in 2010. The foreign net operating loss carryforwards will begin to expire in the year 2005. State net operating loss carryforwards will begin to expire if not utilized in 2003. In addition, as of September 30, 2002, we had research credit carryforwards for federal and California income tax purposes of approximately $765,000 and $683,000, respectively, available to reduce future income taxes. The federal research credit carryforwards begin to expire in the year 2010. The California research credit carryforwards are available indefinitely.

Internal Revenue Code. The Company has not yet determined whether an ownership change occurred due to significant stock transactions in each of the reporting years disclosed. If an ownership change occurred, utilization of the net operating loss carryforwards could be reduced significantly.

As discussed in Note 3 of the Notes to the Consolidated Financial Statements, “Cumulative Effect of a Change in Accounting Principle”, as a result of the implementation of Statement of Financial Accounting Standard No. 142, for fiscal year 2002, we recorded a charge of approximately $3.2 million as a cumulative effect of a change in accounting principle for the write-off of all the remaining goodwill associated with acquisitions prior to fiscal year 2002. Previously, for fiscal 2001, goodwill had been amortized and amounted to approximately $10.6 million.

Liquidity and Capital Resources for the Fiscal Years Ended September 30, 2003, 2002, and 2001

At September 30, 2003, we had approximately $23.2 million in cash and cash equivalents and approximately $137.0 million in short-term investments, for a total of approximately $160.2 million. Our short-term investments consist of investment-grade corporate and government debt securities with Moody’s ratings of A2 or better.

Net cash provided by operating activities was approximately $6.0 million for the year ended September 30, 2003, $1.1 million for the year ended September 2002 and $11.3 million for the year ended September 30, 2001. For the year ended September 30, 2003, net cash provided by operating activities was primarily the result of net income, excluding all non-cash amortization and depreciation charges, a decrease in accounts receivable and prepaid and other assets, partially offset, by a decrease in accounts payable, accrued expenses, and deferred revenue. For the year ended September 30, 2002, net cash provided by operating activities was primarily the result of net income, excluding all non-cash charges, and a decrease in accounts receivable and prepaid and other assets, offset, in part, by a decrease in accounts payable, accrued expenses, and deferred revenue. For both years, accounts receivable declined mainly due to improved collections. In both years, prepaid and other assets declined mainly due to the receipt of accrued interest generated from our cash and short-term investments. Similarly, in both years, accounts payable and accrued expenses declined mainly due to the timing of certain payments associated with our headquarters building and periodic insurance renewals. For the year ended September 30, 2001, net cash provided by operating activities was primarily from net income from operations excluding all non-cash charges and an increase in accounts payable and accrued expenses. The increase in cash from operating activities was partially offset by an increase in prepaid and other assets due to an increase in investment interest receivable.

Cash provided by our investing activities totaled approximately $71.4 million for the year ended September 30, 2003. Cash used for our investing activities totaled approximately $102.4 million for the year ended September 30, 2002 and $225.7 million for the year ended September 30, 2001. In fiscal 2003, we generated $74.2 million from the net sales of short-term investments. We used $2.5 million to purchase property and equipment and used $234,000, net, for the acquisitions of the businesses of Enviz, Inc. and Streamcheck. In fiscal 2002, we used $85.7 million for the purchase of our headquarters building, $3.2 million to purchase other property and equipment, $2.2 million in connection with our acquisitions of Envive, OnDevice, and NetMechanic, and $11.3 million for the net purchase of short-term investments. In fiscal 2001, we invested a net amount of $207.5 million in short-term investments, $14.8 million for capital expenditures, and $3.4 million for the management service provider business of Envive.

Cash used for our financing activities totaled approximately $75.1 million for the year ended September 30, 2003. Cash provided by our financing activities totaled approximately $78.0 million for the year ended September 30, 2002. Cash used for our financing activities totaled approximately $1.5 million for the year ended

September 30, 2001. In fiscal 2003, we used approximately $79.2 million for the repurchase of approximately 8.9 million shares of our common stock, primarily pursuant to the two issuer tender offers completed in November 2002 and May 2003. This was partially offset by approximately $4.1 million from the issuance of common stock associated with our employee stock option and stock purchase plans. As of September 30, 2003, the total number of shares of our common stock repurchased since the repurchase program was authorized by our Board of Directors in January 2001 was approximately 10.4 million shares at an aggregate cost of approximately $90.1 million. We currently have authorization to repurchase additional shares of our common stock for up to approximately $39.9 million. In fiscal 2002, we acquired our headquarters building on September 30, 2002, with $85.0 million of cash that had previously collateralized the operating lease obligation with respect to the building and was designated as restricted cash. In fiscal 2002, we used approximately $8.1 million for the repurchase of approximately 1.2 million shares of our common stock under our repurchase program and $830,000 for the repayment of notes payable. In fiscal 2002, we generated approximately $1.9 million in cash from the issuance of common stock under our employee stock option and stock purchase plans. In fiscal 2001, we received approximately $2.2 million from the issuance of common stock under our employee stock option and stock purchase plans, offset by approximately $1.3 million used for the repayment of notes payable and approximately $2.4 million used for the repurchase of 250,000 shares of our common stock under our repurchase program.

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. If, after some period of time, cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the 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.

As of September 30, 2003, our principal commitments consisted of $223,000 in real property operating leases, with various lease terms, the longest of which expires in December 2005. Additionally, we had contingent commitments to 53 bandwidth and collocation providers amounting to $996,000 for 105 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 make additional capital expenditures of approximately $700,000 related to our operations and headquarters building for the first quarter of fiscal 2004, excluding costs associated with the completion of our acquisition of assets from Xaffire, Inc. in December 2003, and any other acquisitions or extraordinary transactions.

The following table summarized our minimum contractual obligations and commercial commitments as of September 30, 2003 (in thousands), and the effect we expect them to have on our liquidity and cash flow in future periods:

In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States for interim financial statements, our management is required to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Our critical accounting policies and judgments are of both a routine and non-routine nature. The recurring policies relate to revenue recognition, the allowance for doubtful accounts receivable, and goodwill impairments. The non-routine policy relates to the valuation of our long lived assets.

Subscription services revenue consists of fees from subscriptions to our Internet measurement, monitoring, testing and diagnostic services. Our subscription services revenue is generally deferred upon invoicing and is recognized ratably over the service period, generally ranging from one to twelve months. For some customers, subscription services revenue is invoiced monthly upon completion of the services. We do not generally grant refunds. All discounts granted reduce revenue. Revenue is not recognized for free trial periods. Revenue from our consulting and support services, which includes revenue from our load testing service, is recognized as the services are performed, typically over a period of one to three months. For consulting projects that span more than one month, we recognize revenue as milestones or deliverables are completed.

Our accounting policy for 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 of 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. The allowance for doubtful accounts represents management’s best estimate, but changes in circumstances, in the future, relating to accounts receivable may result in a requirement for additional allowances in the future or reductions in allowances due to future recoveries or trends. Accounts receivable is recorded net of an allowance for doubtful accounts receivable of approximately $1.0 million, or 19% of total account receivable, and $1.2 million, or 20% of total accounts receivable, as of September 30, 2003 and 2002, respectively. The slight decrease in our allowance for doubtful accounts is due to improved collection efforts as well as a reduction in loss experience.

Our methodology for allocating the purchase price relating to acquisitions is determined based on valuations performed by an independent third party. 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.

Effective October 1, 2001, we adopted Statement of Financial Accounting Standards (SFAS) No. 142. With our adoption of SFAS No. 142, we reassessed the useful lives and residual values of all acquired intangible assets to identify any necessary amortization period adjustments and to determine if any amount of identifiable intangible assets should be reclassified to goodwill. Based on that assessment, no adjustments were made to the amortization periods or residual values of identifiable intangible assets.

SFAS No. 142 provides a six-month transitional period from the effective date of adoption for us to perform an assessment as to whether there is an indication that goodwill is impaired. To accomplish this, we identified our reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and identifiable intangible assets, to those reporting units as of the date of adoption. We determined that we had one reporting unit.

SFAS No. 142 requires us to determine the fair value of our one reporting unit as of October 1, 2001, and compare it to the reporting unit’s carrying amount. To the extent that the reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and we must perform the second step of the transitional impairment test. During the second quarter of fiscal 2002, we performed the first step of the transitional impairment test required under SFAS No. 142, and obtained an indicator of impairment in our single reporting unit. During the third quarter of fiscal 2002, we performed the second step of the transitional impairment test. In the second step, in accordance with SFAS No. 141, we compared the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation to its carrying amount, both of which could be measured as of the date of adoption. We determined the fair value of our single reporting unit using our market capitalization value after adjusting for a control premium and compared it to our carrying value. We determined our market capitalization value based on the number of shares outstanding and the stock price as of October 1, 2001, adjusting for a 10% premium that is assumed to represent additional value that an acquirer would be required to pay for a controlling interest in the Company. This evaluation indicated that goodwill associated with acquisitions completed prior to fiscal year 2002 was impaired as of October 1, 2001. Accordingly, we recorded a $3.2 million non-cash impairment charge as a cumulative effect of a change in accounting principle for the write-off of the remaining goodwill as of October 1, 2001. The charge is reflected in the results for the year ended September 30, 2002.

We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances for our single reporting unit. The goodwill recorded on the Consolidated Balance Sheets as of September 30, 2003 was $195,000, as compared to $0 as of September 30, 2002.

We evaluate the recoverability of fixed assets and identifiable intangible assets other than goodwill whenever events or changes in circumstances indicate the carrying amount of any such asset group may not be fully recoverable. Changes in circumstances include economic conditions or operating performance. Our evaluation is based upon assumptions about the estimated future undiscounted net cash flows from such asset groups. Management continually applies its best judgment when performing these evaluations to determine the timing of the testing, the undiscounted net cash flows used to assess recoverability 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.

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Issue 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. The provisions of Issue 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of Issue 00-21 did not have a material impact on our consolidated financial position, results of operations or cash flows.

We have introduced new products and services, and we have an unproven business model, which makes it difficult to evaluate our current business and future prospects.

The long-term revenue and income potential of our current business and services and the related markets are unproven. In addition, because some of our products and services are new and because the market for web performance management services is evolving, we have limited insight into trends that may emerge and affect our business.

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

We experienced operating losses in each annual period since inception and in each quarterly period since inception through the third quarter of fiscal 2003. We may not be able to sustain operating profitability in the future. We incurred net losses of $4.7 million for the year ended September 30, 2003, and as of September 30, 2003, we had an accumulated deficit of $142.1 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 September 30, 2003, we had approximately $2.2 million of identifiable intangible assets and $195,000 of goodwill. If we complete additional acquisitions in the future, we may have additional goodwill and/or identifiable intangibles and, accordingly, may incur expenses in connection with a write-down of goodwill and identifiable intangible assets due to changes in market conditions as we did in the quarter ended June 30, 2001 when we recorded an impairment charge for goodwill and identifiable intangible assets of $30.5 million in connection with our acquisitions of Velogic and Digital Content. In addition, in fiscal 2002, we recorded a charge of approximately $3.2 million as a cumulative effect of a change in accounting principle for the write-off of all the remaining goodwill associated with our acquisitions made prior to September 30, 2003. We believe that our operating expenses could increase as they have in certain past periods. As a result, we will need to increase our revenue to sustain profitability. We may not sustain a sequential quarterly increase in revenue and may never be able to regain our historic revenue growth rates.

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

To maintain and grow our revenue, we must achieve and maintain high customer renewal rates for our services. Our customers have no obligation to renew our services and therefore, they could cease using our services at any time. In addition, our customers may renew for fewer services. Further, our customers may reduce their use of our services during the term of their subscription. We cannot project the level of renewal rates. Our customer renewal rates may decline as a result of a number of factors, including consolidations in the Internet industry or if a significant number of our customers cease operations.

Further, we depend on sales 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 an increase in cancellations and non-renewals in the past and may continue to experience an increased amount of cancellations and/or non-renewals.

We have experienced, and may in the future experience, cancellations and/or reduction in service. 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, our revenue could continue to decline unless we are able to obtain additional customers or sources of revenue, sufficient to replace lost revenue. Continued reductions and/or cancellations could also result in our inability to collect amounts due.

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.

Results of operations could vary significantly from quarter to quarter. If revenue falls 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:

If we are required by law or elect to account for stock options under our stock option plans as a compensation expense, our results of operations would be materially affected.

We expect that we will be required to record compensation expense in connection with option grants in accordance with SFAS 123 that have an exercise price at or above fair market value. It is possible that future laws or regulations will require us to treat all stock options as a compensation expense or we may voluntarily elect to do so. If there is any such change in accounting regulations or if we elect to account for options in this way, this could result in our reporting increased operating expenses, which would decrease any reported net income or increase any reported net loss. Note 2 of our consolidated financial statements shows the impact that such a change in accounting treatment would have had on our net loss and net income loss per share if it had been in effect during the reporting periods shown and if the compensation expense were calculated as described in Note 2.

Our operating results could be harmed if sales of our web performance measurement services decline.

Sales of our web performance measurement services, primarily our Web Site Perspective-Business Edition services, and, to a lesser degree, our Transaction Perspective services, have generated a majority of our total revenue. Therefore, the success of our business currently depends, and for the immediate future will continue to substantially depend, on sales and renewals of our benchmarking services. We have, from time to time, increased the prices of our web performance measurement services, which could reduce demand for these services. This could result in decreased sales, which would cause our revenue to decline.

Improvements to the infrastructure of the Internet could reduce or eliminate demand for our Internet performance measurement services.

The demand for our Internet performance measurement services could be reduced or eliminated if future improvements to the infrastructure of the Internet lead companies to conclude that the measurement and evaluation of the performance of their web sites is no longer important to their business. Because the inherent complexity of the Internet currently causes significant quality of service problems for e-business companies, the vendors and operators that supply and manage the underlying infrastructure are continuously seeking to improve the speed, availability, reliability and consistency of the Internet. If these vendors and operators succeed in significantly improving the performance of the Internet, which would result in corresponding improvements in the performance of companies’ web sites, demand for our services would likely decline which would harm our operating results.

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, in the past, 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 acquired, rather than developed internally, some of our services in connection with our acquisitions of companies and businesses. 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.

If we do not continually improve our services in response to technological changes, including changes to the Internet, we may encounter difficulties retaining existing customers and attracting new customers.

The ongoing evolution of the Internet requires us to continually improve the functionality, features and reliability of our web performance management 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.

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

The market for web performance measurement and management 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 software and services with features similar to our services such as Mercury Interactive, Gomez Advisors, Segue Software, WatchFire and a variety of small companies that offer a combination of testing, market research capabilities and data. While we believe these services are not as comprehensive as ours, customers could still 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.

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 performance benchmarking, testing, and application performance management, such as WebCriteria,, a division of Coremetrics, Inc. and INS INSoft Division, an unit of Lucent Technologies, 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, NetIQ, Veritas’ Precise Software, and IBM’s Tivoli Unit, with some of whom we have strategic relationships, could choose to offer services similar to ours.

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.

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.

Ten customers accounted for approximately 30%, 29% and 23% of our total revenue for the years ended September 30, 2003, 2002, and 2001, 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 may terminate their services at any time with little or no penalty. If we lose a major customer, our revenue could decline.

If we do not complement our direct sales force with relationships with other companies to help market our web performance management services, we may not be able to grow our business.

To increase sales of our web performance management 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 year ended September 30, 2002, we terminated relationships with two of our international resellers. During the fourth quarter of fiscal 2003, we also terminated another relationship with one of our international resellers, and we may be required to terminate other reseller relationships in fiscal 2004. As a result, we are investing time and resources in evaluating replacements for these resellers and are committing resources to modify our direct sales effort in the United Kingdom and Germany.

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. Although we, and a number of other technology companies, have implemented workforce reductions, there remains substantial competition for highly skilled employees. Our key employees are not bound by agreements that could prevent them from terminating their employment at any time. 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.

Consulting and support services revenue represented approximately 10% of total revenue for the year ended September 30, 2003. The cost of consulting and support services has, at times, exceeded our consulting revenue. We expect that the costs of consulting and support services as a percentage of consulting and support services revenue will be greater than the costs of subscription services as a percentage of subscription services revenue. We will also need to successfully market these services to potential customers in order to increase revenue. Each consulting engagement typically spans a one to three month period, and therefore, it is more difficult for us to predict the amount of consulting and support services revenue recognized in any particular quarter. There are many experienced firms that offer computer network and Internet-related consulting services. These consulting services providers include consulting companies, such as Accenture and Ernst & Young, as

well as consulting divisions of large technology companies such as IBM. Because we do not have an established reputation for delivering consulting services, because this area is very competitive, and due to our limited experience in delivering consulting services, we may not succeed in selling these services.

The success of our business depends on the continued use of the Internet by business and consumers for e-business and communications.

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

Our network infrastructure could be disrupted by a number of different occurrences, which could impair our ability to serve and retain existing customers or attract new customers.

All data collected from our measurement computers are stored in and distributed from our operations center, which we maintain at a single location. Therefore, 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. Although we completed a generator project to provide our own source of long-term uninterruptible power, if we 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. We are currently developing a redundant system for computer-network and other services at an alternate site. Various factors could cause us to not be able to ever complete such systems. Therefore, our operations systems are vulnerable to damage from break-ins, computer viruses, unauthorized access, vandalism, fire, floods, earthquakes, power loss, telecommunications failures and similar events.

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, causing a disruption in our services, this could impair our ability to retain existing customers or attract new customers.

If our computer infrastructure is not functioning properly, we may not be able to deliver our services in a timely or accurate manner. We have occasionally experienced outages of our service in the past, which have typically lasted no more than a few hours, with the last one of significance occurring in October 2002. The outages that we have experienced have lasted no more than a few hours. These outages have been caused by a variety of factors including electrical distribution equipment malfunctions, operator error, the failure of a back-up computer to operate when the primary computer ceased functioning and power outages due to our previous facility’s being inadequately equipped to house our operations center. Any outage for any period of time or loss of customer data could cause us to lose customers.

Individuals who attempt to breach our network security, such as hackers, could, if successful, misappropriate proprietary information or cause interruptions in our services. Although in the past, we had a breach of our security through what appears to be unauthorized access to certain data belonging to one of our customers, we have not yet experienced any breaches of our network security or sabotage that has prevented us from serving our customers. 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 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 are located at facilities that are not owned by our customers or us. Instead, these computers are installed at locations near various Internet access points worldwide. Although we operate these computers remotely from our San Mateo, California operations center, we do not own or operate the facilities, and we have little control over how these computers 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 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. Our ability to collect data in a timely manner could be impaired if we are unable to maintain and repair our computers should performance problems arise.

Others might bring infringement claims against us or our suppliers that 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 will be susceptible to additional risks associated with international operations.

We believe we must expand the sales of our services outside the United States. To date, we have little experience with direct sales outside the United States, and we may not succeed in these efforts. International sales were approximately 5% and 6% of our total revenue for the years ended September 30, 2003 and 2002, respectively. We intend to expand the sales of our services by selling directly to certain customers and through resellers to other customers. Therefore, 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:

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

We may face difficulties assimilating our acquisitions 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:

Our future operating results could be harmed if we are unable to lease a major portion of the space in our corporate headquarters building or if the fair value of this property decreases further.

We estimate that we will need to lease the unoccupied portion, or approximately 70%, of our headquarters building in San Mateo, California. We may be unable to lease all or a part of the available space, and if it is leased, we may not receive sufficiently high rental rates to cover our building operating costs. In addition, we have previously incurred a charge for the write-down of the building, and, if the real estate market continues to deteriorate, we may incur charges for future write-downs. Any such charge could harm our results of operations.

Compliance with new rules and regulations concerning corporate governance may be costly and could harm our business.

The Sarbanes-Oxley Act, which was signed into law in July 2002, mandates, among other things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members and imposes increased civil and criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations. In addition, The Nasdaq Stock Market, on which our common

stock is listed, has also adopted additional comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations will increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management’s attention from business operations. We also expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Further, our board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified board members and executive officers, which would adversely affect our business.

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:

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 plan was amended on December 15, 2003. 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. Our Board of Directors adopted a new policy under which a committee consisting solely of independent directors of the Board will review the Rights Agreement at least once every three years to consider whether maintaining the Rights Agreement 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.

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 at September 30, 2003, the interest earned on those cash, cash equivalents, and short-term investments could increase or decrease by approximately $570,000 on an annualized basis.

Foreign Currency Fluctuations and Derivative Transactions. We have not had any significant transactions in foreign currencies, nor do we have any significant balances that are due or payable in foreign currencies at September 30, 2003. We do not enter into derivative transactions for trading or speculative purposes.

We have audited the accompanying consolidated balance sheets of Keynote Systems, Inc. and subsidiaries as of September 30, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended September 30, 2003. In connection with our audits of the financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Keynote Systems, Inc. and subsidiaries as of September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

Keynote Systems, Inc. was incorporated on June 15, 1995 in California and reincorporated in Delaware on March 31, 2000. Keynote Systems, Inc. and its subsidiaries (the “Company”) provide web performance measurement and management services that enable corporate enterprises to monitor, benchmark, test, diagnose, and optimize their e-business systems inside and outside the firewall.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany balances have been eliminated in consolidation.

Subscription services revenue consists of fees from subscriptions to the Company’s web performance measurement and management services. The Company’s subscription services revenue is deferred upon invoicing and is recognized ratably over the service period, generally ranging from one to twelve months. For some customers, subscription services revenue is invoiced monthly upon completion of the services. Deferred revenue is comprised of all unearned revenue, primarily unearned subscription services revenue, and is recorded as deferred revenue on the balance sheet until the revenue is earned. All unearned revenue is recorded as deferred revenue on the balance sheet. The Company does not generally grant refunds. All discounts granted reduce revenue. Revenue is not recognized for free trial periods. Revenue from consulting and support services, which includes revenue from the Company’s load testing service, is recognized as the services are performed, typically over a period of one to three months. For consulting projects that span more than one month, the Company recognizes revenue as milestones or deliverables are completed.

The preparation of financial statements in conformity with GAAP 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. Actual results could differ from those estimates.

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

The Company classifies all of its short-term investments as available-for-sale. These investments mature in two years or less, and consist of investment-grade corporate and government debt securities with Moody’s ratings of A2 or better. Investments classified as available-for-sale are recorded at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses are recorded based on specific identification. The Company did not have any realized gains or losses for the three years ended September 30, 2003.

Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three years. Equipment under capital leases is amortized over the shorter of the estimated useful life of the equipment or the lease term. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the lease term. The land and building associated with the Company’s headquarters were recorded at their current fair market values as of September 30, 2002 based on an independent appraisal report. The actual acquisition cost of the land and building was higher than its fair market value because the company acquired the building pursuant to a synthetic lease arrangement which provided for a residual guarantee of $85.0 million. The cost of the building is being depreciated over a thirty year life.

Other comprehensive income includes unrealized gains and losses on short-term investments in corporate and government debt securities and foreign currency translation which are excluded from earnings and reported as a component of stockholders’ equity. The functional currency of the Company’s foreign operations is the applicable local currency or U.S. dollar. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using average exchange rates during each reporting period. Gains and losses from foreign currency transactions are reflected in the consolidated statements of operations as incurred.

The carrying value of the Company’s financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximates their 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 trade 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 any 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. The allowance for doubtful accounts represents management’s best current estimate, but changes in circumstances relating to accounts receivable, including unforeseen declines in market conditions and collection rates, may result in a requirement for additional allowances in the future. The Company believes that it has adequately reserved for doubtful accounts as of the date of each balance sheet presented herein.

At September 30, 2003, no single customer accounted for more than 10% of the Company’s total accounts receivable. At September 30, 2002, one customer accounted for more than 10% of the Company’s total accounts receivable, which receivable was collected subsequent to September 30, 2002. For the years ended September 30, 2003, 2002 and 2001, no single customer accounted for more than 10% of total revenue.

Excess occupancy costs are fixed charges associated with the unoccupied portion of the Company’s headquarter’s building, acquired in September 2002, such as property taxes, insurance and depreciation. and are based on the actual unoccupied square footage, which was 60% for the first nine months and 70% for the last three months for the year ended September 30, 2003.

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. Identifiable intangible assets are generally amortized on a straight-line basis over a three- year period. Prior to October 1, 2001, goodwill was also amortized on a straight-line basis over a three-year period. With the Company’s adoption of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, on October 1, 2001, goodwill is no longer amortized but is subject to annual impairment testing. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”

Upon adoption of SFAS No. 142, the Company reassessed the useful lives and residual values of all acquired identifiable intangible assets to identify any necessary amortization period adjustments and to determine, if any, other intangible assets should be reclassified to goodwill. Based on that assessment, no adjustments were made to the amortization period or residual values of identifiable intangible assets. The Company recorded a $3.2 million non-cash impairment charge as a cumulative effect of a change in accounting principle for the year ended September 30, 2002. See Note 3 and Note 6 to the Consolidated Financial Statements for more details.

Amortization of goodwill and identifiable intangible assets was $1.6 million, $1.1 million, and $12.7 million for the years ended September 30, 2003, 2002 and 2001, respectively.

The Company reviews its long-lived assets, including identifiable intangible assets, for impairment periodically and whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

The Company accounts for stock option grants under Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, which permits the use of the intrinsic-value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. No compensation expense is recognized on the grant date, when the option exercise price equals or exceeds the market price of the underlying common stock. Costs associated with stock-based compensation are amortized ratably over the vesting period of the individual award. There has been no stock-based compensation charges since September 1999, when the Company went public, and the deferred stock compensation was in connection with certain options granted prior to June 30, 1999. As of September 30, 2003, the deferred stock compensation had been fully amortized. See Note 8 to the Consolidated Financial Statements for more details.

The following table illustrates the effect on net loss and basic and diluted net loss per share if the Company had accounted for its stock option and stock purchase plans under the fair value method of accounting under

Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (in thousands):

The net tax effect on the stock-based employee compensation determined under fair value based method for all awards is zero. See Note 8 of the Notes to Consolidated Financial Statements for additional detail.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts that the Company expects to realize.

Research and development costs are expensed as incurred until technological feasibility has been established, in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. To date, the Company’s service offerings have been available for general release concurrent with the establishment of technological feasibility and, accordingly, no research and development costs have been capitalized.

Basic net loss per share is computed using the weighted-average number of outstanding shares of common stock excluding shares of restricted stock subject to repurchase summarized below. Diluted net loss per share is computed using the weighted-average number of shares of common stock outstanding and, when dilutive, potential shares from options and warrants to purchase common stock using the treasury stock method and from convertible securities on an as-if-converted basis.

The following potential shares of common stock have been excluded from the computation of diluted net loss per share because the effect would have been antidilutive (in thousands):

The weighted-average exercise price of outstanding stock options was $12.61, $12.58, and $19.58 for the years ended September 30, 2003, 2002, and 2001, respectively. The weighted-average purchase price of restricted stock was $2.06, $1.09, and $0.74, for the years ended September 30, 2003, 2002, and 2001, respectively.

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Issue 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. The provisions of Issue 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of Issue 00-21 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current financial statement presentation.

As described in Note 2, “Summary of Significant Accounting Policies—Goodwill and Identifiable Intangible Assets”, the Company early adopted SFAS No. 142, effective October 1, 2001. SFAS No. 142 requires that goodwill and identifiable intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually.

SFAS No. 142 provides a six-month transitional period from the effective date of adoption for the Company to perform an assessment of whether there is an indication that goodwill is impaired. To accomplish this, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and identifiable intangible assets, to those reporting units as of the date of adoption. The Company determined that it had one reporting unit as of October 1, 2001.

SFAS No. 142 required the Company to determine the fair value of its one reporting unit as of October 1, 2001, and compare it to the reporting unit’s carrying amount. To the extent that the reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. During the second quarter of fiscal 2002, the Company performed the first step of the transitional impairment test required under SFAS No. 142, and obtained an indicator of impairment in its single reporting unit. During the third quarter of fiscal 2002, the Company performed the second step of the transitional impairment test. In the second step, in accordance with SFAS No. 141, the Company compared the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation to its carrying amount, both of which were measured as of the date of adoption. The Company determined the fair value of its single reporting unit using its market capitalization value after adjusting for a control premium and compared it to its carrying value. The Company determined its market capitalization value based on the number of shares outstanding and the stock price as of October 1, 2001, adjusting for a 10% premium that is assumed to represent additional value that an acquirer would be required to pay for a controlling interest in the Company. This evaluation indicated that goodwill associated with acquisitions completed prior to fiscal 2002 was impaired as of October 1, 2001. Accordingly, the Company recorded a $3.2 million non-cash impairment charge as a cumulative effect of a change in accounting principle for the write-off of the remaining goodwill as of October 1, 2001. The charge is reflected in the results for the year ended September 30, 2002. The goodwill recorded on the Company’s Consolidated Balance Sheets as of September 30, 2003 was $195,000, as compared to $0 as of September 30, 2002.

The following table summarizes the Company’s short-term investments in investment-grade debt securities as of September 30, 2003 (in thousands):

The following table summarizes the maturities of fixed maturity investments available for sale at September 30, 2003 (in thousands). Expected maturities of the debt securities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

As described in Note 2, “Summary of Significant Accounting Policies”, and Note 3, “Cumulative Effect of a Change in Accounting Principle”, the Company adopted SFAS No. 142, effective October 1, 2001. The following table reconciles the reported operating loss, net loss before the cumulative effect of a change in accounting principle, net loss, and net loss per share for fiscal 2001 to its respective pro forma balances adjusted to exclude goodwill amortization expense, which is no longer recognized under the provisions of SFAS No. 142. Fiscal 2002 and 2003 results, adjusted for a cumulative effect of a change in accounting principle in fiscal 2002, are presented for comparative purposes (in thousands, except for loss per share).

The goodwill recorded on the Consolidated Balance Sheets as of September 30, 2003 was $195,000, as compared to $0 as of September 30, 2002. The increase in goodwill was in connection with the Company’s

acquisition of the business of Streamcheck. See Note 9, “Acquisitions,” to the Consolidated Financial Statements for more details.

Identifiable intangible assets amounted to approximately $2.2 million (net of accumulated amortization of approximately $9.8 million) and approximately $2.9 million (net of accumulated amortization of approximately $8.2 million) at September 30, 2003 and 2002, respectively. The components of identifiable intangible assets excluding goodwill are as follows (in thousands):

The amortization expense for existing identifiable intangible assets is estimated to be approximately $1.4 million for fiscal 2004, approximately $702,000 for fiscal 2005, and approximately $74,000 for fiscal 2006.

In September 1999, the Company adopted the 1999 Equity Incentive Plan (Incentive Plan). The Incentive Plan provides for the award of incentive stock options, nonqualified stock options, restricted stock awards and stock bonuses. Options may be exercisable only as they vest or may be immediately exercisable with the shares issued subject to the Company’s right of repurchase that lapses as the shares vest. In general, options vest over a four-year period. As of September 30, 2003, the Company was authorized to issue up to approximately 10.8 million shares of common stock in connection with the Incentive Plan to employees, directors, and consultants, which includes options reserved for issuance under the Company’s 1996 and 1999 Stock Option Plans, which plans terminated upon the completion of the Company’s initial public offering. As of September 30, 2003, options to purchase approximately 5.6 million shares were outstanding under the plan, and approximately 5.2 million shares have been reserved for future issuance.

Stock options granted prior to April 1999 were generally immediately exercisable subject to a restricted stock purchase agreement whereby the Company has the right to repurchase the unvested portion of the shares upon the voluntary or involuntary termination of the purchaser’s employment with the Company at the original issuance cost. The Company’s right of repurchase lapsed with respect to 25% of the shares after one year and ratably on a monthly basis over the following three years. As of September 30, 2003, the Company’s right of repurchased had lapsed for all shares granted prior to April 1999. However, as of September 30, 2003, approximately 5,000 shares of common stock issued upon exercise of stock options assumed in connection with an acquisition were subject to repurchase at a weighted-average price of $2.06 per share.

Under the Incentive Plan, the exercise price for incentive stock options is at least 100% of the stock’s fair market value on the date of the grant for employees owning less than 10% of the voting power of all classes of stock, and at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock. For nonqualified stock options, the exercise price must be at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock and no less than 85% for employees owning less than 10% of the voting power of all classes of stock. Options expire 10 years after the date of grant.

In September 1999, the Company adopted the 1999 Employee Stock Purchase Plan (Purchase Plan). The Company had reserved a total of approximately 1.4 million shares of common stock for issuance under the Purchase Plan as of September 30, 2003.

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 September 30, 2003, approximately 442,000 shares had been issued under this plan, and approximately 981,000 shares had been reserved for future issuance.

The Company issues stock options to its employees and outside directors and provides employees with stock purchase rights pursuant to stockholder approved equity incentive and employee stock purchase plans. The Company accounts for its stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no stock-based employee compensation cost is reflected in operating expenses for the three years ended September 30, 2003, as all options granted under these plans had an exercise price equal to or in excess of the fair market value of the underlying common stock as of the grant date for each stock option, except for certain stock options granted in fiscal 1999 or earlier, prior to the Company’s initial public offering. For those option grants in fiscal 1999 or earlier, the Company recorded deferred stock compensation of $1.9 million for the difference at the grant date between the exercise price of each stock option granted and the fair value of the underlying common stock. This amount was being amortized on a straight-line basis over the vesting period, which was generally four years. As of September 30, 2003, the deferred stock compensation has been fully amortized.

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 for the years ended September 30, 2003, 2002, and 2001, respectively, are as follows:

The following table summarizes information about stock options outstanding as of September 30, 2003 (in thousands, except per share data):

In January 2001, the Company’s Board of Directors authorized the repurchase of up to $50.0 million of the Company’s outstanding common stock on the open market from time to time as market conditions warrant. In October 2002, the Company’s Board of Directors increased the amount authorized for repurchase to an aggregate of $130.0 million of the Company’s outstanding common stock on the open market, less the amount paid for shares previously purchased. The Company completed an issuer tender offer on November 26, 2002 and purchased approximately 4.3 million shares at a price of $8.00 per share for approximately $34.6 million.

Additionally, the Company completed an issuer tender offer on May 16, 2003 and purchased approximately 4.3 million shares at a price of $9.50 per share for approximately $40.5 million.

In accordance with the January 2001 share repurchase authorization, the Company acquired 8.9 million, 1.2 million and 250,000 shares of common stock in fiscal 2003, 2002 and 2001, respectively. The total number of shares repurchased since January 2001, including the tender offers described above, is approximately 10.4 million shares, for an aggregate price of approximately $90.1 million. The Company currently has authorization to repurchase up to approximately $39.9 million of its common stock.

In April 2001, the Company’s Board of Directors approved a voluntary stock option exchange program. The Company offered its employees (other than its Chief Executive Officer, executive officers who report to the Chief Executive Officer, directors and non-exempt employees) the opportunity to cancel certain stock options granted on or after September 24, 1999, with exercise prices above the then-current market value of the Company’s common stock, in exchange for new options to be granted at the then-fair market value on a date at least six months and one day after the options were cancelled. Options to purchase a total of approximately 1.2 million shares were cancelled pursuant to this program on May 8, 2001. Subject to the terms and conditions of the program, the Company, on November 12, 2001, granted new options to purchase a total of approximately 1.2 million shares at $7.52 per share.

On October 28, 2002, the Company announced that its Board of Directors adopted a stockholder rights plan. The plan was amended on December 15, 2003. The plan is designed to protect the long-term value of the Company for its stockholders during any future unsolicited acquisition attempt. The rights become exercisable only upon the occurrence of certain events specified in the plan, including the acquisition of 20% of the Company’s outstanding common stock by a person or group. The Company’s Board of Directors adopted a policy under which a committee consisting solely of independent directors of the Board will review the Rights Agreement at least once every three years to consider whether maintaining the Rights Agreement continues to be in the best interests of Keynote and its stockholders. The Board may amend the terms of the rights without the approval of the holders of the rights.

In July 2003, the Company acquired the business of Streamcheck, a provider of quality measurement services for streaming media, for $567,000 in cash, plus up to $450,000 additional cash payment if certain revenue and profitability targets are achieved during the period from July 22, 2003 through September 30, 2004. The Company believes this acquisition will enhance its ability to provide streaming measurement services.

The $567,000 purchase price consideration was based on estimated fair values of the assets and liabilities of Streamcheck at the acquisition date, and allocated to the technology-based and customer-based intangible assets acquired. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

As summarized above, there was $195,000 of goodwill arising from the Streamcheck acquisition. In accordance with SFAS No. 141, the Company did not record any goodwill amortization. However, in accordance with SFAS No. 142, goodwill is subject to impairment testing on an annual basis. Identifiable intangible assets are being amortized on a straight-line basis over a three year period. Amortization of identifiable intangible assets related to the acquisition of the business of Streamcheck was $24,000 for the year ended 30, 2003. The consolidated statement of operations for the year ended September 30, 2003 includes the results of operations relating to Streamcheck’s business activity subsequent to the acquisition.

In October 2002, the Company acquired the assets of Enviz, Inc. (Enviz), a leader in user experience testing technology for $76,000 in cash and 111,000 shares of the Company’s common stock. This acquisition enhanced the Company’s ability to provide testing services for diagnosing and improving web effectiveness by testing the total quality of the user experience.

The $798,000 purchase price consideration was based on estimated fair values of the assets and liabilities of Enviz at the acquisition date, and allocated to the technology-based and customer-based intangible assets acquired. The purchase consideration of approximately $798,000 was allocated to the assets and liabilities acquired based on their estimated fair values at the acquisition date. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Identifiable intangible assets are being amortized on a straight-line basis over a three year period. There was no goodwill arising from this acquisition. Amortization of identifiable intangible assets related to the Enviz acquisition was $274,000 for the year ended September 30, 2003. The consolidated statement of operations includes the results of operations relating to Enviz’s business activity subsequent to the acquisition.

On May 1, 2002, the Company acquired NetMechanic, Inc. (NetMechanic), a provider of remote web site quality assurance and testing services. This acquisition enhanced the Company’s ability to provide a complete suite of cost-effective content testing and availability monitoring services for the small to medium size business market. The acquisition was completed for approximately $1.2 million in cash.

The cash purchase consideration of approximately $1.2 million was allocated to the assets and liabilities acquired based on their estimated fair values at the acquisition date. There was no goodwill arising from the acquisition. Identifiable intangible assets are being amortized on a straight-line basis over three years. Amortization of identifiable intangible assets related to the NetMechanic acquisition was $535,000 and $222,000 for the years ended September 30, 2003 and 2002, respectively. The consolidated statement of operations includes activities relating to NetMechanic’s business activity subsequent to the acquisition.

On October 10, 2001, the Company acquired the business of onDevice Corporation (onDevice), a provider of wireless application testing services. The acquisition enhanced the Company’s ability to offer additional performance improvement services to wireless customers, and was accounted for under the purchase method of accounting. The transaction was completed for $860,000 in cash.

The $860,000 cash purchase consideration was based on estimated fair values of the assets of onDevice at the acquisition date, and allocated to the technology-based intangible assets acquired. There was no goodwill arising from the acquisition. Identifiable intangible assets are being amortized on a straight-line basis over three years, and amortization of identifiable intangible assets related to onDevice was $283,000 and $275,000 for the twelve months ended September 30, 2003 and 2002, respectively. The consolidated statements of operations include activities relating to onDevice’s business activities subsequent to the acquisition.

On July 13, 2001, the Company acquired the management service provider business of Envive Corporation (Envive), a provider of web application performance management solutions. The transaction was accounted for under the purchase method of accounting. The acquisition has supplemented the Company’s existing testing services.

The $3.4 million cash purchase consideration was allocated to the assets and liabilities acquired based on estimated fair values at the acquisition date. The primary purchase adjustments related to the recording of goodwill of approximately $2.2 million and identifiable intangible assets of approximately $1.3 million. In accordance with SFAS No. 141, the Company did not record any goodwill amortization since the acquisition occurred after June 30, 2001. However, as a result of the implementation of SFAS No. 142, the goodwill of $2.2 million was deemed to be impaired as of October 1, 2001. Accordingly, the Company wrote-off the goodwill which was recorded as part of the $3.2 million non-cash impairment charge that was a cumulative effect of a change in accounting principle as of October, 1, 2001. Identifiable intangible assets of $1.3 million include $1.2 million related to technology and $100,000 related to customer base. Identifiable intangible assets are being amortized on a straight-line basis over thirty-six months, their estimated useful life. Amortization of identifiable intangible assets related to the Envive acquisition was $295,000, $400,000 and $239,000 for the years ended September 30, 2003, 2002 and 2001, respectively. The consolidated statement of operations includes activities of Envive subsequent to the acquisition. During the year ended September 30, 2003, in connection with the finalization of the acquisition of the business of Envive Corporation, the Company received $254,000 of cash. As a result, the original $3.4 million purchase price was adjusted to reflect the Company’s receipt of this amount. The remaining $3.1 million was allocated based on the original purchase price allocation ratios to technology-based and customer-based intangible assets.

In fiscal 2003, the Company recorded approximately $1.6 million in amortization related to identifiable intangible assets and $31,000 in amortization of stock-based compensation.

In fiscal 2002, the Company recorded approximately $1.1 million in amortization related to identifiable intangible assets, $200,000 in in-process research and development charge associated with the acquisition of NetMechanic, and $421,000 in amortization of stock-based compensation. Additionally, as mentioned in Note 4 of the Notes to Consolidated Financial Statements, the Company recorded a charge of approximately $3.2 million as a cumulative effect of a change in accounting principle for the write-off of the remaining goodwill as of October 1, 2001 associated with its acquisitions of Digital Content, Velogic, and Envive.

In July 2000, the Company entered into a five-year synthetic lease arrangement for its corporate headquarters building in San Mateo, California. On September 30, 2002, the Company terminated the lease by purchasing the property for a total of $85.7 million. The lease, which was due to expire in 2005, provided for a residual guarantee of $85.0 million due at the end of the lease term or upon lease termination. The Company’s obligation was fully collateralized with restricted cash of $85.0 million.

After the Company entered into the lease in July 2000, real estate market conditions worsened, including a significant increase in available space for lease and significant declines in corresponding lease rates for commercial property. Accordingly, a loss on the termination of this lease was recognized in connection with the purchase of the building. The loss was calculated by comparing the purchase price of the building to its fair value. To determine the fair value of the building, the Company had an independent real estate appraisal conducted, which indicated that the fair value of the property was approximately $25.0 million. The calculated loss of approximately $60.7 million was recorded in the fourth quarter of fiscal 2002. The $60.7 million loss on termination was adjusted for the reversal of the remaining excess facility charge accrual and costs associated with the acquisition of the building, resulting in a net charge to its consolidated statements of operations of approximately $52.0 million.

During the year ended September 30, 2001, the Company recorded a charge of $11.0 million for certain costs related to the unoccupied portion of its building in San Mateo, California. The Company occupied approximately 40% of the building, and actively sought tenants for the remaining 60%. The $11.0 million charge included certain lease costs such as rent, insurance, and property taxes that the Company expected to incur. At September 30, 2001, $10.3 million of the excess facility charge remained accrued. On September 30, 2002, the remaining accrual of $9.3 million was reversed as a result of the termination of the synthetic lease arrangement. See “Lease Termination Charge on Headquarters Building” above for more details.

Income (loss) (excluding allocations of corporate overhead) before income taxes is attributable to the following geographic locations for the years ended September 30, 2003, 2002, and 2001 (in thousands):

Income tax expense for the years ended September 30, 2003, 2002, and 2001 consisted of the following (in thousands):

Income tax expense (benefit) for the years ended September 30, 2003, 2002, and 2001 differed from the amounts computed by applying the statutory federal income tax rate of 35% to pretax income (loss) as a result of the following (in thousands):

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets are presented below (in thousands):

Management has established a valuation allowance for the portion of deferred tax assets for which realization is uncertain. The net change in the total valuation allowance for the years ended September 30, 2003 and 2002 was an increase of approximately $15.4 million and $15.1 million, respectively. The Company’s accounting for deferred taxes under SFAS No. 109, “Accounting for Income Taxes,” involves

the evaluation of a number of factors concerning the realizability of the Company’s deferred tax assets. To support the Company’s conclusion that a 100% valuation allowance was required, management primarily considered such factors as the Company’s history of operating losses, the nature of the Company’s deferred tax assets and the absence of taxable income in prior carryback years. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon several factors, including the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences become deductible, history of operating income or losses. At present, management does not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying consolidated balance sheets.

As of September 30, 2003, approximately $5.4 million of the valuation allowance for deferred tax assets is attributable to employee stock option deductions, the benefit from which will be allocated to additional paid-in capital if and when subsequently realized.

The Company has net operating loss carryforwards for U.S. and foreign income tax purposes of approximately $41.5 million and $1.8 million, respectively, available to reduce future income subject to income taxes. The U.S. net operating loss carryforwards will begin to expire, if not utilized, in the year 2010. The foreign net operating loss carryforwards will begin to expire in the year 2005. In addition, the Company had approximately $18.5 million of net operating loss carryforwards available to reduce future taxable income, for state income tax purposes. The state net operating loss carryforwards will begin to expire, if not utilized, in the year 2003.

As of September 30, 2003, the Company had research credit carryforwards for both federal and state income tax purposes of approximately $1.2 million, respectively, available to reduce future income taxes. The federal research credit carryforwards begin to expire in the year 2010. The California research credit carryforwards expire indefinitely.

Federal and state tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue Code. The Company has not yet determined whether an ownership change occurred due to significant stock transactions in each of the reporting years disclosed. If an ownership change occurred, the utilization of the net operating loss carryforwards could be reduced significantly.

The Company leases certain of its facilities and equipment under noncancellable operating leases, which expire on various dates through December 2005. At September 30, 2003, future minimum payments under the leases, are as follows (in thousands):

Rent expense for the years ended September 30, 2003, 2002 and 2001 was approximately $151,000, $2,536,000 and $2,075,000, respectively.

Beginning on August 16, 2001, a number of class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, certain of its officers, and the underwriters of the Company’s initial public offering. These lawsuits were essentially identical, and were brought on behalf of those who purchased the Company’s securities between September 24, 1999 to August 19, 2001. These complaints alleged generally that the underwriters in certain initial public offerings, including the Company’s, allocated shares in those initial public offerings in unfair or unlawful ways, such as requiring the purchaser to agree to buy in the aftermarket at a higher price or to buy shares in other companies with higher than normal commissions. The complaint also alleged that the Company had a duty to disclose the activities of the underwriters in the registration statement relating to its initial public offering. In June 2003, the plaintiffs’ counsel and the issuer defendants’ counsel reached a settlement agreement whereby the issuers and individual defendants were dismissed from the case, without any payments by us. The settlement awaits approval by the Court.

The Company is subject to 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.

The Company has determined that it operates in a single reportable operating segment: the development and sale of services to measure, test, assure and improve the quality of service of web sites.

The Company markets its products primarily from its operations in the United States. International sales are primarily to customers in Europe. These sales and the Company’s foreign-owned assets are not significant. At September 30, 2003, no single customer accounted for more than 10% of the Company’s total accounts receivable. At September 30, 2002, one customer accounted for more than 10% of the Company’s total accounts receivable, which receivable was collected subsequent to September 30, 2002. For the years ended September 30, 2003, 2002, and 2001, no single customer accounted for more than 10% of the Company’s total revenue.

The following tables set forth quarterly supplementary data for each of the fiscal years in the two-year period ended September 30, 2003.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

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 our chief financial officer, based on their evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, concluded that our disclosure controls and procedures were effective for this purpose.

There have been no significant changes in our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Information relating to our executive officers is presented under Item 4A in this report. The other information required by this item relating to our directors is presented under the caption “Proposal No. 1—Election of Directors” , “Section 16(a) Beneficial Ownership Compliance”, and “Code of Ethics” in our definitive proxy statement in connection with our 2003 Annual Meeting of Stockholders to be filed within 120 days of our fiscal year-end. That information is incorporated into this report by reference.

Information required by this item will be presented under the caption “Executive Compensation” in our definitive proxy statement. That information is incorporated into this report by reference.

Information required by this item will be presented under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans” in our definitive proxy statement. That information is incorporated into this report by reference.

Information required by this item will be presented under the caption “Certain Relationships and Related Transactions” in our definitive proxy statement. That information is incorporated into this report by reference.

Although we are not yet required to comply with this item, we intend to present the information required by this item under the caption “Principal Accountant Fees and Services” in our definitive proxy statement. That information is incorporated into this report by reference.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

The following financial statement schedule is filed as part of this report and should be read together with our consolidated financial statements:

The following table lists the exhibits filed as part of this report. In some cases, these exhibits are incorporated into this report by reference to exhibits to our other filings with the Securities and Exchange Commission. Where an exhibit is incorporated by reference, we have noted the type of form filed with the Securities and Exchange Commission, the file number of that form, the date of the filing and the number of the exhibit referenced in that filing.

We did not file any current reports on Form 8-K during the year ended September 30, 2003.

Pursuant to the requirements of Section 13 or 15(d) 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 29th day of December, 2003.

KEYNOTE SYSTEMS INC.

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

Pursuant to the requirements of the Securities Exchange Act, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the date indicated.

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

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

		Page
ITEM 1:	Business	4

ITEM 2:	Properties	14

ITEM 3:	Legal Proceedings	14

ITEM 4:	Submission of Matters to a Vote of Security Holders	14

ITEM 4A:	Executive Officers	14

	PART II

ITEM 5:	Market for the Registrant’s Common Stock and Related Stockholder Matters	16

ITEM 6:	Selected Consolidated Financial Data	17

ITEM 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

ITEM 7A:	Qualitative and Quantitative Disclosures About Market Risks	41

ITEM 8:	Financial Statements and Supplementary Data	42

ITEM 9:	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	66

ITEM 9A:	Controls and Procedures	66

	PART III

ITEM 10:	Directors and Executive Officers of the Registrant	68

ITEM 11:	Executive Compensation	68

ITEM 12:	Security Ownership of Certain Beneficial Owners and Management	68

ITEM 13:	Certain Relationships and Related Transactions	68

ITEM 14:	Principal Accountant Fees and Services	68

	PART IV

ITEM 15:	Exhibits, Financial Statement Schedules and Reports on Form 8-K	68

Signatures		71

	High		Low
Fiscal Year ended September 30, 2003
Fourth Quarter	$	12.24	$	9.61
Third Quarter		11.35		9.15
Second Quarter		9.40		7.65
First Quarter		8.29		6.10

Fiscal Year ended September 30, 2002
Fourth Quarter	$	7.65	$	6.07
Third Quarter		9.75		7.15
Second Quarter		10.50		8.40
First Quarter		9.40		6.95

	Years Ended September 30,
	2003			2002(1)			2001(2)			2000			1999
	(in thousands, except per share data)
Statement of Operations Data:
Total revenue	$	38,262		$	37,940		$	45,629		$	33,767		$	7,272
Loss from operations before cumulative effect of a change in accounting principle		(10,194	)		(74,366	)		(74,083	)		(17,180	)		(7,015	)
Net loss before cumulative effect of a change in accounting principle		(4,725	)		(62,367	)		(56,401	)		(2,715	)		(7,110	)
Cumulative effect of a change in accounting principle		—			(3,160	)		—			—			—
Net loss		(4,725	)		(65,527	)		(56,401	)		(2,715	)		(7,110	)
Basic and diluted net loss per share before cumulative effect of a change in accounting principle		(0.21	)		(2.24	)		(2.04	)		(0.11	)		(1.54	)
Basic and diluted net loss per share		(0.21	)		(2.35	)		(2.04	)		(0.11	)		(1.54	)

	As of September 30,
	2003			2002(1)			2001(2)			2000			1999
Balance Sheet Data:
Cash, cash equivalents, and short-term investments	$	160,214		$	239,287		$	254,193		$	260,201		$	64,647
Restricted cash		—			—			85,000			85,000			—
Total cash, cash equivalents, short-term investments and restricted cash		160,214			239,287			339,193			345,201			64,647
Total assets		202,368			285,781			372,664			408,611			71,071
Long-term obligations		—			—			—			791			2,842
Total stockholders’ equity (deficit)		190,280			271,455			343,119			392,080			63,242

	Years Ended September 30,
	2003		2002		2001
Revenue:
Subscription services	90.1	%	90.5	%	95.0	%
Consulting and support services	9.9		9.5		5.0

Total revenue	100.0		100.0		100.0
Expenses:
Costs of subscription services	21.5		30.5		29.3
Costs of consulting and support services	9.7		9.0		6.5
Research and development	19.4		23.6		16.5
Sales and marketing	35.8		52.5		49.0
Operations	16.5		19.7		15.8
General and administrative	16.5		19.0		14.4
Restructuring costs	—		—		0.6
Excess facility costs	—		—		24.1
Excess occupancy costs	3.0		—		—
Lease termination charge	—		137.1		—
In-process research and development, other acquisition-related charges, amortization and impairment of goodwill and identifiable intangible assets and amortization of stock-based compensation	4.2		4.6		106.1

Total operating expenses	126.6		296.0		262.3
Loss from operations before cumulative effect of a change in accounting principle	(26.6	)	(196.0	)	(162.3	)
Interest income	15.0		31.8		41.1
Interest and other expenses	(0.7	)	(0.2	)	(1.0	)
Provision for income taxes	—		—		(1.3	)

Net loss before cumulative effect of a change in accounting principle	(12.3	)	(164.4	)	(123.5	)
Cumulative effect of a change in accounting principle	—		(8.3	)	—

Net loss	(12.3	)%	(172.7	)%	(123.5	)%

		Date of Introduction
Web Performance Measurement Services:

Keynote Web Site Perspective—Business Edition		April 1997

Keynote Web Site Perspective—Consumer Edition		December 1999

Keynote Transaction Perspective		April 1999

Keynote Red Alert		August 2000

Keynote Streaming Perspective		October 2000

Keynote NetMechanic		May 2002

Keynote Red Alert Performance Tracker		July 2003

Web Performance Management Services:

Keynote Professional Services		January 1999

Keynote Private Agents		January 1999

Keynote Enterprise Adapters		May 2001

Keynote LoadPro		July 2000

Keynote Data Pulse		July 2001

Keynote Test Perspective		July 2001

Keynote Wireless Perspective		October 2001

Keynote Diagnostic Services		November 2001

Keynote Traffic Perspective		November 2001

Keynote WebEffective		October 2002

Keynote WebIntegrity		October 2002

Keynote Application Perspective		October 2003

Keynote Performance Scoreboard		October 2003

Keynote PerformanceTune		October 2003

Keynote Test Perspective for Siebel 7		October 2003

Keynote Network Perspective		December 2003

Name	Age	Position
Umang Gupta	54	Chairman of the Board and Chief Executive Officer
Peter Maloney	40	Vice President and Chief Financial Officer
Donald Aoki	46	Vice President of Engineering
Lloyd Taylor	45	Vice President of Operations
Richard Rudolph	41	Vice President of Worldwide Sales
Arnold Waldstein	54	Vice President of Marketing and Business Development

	2003		2002		% Change
	(In thousands)
Subscription services	$	34,484	$	34,337	—	%
Consulting and support services	$	3,778	$	3,603	5	%

Total Revenue	$	38,262	$	37,940	—

	Technology Based		Customer Based		Trademark		Total
Net carrying value at September 30, 2003	$	2,055	$	121	$	0	$	2,176

	Contractual Obligations		Commercial Commitments
Fiscal Year Ended September 30,	Leases		Bandwidth and Collocation		Total
2004	$	103	$	980	$	1,083
2005		103		16		119
2006		17				17

	$	223	$	996	$	1,219

		Page
Independent Auditors’ Report		43

Consolidated Balance Sheets		44

Consolidated Statements of Operations		45

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)		46

Consolidated Statements of Cash Flows		47

Notes to Consolidated Financial Statements		48

Supplementary Data (Unaudited)		66

Financial Statement Schedule		67

	September 30,
	2003			2002
ASSETS
Current assets:
Cash and cash equivalents	$	23,242		$	20,874
Short-term investments		136,972			218,413

Total cash, cash equivalents, and short-term investments		160,214			239,287
Accounts receivable, less allowance for doubtful accounts of $1,048 and $1,238 as of September 30, 2003 and 2002, respectively		4,349			4,820
Prepaids and other current assets		1,506			1,347

Total current assets		166,069			245,454
Property and equipment, net		33,928			37,468
Goodwill		195			—
Identifiable intangible assets, net		2,176			2,859

Total assets	$	202,368		$	285,781


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	654		$	1,014
Accrued expenses		7,077			8,191
Deferred revenue		4,357			5,121

Total current liabilities		12,088			14,326

Total liabilities		12,088			14,326

Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 18,817,420 and 27,066,767 shares issued and outstanding as of September 30, 2003 and 2002, respectively		19			28
Treasury stock		(29	)		(6,990	)
Additional paid-in capital		331,912			413,684
Deferred compensation		—			(31	)
Accumulated deficit		(142,056	)		(137,331	)
Accumulated other comprehensive income		434			2,095

Total stockholders’ equity		190,280			271,455

Total liabilities and stockholders’ equity	$	202,368		$	285,781

	Common Stock					Additional Paid-In Capital			Treasury Stock					Deferred Stock-Based Compensation			Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders’ Equity (Deficit)			Comprehensive Income (Loss)


	Shares		Amount						Shares		Amount
Balances as of September 30, 2000	27,807,763		$	28		$	413,084		—		$	—		$	(5,629	)	$	(15,403	)	$	—		$	392,080		$	(2,715	)
Repurchase of common stock	—			—			—		(297,739	)		(2,442	)		—			—			—			(2442	)
Issuance of common stock	288,691			—			882		123,067			1,356			—			—			—			2,238
Deferred compensation related to Digital Content acquisition, net	—			—			—		—			—			4,836			—			—			4,836
Amortization of stock-based compensation	—			—			—		—			—			341			—			—			341
Net loss	—			—			—		—			—			—			(56,401	)		—			(56,401	)		(56,401	)
Unrealized gain on available-for sale investment	—			—			—		—			—			—			—			2,467			2,467			2,467

Balances as of September 30, 2001	28,096,454			28			413,966		(174,672	)		(1,086	)		(452	)		(71,804	)		2,467			343,119			(53,934	)

Repurchase of common stock	—			—			(28	)	(1,159,812	)		(7,977	)		—			—			—			(8,005	)
Issuance of common stock	22,501			—			(254	)	282,296			2,073			—			—			—			1,819
Amortization of stock-based compensation	—			—			—		—			—			421			—			—			421
Net loss	—			—			—		—			—			—			(65,527	)		—			(65,527	)		(65,527	)
Foreign currency translation	—			—			—		—			—			—			—			107			107			107
Unrealized loss on available-for sale investments	—			—			—		—			—			—			—			(479	)		(479	)		(479	)

Balance as of September 30, 2002	28,118,955		$	28		$	413,684		(1,052,188	)	$	(6,990	)		(31	)	$	(137,331	)	$	2,095		$	271,455		$	(65,899	)

Repurchase of common stock	—			—			(1,084	)	(8,931,419	)		(78,521	)		—			—			—			(79,605	)
Issuance of common stock	407,335			1			2,787		163,312			1,301			—			—			—			4,089
Issuance of common stock in connection with the Enviz acquisition	111,000			—			696		—			—			—			—			—			696
Retirement of treasury stock	(9,817,314	)		(10	)		(84,171	)	9,817,739			84,181			—			—			—			—
Amortization of stock-based compensation	—			—			—		—			—			31			—			—			31
Net loss	—			—			—		—			—			—			(4,725	)		—			(4,725	)		(4,725	)
Foreign currency translation	—			—			—		—			—			—			—			30			30			30
Unrealized loss on available-for sale investment	—			—			—		—			—			—			—			(1,691	)		(1,691	)		(1,691	)

Balance as of September 30, 2003	18,819,976		$	19		$	331,912		(2,556	)	$	(29	)	$	—		$	(142,056	)	$	434		$	190,280		$	(6,386	)

	Year Ended September 30,
	2003			2002			2001
Net loss, as reported	$	(4,725	)	$	(65,527	)	$	(56,401	)
Add: Stock-based employee compensation included in net loss		31			421			341
Less: Total stock-based employee compensation expense determined under fair value based method for all awards		(10,134	)		(10,137	)		(4,889	)

Pro forma net loss	$	(14,828	)	$	(75,243	)	$	(60,949	)

Basic and diluted net loss per share:
As reported		(0.21	)		(2.35	)		(2.04	)

Pro forma	$	(0.67	)	$	(2.70	)	$	(2.20	)

Number of shares used in computing as reported and pro forma basic and diluted loss per share		22,080			27,864			27,713

	Year Ended September 30,
	2003	2002	2001
Shares outstanding under stock options	5,581	6,378	3,351
Shares of restricted stock subject to repurchase	5	21	101

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
Obligations of U.S. government agencies	$	68,122	$	146		(34	)	$	68,234
Corporate bonds and commercial paper		68,553		222		(37	)		68,738

Total	$	136,675	$	368	$	(71	)	$	136,972

	Amortized Cost		Estimated Market Value
Year ending September 30,
2004	$	50,203	$	50,329
2005		86,472		86,643
Thereafter		—		—

Total	$	136,675	$	136,972

	Useful Lives (Years)	September 30,
	Useful Lives (Years)	2003		2002
Computer equipment and software	3	$	23,223	$	23,503
Furniture and fixtures	5		1,485		1,492
Land	—		14,150		14,150
Building	30		10,750		10,750
Leasehold and building improvements	5–30		6,655		5,479

			56,263		55,374
Less accumulated depreciation and amortization			22,335		17,906

Total		$	33,928	$	37,468

	Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Outstanding	Weighted- Average Exercise Price
At $0.50	1	5.2	$	0.50	1	$	0.50
From $1.60 to $2.05	16	5.6		1.70	16		1.69
From $3.20 to $4.42	22	5.6		4.02	22		4.02
From $6.21 to $9.30	3,872	7.6		7.82	1,961		7.92
From $9.35 to $13.53	1,184	8.7		10.60	322		10.82
From $14.50 to $21.63	46	4.1		16.61	37		16.72
From $22.31 to $29.88	42	5.8		24.39	33		24.37
From $33.75 to $37.63	71	6.5		35.93	14		36.16
From $54.75 to $81.13	322	6.1		69.42	245		69.32
At $154.00	5	6.4		154.00	4		154.00

From $0.50 to $154.00	5,581	7.7	$	12.61	2,655	$	14.59

Fixed assets	$	21
Customer-based intangible assets		59
Technology-based intangible assets		292
Goodwill		195

Total purchase consideration	$	567

Technology-based intangible assets	$	771
Customer-based intangible assets		29
Fixed assets, net		27
Current liabilities		(14	)
Deferred revenue		(15	)

Total purchase consideration	$	798

Year ending September 30:
2004	$	103
2005		103
2006		17
Thereafter		—

Total minimum lease payments	$	223

	2003
	Quarter Ended												Year Ended September 30, 2003
	December 31, 2002			March 31, 2003			June 30, 2003			September 30, 2003			Year Ended September 30, 2003
	(In thousands, except per share data)
Revenue	$	9,758		$	9,558		$	9,432		$	9,514		$	38,262
Total operating expenses		13,919			13,336			11,697			9,504			48,456
Income (Loss) from operations		(4,161	)		(3,778	)		(2,265	)		10			(10,194	)
Net Income (loss)		(1,997	)		(2,117	)		(1,263	)		652			(4,725	)
Basic and diluted net income (loss) per share	$	(0.08	)	$	(0.09	)	$	(0.06	)	$	0.03		$	(0.21	)

	2002
	Quarter Ended												Year Ended September 30, 2002
	December 31, 2001			March 31, 2002			June 30, 2002			September 30, 2002			Year Ended September 30, 2002
	(In thousands, except per share data)
Revenue	$	9,589		$	9,209		$	9,474		$	9,668		$	37,940
Total operating expenses		15,896			15,042			14,889			66,479			112,306
Loss from operations		(6,307	)		(5,833	)		(5,415	)		(56,811	)		(74,366	)
Net loss		(6,163	)		(2,989	)		(2,499	)		(53,876	)		(65,527	)
Basic and diluted net loss per share	$	(0.22	)	$	(0.11	)	$	(0.09	)	$	(1.93	)	$	(2.35	)

CLASSIFICATION PERIOD	BALANCE AT BEGINNING OF PERIOD		ADDITIONS CHARGED TO OPERATIONS		WRITE-OFFS			BALANCE AT END OF PERIOD
ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR ENDED
September 30, 2003	$	1,238,000	$	525,000	$	(715,000	)	$	1,048,000
September 30, 2002	$	1,041,000	$	2,022,000	$	(1,825,000	)	$	1,238,000
September 30, 2001	$	714,000	$	2,995,000	$	(2,668,000	)	$	1,041,000

Exhibit No.	Exhibit	Incorporated by Reference				Filed Herewith
Exhibit No.	Exhibit	Form	File No.	Filing Date	Exhibit No.	Filed Herewith
2.01	Agreement and Plan of Reorganization dated as of May 9, 2000, by and between Keynote and Velogic, Inc.	8-K	000-27241	06-16-00	2.01

2.02	Agreement and Plan of Reorganization dated as of August 18, 2000 by and among Keynote, Big Red Acquisition Corporation, Digital Content, L.L.C. and the members of Digital Content L.L.C.	8-K	000-27241	09-01-00	2.01

3.01	Amended and Restated Certificate of Incorporation.	S-1	333-94651	01-14-00	3.04

3.02	Bylaws.	14A	000-27241	01-19-00	Annex B

3.03	Certificate of Designations specifying the terms of the Series A Junior Participating Preferred Stock of registrant, as filed with the Secretary of State of the State of Delaware on October 28, 2002	8-A	000-27241	10-29-02	3.02

4.01	Form of Specimen Stock Certificate for Keynote common stock.	S-1	333-82781	09-22-99	4.01

4.02	Third Amended and Restated Investors’ Rights Agreement, dated as of April 26, 1999.	S-1	333-82781	07-13-99	4.02

10.01	Form of Indemnity Agreement between Keynote and each of its directors and executive officers.	S-1	333-94651	01-14-00	10.01A

10.02	1996 Stock Option Plan.	S-1	333-82781	07-13-99	10.02

10.03	1999 Stock Option Plan.	S-1	333-82781	07-13-99	10.03

10.04	1999 Equity Incentive Plan and related forms of stock option agreement and stock option exercise agreement.	S-1	333-82781	08-23-99	10.04

10.05	1999 Employee Stock Purchase Plan and related forms of enrollment form, subscription agreement, notice of withdrawal and notice of suspension.	S-1	333-82781	08-23-99	10.05

10.06	401(k) Plan.	S-1	333-82781	07-13-99	10.06

10.07*	Employment Agreement dated as of December 9, 1997 between Keynote and Umang Gupta.	S-1	333-82781	07-13-99	10.08

10.08*	Amendment Agreement dated as of November 12, 2001 between Keynote and Umang Gupta.	10-Q	000-27241	02-14-02	10.01

21.01	Subsidiaries of Keynote.					X

23.01	Consent of KPMG LLP, Independent Auditors.					X

Name	Title	Date
Principal Executive Officer:

/S/ UMANG GUPTA Umang Gupta	Chairman of the Board, Chief Executive Officer and Director	December 29, 2003

Principal Financial and Accounting Officer:

/S/ PETER J. MALONEY Peter J. Maloney	Vice President and Chief Financial Officer	December 29, 2003

Additional Directors:

/S/ DAVID COWAN David Cowan	Director	December 29, 2003

/S/ MOHAN GYANI Mohan Gyani	Director	December 29, 2003

/S/ GEOFFREY PENNEY Geoffrey Penney	Director	December 29, 2003

/S/ DEBORAH RIEMAN Deborah Rieman	Director	December 29, 2003

/S/ STRATTON SCLAVOS Stratton Sclavos	Director	December 29, 2003

Former Officer:

/S/ JOHN J. FLAVIO John J. Flavio	Former Senior Vice President of Finance and Former Chief Financial Officer	December 29, 2003