ReBoot

I think the only real requirement is that the function must be a weapon or a tool that is directly portable and operable by the user. (i.e. it can't become a vehicle or some other major machine)

Beyond that, it's basically limited by the quick-thinking of the user and it's power supply.

That's what I would say.

Well, it's a tool used for mending and defending. I don't think it can turn into a weapon like Matrix's Gun. Although in season 4, they seemed to have thrown all the rules out the book. If it is a weapon, it's more defensive than offensive.

Starbat - Good Answer.

As Starbat stated, it is most likely limited by its power supply, as seen in the ep. Infected.

I would think it could be used for just about anything, though. Tools, healing, mending. And maybe improvised weapons?

Well actually the key tool has capabilities like a weapon. Such as "Power Beam." I think that the limit of the key tool comes from the individual Guardians ranking in the super computer (sorta like a security clearance requirement to access the armory.) The higher ranking Guardians (from what little of they're key tools they showed) used powers very different from Bob's, it's also possible that Bob just didn't download the offensive applications. Remember that he was a pacifist when it came down to most situations and never liked the idea of deletion.

The power supply is also another good point. The large amounts of energy it would take to focus the key tool into a formidable ranged weapon would drain it fast and would probably be good for only one or two powerful blasts, where as making a bladed weapon (a sword for instance) would be no different than the energy baton that Bob used against Megabyte after he was found out at his wedding to Dot in the previous mini movie.

I'm not sure about the higher ranking guardian criteria. For some reason, Glitch upgraded to version model 2. While Copeland (Turbo's keytool) remained version 1. But that was in season 4 with all that crazy stuff they did.

I like the idea about having to download the apps for the keytool.

I always just saw Glitch turning into that upgraded version after being separated from Bob as being a side effect of being merged with Bob in the first place, maybe something to do with them absorbing energy or something. I didn't see it as an upgrade that all keytools would normally get.