KEYNOTE SYSTEMS INC

On June 23, 2013, the Company entered into a Material Definitive Agreement and Plan of Merger (the “Merger”) to be acquired by affiliates formed by Thoma Bravo, LLC. (“Thoma Bravo”), an investment fund, with the Company surviving the Merger. Pursuant to the agreement, at the effective time of the merger, each option to purchase a share of common stock and each restricted stock unit that is outstanding will accelerate in full, and each share of common stock of the Company outstanding immediately prior to the effective time of the Merger will be cancelled and converted into the right to receive $20.00 in cash, without interest thereon and subject to applicable withholding taxes. The agreement is subject to shareholder approval as well as other regulatory and customary closing conditions. If approved by the Company’s shareholders and if the other conditions to closing are satisfied, the transaction is expected to be completed by the end of September 2013.  The merger is subject to certain closing conditions and there can be no assurance that the merger will be consummated. As of June 30, 2013, the Company recorded $1.2 million of transaction expenses, primarily investment banking fees and legal fees, in its operating results associated with the Merger.

The accompanying unaudited financial statements do not include the effects of the merger, nor do they include any adjustments associated with the purchase price allocation of the merger.

On June 27, 2013 a suit entitled Telker v. Keynote Systems, Inc., et al., Case No. CIV 52260, and on July 3, 2013 a suit entitled Satyanaryana Gunda v. Keynote Systems, Inc., et al, Case No. CIV 522675, were filed in the Superior Court of the State of California for San Mateo County. In addition, on July 2, 2013 a suit entitled Ruffner v. Keynote Systems, Inc., et al., Civil Action No. 8699, and on July 9, 2013 a suit entitled Vladimir v. Keynote Systems, Inc., et al., Civil Action No. 8710, were filed in the Court of Chancery of the State of Delaware. All four of the suits challenge the proposed Merger of the Company (Note 1). Each is a putative class action filed on behalf of the Company’s stockholders and name as defendants the Company, its directors, and Thoma Bravo. The suits allege that the individual defendants breached their fiduciary duty by failing to maximize stockholder value in negotiating and approving the Merger. Each of the suits also alleges that Thoma Bravo aided and abetted the alleged breaches of fiduciary duties. The suits seek, among other relief, declaratory and injunctive relief enjoining the Merger. Due to the preliminary nature of these allegations, the Company is unable to determine the likelihood of unfavorable outcomes against it and is unable to reasonably estimate a range of loss, if any. An adverse judgment for monetary damages could have an adverse effect on the operations and liquidity of the Company. A preliminary injunction could delay or jeopardize the completion of the Merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the Merger.

On July 3, 2013 a suit entitled Satyanaryana Gunda v. Keynote Systems, Inc., et al, Case No. CIV 522675, was filed in the Superior Court of the State of California for San Mateo County.  In addition, on July 2, 2013 a suit entitled Ruffner v. Keynote Systems, Inc., et al., Civil Action No. 8699, and on July 9, 2013 a suit entitled Vladimir v. Keynote Systems, Inc., et al., Civil Action No. 8710, were filed in the Court of Chancery of the State of Delaware.  All of the suits challenge the proposed Merger of the Company (Note 1). Each is a putative class action filed on behalf of the Company’s stockholders and name as defendants the Company, its directors, and Thoma Bravo (Note 16).

On June 27, 2013, a suit entitled Telker v. Keynote Systems, Inc., et al., Case No. CIV 52260, and, on July 3, 2013, a suit entitled Satyanaryana Gunda v. Keynote Systems, Inc., et al, Case No. CIV 522675, were filed in the Superior Court of the State of California for San Mateo County. In addition, on July 2, 2013, a suit entitled Ruffner v. Keynote Systems, Inc., et al., Civil Action No. 8699, and, on July 9, 2013, a suit entitled Vladimir v. Keynote Systems, Inc., et al., Civil Action No. 8710, were filed in the Court of Chancery of the State of Delaware. All four of the suits challenge our proposed merger with Thoma Bravo. Each is a putative class action filed on behalf of our stockholders and name as defendants us, our directors, and Thoma Bravo. The suits allege that the individual defendants breached their fiduciary duty by failing to maximize stockholder value in negotiating and approving the merger agreement. Each of the suits also alleges that Thoma Bravo aided and abetted the alleged breaches of fiduciary duties. The suits seek, among other relief, declaratory and injunctive relief enjoining the merger. Due to the preliminary nature of these allegations, we are unable to determine the likelihood of unfavorable outcomes against us and are unable to reasonably estimate a range of loss, if any. An adverse judgment for monetary damages could have an adverse effect on our operations and liquidity. A preliminary injunction could delay or jeopardize the completion of the merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the merger.

The announcement and pendency of the proposed acquisition of us by Thoma Bravo could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, partners and employees, which could have an adverse effect on our business, financial results and operations, regardless of whether the merger is completed. In particular, we could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the proposed transaction. We could also potentially lose customers or suppliers, new customer or supplier contracts could be delayed or decreased and we may have difficulty in hiring new key employees. We also face litigation in connection with the transaction which could cause us to incur increased expenses to defend these claims.  In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the transaction, which could adversely affect our business and results of operations.