WITNESS SYSTEMS INC
S-1/A, 1999-12-30
PREPACKAGED SOFTWARE
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<PAGE>   1


   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1999


                                                      REGISTRATION NO. 333-91383
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------

                                AMENDMENT NO. 2

                                       TO

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                             ---------------------

                             WITNESS SYSTEMS, INC.
             (Exact name of Registrant as Specified in its Charter)

<TABLE>
<S>                              <C>                              <C>
           DELAWARE                           7372                          23-2518693
(State or other Jurisdiction of   (Primary Standard Industrial           (I.R.S. Employer
Incorporation or Organization)     Classification Code Number)        Identification Number)
</TABLE>

                             ---------------------
                             1105 SANCTUARY PARKWAY
                           ALPHARETTA, GEORGIA 30004
                                 (770) 754-1900

         (Address, including Zip Code, and Telephone Number, Including
            Area Code, of Registrant's Principal Executive Offices)
                             ---------------------
                                 DAVID B. GOULD
          CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
                             WITNESS SYSTEMS, INC.
                             1105 SANCTUARY PARKWAY
                           ALPHARETTA, GEORGIA 30004
                                 (770) 754-1900

           (Name, Address, Including Zip Code, and Telephone Number,
                   Including Area Code, of Agent for Service)
                             ---------------------
                                   COPIES TO:

<TABLE>
<S>                                                          <C>
                 JOHN C. YATES, ESQ.                                          BRYAN E. DAVIS, ESQ.
               JEFFREY L. SCHULTE, ESQ.                                      MARC L. HARRISON, ESQ.
                VIPANJ B. PATEL, ESQ.                                        ASHLEY E. HUFFT, ESQ.
            MORRIS, MANNING & MARTIN, LLP                                      ALSTON & BIRD LLP
            1600 ATLANTA FINANCIAL CENTER                                     ONE ATLANTIC CENTER
               3343 PEACHTREE ROAD, NE                                     1201 WEST PEACHTREE STREET
             ATLANTA, GEORGIA 30326-1044                                  ATLANTA, GEORGIA 30309-3424
</TABLE>


    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:  As soon as
practicable after this registration statement is declared effective.


    If any of the securities being registered on this form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") please check the following box.  [ ]

    If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ]

    If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.  [ ]

    If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.  [ ]

    If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [ ]

    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2

        THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
        WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
        WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS
        PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
        SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
        OR SALE IS NOT PERMITTED.


                 SUBJECT TO COMPLETION, DATED DECEMBER 30, 1999


PROSPECTUS


                                3,800,000 SHARES


                            WITNESS SYSTEMS INC LOGO

                                  COMMON STOCK


     This is an initial public offering of common stock by Witness Systems, Inc.
We are selling 3,800,000 shares of common stock. The estimated initial public
offering price is between $12.00 and $14.00 per share.

                               ------------------

     Prior to this offering, there has been no public market for the common
stock. The shares of common stock have been proposed to be listed for quotation
on the Nasdaq National Market under the symbol WITS.
                               ------------------

<TABLE>
<CAPTION>
                                                              PER SHARE      TOTAL
                                                              ---------      -----
<S>                                                           <C>         <C>
Initial public offering price...............................   $          $
Underwriting discounts and commissions......................   $          $
Proceeds to Witness Systems, before expenses................   $          $
</TABLE>


     Witness Systems and two selling stockholders have granted the underwriters
an option for a period of 30 days to purchase up to 570,000 additional shares of
common stock.


                               ------------------

         INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.

                    SEE "RISK FACTORS" BEGINNING ON PAGE 6.

                               ------------------

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


CHASE H&Q

                  U.S. BANCORP PIPER JAFFRAY
                                                      SOUNDVIEW TECHNOLOGY GROUP

       , 2000
<PAGE>   3
Artwork Depicted in Prospectus

1.  Inside front page gate-fold portrays the following: Title bar at the top of
    page states: "Recording, evaluating & analyzing" underneath which is an
    indented title bar stating "Multimedia Customer Interactions".


     In the center of the page are three concentric circles each with a line of
     text. The text in the center circle states: "eQuality". On the top the
     first layered circle text states: "eQuality Analysis". On the left side of
     the second layered circle text states: "telephone...web chat...e-mail...
     e-commerce." On the right side of the third concentric circle text states:
     "optimizing customer relationships." Three boxes of text extend from the
     left side of the circle diagram. The text in the top box states: "Key
     Customers". The text in the second box states "Marketing Campaigns". The
     text in the third and bottom box states "Specific Products". Below the
     bottom box of text is the stylized Witness Systems logo. Underneath the
     logo are three lines of text stating "WITNESS SYSTEMS INC,"
     "www.witsys.com," and "(c) 1999 Witness Systems Inc." Four triangles extend
     from the right side of the circle diagram. At the end of the first triangle
     text states: "improve customer loyalty. At the end of the second triangle
     text states: "increase revenue opportunities." At the end of the third
     triangle text states: "enhance profitability." At the end of the fourth
     triangle text states "improve quality of services." On the top right corner
     of the page is the stylized Witness logo. Lightly shaded strings of
     numerals are embedded in the background of the page.


<PAGE>   4

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Prospectus Summary..........................................    1
Risk Factors................................................    6
Forward-Looking Statements..................................   20
Use of Proceeds.............................................   20
Dividend Policy.............................................   20
Capitalization..............................................   21
Dilution....................................................   22
Selected Consolidated Financial Data........................   23
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................   25
Business....................................................   38
Management..................................................   53
Related Party Transactions..................................   62
Principal and Selling Stockholders..........................   64
Description of Capital Stock................................   67
Shares Eligible for Future Sale.............................   70
Underwriting................................................   71
Legal Matters...............................................   74
Experts.....................................................   74
Additional Information......................................   74
Index to Consolidated Financial Statements..................  F-1
</TABLE>

<PAGE>   5

                               PROSPECTUS SUMMARY

     The summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all the information you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including "Risk Factors" and the financial statements, before making
an investment decision.

                                WITNESS SYSTEMS


     We provide business-driven multimedia recording and analysis software that
enables companies to enhance their customer interactions. Our eQuality software
is designed to enable companies to optimize their customer relationship
management. As a result, we believe our customers are able to generate
additional revenue opportunities, improve profitability, enhance customer
retention and achieve greater customer intimacy.



     Our eQuality software is designed to enable customer contact centers within
a company to record and evaluate complete customer interactions through multiple
communications media, such as telephone, Web chat and e-mail. By capturing both
voice and computer desktop activity and synchronizing them during replay, a
company can observe and analyze complete customer interactions as they actually
occurred. Our software allows companies to selectively record and analyze
customer interactions based on business criteria which they define, such as key
customers, important marketing campaigns, specific products and selected
customer service representatives.



     Our customers include American Express, Bank of America, Bell Atlantic
Mobile, Capital One, Chase Manhattan Bank, CheckFree, CompUSA, EDS, Federal
Express, Federated Department Stores, General Motors/Saturn, GTE, MCI WorldCom,
Merck-Medco, Pepsi, Sabre, Southern Company, Travelocity.com, VISA, Wells Fargo
and Xerox.


THE MARKET OPPORTUNITY


     The rapid growth of the Internet and eCommerce permits customers to easily
change vendors at relatively low cost, consequently increasing the importance
companies place on their customer relationships. As a result, companies
increasingly are seeking customer relationship management products and services
that enhance their direct customer interactions. AMR Research predicted that the
market for technology related to customer relationship management will grow at a
compound annual rate of 49% from 1998 to 2003, exceeding $16.8 billion by 2003.



     To understand and improve customer relationships, companies must first
improve specific business processes which involve a high degree of direct
customer interaction. Today, many of a company's direct customer interactions
occur through contact centers. The PELORUS Group estimates that by the end of
2003, the number of installed call center systems will exceed 117,000, with the
number of agent positions reaching approximately 5.3 million. As a result, many
companies are focused on developing and improving the efficiency of their
contact center operations.



     While a number of applications have emerged to attempt to address the need
to better manage the increasing complexity of customer interactions conducted
over a variety of media, such as telephone, Web chat and e-mail, we believe that
most currently available solutions do not provide active recording, evaluation
and analysis of customer service representative performance. As a result, we
believe that there is a significant opportunity for a comprehensive, integrated
multimedia solution which optimizes a company's customer interactions.



OUR EQUALITY SOLUTION


     We believe our software provides our customers with the following key
business benefits:


     - Increases revenue opportunities.  Our software enables companies to
       customize sales and marketing efforts to individual customer preferences,
       improve the selling techniques of customer service representatives and
       sell additional complementary or higher-end products and services to
       existing customers.


                                        1
<PAGE>   6


     - Enables improved profitability.  Our software enables companies to
       increase profitability by improving the efficiency of customer service
       representatives and by reducing costs associated with customer service
       representative turnover and customer turnover.


     - Enhances customer retention.  Using our software, companies can develop
       more intimate knowledge of their customers, which should improve the
       overall quality of the products and services being delivered to customers
       and facilitate longer-term, more profitable customer relationships.

     We believe that we are able to provide these key business benefits through
the innovative features of our software solution, which include the following:

     - Enables synchronized replay of voice and computer desktop data.  Our
       software captures both voice and computer desktop activity and enables
       synchronized replay, which allows companies to observe and analyze
       complete customer interactions as they actually occurred.


     - Captures customer interactions across multiple communications media.  Our
       software captures customer interactions from a variety of communications
       media, including telephone, Web chat and e-mail. This multimedia
       capability allows companies to deliver consistent, high quality customer
       service regardless of the communication channel.



     - Records based on company-selected criteria.  Our software allows
       companies to selectively record and analyze customer interactions based
       on business criteria which they define, such as key customers, important
       marketing campaigns, specific products and selected customer service
       representatives.



     - Provides performance analysis and feedback.  Our software facilitates the
       evaluation and analysis of customer service representative performance
       through easy-to-use reports, graphs and tables.



     - Integrates with third party software and hardware.  Our software is
       designed to integrate with a variety of third party software, such as
       customer relationship management and enterprise resource planning
       applications, and with existing telephony and computer network hardware
       and software.



     - Provides an open architecture that scales to support small to large
       installations.  Our software operates on the Windows NT platform and is
       compatible with standard voice cards and databases. It is also designed
       to support the needs of small single site installations, as well as large
       multi-site installations.



     - Enables rapid deployment.  We typically implement our software at a
       customer's initial site within 30 to 45 days from the date the software
       agreement is signed by a new customer. We ordinarily complete the actual
       software installation within three to five days. We can implement
       additional sites for that customer in five to seven days.


OUR STRATEGY


     Our objective is to be the leading provider of software that enables
companies to optimize their customer interactions across a variety of
communications media, including telephone, Web chat, Internet self-service and
e-mail. Key elements of our strategy include:


     - extend the breadth and depth of our product offerings;

     - increase sales to existing and new customers;

     - expand our network of application software and Internet infrastructure
       business alliances; and

     - expand our international presence.

                                        2
<PAGE>   7


     Our headquarters are located at 1105 Sanctuary Parkway, Suite 210,
Alpharetta, Georgia 30004, our telephone number is (770) 754-1900 and our Web
site address is www.witsys.com. We were originally incorporated in Georgia in
1988 and reincorporated in Delaware in 1997. Information contained on our Web
site does not constitute part of this prospectus, and you should rely only on
the information contained in this prospectus in deciding whether to invest in
our common stock. WITNESS(R) and the WITNESS logo are our registered trademarks,
and we have filed applications with the United States Patent and Trademark
Office to register our marks eQuality(TM) and Bringing eQuality to
eBusiness(TM). This prospectus also includes trademarks, service marks and trade
names of other companies. This prospectus refers to market research reports
prepared by various organizations, which typically do not disclose their
underlying limitations or assumptions. You should not rely on these market
reports as being necessarily indicative of future developments.


                                        3
<PAGE>   8

                                  THE OFFERING


<TABLE>
<S>                                                      <C>     <C>
Common stock offered by Witness Systems.................         3,800,000 shares
Common stock to be outstanding after this offering......         21,078,345 shares
Use of proceeds.........................................         For repayment of debt, expansion of
                                                                 sales and marketing capabilities,
                                                                 product development, working capital
                                                                 and potential acquisitions of products,
                                                                 technologies and businesses. See "Use
                                                                 of Proceeds."
Proposed Nasdaq National Market symbol..................         WITS
</TABLE>



     The number of shares to be outstanding after this offering is based on the
number of shares outstanding as of December 29, 1999 and does not include the
following:



     - 2,702,768 shares of common stock issuable under options outstanding as of
       December 29, 1999 with a weighted average exercise price of $2.07 per
       share;



     - 153,000 shares of common stock that could be issued under warrants
       outstanding as of December 29, 1999 with a weighted average exercise
       price of $2.58 per share; and



     - 1,840,135 shares of common stock that could be issued under our amended
       and restated stock incentive plan and 990,000 shares of common stock
       reserved for issuance under our employee stock purchase plan.

                                ---------------

     Except as otherwise indicated, all information in this prospectus:


     - reflects the payment of preferred stock dividends in the form of
       additional shares of our preferred stock and the conversion of each
       outstanding share of our preferred stock into 1.8 shares of our common
       stock, which will occur immediately before the completion of this
       offering;



     - reflects a 1.8 for 1 stock split of the shares of common stock issued and
       outstanding as of December 27, 1999;


     - reflects the amendment and restatement of our certificate of
       incorporation and bylaws, which will occur immediately before the
       completion of this offering;

     - assumes no exercise of the underwriters' over-allotment option; and


     - assumes the initial public offering price of our common stock will be
       $13.00 per share.


                                        4
<PAGE>   9

                      SUMMARY CONSOLIDATED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)


     The following table is a summary of the consolidated financial data for our
business. You should read this information together with the consolidated
financial statements and the related notes appearing at the end of this
prospectus and the information under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds." For an
explanation of the determination of the number of shares used to compute
historical and pro forma basic and diluted net loss per share, see note 1(l) of
the notes to our consolidated financial statements. The pro forma consolidated
balance sheet data summarized below gives effect to the payment of preferred
stock dividends in the form of additional shares of our preferred stock and the
conversion of each outstanding share of our preferred stock into 1.8 shares of
our common stock, which will occur immediately before the completion of this
offering as if the conversion occurred on September 30, 1999. The pro forma as
adjusted consolidated balance sheet data summarized below also reflects the sale
of the common stock offered by us at an assumed initial offering price of $13.00
per share, after deducting underwriting discounts and estimated offering
expenses payable by us, and our receipt and application of the net proceeds from
the offering.



<TABLE>
<CAPTION>
                                                                           NINE MONTHS ENDED
                                             YEAR ENDED DECEMBER 31,         SEPTEMBER 30,
                                           ---------------------------   ---------------------
                                            1996      1997      1998        1998        1999
                                           -------   -------   -------   -----------   -------
                                                                         (UNAUDITED)
<S>                                        <C>       <C>       <C>       <C>           <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
  License...............................   $   764   $ 3,775   $ 8,507     $ 5,595     $10,811
  Services..............................       425     1,138     2,444       1,657       4,079
  Hardware..............................       632     1,271     2,171       1,750          46
                                           -------   -------   -------     -------     -------
          Total revenues................     1,821     6,184    13,122       9,002      14,936
                                           -------   -------   -------     -------     -------
Gross profit............................       249     3,242     7,804       4,926      12,036
Acquired in-process research and
  development...........................        --        --        --          --       3,506
Operating loss..........................    (2,195)   (2,275)   (4,913)     (4,053)     (6,240)
Net loss................................   $(2,191)  $(2,213)  $(4,944)    $(4,079)    $(6,560)
                                           =======   =======   =======     =======     =======
Net loss applicable to common
  stockholders..........................   $(2,191)  $(2,297)  $(5,446)    $(4,156)    $(7,650)
                                           =======   =======   =======     =======     =======
Historical net loss per share -- basic
  and diluted...........................   $ (0.21)  $ (0.32)  $ (0.78)    $ (0.57)    $ (1.18)
                                           =======   =======   =======     =======     =======
Shares used in computing historical net
  loss per share -- basic and diluted...    10,307     7,238     6,964       7,245       6,469
                                           =======   =======   =======     =======     =======
Pro forma net loss per share -- basic
  and diluted...........................                       $ (0.37)                $ (0.43)
                                                               =======                 =======
Shares used in computing pro forma net
  loss per share -- basic and diluted...                        13,399                  15,276
                                                               =======                 =======
</TABLE>



<TABLE>
<CAPTION>
                                                                      SEPTEMBER 30, 1999
                                                              ----------------------------------
                                                                                      PRO FORMA
                                                               ACTUAL    PRO FORMA   AS ADJUSTED
                                                              --------   ---------   -----------
<S>                                                           <C>        <C>         <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...........  $     52    $    52      $41,691
Working capital (deficit)...................................    (2,248)    (2,248)      40,293
Total assets................................................     8,919      8,919       50,558
Long-term debt, less current portion........................     2,210      2,210           --
Stockholders' (deficit) equity..............................   (24,672)    (2,559)      42,192
</TABLE>


                                        5
<PAGE>   10

                                  RISK FACTORS


     You should consider carefully the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could harm our business, financial condition and results of
operations and could result in a complete loss of your investment.


                         RISKS RELATED TO OUR BUSINESS


WE HAVE NOT ACHIEVED PROFITABILITY TO DATE, WE EXPECT LOSSES IN THE FUTURE AND
WE MAY NOT EVER BECOME PROFITABLE



     We have incurred substantial losses since our inception and expect to
continue to suffer losses in the future. In every fiscal period since we began
operations, our business has not experienced sufficient cash flow to fund our
operations without acquiring capital from other sources. As a result of our
accumulated operating losses, as of September 30, 1999, we had an accumulated
deficit of approximately $24.7 million. In addition, we expect to continue to
devote substantial resources to research and development, professional services
and sales and marketing activities. As a result, we will need to generate
significant revenues to achieve and sustain profitability in any future period,
and we may never be able to do so. If we fail to achieve profitability at all or
within the time frame expected by investors, it will materially and adversely
affect the market price of our stock.


OUR QUARTERLY REVENUES, EXPENSES AND OPERATING RESULTS ARE LIKELY TO FLUCTUATE,
WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE


     Our quarterly revenues, expenses and operating results could vary
significantly from period to period. In particular, we derive a significant
portion of our software license revenue in each quarter from a small number of
relatively large orders. A delay in the recognition of revenues from one of
these orders may cause our results of operations during a quarter to be lower
than we expect. The delay or failure to close anticipated sales in a particular
quarter could reduce our revenues in that quarter and subsequent quarters over
which revenues for the sale would likely be recognized. In addition, because our
revenues from implementation, maintenance and training services largely
correlates with our license revenues, a decline in license revenues could also
cause a decline in our services revenues in the same quarter or in subsequent
quarters. Our revenues, expenses and operating results may vary significantly in
response to the risk factors described in this section, as well as the following
factors, some of which are beyond our control:


     - a decrease in demand for our software or, more generally, for products
       that record and analyze the interactions between a business and its
       customers;

     - announcements or introductions of new products and services by our
       competitors;

     - product pricing decisions by our competitors;

     - our ability to develop, market and manage new software, software
       enhancements and services;

     - the deferral of orders for our software or delays in the implementation
       of our software from one quarter to a later quarter;

     - how quickly we are able to develop new software, software enhancements
       and services that our customers require;

     - how much money we have to spend to improve our software, services and
       operations;

     - customer delays in purchasing our software or services in late 1999 and
       early 2000 due to Year 2000 concerns;

     - the lengthiness and unpredictability of sales cycles for our software;

     - the mix of revenue generated by software licenses and related services;

     - the timing and size of our capital expenditures and changes in our
       working capital; and

                                        6
<PAGE>   11

     - general economic factors and changes in technology that could cause our
       existing and potential customers to decrease what they spend on customer
       relationship management software.


     Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results may not be a good indication of our future
performance, and you should not rely on them to predict our future performance
or the future performance of our stock price. Historically, our revenue growth
has fluctuated from as low as 1% to as high as 56% from one quarter to the next.
If our future revenues or operating results fall below the expectations of
investors or securities analysts, the price of our common stock would likely
decline.



SEASONAL TRENDS IN SALES OF BUSINESS SOFTWARE OR CUSTOMER INTERACTION LEVELS MAY
AFFECT OUR QUARTERLY REVENUES



     The market for business software has experienced seasonal fluctuations in
demand. The first and third quarters of the year have been typically
characterized by lower levels of revenues. We believe that these fluctuations
are caused in part by customer buying patterns, which are influenced by year-end
budgetary pressures and by sales force commission structures. Customer
interaction centers typically experience much higher volumes of customer contact
during and immediately following the year-end holiday season. As a result, many
customers may elect to defer installation of our software during this time. This
has caused us to experience, and we expect to continue to experience, seasonal
fluctuations in our revenues. As our revenues grow, seasonal fluctuations in our
revenues may become more evident.


WE FACE INTENSE COMPETITION THAT COULD ADVERSELY AFFECT OUR REVENUES,
PROFITABILITY AND MARKET SHARE

     The market for products that record and analyze customer interactions is
intensely competitive and experiences rapid changes in technology. We believe
our principal competitors include, but are not limited to:

     - quality monitoring suppliers to the contact center industry;

     - traditional call-logging vendors;

     - systems integrators and consulting firms; and

     - new, larger and more established entities that may acquire, invest in or
       form joint ventures with providers of recording or performance enhancing
       software solutions.

     Many of our current and potential competitors have longer operating
histories, more established business relationships, larger customer bases, a
broader range of products and services, greater name recognition and
substantially greater financial, technical, marketing, personnel, management,
service, support and other resources than we do. This could allow our current
and potential competitors to respond more quickly than we can to new or emerging
technologies and changes in customer requirements, better take advantage of
acquisitions and other opportunities, devote greater resources to the marketing
and sale of their products and services and adopt more aggressive pricing
policies. In addition, many of our competitors market their products through
resellers and companies that integrate their technology and products with those
of the competitor. These resellers and technology partners of our competitors
often have strong business relationships with our customers and potential
customers. Our competitors may use these business relationships to market and
sell their products and compete for customers with us. We cannot assure you that
our competitors will not offer or develop products and services that are
superior to ours.

                                        7
<PAGE>   12


     In addition, we have developed, and intend to continue to develop,
relationships with companies that resell our software and companies that provide
us with customer referrals or leads. Revenues from our resellers accounted for
less than 10% of our total revenues for the nine months ended September 30,
1999. We expect revenues from our resellers, and accordingly our dependence on
resellers, to increase as we establish more relationships with companies to
resell our software worldwide. We engage in joint marketing and sales efforts
with our resellers, and rely on them for recommendations of our software during
the evaluation stage of the purchase process. When we enter into agreements with
these companies, the agreements are not exclusive and may ordinarily be
terminated by either party. Some of these companies have similar, and often more
established, relationships with our competitors, and may recommend the products
and services of our competitors to customers instead of our software and
services. In addition, through their relationships with us, these companies
could learn about our software and the market for our software and services and
could develop and sell competing products and services. As a result, our
relationships with these companies could lead to increased competition for us.


     Our software must integrate with software and hardware solutions provided
by a number of our existing and potential competitors. These competitors or
their business partners could alter their products so that our software no
longer integrates well with them, or they could delay or deny our access to
software releases that allow us to timely adapt our software to integrate with
their products. They could thus effectively prevent us from modifying our
software to keep pace with the changing technology of their products. If we
cannot adapt our software to changes in our competitors' technology, it may
significantly impair our ability to compete effectively, particularly if our
software must integrate with the software and hardware solutions of our
competitors.

     We expect that competition will increase as other established and emerging
companies enter our market and as new products, services and technologies are
introduced. Increased competition may result in price reductions, lower gross
margins and loss of our market share. This could materially and adversely affect
our business, financial condition and results of operations.

OUR SOFTWARE HAS A LONG SALES CYCLE WHICH MAKES IT DIFFICULT TO PLAN OUR
EXPENSES AND FORECAST OUR RESULTS

     Although it typically takes three to six months from the time we qualify a
sales lead until we sign a contract with the customer, we occasionally
experience a longer sales cycle. It is therefore difficult to predict the
quarter in which a particular sale will occur. If our sales cycle unexpectedly
lengthens for one or more large orders or a significant number of small orders,
it would adversely affect the timing of our revenues and the timing of our
corresponding expenditures. This could harm our ability to meet our financial
forecasts for a given quarter. Our customers' decisions regarding their purchase
of our software and services is relatively long due to several factors,
including:

     - the complex nature of our software;

     - our need to educate potential customers about the uses and benefits of
       our software;

     - the investment of money and other resources required by customers to
       purchase and implement our software;

     - customers' budget cycles and operating activities, which affect the
       timing of their purchases;

     - the competitive evaluation and internal approval process many of our
       customers undertake before purchasing our software and services;

     - delayed purchases due to announcements or planned introductions of new
       software or software enhancements by us or our competitors; and

     - the length of time some of our larger customers require to make a
       decision to purchase our software and services.
                                        8
<PAGE>   13

IF WE FAIL TO DEVELOP NEW SOFTWARE OR IMPROVE OUR EXISTING SOFTWARE TO MEET OR
ADAPT TO THE CHANGING NEEDS AND STANDARDS OF OUR TARGET MARKET, SALES OF OUR
SOFTWARE AND SERVICES MAY DECLINE

     Our future success depends upon our ability to develop and introduce new
software and software enhancements which meet the needs of companies seeking to
record and analyze their interactions with customers. To achieve increased
market acceptance of our software and services, we must, among other things,
continue to:

     - improve our existing software and introduce new software solutions;

     - incorporate new technology into our software and services on a timely and
       cost-effective basis;

     - keep pace with the products and services of our competitors;

     - satisfy the changing requirements of our current and potential customers;

     - improve the effectiveness of our software, particularly in
       implementations involving very large databases and large numbers of
       simultaneous users;

     - enhance our software's ease of administration;

     - improve our software's ability to extract data from existing software
       systems; and

     - adapt to rapidly changing computer operating system, database and
       software platform standards and Internet technology.


     We may require substantial product development expenditures and lead-time
to keep pace and ensure compatibility with new technology in our industry. If we
fail to develop and introduce new software and enhancements for our existing
software, our software and services may not achieve market acceptance and we may
be unable to attract new customers. We may also lose existing customers, to whom
we seek to sell additional software and services. Also, we have only recently
released our eQuality Analysis and eQuality Interactive software that permit
recording and analysis of Web chat interactions. To date, we have not received
any revenues from eQuality Analysis or eQuality Interactive software and cannot
assure you that we will derive revenues from these products in the future.
Moreover, we cannot be certain how the emergence of the Internet will impact our
business. It may lead to a change in the way call and contact centers operate,
which may ultimately reduce the demand for our software. If this happens it
would materially and adversely affect our business, financial condition and
results of operations.


     We believe that our future success also depends upon the continued ability
of our software to work with the products and other technologies offered by
other software and hardware companies. New products may not be compatible with
our software, but may be compatible with the products of our competitors. In
addition, industry standards may not be established, or we may not be able to
conform to new standards in a timely fashion to remain competitive. Our failure
to conform to prevailing technology standards in our industry could limit our
ability to compete and adversely affect our business.

                                        9
<PAGE>   14

IF THE MARKET IN WHICH WE SELL OUR SOFTWARE AND SERVICES DOES NOT GROW AS WE
ANTICIPATE, WE WILL BE UNABLE TO CONTINUE OUR GROWTH


     The market for customer relationship management software, including
software that records and analyzes customer interactions, is still emerging. If
the market for this software does not grow as quickly or become as large as we
anticipate, we may not be able to continue our growth or may grow more slowly
than expected. Continued growth in demand for this software remains uncertain
because our potential customers may:



     - not understand the benefits of using customer relationship management
       software generally or, more specifically, software which records and
       analyzes the interactions between a business and its customers;


     - not achieve favorable results using this software;

     - experience technical difficulty in implementing this software; or

     - use alternative methods to solve the same business problems this software
       is intended to address.

     In addition, our software is designed to address the needs of contact
centers. If the number of contact centers does not increase as we expect, or if
it grows more slowly than we anticipate, we may not be able to continue our
growth or may grow more slowly than expected.


WE RELY HEAVILY ON SALES OF OUR EQUALITY CALL AND EQUALITY EVALUATION SOFTWARE



     Our financial performance has depended, and will continue to depend, on our
ability to develop and maintain market acceptance of our eQuality Call software
and new and enhanced versions of it. Historically, all of our license revenues
have been derived from the sale of our eQuality Call and eQuality Evaluation
software, and we expect revenues from these two products to continue to account
for substantially all of our revenues for the foreseeable future. To date, we
have not recognized revenue from our recently introduced eQuality Analysis and
eQuality Interactive software. As a result, factors which adversely affect the
pricing or demand for our eQuality Call and eQuality Evaluation software, such
as competitive pressures, technological change or evolution in customer
preferences, could materially and adversely affect our business, financial
condition and results of operations. Many of these factors are beyond our
control and difficult to predict.



IF OUR INTERNAL PROFESSIONAL SERVICES EMPLOYEES DO NOT PROVIDE INSTALLATION
SERVICES EFFECTIVELY AND ACCORDING TO SCHEDULE, OUR CUSTOMERS MAY NOT USE OUR
IMPLEMENTATION SERVICES OR MAY STOP USING OUR SOFTWARE



     Customers that license our products ordinarily purchase installation,
training and maintenance services, which they typically obtain from our internal
professional services organization. Because our software must be installed to
work with a number of computer and telephone network systems, installation of
our software can be difficult. These systems vary greatly from one customer site
to another, and the versions and integration requirements of these third party
systems change frequently. We believe that the speed and quality of installation
services are competitive factors in our industry. If our installation services
are not satisfactory to our customers, the customers may choose to not use our
implementation services to install software they license from us. In addition,
these customers may determine that they will not license our software and
instead will use the products and services of one of our competitors. If this
happens, we would lose licensing and services revenues from these customers, and
it would likely harm our reputation in the industry in which we compete. This
could materially and adversely affect our business, financial condition and
results of operations.


                                       10
<PAGE>   15

IF WE NEED ADDITIONAL FINANCING TO MAINTAIN OR EXPAND OUR BUSINESS, IT MAY NOT
BE AVAILABLE ON FAVORABLE TERMS, OR AT ALL

     Although we believe that the net proceeds from this offering, together with
our current cash and borrowing capacity, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months, we expect to incur net losses for the foreseeable future and
may need additional funds to expand or meet all of our operating needs. If we
need additional financing, we cannot be certain that it will be available to us
on favorable terms, or at all. Further, if we raise additional funds by issuing
equity securities, your ownership interest could be significantly diluted, and
any additional equity securities we issue may have rights, preferences or
privileges senior to your rights. Also, the terms of any additional financing we
obtain may significantly limit our future financing and operating activities. If
we need funds and cannot raise them on acceptable terms, we may be forced to
sell assets or seek to refinance our outstanding obligations. We may also be
unable to:

     - develop and enhance our software to remain competitive;

     - take advantage of future opportunities, such as acquisitions; or

     - respond to changing customer needs and our competitors' innovations.

     Any of these events could significantly harm our business and financial
condition and limit our growth.


IF WE DO NOT CONTINUE TO EXPAND THE DISTRIBUTION OF OUR PRODUCTS THROUGH DIRECT
AND INDIRECT SALES CHANNELS, WE MAY BE UNABLE TO EXPAND OUR MARKET SHARE OR
INCREASE OUR REVENUES



     To expand our market share and revenues, attract new customers and increase
sales to existing customers, we will need to expand our direct and indirect
channels of distribution. Although we have historically received more that 90%
of our revenues from direct sales, we will require an increase in our direct
sales to achieve our growth plans. To accomplish this, we will need to expand
our direct sales force by hiring additional sales personnel and management, and
increase the number of relationships we have with companies that provide us with
customer referrals or leads for new business. Historically, it has taken us up
to six months to train new sales personnel before they reach an acceptable level
of productivity. We have also experienced difficulty in finding new sales
personnel with experience in computer and telephone integration technologies. We
cannot assure you that we will be able to continue to find an adequate number of
new sales personnel meeting our specific needs. If the personnel we hire are
less qualified, it may take us more time to train them and they may take a
longer time to reach an acceptable level of productivity. We cannot assure you
that we will be able to hire the necessary sales personnel and management on
reasonable terms, or at all. Moreover, we will be required to train any new
personnel, and the new personnel may not reach full productivity for a long
period of time.


     We also intend to derive revenues from our indirect sales channel through
relationships with companies that resell our software. In particular, we intend
to use resellers to increase our sales internationally and to market our
software to small and medium contact centers.


     To date, we have entered into agreements with only a small number of
companies that resell our software and companies that provide us with customer
referrals. For the nine months ended September 30, 1999, less than 10% of our
revenues were generated through these resellers. When we enter into agreements
with these companies, they are not exclusive and may ordinarily be terminated by
either party. Some of these companies have similar, and often more established,
relationships with our competitors, and may recommend the products and services
of our competitors to customers instead of our software and services.
Maintaining reseller relationships in today's rapidly evolving marketplace has
proven to be difficult. For example, during the nine months ended September 30,
1998, we incurred a $900,000 charge to terminate a distributor agreement that we
believed had become counterproductive. We cannot assure you that we will be

                                       11
<PAGE>   16


able to maintain productive relationships or that we will be able to establish
similar relationships with additional companies on a timely basis, or at all. In
addition, we cannot be certain that these distribution partners will devote
adequate resources to selling our software and services. If we are unable to
maintain and expand our direct sales force and indirect distribution channels,
we will not be able to increase our revenues and our business will suffer.



OUR FAILURE TO PROPERLY MANAGE OUR RAPID GROWTH COULD STRAIN OUR RESOURCES AND
MAKE IT DIFFICULT TO SUPPORT OUR FUTURE OPERATIONS



     Our business could suffer if we fail to effectively manage our growth. Our
revenues increased approximately 66% in the nine month period ended September
30, 1999 from the same period the previous year. From September 30, 1998 to
September 30, 1999, the number of our employees increased from 96 to 159. This
growth in our revenues and number of employees has placed, and will continue to
place, a significant strain on our management, personnel, systems, controls and
other resources. If we are unable to effectively manage our growth, it may be
difficult to support our future operations. To manage growth effectively, we
must:


     - accurately predict the growth in demand for our software and expand our
       capacity and implementation services to meet that demand;

     - expand and improve our operating and financial systems, procedures and
       controls;

     - attract, train, motivate, manage and retain key personnel;

     - expand our facilities;

     - successfully integrate the operations and personnel of any businesses we
       acquire; and

     - respond quickly and effectively to unanticipated changes in our industry.


IF WE FAIL TO EXPAND AND MANAGE OUR INTERNATIONAL OPERATIONS, WE MAY BE UNABLE
TO REACH OR MAINTAIN OUR DESIRED LEVELS OF REVENUE OR PROFITABILITY



     Revenues from customers located outside of North America accounted for less
than 5% of our total revenues for the nine months ended September 30, 1999. Our
current goal is to increase our international revenues to approximately 20% of
our total revenues by the end of 2002. In order to achieve this, we intend to
continue to expand our international operations through internal business
expansion and strategic business relationships. Our operations outside of North
America currently consist of fewer than ten dedicated employees located in the
United Kingdom. Most of our international revenues to date have come from
international branches of our customers based in North America. We have
established relationships with a small number of international resellers, but to
date we have not recognized a material amount of revenues from these
relationships. In addition to general risks associated with international
expansion, such as foreign currency fluctuations and political and economic
instability, our plans to expand internationally may be adversely affected by a
number of risks, including:


     - limited development of an international market for our software and
       services;

     - the challenges we face in expanding and training our international sales
       force and support operations;

     - expenses associated with customizing products for multiple countries;

     - longer payment cycles, different accounting procedures and difficulties
       in collecting accounts receivable; and

     - multiple, conflicting and changing governmental laws and regulations
       governing intellectual property, call monitoring and the recording of
       employees.

                                       12
<PAGE>   17


     As we further expand our operations outside the United States, we will face
new competitors and competitive environments. In addition to the risks
associated with our domestic competitors, foreign competitors may pose an even
greater risk, as they may possess a better understanding of their local markets
and better working relationships with local infrastructure providers and others.
In particular, because telephone protocols and standards are unique to each
country, local competitors will have more experience with, and may have a
competitive advantage in, these markets. We may not be able to obtain similar
levels of local knowledge or similar relationships in foreign markets, which
could place us at a significant competitive disadvantage.



OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY LEAD TO THIRD PARTIES USING
OUR TECHNOLOGY FOR THEIR OWN BENEFIT AND OUR FAILURE TO ACCESS THIRD PARTY
TECHNOLOGY COULD DELAY THE DEVELOPMENT OR SALE OF OUR SOFTWARE


     Our success depends to a significant degree upon the legal protection of
our software and other proprietary technology rights. We rely on a combination
of patent, trade secret, copyright and trademark laws and confidentiality and
non-disclosure agreements with employees and third parties to establish and
protect our proprietary rights. These measures may not be sufficient to protect
our proprietary rights, and we cannot be certain that third parties will not
misappropriate our technology and use it for their own benefit. Also, most of
these protections do not preclude our competitors from independently developing
products with functionality or features substantially equivalent or superior to
our software. Any failure to protect our intellectual property could have a
material adverse effect on our business.

     We currently have three registered trademarks, one patent generally
relating to our voice and data synchronization technology and data capture
technique and seven pending copyright registrations protecting our software
source code. We cannot assure you that we will file further patent, trademark or
copyright applications, that any future applications will be approved, that any
existing or future patents, trademarks or copyrights will adequately protect our
intellectual property or that any existing or future patents, trademarks or
copyrights will not be challenged by third parties. Furthermore, one or more of
our existing or future patents, trademarks or copyrights may be found to be
invalid or unenforceable. We are currently evaluating whether to revise one
aspect of the patent for our synchronization techniques. If we are unsuccessful,
we may not be able to enforce any aspect of that patent against third parties
who infringe it. We also have two patent applications pending in the United
States Patent and Trademark Office. There is no guarantee that our pending
applications will result in issued patents or, if issued, that they will provide
us with any competitive advantages.

     Moreover, the laws of other countries in which we market our products may
afford little or no effective protection of our proprietary technology. If we
resort to litigation to enforce our intellectual property rights, the
proceedings could be burdensome and expensive, would likely divert valuable
management and product development resources and could involve a high degree of
risk, regardless of whether we win or lose the litigation.

     We rely on technology licensed from third parties, including databases,
application programming interfaces, developmental tools and software necessary
to integrate our software with third party technology and products. In addition,
third party products are bundled with our software. If we lose access to this
technology, or if it is not available to us on reasonable terms, it could cause
delays in our development and introduction of new and enhanced software until we
can obtain equivalent or replacement technology, if available, or develop this
technology internally, if feasible. If we lost access to technology that is
bundled with our software, this would require us to modify or redesign our
software and could cause a delay in our ability to market and sell our current
software, or a delay in our ability to develop, market and sell new or enhanced
software. This delay or a failure to obtain replacement technology could have a
material adverse effect on our business, financial condition and results of
operations.

                                       13
<PAGE>   18


CLAIMS BY OTHER COMPANIES THAT OUR SOFTWARE INFRINGES THEIR INTELLECTUAL
PROPERTY COULD REQUIRE US TO INCUR SUBSTANTIAL EXPENSES OR PREVENT US FROM
SELLING OUR SOFTWARE OR SERVICES


     If any of our software violates the intellectual property rights of others,
we may be required to reengineer or redevelop our software, seek to obtain
licenses from third parties to continue offering our software without
substantial reengineering, or conduct studies of such intellectual property
rights so as to evaluate whether such intellectual property rights are valid or
enforceable. Any efforts to reengineer our software or obtain licenses from
third parties may not be successful, could be extremely costly and would likely
divert valuable management and product development resources. Any efforts to
study the intellectual property rights of third parties may not be successful
and could reveal that such intellectual property rights are valid and
enforceable, could be extremely costly and would likely divert valuable
management and product development resources.


     In addition, in the rapidly developing technological environment in which
we operate, third parties may have filed a number of patent applications, many
of which are confidential when filed. If our software is found to violate these
patents when they are issued or any other intellectual property of others, we
may become subject to claims for infringement. An infringement claim against us
could result in the loss of our proprietary rights and, whether meritorious or
not, could be time-consuming, result in costly litigation or require us to pay
damages or enter into royalty or licensing agreements on terms that are
unfavorable to us. Royalty or licensing agreements might not be available to us
on reasonable terms or at all. In addition, our customers may become subject to
claims if the software they license from us infringes the intellectual property
of others. Our license agreements with our customers generally provide that we
will indemnify the customers for liability they incur as a result of these
infringement claims. As a result, any infringement claim could materially and
adversely affect our business, financial condition and results of operations.


     Approximately two years ago, we were accused of infringing a patent owned
by a third party. We undertook to study the matter, concluded that the asserted
patent was not infringed, and informed the third party of our belief that the
patent was not infringed. Following an exchange of correspondence between
September 1996 and January 1998, nothing further was heard from the patent
owner.


     Although we have not exchanged correspondence with this third party since
January 1998, we cannot assure you that a renewed claim of infringement by this
third party, either in connection with the patent referred to above or another
patent or other intellectual property, or a claim of infringement by a different
patent or other intellectual property owner, will not be asserted against us in
the future. Furthermore, we expect that we and other participants in our
industry and related industries will be increasingly subject to infringement
claims as the number of competitors with patent and other intellectual property
portfolios in these industries grows. Although patent and intellectual property
disputes may be settled through licensing or similar arrangements, costs
associated with these arrangements may be substantial and we cannot assure you
that necessary licenses or similar arrangements will be made available to us on
a reasonable basis or at all. Consequently, if we become subject to an adverse
determination in a judicial or administrative proceeding or we fail to obtain
necessary licenses it could prevent us from producing and selling our software.
This would have a material adverse effect on our business, financial condition
and results of operations.


     In addition, if we decide to, or are forced to, litigate any of these
claims, the litigation could be expensive and time-consuming, could divert our
management's attention from other matters, and could otherwise materially and
adversely affect our business, financial condition and results of operations,
regardless of the outcome of the litigation. Litigation and intellectual
property claims against us could also disrupt our sale of software.
Additionally, it could lead to claims by third parties against our customers and
others using our software. Our customers and these other users of our software
would likely hold us responsible for these claims and any resulting harm they
suffer.

                                       14
<PAGE>   19


GOVERNMENT REGULATION OF TELEPHONE AND INTERNET MONITORING COULD CAUSE A DECLINE
IN THE USE OF OUR SOFTWARE, RESULT IN INCREASED EXPENSES FOR US OR SUBJECT US
AND OUR CUSTOMERS TO LIABILITY



     As the telecommunications industry continues to evolve, state, federal and
foreign governments may increasingly regulate the monitoring of
telecommunications and telephone and Internet monitoring and recording products,
such as our software. We believe that increases in regulation could come in the
form of a number of different kinds of laws, including privacy and employment
regulations. The adoption of new laws governing the use of our software or
changes made to existing laws could cause a decline in the use of our software
and could result in increased expenses for us, particularly if we are required
to modify our software to accommodate these new or changing laws. Moreover, new
laws or changes to existing laws could subject us and our customers to
liability. In addition, whether or not these laws are adopted, if we do not
adequately address the privacy concerns of consumers, companies may be hesitant
to use our software. If any of these events occur, it could materially and
adversely affect our business.


OUR PRODUCTS MAY FAIL TO PERFORM PROPERLY, WHICH MAY CAUSE US TO INCUR
ADDITIONAL EXPENSES OR LOSE SALES


     Our software is used in a complex operating environment that requires its
integration with computer and telephone networks and other business software
applications. Furthermore, the hardware, software and network systems generally
used in conjunction with our software, particularly telephone standards and
protocols, change rapidly. The evolution of these standards may cause our
products to function slowly or improperly. Poor product performance may
necessitate redevelopment of our product or other costly reengineering measures
which may divert our management and product development resources and funds. Due
to the large number of, and variations in, computer and telephone network
systems and applications, as well as the rapid changes in these products, our
testing process may be unable to duplicate all possible environments in which
our software is expected to perform. Any errors or defects that are discovered
after we release new or enhanced software could cause us to lose revenue, cause
a delay in the market acceptance of our software, damage our customer
relationships and reputation and increase our service and warranty costs.



IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO
EFFECTIVELY MANAGE AND EXPAND OUR BUSINESS



     Our future success will depend in large part on our ability to hire, train,
retain and motivate a sufficient number of qualified personnel, particularly in
sales, marketing, research and development, service and support. In particular,
competition for research and development personnel with computer and telephone
integration skills is intense, and turnover of technical personnel is
particularly high in our industry. If we are unable to attract and retain
qualified personnel or if we experience high personnel turnover, it would
increase our costs of operations and could prevent us from effectively managing
and expanding our business.


     Our future success also depends upon the continued service of our executive
officers, particularly our Chairman, President and Chief Executive Officer,
David Gould. We have an employment agreement with Mr. Gould and non-compete
agreements with all of our executive officers. However, any of our executive
officers and other employees could terminate his or her relationship with us at
any time. The loss of the services of our executive officers or other key
personnel could materially and adversely affect our business. In addition, if
one or more of our executive officers or key employees were to join one of our
competitors or otherwise compete with us, it could harm our business.

                                       15
<PAGE>   20

WE MAY MAKE ACQUISITIONS OR INVESTMENTS THAT ARE NOT SUCCESSFUL AND THAT
ADVERSELY AFFECT OUR ONGOING OPERATIONS


     We may acquire or make investments in companies, products, services and
technologies which complement our software and services. Because of the
proliferation of new customer interaction mediums such as the Internet and
e-mail, we believe that it may be important for us to acquire complementary
technology to quickly bring new products to market. We have very limited
experience in making acquisitions and investments. As a result, our ability to
identify prospects, conduct acquisitions and to properly manage the integration
of acquisitions is unproven. If we fail to properly evaluate and execute
acquisitions or investments, it may seriously harm our business and operating
results. In making or attempting to make acquisitions or investments, we face a
number of risks, including:


     - the difficulty of identifying and hiring one or more senior executives
       with acquisition experience;

     - the difficulty of identifying suitable acquisition or investment
       candidates and negotiating acceptable terms for acquisitions and
       investments;


     - the potential distraction of our management, diversion of our resources
       and disruption of our business;



     - our retention and motivation of key employees of the acquired companies;


     - our entry into geographic markets in which we have little or no prior
       experience;

     - competition for acquisition opportunities with competitors that are
       larger than us or have greater financial and other resources than we
       have;

     - our inability to accurately forecast the financial impact of an
       acquisition or investment; and

     - our inability to maintain good relations with the customers and suppliers
       of the acquired company.

     In addition, if we make acquisitions using convertible debt or equity
securities, our existing stockholders may be diluted, which could cause the
market price of our stock to decline.

YEAR 2000 ISSUES MAY DISRUPT OUR OPERATIONS, SUBJECT US TO LIABILITIES AND COSTS
AND AFFECT THE TIMING OF OUR REVENUES

     The Year 2000 computer problem refers to the potential for system and
processing failures of date related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This
problem could result in miscalculations, data corruption, system failures or
disruptions of operations. We are subject to potential Year 2000 problems
affecting the systems and technology on which we depend, including:

     - the internal systems, software and other technology we use in our
       business;

     - the products and other technology produced by others which is integrated
       with our software;

     - the systems of our customers and our vendors; and

     - other technology and products employed by our customers which is used in
       connection with our software.

     Furthermore, we cannot assure you that our software will be Year 2000
compliant. Moreover, because our software is used in connection with other
products, Year 2000 problems affecting these products could cause our software
to fail. If Year 2000 problems cause the failure of any of the technology,
software or systems described above, we could lose customers, suffer significant
                                       16
<PAGE>   21

disruptions in our business, lose revenues and incur substantial liabilities and
expenses. We could also become involved in costly litigation resulting from Year
2000 problems. This could materially and adversely affect our business,
financial condition and results of operations.

     This year, a significant number of companies, including some of our current
customers, are devoting a substantial amount of their information technology
resources to testing systems for Year 2000 compliance and fixing existing Year
2000 problems. As a result, many of our existing and potential customers may
delay the purchase and installation of our software. Consequently, we may have
lower than expected licensing and services revenues during 2000.

                         RISKS RELATED TO THIS OFFERING

THIS IS OUR INITIAL PUBLIC OFFERING, AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING OR THAT AN ACTIVE PUBLIC MARKET FOR
OUR SHARES WILL DEVELOP

     Before this offering, you could not buy or sell our common stock publicly.
If you purchase shares of our common stock in this offering, you will pay a
price that was not established in a competitive market. Rather, you will pay a
price negotiated between us and representatives of the underwriters, which may
not indicate future market price. The price of our common stock that will
prevail in the market after this offering may be lower than the price you pay.
As a result, you may not be able to sell your stock for a price equal to or
greater than the initial offering price. In addition, as this is our initial
public offering, the number of shares available for public sale will be
relatively small, and we cannot predict how liquid the market for our shares
will be. An active public market for our common stock may not develop or be
sustained after the offering.

THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING MAY BE VOLATILE, AND YOU MAY
EXPERIENCE INVESTMENT LOSSES

     The market price of our common stock may fluctuate significantly in
response to the following and other factors, some of which are beyond our
control:

     - variations in our quarterly operating results;

     - announcements of significant contracts, technological innovations or new
       products or services by us or our competitors;

     - changes in financial estimates by securities analysts;

     - the operating and stock price performance of other companies in our
       industry; and

     - fluctuations in stock market price and volume, which are particularly
       common among securities of software and other technology companies.

     Further, the stock markets, and in particular the Nasdaq National Market on
which we intend to list our common stock, have experienced extreme price and
volume fluctuations that have affected the market prices of equity securities of
many technology companies. These fluctuations often have been unrelated or
disproportionate to the operating performance of the companies. Because our
business is technology related, the price of our common stock could fluctuate
widely if the market price of equity securities of other technology companies
becomes volatile. In the past, following periods of downward volatility in the
market price of a company's securities, class action litigation has often been
brought against that company. If such an action is brought against us, it would
be expensive and would divert our management's attention and our other
resources.

                                       17
<PAGE>   22

OUR MANAGEMENT AND AFFILIATES CONTROL A LARGE PERCENTAGE OF OUR VOTING STOCK AND
COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER APPROVAL
AFTER THIS OFFERING

     After this offering, our executive officers and directors and members of
their families will together control approximately      % of our outstanding
common stock. As a result, these stockholders, if they act together, will be
able to control all matters requiring stockholder approval, including the
election of our directors and the approval of significant corporate transactions
involving us. This control may have the effect of delaying, preventing or
deterring a change in control of Witness Systems and could deprive our
stockholders of an opportunity to receive a premium for their common stock as
part of any sale or acquisition.

FUTURE SALES OF COMMON STOCK AND THE RIGHTS OF SOME OF OUR STOCKHOLDERS TO
REGISTER SALES OF THEIR STOCK COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
STOCK


     Sales of a substantial number of shares of our common stock after this
offering, or the perception by the market that those sales could occur, could
cause the market price of our common stock to decline or could make it more
difficult for us to raise funds through the sale of equity in the future. The
shares of common stock being sold in this offering will generally be freely
tradable without restriction. The remaining 17,278,345 shares of common stock
outstanding will be restricted securities as defined in Rule 144 under the
Securities Act. Except as described in the next paragraph, the holders of these
shares of common stock may sell them in the future without registration under
the Securities Act if they comply with Rule 144, Rule 701 or any other
applicable exemption under the Securities Act.



     We, our directors and executive officers and some of our stockholders have
agreed with the underwriters not to sell any common stock or securities
convertible into or exchangeable for common stock for 180 days after the date of
this prospectus, subject to some exceptions. When these lock-up agreements
expire,                shares of common stock will be eligible for resale in the
future without registration under the Securities Act if the holders of the
common stock comply with Rule 144, Rule 701 or any other applicable exemption
under the Securities Act. Hambrecht & Quist LLC or its successor may agree to
release any or all of the shares of common stock from these lock-up agreements
at any time.



     Some of our existing stockholders have the right to require us to register
under the Securities Act up to 15,448,251 shares of their common stock at any
time. Of these shares,                are subject to the lock-up agreements
described above. Once we register these shares, they can be freely sold in the
public market, subject to these lock-up agreements.



     Immediately after this offering, we intend to register under the Securities
Act approximately 5,532,903 shares of our common stock issuable upon the
exercise of stock options or reserved for issuance under our amended and
restated stock incentive plan and our employee stock purchase plan. After that
registration, approximately                shares will be issuable and freely
tradable upon the exercise of vested options. Of the                shares
issuable upon the exercise of stock options,                are subject to the
lock-up agreements described above. Once we register these shares, they can be
freely sold in the public market upon issuance, subject to those lock-up
agreements. You should read "Shares Eligible for Future Sale" for a more
detailed description of these risks.



OUR CERTIFICATE OF INCORPORATION AND BYLAWS, AS WELL AS DELAWARE LAW, MAY
PREVENT OR DELAY A FUTURE TAKEOVER


     Our amended and restated certificate of incorporation and bylaws contain
provisions which could make it harder for a third party to acquire us without
consent of our board of directors. For example, if a potential acquiror were to
make a hostile bid for us, the acquiror would not be able to call a special
meeting of stockholders to remove our board of directors or act by written
consent without a meeting. In addition our board of directors has staggered
terms which makes it difficult to

                                       18
<PAGE>   23

remove all our directors at once. The acquiror would also be required to provide
advance notice of its proposal to remove directors at an annual meeting.

     Our board of directors has the ability to issue preferred stock which would
significantly dilute the ownership of a hostile acquiror. In addition, Delaware
law limits business combination transactions with 15% stockholders that have not
been approved by the board of directors. These provisions and other similar
provisions make it more difficult for a third party to acquire us without
negotiation.

     As a result of these provisions, our board of directors could choose not to
negotiate with an acquiror if it does not believe an acquisition is in our
strategic interests. These provisions may apply even if the acquiror's offer is
considered beneficial to our stockholders. Moreover, if the acquiror is
discouraged from offering to acquire us or prevented from successfully
completing a hostile acquisition, you could lose the opportunity to sell your
shares at a favorable price.

                                       19
<PAGE>   24

                           FORWARD-LOOKING STATEMENTS

     We have made forward-looking statements in this prospectus that are subject
to risks and uncertainties. Many of these forward-looking statements refer to
our plans, objectives, expectations and intentions, as well as our future
financial results. You can identify these forward-looking statements by
forward-looking words such as "expects," "anticipates," "intends," "plans,"
"may," "will," "believes," "seeks," "estimates" and similar expressions. Because
these forward-looking statements involve risks and uncertainties, there are
important factors that could cause our actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors" and other factors identified by cautionary language used
elsewhere in this prospectus. Before you invest in our common stock, you should
be aware that the occurrence of the events described in these risk factors and
elsewhere in this prospectus could materially and adversely affect our business,
financial condition and results of operations.

                                USE OF PROCEEDS


     We expect to receive net proceeds of approximately $45.0 million from the
sale of 3,800,000 shares of common stock, assuming a public offering price of
$13.00 per share and after deducting underwriting discounts and commissions of
$3.5 million and estimated expenses of approximately $950,000. If the
underwriters exercise their over-allotment option in full, we will receive net
proceeds of approximately $       million. We will not receive any proceeds from
the sale of shares by the selling stockholders.



     We intend to use the net proceeds from this offering to:



     - repay outstanding debt of approximately $3.0 million, including accrued
       interest and any other amounts due to the lender. We will record a charge
       to the statement of operations for approximately $240,000 upon repayment
       of the outstanding debt due to a write off of the unamortized debt
       discount and the payment of a prepayment penalty;



     - fund sales and marketing expenses in the year 2000 of approximately $18.0
       million; and



     - fund research and development expenses in the year 2000 of approximately
       $10.0 million.



     We expect to use the remaining net proceeds from this offering to fund our
operating deficits and other working capital needs and for general corporate
purposes, including the development of our product lines through acquisitions of
products, technologies and businesses. Currently, however, we have no
commitments or agreements regarding any acquisitions. The amount of net proceeds
that we actually expend for working capital purposes will vary significantly
depending on a number of factors, including our future revenue growth, if any,
the amount of cash we generate from operations and the progress of our product
development efforts. We will have significant discretion in applying the net
proceeds of this offering and we may use the proceeds in ways with which you
disagree and in ways which may negatively affect our financial condition.
Pending the uses described above, we will invest the net proceeds in short-term,
investment grade, interest-bearing securities.


                                DIVIDEND POLICY

     We have never declared or paid cash dividends on our capital stock, and we
do not anticipate declaring or paying any cash dividends for the foreseeable
future. We currently expect to retain all earnings, if any, for investment in
our business. In addition, the terms of our current credit facility prohibit us
from paying cash dividends without our lender's consent.

                                       20
<PAGE>   25

                                 CAPITALIZATION

     The following table describes our capitalization as of September 30, 1999:

     - on an actual basis;


     - on a pro forma basis which gives effect to the payment of preferred stock
       dividends in the form of additional shares of our preferred stock and the
       conversion of each outstanding share of our preferred stock into 1.8
       shares of our common stock, which will occur immediately before the
       completion of this offering as if the conversion occurred on September
       30, 1999; and



     - on a pro forma as adjusted basis to further reflect the sale of the
       common stock offered by us at an assumed offering price of $13.00 per
       share, after deducting underwriting discounts and estimated offering
       expenses payable by us, and our receipt and application of the net
       proceeds from this offering to repay outstanding debt as if the sale of
       common stock and receipt of proceeds occurred on September 30, 1999.


     You should read this table together with the consolidated financial
statements and the related notes appearing at the end of this prospectus and the
information under "Management's Discussion and Analysis of Financial Condition
and Resulting Operations" and "Use of Proceeds."


<TABLE>
<CAPTION>
                                                                    SEPTEMBER 30, 1999
                                                            ----------------------------------
                                                                                    PRO FORMA
                                                             ACTUAL    PRO FORMA   AS ADJUSTED
                                                            --------   ---------   -----------
                                                            (IN THOUSANDS, EXCEPT SHARE DATA)
                                                                       (UNAUDITED)
<S>                                                         <C>        <C>         <C>
Long-term debt, including current portion.................  $  3,112   $  3,112     $     --
Convertible preferred stock:
  Series A; 4,000,000 shares authorized, 3,184,000 issued
     and outstanding, actual; no shares authorized, issued
     and outstanding, pro forma and pro forma as
     adjusted.............................................     8,319         --           --
  Series B; 1,231,954 shares authorized, 1,181,954 shares
     issued and outstanding, actual; no shares authorized,
     issued and outstanding, pro forma and pro forma as
     adjusted.............................................     5,479         --           --
  Series C; 1,500,000 shares authorized, 1,325,028 shares
     issued and outstanding, actual; no shares authorized,
     issued and outstanding, pro forma and pro forma as
     adjusted.............................................     8,315         --           --
Stockholders' (deficit) equity:
  Preferred stock, par value $0.01; no shares authorized,
     issued and outstanding, actual; 10,000,000
     authorized, pro forma and pro forma as adjusted; no
     shares issued or outstanding, pro forma and pro forma
     as adjusted..........................................        --         --           --
  Common stock, par value $0.01; 50,000,000 shares
     authorized; 10,302,163 issued and 6,862,379 shares
     outstanding, actual; 20,691,106 shares issued and
     17,251,322 shares outstanding, pro forma (unaudited);
     24,491,106 shares issued and 21,051,322 shares
     outstanding, pro forma as adjusted (unaudited).......       103        207          245
  Additional paid-in capital..............................     5,062     27,071       72,025
  Accumulated deficit.....................................   (20,322)   (20,322)     (20,563)
  Stockholders notes receivable...........................    (2,594)    (2,594)      (2,594)
  Treasury stock, 3,439,784 common shares at cost.........    (6,921)    (6,921)      (6,921)
                                                            --------   --------     --------
          Total stockholders' (deficit) equity............   (24,672)    (2,559)      42,192
                                                            --------   --------     --------
          Total capitalization............................  $    553   $    553     $ 42,192
                                                            ========   ========     ========
</TABLE>



     The number of shares of common stock outstanding as of September 30, 1999
does not reflect 2,855,768 shares of common stock issuable under options and
warrants outstanding as of December 29, 1999 at a weighted average exercise
price of $2.10 per share, 1,840,135 shares of common stock reserved for issuance
under our amended and restated stock incentive plan and 990,000 shares of common
stock reserved for issuance under our employee stock purchase plan.


                                       21
<PAGE>   26

                                    DILUTION


     Our pro forma net tangible book value (deficit) as of September 30, 1999
was $(2.6) million, or $(0.15) per share of common stock. We have calculated
this amount by:


     - subtracting our total liabilities from our pro forma total tangible
       assets; and


     - then dividing the difference by the total pro forma number of shares of
       common stock outstanding, after giving effect to the payment of preferred
       stock dividends in the form of additional shares of our preferred stock
       and the conversion of each outstanding share of our preferred stock into
       1.8 shares of our common stock, which will occur immediately before
       completion of this offering.



     If we give effect to our receipt of the net proceeds from our sale of
3,800,000 shares of common stock at an assumed initial public offering price of
$13.00 per share, our adjusted pro forma net tangible book value as of September
30, 1999 would have been approximately $42.2 million, or $2.00 per share. This
amount represents an immediate increase in pro forma net tangible book value of
$2.15 per share to existing stockholders and an immediate dilution of $11.00 per
share to new investors. The following table illustrates this per share dilution:



<TABLE>
<S>                                                           <C>      <C>
Assumed initial public offering price.......................           $13.00
                                                                       ------
  Pro forma net tangible book value as of September 30,
     1999...................................................  $(0.15)
                                                              ------
  Pro forma increase in net tangible book value attributable
     to this offering.......................................    2.15
                                                              ------
  Pro forma net tangible book value after the offering......             2.00
                                                                       ------
Dilution to new investors...................................           $11.00
                                                                       ======
</TABLE>



     The following table summarizes, on an as adjusted pro forma basis, as of
September 30, 1999, the total number of shares of common stock purchased from
us, the total consideration paid and the average price per share paid by
existing stockholders (net of share repurchases) and to be paid by new investors
in this offering at an assumed initial offering price of $13.00 per share,
before deducting estimated underwriting discounts and offering expenses:



<TABLE>
<CAPTION>
                            SHARES PURCHASED       TOTAL CONSIDERATION
                          --------------------    ---------------------    AVERAGE PRICE
                            NUMBER     PERCENT      AMOUNT      PERCENT      PER SHARE
                          ----------   -------    -----------   -------    -------------
<S>                       <C>          <C>        <C>           <C>        <C>
Existing stockholders...  17,251,322     81.9%    $16,698,000     25.3%       $ 0.97
New investors...........   3,800,000     18.1      49,400,000     74.7         13.00
                          ----------    -----     -----------    -----
          Total.........  21,051,322    100.0%    $66,098,000    100.0%
                          ==========    =====     ===========    =====
</TABLE>


     If the underwriters exercise their over-allotment option in full, the
number of shares held by existing stockholders will decrease to                ,
or      % of the total shares outstanding, and the number of shares held by new
investors will increase to                , or      % of the total shares
outstanding.


     The above computations exclude 2,855,768 shares of common stock issuable
upon the exercise of options and warrants outstanding as of December 29, 1999 at
a weighted average exercise price of $2.10 per share, 1,840,135 shares of common
stock reserved for issuance under our amended and restated stock incentive plan
and 990,000 shares of common stock reserved for issuance under our employee
stock purchase plan. From September 30, 1999 through December 29, 1999, options
were exercised to purchase an aggregate of 12,193 shares of common stock. If any
additional options and warrants are exercised, new investors will experience
further dilution. For more information about our stock option plans, see
"Management -- Option Plans."


                                       22
<PAGE>   27

                      SELECTED CONSOLIDATED FINANCIAL DATA


     The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the related notes
appearing at the end of this prospectus and the information under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Use of Proceeds." For an explanation of the determination of the number of
shares used to compute historical and pro forma basic and diluted net loss per
share, see note 1(l) of the notes to our consolidated financial statements.


     The statement of operations data for the years ended December 31, 1996,
1997 and 1998 and for the nine months ended September 30, 1999 and the balance
sheet data as of December 31, 1997 and 1998 and September 30, 1999 are derived
from, and are qualified by reference to, our consolidated financial statements
included at the end of this prospectus, which have been audited by KPMG LLP. The
statement of operations data for the year ended December 31, 1995 and the
balance sheet data as of December 31, 1996 are derived from, and are qualified
by reference to, our consolidated financial statements which are not included in
this prospectus and which have been audited by KPMG LLP. The statement of
operations data for the year ended December 31, 1994 and the balance sheet data
as of December 31, 1994 and 1995 are derived from our unaudited consolidated
financial statements, which are not included in this prospectus. The statement
of operations data for the nine months ended September 30, 1998 is unaudited and
is included with the consolidated financial statements included in this
prospectus. In the opinion of our management, the unaudited consolidated
financial statements have been prepared on a basis consistent with the annual
audited consolidated financial statements which appear elsewhere in this
prospectus, and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of our financial position and
results of operations for these unaudited periods. Our historical results are
not necessarily indicative of results to be expected in the future.


<TABLE>
<CAPTION>
                                                                                                             NINE MONTHS ENDED
                                                                YEAR ENDED DECEMBER 31,                        SEPTEMBER 30,
                                                 ------------------------------------------------------    ----------------------
                                                    1994         1995      1996       1997       1998         1998         1999
                                                 -----------    ------    -------    -------    -------    -----------    -------
                                                 (UNAUDITED)                                               (UNAUDITED)
                                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                              <C>            <C>       <C>        <C>        <C>        <C>            <C>
STATEMENT OF OPERATIONS DATA:
 Revenues:
   License.....................................    $  300       $  444    $   764    $ 3,775    $ 8,507      $ 5,595      $10,811
   Services....................................       177          161        425      1,138      2,444        1,657        4,079
   Hardware....................................       246          357        632      1,271      2,171        1,750           46
                                                   ------       ------    -------    -------    -------      -------      -------
       Total revenues..........................       723          962      1,821      6,184     13,122        9,002       14,936
                                                   ------       ------    -------    -------    -------      -------      -------
 Cost of revenues:
   License.....................................         8           10         30        164        310          218          258
   Services....................................       138          130        622      1,204      2,526        1,863        2,596
   Hardware....................................       235          315        920      1,574      2,482        1,995           46
                                                   ------       ------    -------    -------    -------      -------      -------
       Total cost of revenues..................       381          455      1,572      2,942      5,318        4,076        2,900
                                                   ------       ------    -------    -------    -------      -------      -------
       Gross profit............................       342          507        249      3,242      7,804        4,926       12,036
                                                   ------       ------    -------    -------    -------      -------      -------
 Operating expenses:
   Sales and marketing.........................        72           93        291      2,016      6,147        4,236        7,409
   Research and development....................       114          264      1,095      1,817      3,529        2,385        4,140
   General and administrative..................       163          401      1,058      1,684      2,141        1,458        2,556
   Charge for termination of distribution
     agreement.................................        --           --         --         --        900          900           --
   Acquired in-process research and
     development...............................        --           --         --         --         --           --        3,506
   Other personnel costs.......................        --          621         --         --         --           --          665
                                                   ------       ------    -------    -------    -------      -------      -------
       Operating loss..........................        (7)        (872)    (2,195)    (2,275)    (4,913)      (4,053)      (6,240)
 Interest income (expense), net................         5            9          4         62        (31)         (26)        (320)
                                                   ------       ------    -------    -------    -------      -------      -------
 Loss before provision for income taxes........        (2)        (863)    (2,191)    (2,213)    (4,944)      (4,079)      (6,560)
 Provision for income taxes....................        --           --         --         --         --           --           --
                                                   ------       ------    -------    -------    -------      -------      -------
 Net loss......................................        (2)        (863)    (2,191)    (2,213)    (4,944)      (4,079)      (6,560)
 Preferred stock dividends and accretion.......        --           --         --        (84)      (502)         (77)      (1,090)
                                                   ------       ------    -------    -------    -------      -------      -------
 Net loss applicable to common stockholders....    $   (2)      $ (863)   $(2,191)   $(2,297)   $(5,446)     $(4,156)     $(7,650)
                                                   ======       ======    =======    =======    =======      =======      =======
 Historical net loss per share -- basic and
   diluted.....................................    $   --       $(0.10)   $ (0.21)   $ (0.32)   $ (0.78)     $ (0.57)     $ (1.18)
                                                   ======       ======    =======    =======    =======      =======      =======
 Shares used in computing historical net loss
   per share -- basic and diluted..............     6,179        8,922     10,307      7,238      6,964        7,245        6,469
                                                   ======       ======    =======    =======    =======      =======      =======
 Pro forma net loss per share -- basic and
   diluted.....................................                                                 $ (0.37)                  $ (0.43)
                                                                                                =======                   =======
 Shares used in computing pro forma net loss
   per share -- basic and diluted..............                                                  13,399                    15,276
                                                                                                =======                   =======
</TABLE>


                                       23
<PAGE>   28


<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                 -------------------------------------------   SEPTEMBER 30,
                                                 1994   1995     1996      1997       1998         1999
                                                 ----   -----   -------   -------   --------   -------------
                                                 (UNAUDITED)
                                                                       (IN THOUSANDS)
<S>                                              <C>    <C>     <C>       <C>       <C>        <C>
BALANCE SHEET DATA:
  Cash, cash equivalents and short-term
    investments................................  $ 99   $  84   $    69   $ 2,092   $    912     $     52
  Working capital (deficit)....................   143    (142)   (2,399)   (2,506)    (3,331)      (2,248)
  Total assets.................................   365     316     1,108     3,966      5,026        8,919
  Long-term debt, less current portion.........    --      --        --        --      1,102        2,210
  Total convertible preferred stock............    --      --        --     6,733     12,710       22,113
  Total stockholders' equity (deficit).........   143     (69)   (2,260)   (8,241)   (15,551)     (24,672)
</TABLE>


                                       24
<PAGE>   29

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our Consolidated
Financial Statements and Notes.


OVERVIEW


     We provide business-driven multimedia recording and analysis software that
enables companies to enhance their customer interactions across multiple
communications media. Our software is designed to enable customer contact
centers within a company to record and evaluate complete customer interactions
through one or more communications media, such as telephone and Web chat. We
believe that the key benefits of our products include increased revenues from
improved customer interactions, improved profitability from increased customer
service representative and supervisor productivity and reduced turnover and
enhanced customer retention through greater customer intimacy. Our software is
designed to integrate with a variety of third party software, such as customer
relationship management and enterprise resource planning applications, and with
existing telephony and computer network hardware and software. The majority of
our customers are companies with one or more contact centers that handle voice
and data customer interactions for outbound sales and marketing operations,
inbound service/support lines, or both. We utilize our direct sales organization
and a variety of strategic marketing alliances to reach our target customer
base.


SOURCES OF REVENUES AND REVENUE RECOGNITION POLICY


     We generate revenues principally from licensing our software directly to
customers and providing related professional services, including software
installation, training and maintenance. During the nine months ended September
30, 1999, approximately 95% of our revenues were derived from sales within North
America through our direct sales force. Prior to 1999, substantially all of our
revenues were derived from sales within North America. Our license agreements
generally provide that customers pay a software license fee for one or more
software products for a specified number of users. The amount of the license fee
varies based on which software product is licensed, the number of software
products licensed and the number of users licensed. Customers can subsequently
pay additional license fees to allow additional users to use previously licensed
software products or to license additional software products. Each of our
software products contains the same core functionality, allowing for easy
integration of additional software products as they are licensed from us.
Customers that license software products receive the software on compact disc.



     We recognize license revenues in accordance with the provisions of American
Institute of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition" and SOP 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2." Following the requirements of SOP 97-2, we recognize
license revenues when all the following conditions are met:


     - we have signed a noncancellable license agreement with the customer;

     - we have delivered the software product to the customer;

     - the amount of fees to be paid by the customer is fixed or determinable;
       and

     - we believe that collection of these fees is probable.


     Until the first quarter of 1999, we generated revenues from the sale of
computer hardware to our customers. This hardware consisted of standard, readily
available computer servers that we purchased from third parties and resold.
Because of our relatively low volume of sales compared to traditional computer
equipment providers, we were unable to compete on price with those providers and
frequently resorted to selling hardware at very low margins or below our cost.
The losses that we incurred from selling hardware adversely affected our
liquidity and financial position.


                                       25
<PAGE>   30


Because of this, we discontinued hardware sales in the first quarter of 1999
which improved our gross margins during 1999. Our customers currently purchase
their hardware from other suppliers.



     Our customers generally purchase installation and training services. They
ordinarily purchase these services directly from us through our internal
professional services organization on either a fixed fee or a time and materials
basis. Revenues on installation and training services are recognized upon
performance of the related services.



     Our customers also purchase maintenance contracts that provide software
upgrades and technical support over a stated term, generally twelve months.
Historically, all of our customers have purchased an initial maintenance
contract for each newly licensed site. From January 1997 through September 1999,
on average, over 92% of our customer sites at the beginning of each year renewed
their annual maintenance contracts. Revenues on maintenance are recognized
ratably over the terms of the maintenance contracts, which are usually one year.


COST OF REVENUES AND OPERATING EXPENSES


     Our cost of license revenues primarily consists of license fees due to
third parties for royalties and packaging costs. Our cost of services revenues
includes salaries and related expenses for our installation, training and
maintenance personnel and allocations of facilities, communications and
depreciation expenses. Our cost of hardware revenues consisted of purchases of
hardware. We discontinued sales of hardware during the first quarter of 1999.
Our operating expenses are classified into three general categories: sales and
marketing, research and development and general and administrative. We classify
all charges to these operating expense categories based on the nature of the
expenditures. We allocate the costs for overhead and facilities to each of the
functional areas that use the overhead and facilities services. These allocated
charges include facility rent for corporate offices, communication charges and
depreciation expenses for office furniture and equipment. We anticipate that our
operating expenses will increase substantially in future quarters as we increase
sales and marketing operations, develop new distribution channels, fund greater
levels of research and development, broaden professional services and support
and improve operational and financial systems. As a result, we expect to incur
additional losses for the foreseeable future. In addition, our limited operating
history makes it difficult for us to predict future operating results, and,
accordingly, there can be no assurance that we will achieve or sustain revenue
growth or profitability.


     Research and development costs are expensed as incurred. Costs incurred
subsequent to establishing technological feasibility, in the form of a working
model, are capitalized and amortized over their estimated useful lives. To date,
software development costs incurred after technological feasibility has been
established have not been material.


     We had 171 full-time employees at December 29, 1999, up from 25, 74 and
111, at December 31, 1996, 1997 and 1998, respectively. This rapid growth places
a significant demand on our management and operational resources. In order to
manage growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. In addition, we expect that
future expansion will continue to challenge our ability to hire, train, motivate
and manage our employees. Competition is intense for highly qualified technical,
sales and marketing and management personnel. If our total revenue does not
increase relative to our operating expenses, our management systems do not
expand to meet increasing demands, we fail to attract, assimilate and retain
qualified personnel or our management otherwise fails to manage our expansion
effectively, there would be a material adverse effect on our business, financial
condition and operating results.


                                       26
<PAGE>   31

RESULTS OF OPERATIONS


     The table below shows operating data as a percentage of total revenues for
the periods indicated:


<TABLE>
<CAPTION>
                                                                               NINE MONTHS
                                                         YEAR ENDED               ENDED
                                                        DECEMBER 31,          SEPTEMBER 30,
                                                  ------------------------    --------------
                                                   1996     1997     1998     1998     1999
                                                  ------    -----    -----    -----    -----
<S>                                               <C>       <C>      <C>      <C>      <C>
STATEMENT OF OPERATIONS DATA:
  Revenues:
     License..................................      42.0%    61.0%    64.8%    62.2%    72.4%
     Services.................................      23.3     18.4     18.7     18.4     27.3
     Hardware.................................      34.7     20.6     16.5     19.4      0.3
                                                  ------    -----    -----    -----    -----
          Total revenues......................     100.0    100.0    100.0    100.0    100.0
  Cost of revenues:
     License..................................       1.6      2.7      2.4      2.4      1.7
     Services.................................      34.2     19.4     19.2     20.7     17.4
     Hardware.................................      50.5     25.5     18.9     22.2      0.3
                                                  ------    -----    -----    -----    -----
          Total cost of revenues..............      86.3     47.6     40.5     45.3     19.4
                                                  ------    -----    -----    -----    -----
          Gross profit........................      13.7     52.4     59.5     54.7     80.6
  Operating expenses:
     Sales and marketing......................      16.0     32.6     46.8     47.1     49.6
     Research and development.................      60.1     29.4     26.9     26.5     27.7
     General and administrative...............      58.1     27.2     16.3     16.2     17.1
     Charge for termination of distribution
       agreement..............................        --       --      6.9     10.0       --
     Acquired in-process research and
       development............................        --       --       --       --     23.5
     Other personnel costs....................        --       --       --       --      4.5
                                                  ------    -----    -----    -----    -----
          Operating loss......................    (120.5)   (36.8)   (37.4)   (45.0)   (41.8)
  Interest income (expense), net..............       0.2      1.0     (0.3)    (0.3)    (2.1)
                                                  ------    -----    -----    -----    -----
          Loss before provision for income
            taxes.............................    (120.3)   (35.8)   (37.7)   (45.3)   (43.9)
  Provision for income taxes..................        --       --       --       --       --
                                                  ------    -----    -----    -----    -----
          Net loss............................    (120.3)%  (35.8)%  (37.7)%  (45.3)%  (43.9)%
                                                  ======    =====    =====    =====    =====
</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999

  Revenues


     Total revenues increased from $9.0 million in the nine months ended
September 30, 1998 to $14.9 million in the nine months ended September 30, 1999,
representing a 66% increase, principally due to growth in our license revenue.
License revenues increased from $5.6 million in the nine months ended September
30, 1998 to $10.8 million in the nine months ended September 30, 1999,
representing a 93% increase. The increase in license revenues was primarily a
result of a growing market awareness of our products and, to a lesser extent, an
expanded sales force. In addition, during the nine months ended September 30,
1998 and 1999, 35% and 57%, respectively, of our license revenues were
attributable to new customers, while 65% and 43%, respectively, were
attributable to add-on sales associated with our existing customer base. As a
percentage of total revenues, license revenues increased from 62.2% in the nine
months ended September 30, 1998 to 72.4% in the nine months ended September 30,
1999.


     Services revenues increased from $1.7 million in the nine months ended
September 30, 1998 to $4.1 million in the nine months ended September 30, 1999,
representing a 146% increase.

                                       27
<PAGE>   32


Installation and training revenues increased primarily from the increase in
license revenues. Maintenance revenues have increased as our customer base has
grown from 168 customer sites as of December 31, 1998 to 302 customer sites as
of September 30, 1999. As a percentage of total revenues, services revenues
increased from 18.4% in the nine months ended September 30, 1998 to 27.3% in the
nine months ended September 30, 1999.


     Hardware revenues decreased from $1.8 million in the nine months ended
September 30, 1998 to $46,000 in the nine months ended September 30, 1999,
representing a 97% decrease. We discontinued the sale of hardware during the
first quarter of 1999. As a percentage of total revenues, hardware revenues
decreased from 19.4% in the nine months ended September 30, 1998 to 0.3% in the
nine months ended September 30, 1999.

  Cost of Revenues

     Total cost of revenues decreased from $4.1 million for the nine months
ended September 30, 1998 to $2.9 million for the nine months ended September 30,
1999, primarily due to our discontinuance of hardware sales. Also, we improved
our services margin primarily through improved project management. Cost of
revenues as a percentage of total revenues decreased from 45.3% for the nine
months ended September 30, 1998 to 19.4% for the nine months ended September 30,
1999, primarily due to our discontinuance of hardware sales. We expect, however,
that over time the total cost of revenues as a percentage of total revenues will
increase as the percentage of license revenues as a percentage of total revenues
decreases.

     Cost of license revenues increased from $218,000 for the nine months ended
September 30, 1998 to $258,000 for the nine months ended September 30, 1999, due
to increased royalties for third party software caused by an increase in license
revenues. Cost of license revenues decreased from 2.4% of total revenue for the
nine months ended September 30, 1998 to 1.7% of total revenue for the nine
months ended September 30, 1999.


     Cost of services revenues increased from $1.9 million in the nine months
ended September 30, 1998 to $2.6 million in the nine months ended September 30,
1999. This increase was a result of an increase in the number of employees
engaged in installation, training and customer maintenance services. Cost of
services revenues as a percentage of total revenues decreased from 20.7% for the
nine months ended September 30, 1998 to 17.4% for the nine months ended
September 30, 1999. Cost of services revenues as a percentage of services
revenues decreased from 112% for the nine months ended September 30, 1998 to 64%
for the nine months ended September 30, 1999. This improvement in services
margin was mainly due to improved project management for installation services
and, to a lesser extent, fewer employees engaged in customer maintenance
services per customer. We expect to continue to hire additional service
personnel, however, and anticipate that cost of services revenues will both
increase in absolute dollars and as a percentage of total revenues.


     Hardware cost of revenues decreased from $2.0 million in the nine months
ended September 30, 1998 to $46,000 in the nine months ended September 30, 1999.
This decrease was due to our discontinuance of hardware sales in the first
quarter of 1999. Hardware cost of revenues decreased from 22.2% of total
revenues for the nine months ended September 30, 1998 to 0.3% of total revenues
for the nine months ended September 30, 1999.

  Operating Expenses


     Sales and Marketing.  Sales and marketing expenses increased 75% from $4.2
million in the nine months ended September 30, 1998 to $7.4 million in the nine
months ended September 30, 1999, principally due to an increase in sales
personnel and, to a lesser extent, an increase in marketing program expenses. As
a percentage of total revenues, sales and marketing expenses increased from
47.1% for the nine months ended September 30, 1998 to 49.6% for the nine months
ended September 30, 1999. We expect that the absolute dollar amount of sales and
marketing expenses will

                                       28
<PAGE>   33

continue to increase due to the planned growth of our sales force, including the
establishment of additional sales offices both domestically and internationally
in Europe and Asia. We also expect additional increases in advertising and
marketing programs and other promotional activities and anticipate that sales
and marketing expenses will vary as a percentage of total revenues from period
to period.

     Research and Development.  Research and development expenses increased 74%
from $2.4 million in the nine months ended September 30, 1998 to $4.1 million in
the nine months ended September 30, 1999, primarily due to an increase in the
number of employees and consultants engaged in research and development
activities. As a percentage of total revenues, research and development expenses
increased from 26.5% for the nine months ended September 30, 1998 to 27.7% for
the nine months ended September 30, 1999. We expect research and development
costs to increase in amount as we continue to commit substantial resources to
enhancing existing product functionality and to developing new products.


     General and Administrative.  General and administrative expenses increased
75% from $1.5 million in the nine months ended September 30, 1998 to $2.6
million in the nine months ended September 30, 1999, primarily due to increased
salary and related expenses in our executive, finance and administrative
functions. As a percentage of total revenues, general and administrative
expenses increased from 16.2% for the nine months ended September 30, 1998 to
17.1% for the nine months ended September 30, 1999. We expect general and
administrative costs to increase in absolute amount as we continue to add
infrastructure to support a larger organization, continue to invest in our
international expansion and incur costs related to being a publicly-held
company.


     During the nine months ended September 30, 1998, we incurred a $900,000
charge to terminate a distributor agreement. We incurred other personnel costs
of $665,000 during the nine months ended September 30, 1999, which related to
severance payments for terminated executives as well as a bonus and relocation
costs in connection with recruiting a new executive.


     Acquired In-Process Research and Development.  During the nine months ended
September 30, 1999, we acquired technology to store and retrieve substantially
larger volumes of data than our software is currently capable of storing and
retrieving in exchange for shares of our common stock valued at $3.5 million. We
have accounted for the purchase price as acquired in-process research and
development expense because, at the date of the transaction, the in-process
research and development acquired by us related to the development of technology
not possessed by us and the results of this in-process research and development
had not progressed to a stage where they met technological feasibility as
defined by SFAS No. 86, Accounting for the Cost of Computer Software to Be Sold,
Leased or Otherwise Marketed. As this was our first attempt to develop this type
of technology, there existed a significant amount of uncertainty as to our
ability to complete the development of a product which would achieve market
acceptance within a reasonable timeframe. We continue to expect that we will
complete this development project no sooner than the third quarter of 2000.
Additionally, the amount of development required to enable the acquired in-
process research and development to be compatible with our primary product will
continue to be significant, which increased the uncertainty surrounding its
successful development. We estimate it would have cost us more than $3.5 million
to develop the in-process research and development internally and estimate we
will incur an additional $3.3 million to complete our development efforts. The
in-process research and development does not have an alternative future use to
us that has reached technological feasibility.


  Interest Income (Expense), Net

     Net interest expense increased from $26,000 during the nine months ended
September 30, 1998 to $320,000 during the nine months ended September 30, 1999
due to an increase in borrowings under our credit facilities.

                                       29
<PAGE>   34

YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

  Revenues


     Total revenues increased 240% from $1.8 million in 1996 to $6.2 million in
1997 and increased 112% to $13.1 million in 1998, primarily due to an increase
in license revenues. License revenues increased 394% from $764,000 in 1996 to
$3.8 million in 1997 and increased 125% to $8.5 million in 1998. The increase in
license revenues was primarily the result of a growing market awareness of our
products and, to a lesser extent, an expanded sales force. Further, during 1996,
1997 and 1998, 71%, 49% and 45%, respectively, of our license revenues were
attributable to new customers, while 29%, 51% and 55%, respectively, were
attributable to add-on sales associated with our existing customer base. As a
percentage of total revenues, license revenues increased from 42.0% in 1996 to
61.0% in 1997 and to 64.8% in 1998.


     Services revenues increased 168% from $425,000 in 1996 to $1.1 million in
1997 and increased 115% to $2.4 million in 1998. Installation and training
revenues grew due to an increase in license revenues, and maintenance revenues
grew due to an increase in customers. As a percentage of total revenues, service
revenues decreased from 23.3% in 1996 to 18.4% in 1997 and increased slightly to
18.7% in 1998.

     Hardware revenues increased 101% from $632,000 in 1996 to $1.3 million in
1997 and increased 71% to $2.2 million in 1998. The increase in hardware
revenues was a result of the increased number of customer sites licensing our
software over the same period. As a percentage of total revenues, hardware
revenues decreased from 34.7% in 1996 to 20.6% in 1997 and decreased to 16.5% in
1998.

  Cost of Revenues

     Total cost of revenues increased 87% from $1.6 million in 1996 to $2.9
million in 1997 and increased 81% to $5.3 million in 1998. These increases in
total cost of revenues are related to the increase in total revenues over the
same periods. Total cost of revenues as a percentage of total revenues decreased
from 86.3% in 1996 to 47.6% in 1997 and decreased to 40.5% in 1998, primarily
due to the fact that higher margin license revenues grew at a faster rate than
lower margin hardware revenues.

     Cost of license revenues increased from $30,000 in 1996 to $164,000 in 1997
and increased to $310,000 in 1998. These increases were due to increased
royalties for third party software caused by an increase in license revenues.
Cost of license revenues as a percentage of total revenues increased from 1.6%
in 1996 to 2.7% in 1997 and decreased to 2.4% in 1998.


     Cost of services revenues increased 94% from $622,000 in 1996 to $1.2
million in 1997 and increased 110% to $2.5 million in 1998. These increases were
a result of increases in the number of employees engaged in installation,
training and customer maintenance services. Cost of services revenues as a
percentage of total revenues decreased from 34.2% in 1996 to 19.4% in 1997 and
decreased to 19.2% in 1998. Cost of services revenue as a percentage of services
revenues was 146% in 1996, 106% in 1997 and 103% in 1998. This improvement in
services margin was mainly due to improved project management for installation
services and, to a lesser extent, fewer employees engaged in maintenance
services per customer.


     Hardware cost of revenues increased from $920,000 in 1996 to $1.6 million
in 1997 and increased 58% to $2.5 million in 1998. These increases in hardware
cost of revenues relate to the increases in hardware revenues in the same
periods. Hardware cost of revenues as a percentage of total revenues decreased
from 50.5% of total revenues in 1996 to 25.5% in 1997 and decreased to 18.9% in
1998. Cost of hardware revenues as a percentage of hardware revenues was 146% in
1996, 124% in 1997 and 114% in 1998. This improvement in hardware margin was a
result of increased pricing for hardware. We discontinued sales of hardware
during the first quarter of 1999.

                                       30
<PAGE>   35

  Operating Expenses


     Sales and Marketing.  Sales and marketing expenses increased 593% from
$291,000 in 1996 to $2.0 million in 1997, and then increased 205% to $6.1
million in 1998. The increase in sales and marketing expenses is principally
related to an increase in sales personnel and, to a lesser extent, an increase
in marketing program expenses. As a percentage of total revenues, sales and
marketing expenses were 16.0% in 1996, 32.6% in 1997, and 46.8% in 1998. These
percentage increases were primarily due to an increase in sales personnel.


     Research and Development.  Research and development expenses increased 66%
from $1.1 million in 1996 to $1.8 million in 1997, and then increased 94% to
$3.5 million in 1998. The increase in absolute dollars was primarily due to an
increase in the number of employees and consultants engaged in research and
development activities. As a percentage of total revenues, research and
development expenses were 60.1% in 1996, 29.4% in 1997, and 26.9% in 1998. These
percentage decreases were due to our revenue growing faster than our research
and development expenses.

     General and Administrative.  General and administrative expenses increased
59% from $1.1 million in 1996 to $1.7 million in 1997, and then increased 27% to
$2.1 million in 1998. The increase in absolute dollars was primarily
attributable to increased salary and related expenses in the executive, finance
and administrative functions to manage our growth. As a percentage of total
revenues, general and administrative expenses were 58.1% in 1996, 27.2% in 1997,
and 16.3% in 1998. These percentage decreases were due to our revenues growing
faster than our general and administrative expenses. During 1998, we incurred a
$900,000 charge to terminate a distributor agreement.

 Interest Income (Expense), Net

     Net interest income increased from $4,000 in 1996 to $62,000 in 1997, and
decreased to $31,000 in interest expense in 1998 due to long-term debt we
entered into during the latter portion of 1998.

 Provision for Income Taxes

     No provision for federal, state or foreign income taxes has been recorded
as we incurred net operating losses for all periods presented. We have recorded
a full valuation allowance against the deferred tax asset generated as a result
of these net operating loss carryforwards, as the future realization of the tax
benefit is not currently considered more likely than not.

     As of September 30, 1999, we had net operating loss carryforwards for
federal and state tax purposes of approximately $6.7 million. These federal and
state loss carryforwards may be available to reduce future taxable income and
expire at various dates into the year 2019. Under the provisions of the Internal
Revenue Code, substantial changes in our ownership may limit the amount of net
operating loss carryforwards that could be utilized annually in the future to
offset taxable income.

                                       31
<PAGE>   36

QUARTERLY RESULTS OF OPERATIONS


     The following tables present unaudited quarterly statements of operations
data for each of our last eight quarters in the period ended September 30, 1999,
as well as the percentage of our total revenues represented by each item. The
information has been derived from our unaudited consolidated financial
statements, which have been prepared on substantially the same basis as the
audited consolidated financial statements contained in this prospectus. Our
unaudited consolidated financial statements contain all adjustments, consisting
only of normal recurring adjustments, that we consider to be necessary to
present fairly this information when read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
The results of operations for any quarter are not necessarily indicative of the
results to be expected for any future period.


<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                         -----------------------------------------------------------------------------------------
                         DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,
                           1997       1998        1998       1998        1998       1999        1999       1999
                         --------   ---------   --------   ---------   --------   ---------   --------   ---------
                                                              (IN THOUSANDS)
<S>                      <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>
Revenues:
  License..............  $ 1,007     $ 1,595     $2,086     $ 1,914     $2,912     $ 3,024     $3,417     $ 4,370
  Services.............      346         448        466         743        787       1,091      1,294       1,694
  Hardware.............      351         614        522         614        421          46         --          --
                         -------     -------     ------     -------     ------     -------     ------     -------
         Total
           revenues....    1,704       2,657      3,074       3,271      4,120       4,161      4,711       6,064
Cost of revenues:
  License..............       54          37        101          80         92         102         83          73
  Services.............      416         596        592         675        663         730        818       1,048
  Hardware.............      416         733        581         681        487          46         --          --
                         -------     -------     ------     -------     ------     -------     ------     -------
         Total cost of
           revenues....      886       1,366      1,274       1,436      1,242         878        901       1,121
                         -------     -------     ------     -------     ------     -------     ------     -------
         Gross
           profit......      818       1,291      1,800       1,835      2,878       3,283      3,810       4,943
Operating expenses:
  Sales and
    marketing..........      900       1,211      1,403       1,622      1,911       2,139      2,502       2,768
  Research and
    development........      578         646        833         906      1,144       1,124      1,334       1,682
  General and
    administrative.....      613         508        438         512        683         785        768       1,003
  Charge for
    termination of
    distribution
    agreement..........       --         900         --          --         --          --         --          --
  Acquired in-process
    research and
    development........       --          --         --          --         --          --         --       3,506
  Other personnel
    costs..............       --          --         --          --         --         350         --         315
                         -------     -------     ------     -------     ------     -------     ------     -------
         Operating
           loss........   (1,273)     (1,974)      (874)     (1,205)      (860)     (1,115)      (794)     (4,331)
Interest income
  (expense), net.......        8          (8)        (7)        (11)        (5)        (19)       (72)       (229)
                         -------     -------     ------     -------     ------     -------     ------     -------
         Loss before
           provision
           for income
           taxes.......   (1,265)     (1,982)      (881)     (1,216)      (865)     (1,134)      (866)     (4,560)
Provision for income
  taxes................       --          --         --          --         --          --         --          --
                         -------     -------     ------     -------     ------     -------     ------     -------
         Net loss......  $(1,265)    $(1,982)    $ (881)    $(1,216)    $ (865)    $(1,134)    $ (866)    $(4,560)
                         =======     =======     ======     =======     ======     =======     ======     =======
</TABLE>

                                       32
<PAGE>   37

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                         -----------------------------------------------------------------------------------------
                         DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,
                           1997       1998        1998       1998        1998       1999        1999       1999
                         --------   ---------   --------   ---------   --------   ---------   --------   ---------
<S>                      <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>
Revenues:
  License..............    59.1%       60.0%      67.8%       58.5%      70.7%       72.7%      72.5%       72.1%
  Services.............    20.3        16.9       15.2        22.7       19.1        26.2       27.5        27.9
  Hardware.............    20.6        23.1       17.0        18.8       10.2         1.1          0           0
                          -----       -----      -----       -----      -----       -----      -----       -----
         Total
           revenues....   100.0       100.0      100.0       100.0      100.0       100.0      100.0       100.0
                          -----       -----      -----       -----      -----       -----      -----       -----
Cost of revenues:
  License..............     3.2         1.4        3.3         2.4        2.2         2.5        1.8         1.2
  Services.............    24.4        22.4       19.3        20.6       16.1        17.5       17.4        17.3
  Hardware.............    24.4        27.6       18.9        20.8       11.8         1.1          0           0
                          -----       -----      -----       -----      -----       -----      -----       -----
         Total cost of
           revenues....    52.0        51.4       41.5        43.8       30.1        21.1       19.2        18.5
                          -----       -----      -----       -----      -----       -----      -----       -----
         Gross
           profit......    48.0        48.6       58.5        56.2       69.9        78.9       80.8        81.5
Operating expenses:
  Sales and
    marketing..........    52.8        45.6       45.6        49.6       46.4        51.4       53.1        45.7
  Research and
    development........    33.9        24.3       27.2        27.7       27.8        27.0       28.3        27.7
  General and
    administrative.....    36.0        19.1       14.2        15.7       16.6        18.9       16.3        16.5
  Charge for
    termination of
    distribution
    agreement..........      --        33.9         --          --         --          --         --          --
  Acquired in-process
    research and
    development........      --          --         --          --         --          --         --        57.8
  Other personnel
    costs..............      --          --         --          --         --         8.4         --         5.2
                          -----       -----      -----       -----      -----       -----      -----       -----
         Operating
           loss........   (74.7)      (74.3)     (28.5)      (36.8)     (20.9)      (26.8)     (16.9)      (71.4)
Interest income
  (expense), net.......     0.5        (0.3)      (0.2)       (0.3)      (0.1)       (0.5)      (1.5)       (3.8)
                          -----       -----      -----       -----      -----       -----      -----       -----
  Loss before provision
    for income taxes...   (74.2)      (74.6)     (28.7)      (37.1)     (21.0)      (27.3)     (18.4)      (75.2)
Provision for income
  taxes................      --          --         --          --         --          --         --          --
                          -----       -----      -----       -----      -----       -----      -----       -----
         Net loss......   (74.2)%     (74.6)%    (28.7)%     (37.1)%    (21.0)%     (27.3)%    (18.4)%     (75.2)%
                          =====       =====      =====       =====      =====       =====      =====       =====
</TABLE>


     License revenues as a percentage of total revenues experienced an upward
trend during 1998 and leveled off in the first three quarters of 1999. Services
revenues as a percentage of total revenues varied from quarter to quarter in
1998 and leveled-off in 1999 due primarily to our discontinuance of hardware
sales and, to a lesser extent, increased services revenues. We expect the
relative amount of license revenues as compared to services revenues, as
experienced during the first three quarters of 1999, to decrease which will
increase our cost of revenues and decrease our gross margin. We discontinued the
sale of hardware during the first quarter of 1999.



     Our quarterly revenues increased throughout 1998 and the first three
quarters of 1999 primarily as a result of growing market awareness of our
products and, to a lesser extent, an expanded sales force. Cost of revenues as a
percentage of revenues has trended down due primarily to our discontinuance of
hardware sales and, to a lesser extent, improvements in installation project
management. Operating expenses increased in each quarter primarily as a result
of the increase in the number of employees engaged in sales and marketing and
research and development activities and, to a lesser extent, as a result of the
growth experienced in the executive, finance and administrative functions.


     We believe that our quarterly operating results may experience seasonal
fluctuations in the future. For instance, quarterly results may fluctuate based
on client calendar year budgeting cycles,

                                       33
<PAGE>   38

slow summer purchasing patterns in Europe and our compensation policies that
tend to compensate sales personnel, typically in the latter half of the year,
for achieving annual quotas.

     As a result of the foregoing and other factors, we believe that
quarter-to-quarter comparisons of results are not necessarily meaningful, and
such comparisons should not be relied upon as indications of future performance.
Fluctuations in operating results may also result in volatility in the price of
the shares of our common stock.

LIQUIDITY AND CAPITAL RESOURCES

     We have funded our operations to date primarily through private sales of
convertible preferred stock totaling $20.4 million and, to a lesser extent, from
debt financing. As of September 30, 1999, we had $52,000 in cash and negative
working capital of $2.2 million.


     Accounts receivable increased 154% from $2.5 million at December 31, 1998
to $6.3 million at September 30, 1999. This increase was primarily due to
extended payment terms granted to customers during the nine months ended
September 30, 1999 and, to a lesser extent, to our increased revenues. Nearly
half of the total accounts receivable balance as of September 30, 1999 related
to accounts as to which extended payment terms had been negotiated. Although
these extended payment terms are generally less than 90 days, none of the
amounts were due more than six months from September 30, 1999. As of December
29, 1999, approximately 65% of the September 30, 1999 accounts receivable
balance had been collected.


     The principal use of cash to date has been to fund our losses from
operations and to purchase furniture and equipment. Also, during 1997, 1998 and
for the nine months ended September 30, 1999, we purchased treasury shares
totaling $3.7 million, $1.9 million and $5.4 million, respectively.


     During 1997, we entered into a financing agreement with Silicon Valley Bank
and obtained a $1.0 million working capital line of credit and a $1.0 million
committed equipment line. The working capital line of credit permitted us to
borrow the lesser of $1.0 million or 70% of eligible accounts receivable through
the maturity date of July 1, 1998. At December 31, 1997 there was $1.0 million
outstanding under the working capital line of credit. The committed equipment
line allowed us to obtain advances for all property and equipment purchases made
during the period from May 1, 1997 through December 31, 1997. The aggregate
amount of advances outstanding under the equipment line was $890,000 as of
December 31, 1997, which was converted to a term note as of such date.



     During 1998, the financing agreement was amended and the working capital
line of credit was increased to the lesser of $2.5 million or a variable
percentage of eligible accounts receivable, through December 10, 1999. There was
no balance outstanding under the working capital line of credit as of December
31, 1998. In addition, we obtained a new $1.0 million committed equipment line
of credit under the amended financing agreement for the period from December 11,
1998 through June 10, 1999. As of December 31, 1998, the aggregate advances made
under the equipment line of credit were $1.0 million and the balance outstanding
on the term note was $593,000. In connection with the amended financing
agreement, we issued Silicon Valley Bank a warrant to purchase 18,000 shares of
our common stock.



     In April 1999, the working capital line of credit was increased to the
lesser of $4.0 million or 75% of net eligible accounts receivable through August
1999. In connection with this increase, the original Silicon Valley Bank
warrants were cancelled, and we issued warrants to Silicon Valley Bank to
purchase 20,000 shares of our series B convertible preferred stock for $4.65 per
share. Upon the completion of this offering, if this warrant has not been
exercised, it will become exercisable for 36,000 shares of common stock at an
exercise price of $2.58 per share.


                                       34
<PAGE>   39


     In June 1999, we refinanced all of our then existing borrowings with
Greyrock Capital, a division of NationsCredit Commercial Corporation. Under the
terms of the new loan and security agreement, we obtained a $2.0 million secured
term loan, a $1.0 million secured equipment loan and a $4.0 million working
capital line of credit.



     - The term loan bears interest at prime plus 2.0% and matures with a
       balloon payment on December 31, 2000. The proceeds were used to pay down
       the outstanding credit facilities. The balance outstanding under the term
       loan was $2.0 million as of September 30, 1999.



     - The equipment loan bears interest at prime plus 2% and has monthly
       principal and interest installments through maturity on June 31, 2001.
       The proceeds were used to pay for purchases of property and equipment.
       The balance outstanding under the equipment loan was $875,000 as of
       September 30, 1999.



     - The working capital line of credit permits us to borrow the lesser of
       $4.0 million or 80% of eligible accounts receivable through the maturity
       date of December 31, 2000 and bears interest at prime plus 2%. The line
       of credit is used to fund working capital requirements of ours and we are
       required to remit our accounts receivable collections to Greyrock Capital
       whenever there is a balance outstanding under the line of credit. The
       balance outstanding under the line of credit was $402,000 as of September
       30, 1999.



     In connection with the loan agreement, we issued to Greyrock Capital a
warrant to purchase 117,000 shares of our common stock for $2.58 per share.



     We expect to have capital expenditures of approximately $250,000 and $2.0
million in the fourth quarter of 1999 and the year 2000, respectively. We also
anticipate that our capital expenditures will increase over the next several
years as we expand our facilities and acquire equipment to support expansion of
our sales and marketing and research and development activities.


     We believe that the net proceeds from this offering, together with our
current cash and borrowing capacity will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next 12
months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt securities
or increase the available borrowings under our line of credit. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. We cannot assure you that any financing
arrangements will be available in amounts or on terms acceptable to us.

YEAR 2000 READINESS

     Some computers, software and associated equipment include programming code
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if, for example, 00 is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are commonly referred to as the Year
2000 problem.

     State of Readiness of Our Products.  Our review of the Year 2000 readiness
of our products is performed as a part of our normal quality assurance program.
This program requires testing of computer processes with the hardware system
clock set to dates in the year 2000 and includes testing of dates in the year
2000 as inputs. As of the date of this prospectus, we have identified no
material Year 2000 compliance issues with our products as currently licensed.
However, our products operate in complex network environments and directly and
indirectly interact with a number of other hardware and software systems. We
have not performed extensive tests on all hardware, software, switches and other
devices that may operate in conjunction with our products, or provide data to or
receive data from our products. We also have not tested custom interfaces
written for our products. Some customers using our products may have Year 2000
problems.
                                       35
<PAGE>   40


     State of Readiness of our Internal Information Technology Systems.  We may
be affected by Year 2000 issues related to non-compliant internal systems
developed by us or by third party vendors. We have generally relied upon our own
testing and the public representations of our suppliers of products and services
of their Year 2000 readiness. We believe that we have identified substantially
all major computers, software applications and related equipment used with our
internal operations and we have modified, upgraded or replaced these systems to
minimize the possibility of a material disruption to our business.



     Systems Other Than Information Technology Systems.  Our internal operations
and businesses are also dependent upon computer-controlled systems of third
parties such as suppliers, customers and service providers. The operation of our
office and facilities equipment, such as fax machines, photocopiers, telephone
switches, security systems, elevators, other common devices and utilities, may
be affected by the Year 2000 problem. We have completed our assessment of this
equipment and absent a critical failure beyond our control, such as prolonged
loss of electrical or telephone service, we believe that Year 2000 problems
experienced by third parties will not have a material impact upon us.


     Cost Assessment.  We do not separately track expenditures to achieve Year
2000 readiness. Those expenditures are absorbed within our development
organization. To date, our costs related to Year 2000 readiness have not been
material relative to our overall development expenditures. Furthermore, based on
our experience to date, and our assessment as of the date of this prospectus, we
do not anticipate that costs associated with remediating non-compliant products
or internal systems will be material.

     Risks.  Any failure of our products to achieve Year 2000 readiness could
result in a decrease of sales of our products, an increase in allocation of
resources to address Year 2000 problems of our customers without additional
revenue commensurate with the dedication of resources, or an increase in
litigation costs relating to losses suffered by our customers due to these Year
2000 problems. Failures of our internal systems could prevent us from processing
orders, issuing invoices, and developing products, and could require us to
devote significant resources to correcting these problems. Due to the general
uncertainty inherent in the Year 2000 computer problem, resulting from the
uncertainty of the Year 2000 readiness of third party suppliers and vendors, we
are unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on our business, results of operation, and
financial condition.


     Contingency Plans.  We have developed contingency plans to be implemented
as part of our efforts to identify and correct Year 2000 problems affecting our
internal systems. Depending on the systems affected, these plans include:


     - accelerated replacement of affected equipment or software;

     - the use of backup equipment and software;

     - increased work hours for our employees or use of contract personnel to
       correct on an accelerated schedule any Year 2000 problems which arise or
       to provide manual workarounds for information systems; and

     - other similar approaches.

     If we are required to implement any of these contingency plans, these plans
could have a material adverse effect on our business, financial condition and
operating results.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No.
                                       36
<PAGE>   41

133 is effective for all fiscal years beginning after June 15, 1999.
Subsequently, the effective date was deferred until June 15, 2000. We are in the
process of evaluating this pronouncement, will adopt it upon its effective date
and have not currently reached a conclusion concerning its impact, if any, on
us.

     In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions. This SOP
amends SOP 97-2 to, among other things, require recognition of revenue using the
"residual method" in circumstances outlined in the SOP. Under the residual
method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections of
SOP 97-2, and (2) the difference between the total arrangement fee and the
amount deferred for the undeliverable elements is recognized as revenue related
to the deliverable elements. SOP 98-9 is effective for fiscal years beginning
after March 15, 1999. We do not anticipate any material impact from the
provisions of the new pronouncement on our results of operations.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK


     The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number or
factors including those described in the risk factors section of this
prospectus.


  Foreign Currency Exchange Rate Risk


     To date, approximately 95% of our recognized revenues have been denominated
in U.S. dollars and primarily from customers in the United States, and our
exposure to foreign currency exchange rate changes has been immaterial. We
expect, however, that future license and professional services revenues may also
be derived from international markets and may be denominated in the currency of
the applicable market. As a result, our operating results may become subject to
fluctuations based upon changes in the exchange rates of foreign currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales dominated in U.S. dollars, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor our
exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot assure you that exchange rate fluctuations will not adversely affect
our financial results in the future.


  Interest Rate Risk

     As of September 30, 1999, we had cash and cash equivalents of $52,000 which
consist of cash and highly liquid short-term investments. Due to the nature of
our short-term investments, we have concluded that there is no material market
risk exposure.

     As of September 30, 1999, we had total short-term and long-term debt
outstanding of $902,000 and $2.2 million, respectively, which contain interest
rates that are tied to the prime rate. Therefore, we are subject to exposure to
interest rate risk for these borrowings based on fluctuations in the prime rate.
Based upon the outstanding indebtedness under these arrangements, an increase in
the prime rate of 0.5% would cause a corresponding increase in our annual
interest expense of approximately $16,000.

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<PAGE>   42

                                    BUSINESS

OVERVIEW


     We provide business-driven multimedia recording and analysis software that
enables companies to enhance their customer interactions across multiple
communications media. Our software is designed to enable companies to optimize
their customer relationship management. As a result, we believe our customers
are able to generate additional revenue opportunities, improve profitability,
enhance customer retention and achieve greater customer intimacy.



     Our eQuality software is designed to enable customer contact centers within
a company to record and evaluate complete customer interactions through multiple
media, such as telephone and Web chat. Our software records a customer service
representative's voice interactions with a customer as well as the customer
service representative's corresponding computer desktop activities, such as data
entry, screen navigation and data retrieval. By capturing both voice and
computer desktop activity and synchronizing them during replay, a company can
observe and analyze complete customer interactions as they actually occurred.
Supporting the need for Web-based customer interactions driven by the growth of
the Internet and eCommerce, our software enables companies to also capture,
evaluate and analyze Web chat sessions. In addition, our software allows
companies to selectively record and analyze customer interactions based on
business criteria which they define, such as key customers, important marketing
campaigns, specific products and selected customer service representatives, or
CSRs.



     We currently provide our software to an extensive base of large companies
with multiple contact centers, including American Express, Bank of America, Bell
Atlantic Mobile, Capital One, Chase Manhattan Bank, CheckFree, CompUSA, EDS,
Federal Express, Federated Department Stores, General Motors/Saturn, GTE, MCI
WorldCom, Merck-Medco, Sabre, Southern Company, Travelocity.com, VISA, Wells
Fargo and Xerox. As of December 29, 1999, we had licensed our software to over
135 customers at over 325 sites.


INDUSTRY BACKGROUND

     Developing and maintaining long-term customer relationships is critical to
the success of businesses operating in a competitive global marketplace. The
rapid growth of the Internet and eCommerce has increased the importance
companies place on their customer relationships. Because the Internet enables
consumers to easily evaluate products and prices from a wide range of
geographically dispersed vendors and quickly change vendors at relatively low
cost, it is becoming more difficult for businesses to develop long-term
relationships with their customers. As the use of the Internet expands as a
business platform, the need for personal contact is essential to enabling a
higher quality customer experience. The integration and optimization of customer
contacts across all communications media is therefore becoming a strategic and
tactical business requirement.


     In response to these trends, companies are adopting customer relationship
management initiatives seeking to increase the longevity and profitability of
their customer relationships. To effect these initiatives, companies have
developed software applications to automate and evaluate key sales, marketing
and customer service processes and improve the effectiveness of their customer
interactions. According to META Group, industry leading enterprises are
responding to the steadily increasing competitive pressures and are focusing on
customer relationship management as their most valuable post-year 2000
technology investment. In a press release, AMR Research predicted that the
market for technology related to customer relationship management will grow at a
compound annual rate of 49% from 1998 to 2003, exceeding $16.8 billion by 2003.
Historically, the focus of customer relationship management applications has
been on improving the companies internal sales, marketing and customer service
processes.



     Competitive pressures resulting from the emergence of the Internet and
eCommerce have required companies to shift the focus of their customer
relationship management initiatives from improving their internal operations to
meeting the needs of their customers. Companies are


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<PAGE>   43

developing a new set of business principles that place a greater value on
improving customer satisfaction and enhancing employee skills to foster customer
relationships and increase customer intimacy. We believe that companies with a
better understanding of the characteristics and preferences of their customers
will be able to more effectively customize product and service offerings that
result in increased customer retention. In addition, these companies will be
able to better identify opportunities to sell complementary or higher-end
products and to more accurately forecast customer demand.


     To understand and improve customer relationships, a company must first
improve its specific business processes that involve a high degree of direct
customer interaction. Today, many of a company's direct customer interactions
occur through call centers. These call centers are generally staffed by
telephone operators, often referred to as call center agents, who process a
steady flow of outbound or inbound telephone calls relating to the company's
products and services. Call centers generally consist of supervisor and agent
workstations linked to a central telephone switch and a common computer system.
The PELORUS Group estimates that at the end of 1998, there were approximately
70,000 installed call center systems with 3.3 million call center agent
positions in the United States. It further estimates that by the end of 2003,
the number of installed call center systems will increase to more than 117,000,
with the number of agent positions reaching approximately 5.3 million. As a
result of this widespread market adoption, companies have increased their focus
on developing and improving the efficiency of their call center operations.


     Historically, call centers have had the ability to handle only limited
telephone and other voice interactions. These call centers have generally
focused on either conducting outbound calls, for functions such as collections
and product sales, or on managing inbound calls, for purposes such as product
support, order processing or customer service. The growth of the Internet and
the increased focus of businesses on optimizing relationships with their
customers have contributed to the evolution of traditional single-function,
telephone-based call centers into multi-functional, multi-channel customer
interaction centers, or contact centers. The emergence of multi-channel customer
contact centers has generally increased the volume and complexity of tasks that
call center agents are required to perform. As a result, traditional
single-function call center agents must now assume more valuable, multi-function
customer service responsibilities. Companies are now attempting to apply the
best practices from the call center industry to the rapid, electronic,
high-volume customer interactions associated with the Internet.


     These customer service representatives are now required to effectively
handle multiple tasks that involve interaction across a growing number of
customer touch points, including telephone, the electronic exchange of text
messages over the Internet, commonly referred to as Web chat, and e-mail. For
example, certain Web-based consumers may have the option to select a "call me
now" button which initiates a Web chat or direct telephone interaction with a
customer service representative. While Web-based customer interactions are
expected to continue to grow rapidly, Jupiter Communications estimates that 90%
of all online customers still prefer human interaction. In addition, companies
have discovered that the success of their marketing initiatives depends on their
ability to rapidly make adjustments to these campaigns as they progress. We
believe these adjustments are best effected at the direct point of customer
contact, which we believe is increasingly occurring through the contact center.
The increasing importance of developing long-term customer relationships, the
growing complexity of the customer service representative's job and the
opportunity to manage marketing initiatives through the customer contact center
have combined to dramatically increase the need for companies to provide an
effective means to record, evaluate and analyze their customer interactions.



     A number of applications have emerged to attempt to address the need to
better manage these interactions. However, we believe that most currently
available solutions do not adequately address the importance of optimizing
customer interactions through recording at the point of contact, evaluation of
the customer contact and analysis of customer service representative
performance. For example, current solutions require companies to record every
call center telephone call and

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<PAGE>   44


store these calls on large-scale proprietary hardware systems. These solutions
do not allow a company to selectively record, retrieve, evaluate and analyze
specific customer interactions based on criteria selected by the company.
Consequently, companies who employ these existing solutions have only a limited
ability to actively evaluate and improve their customer interactions which in
turn limits their ability to attract and retain customers. As a result, we
believe that there is a significant opportunity in the marketplace for a
comprehensive, integrated multimedia solution which optimizes a company's
customer interactions.



Our eQuality Solution



     We provide business-driven multimedia recording and analysis software that
enables companies to enhance their customer interactions. As a result, we
believe our customers are able to generate additional revenue opportunities,
improve profitability and enhance customer retention. We believe our software
and services provide the following key business benefits:



     - Increases revenue opportunities.  Our software enables companies to
       analyze customer interactions, incorporating data from their existing
       databases and systems. As a result, companies are able to customize their
       sales and marketing efforts to individual customer preferences or
       tendencies, improve the selling techniques of their customer service
       representatives and sell additional complementary or higher-end products
       and services to their existing customers. Consequently, we believe
       companies utilizing our software can generate additional revenue
       opportunities.



     - Enables improved profitability.  Because our solution improves the
       overall quality of companies' interactions with their customers, costs
       associated with customer turnover are reduced. By providing CSRs with
       better training, companies can improve the efficiency of CSRs by reducing
       their average "talk time," which results in decreased total telephone
       charges and a reduced total number of CSRs needed to handle the same
       volume of customer interactions. Because our software enables the
       evaluation of individual CSR performance, companies can customize
       incentives to reward CSRs. We believe these customized incentives,
       together with effective feedback and training, leads to increased CSR job
       satisfaction, retention of high quality CSRs and reduced costs related to
       CSR turnover. According to the 1999 Purdue University Call Center
       Benchmark Report, inbound call center turnover averages 26% and the
       average cost to acquire a CSR is $6,398. This data, combined with the
       estimates from PELORUS Group, translate into an aggregate CSR turnover
       cost of approximately $5.5 billion.



     - Enhances customer retention.  Using our software, companies can develop
       more intimate knowledge of their customers, which should improve the
       overall quality of products and services being delivered to customers. We
       believe that the growth in Internet-related commerce and services will
       increase the importance customers place on high-quality and consistent
       customer service. The Yankee Group estimates that the average cost to
       acquire a single customer by Amazon.com, eBay and Preview Travel has
       risen approximately 45% from the second quarter of 1998 to the second
       quarter of 1999. It is imperative that companies retain these costly new
       customers to capitalize on their investment. As a result, we believe that
       companies who deliver excellent service to their customers will develop
       longer-term, more profitable customer relationships.


     We believe that we are able to provide these key business benefits through
the innovative features of our software solution, which include the following:


     - Enables synchronized replay of voice and computer desktop data.  Our
       eQuality software records a CSR's voice interaction with a customer as
       well as the CSR's corresponding computer desktop activities, such as data
       entry, screen navigation and data retrieval. By capturing both voice and
       computer desktop activity and synchronizing them during replay, companies
       can observe and analyze complete customer interactions as they actually

                                       40
<PAGE>   45


       occurred. This enables companies to not only evaluate the behavior of
       their customer service representatives, but also to determine whether the
       necessary technology resources for customer support are readily available
       to them and whether they are making effective and efficient use of
       available technology resources.



     - Captures customer interactions across multiple communications media.  Our
       software captures customer interactions from a variety of communications
       media, including telephone, Web chat and e-mail. This multimedia
       capability allows companies to deliver consistent, high quality customer
       service regardless of the communication channel.



     - Records based on company-selected criteria.  Companies using our software
       can record customer interactions based on selected criteria, which we
       refer to as business-driven recording. This enables companies to define
       specific business criteria to trigger recording and analysis of
       information, such as key customers, important marketing campaigns,
       specific products and selected customer service representatives. Further,
       companies can define critical business events to trigger the capture of
       the interaction, such as customer problems which have reached a certain
       severity level. Companies can then use this information to quickly
       evaluate the performance of targeted business initiatives and to adjust
       those initiatives for higher market impact.



     - Provides performance analysis and feedback.  Our eQuality Evaluation
       software facilitates the review, evaluation and scoring of customer
       service representatives, providing an immediate performance summary.
       Using our eQuality Analysis software, a user can combine important data
       derived from eQuality Evaluation with data derived from many other
       business applications, such as customer relationship management and
       enterprise resource planning software and integrated telephony
       applications. For instance, a company can evaluate quality scores
       obtained from eQuality Evaluation with sales achievement data received
       from a sales tracking system to ensure CSRs are not compromising the
       quality of their customer interactions to sell new products. The
       resulting information, which is presented in easy-to-use formats, such as
       reports, graphs and tables, allows companies to provide more meaningful
       feedback to CSRs on their performance and better analyze the overall
       operation of the contact center.



     - Integrates with third party software and hardware.  Our eQuality software
       is designed to integrate with a variety of third party software, such as
       customer relationship management and enterprise resource planning
       applications. In addition, our software is designed to integrate or be
       compatible with a company's existing telephony and computer network
       hardware and software such as telephone switches, automated telephone
       dialers and computer-telephony integration systems. This allows companies
       to capitalize on their existing infrastructure and gain the benefits of
       our software with minimal additional investment.



     - Provides an open architecture that scales to support small to large
       installations.  Our software operates on the Windows NT platform and is
       compatible with standard voice cards and databases. Also, our software
       can capture and record computer screen activity from customer service
       representative workstations that are running any of a variety of
       operating systems. By utilizing off-the-shelf hardware and software, our
       customers are able to implement and support our products at a relatively
       low cost. Because our software is scaleable, it can support the needs of
       a small single site as well as large multi-site installations. For
       example, our software is currently being used at a customer installation
       with approximately 7,000 CSRs. In addition, our software can be expanded
       to accommodate an increasing number of CSRs with minimal hardware and
       software investment.



     - Enables rapid deployment.  Because of our software's features, our
       extensive third party integration, our open architecture and our
       implementation process, we can typically implement our software at a
       customer's initial site within 30 to 45 days from the date the software
       agreement is signed by a new customer. We ordinarily complete the actual

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       software installation within three to five days. Since the detailed
       project planning occurs during installation at the first site, we can
       implement our software at additional sites in five to seven days. Most of
       our target market consists of large corporations with many customer
       contact centers, and we have significant experience with customers
       purchasing our software for multiple sites. As a result, our rapid
       deployment is important in that it allows those customers to quickly
       implement and begin realizing the benefits of our software.


STRATEGY

     Our objective is to be the leading provider of software that enables
companies to optimize their customer interactions across multiple communications
media, including telephone, Web chat, eCommerce, Internet self-service and
e-mail. Key elements of our strategy include the following:

     - Extend the breadth and depth of our product offerings.  We intend to
       continue to invest in research and development to enhance our current
       software and build new software to address the growing needs of companies
       that seek to better manage their customer relationships across multiple
       communications media. We also intend to extend our Web-based
       capabilities, such as the recording and analyzing of integrated
       eCommerce, Internet self-service, e-mail and voice interactions.
       Additionally, we plan to expand the number of third party applications
       with which our software can integrate.

     - Increase sales to existing and new customers.  A majority of our existing
       customers are large companies that have multiple contact centers. While
       we have been successful in penetrating these customers and installing our
       software at more than one contact center, we have not yet installed our
       software at a majority of their contact centers. We intend to capitalize
       on the success of our initial installations, use our direct sales force
       and emphasize the scalability and rapid deployment of our software to
       increase the number of installations at existing customer sites which
       have not yet installed our software. We also plan to continue pursuing
       new customer accounts with multiple contact centers through our existing
       sales force and our network of strategic relationships.


     - Expand our network of application software and Internet infrastructure
       business alliances.  We intend to expand our network of business
       alliances with complementary application software and Internet
       infrastructure providers to increase the number of products with which
       our software is compatible. We believe the demand for our software will
       increase as it becomes compatible with an increasing number of customer
       relationship management, enterprise resource planning and Internet
       infrastructure applications. In addition, expanding this network of
       business alliances will enable us to generate new sales leads as our
       business alliances recommend our product to their customers. Currently we
       have business alliances with the following application and Internet
       infrastructure providers: Siebel Systems, Clarify, Cisco/Geotel, Genesys,
       eShare, Kana, eGain, Brightware, Mustang.com and Davox.



     - Expand our international presence.  We currently maintain a small direct
       sales force in the United Kingdom. In the future, we plan to expand our
       direct and indirect sales channels in Europe, the Asia Pacific region and
       Latin America, with particular attention to areas that are actively
       adopting customer relationship management solutions.


PRODUCTS


     Our eQuality software initiates recording of customer interactions based on
criteria selected by companies and facilitates retrieval and analysis of the
recorded information. It records a customer service representative's voice
interaction with a customer as well as the CSR's corresponding computer desktop
activities, such as data entry, screen navigation and data retrieval. The voice
and data are captured and stored on a computer disk for synchronized evaluation
and analysis. By capturing both voice and desktop activity and synchronizing
them during replay, a company can observe and analyze complete customer
interactions as they actually occurred. The captured

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interactions can then be selectively retrieved, combined with information from a
company's other business systems, such as customer relationship management and
enterprise resource planning software, analyzed and presented in a number of
summary or detailed formats. Our software thus enables companies to evaluate the
effectiveness of its CSRs, improve contact center performance and profile their
customers' characteristics and preferences to create customized product and
service offerings.



     An integral feature of eQuality is business-driven recording, which allows
a company to record specific customer interactions based on criteria that it
selects. Using eQuality, a company can define business rules that trigger
recording of selective customer interactions that are particularly critical to
its operating performance. For example, a company may use eQuality to record
customer interactions based on a number of criteria, including:



     - Key customers.  Our software can selectively record all calls from
       specific classes or groups of customers having common traits or
       characteristics. Examples include customers with certain sales or asset
       levels or customers having a particular importance to the company.



     - Important marketing campaigns.  All calls associated with particular
       marketing campaigns can be recorded so that the effectiveness of the
       campaign can be evaluated while the initiative is in process.
       Consequently, adjustments can be made proactively to optimize performance
       of the campaign.



     - Specific products.  Interactions that relate to specific products can be
       identified and recorded to allow businesses to evaluate product design,
       installation and service issues. Examples include selected calls related
       to new products, key revenue-producing products and particularly
       profitable products.



     - Selected customer service representatives.  Calls that are handled by
       specific CSRs can be sampled so that supervisors can more effectively
       monitor and train CSRs. Examples include newly hired CSRs and CSRs that
       are not achieving desired performance levels.



     By recording only critical customer interactions based on business rules,
companies have fewer interactions to store and therefore significantly lower
storage requirements. Further, our data capture technique allows companies to
utilize minimal network bandwidth by sending across the network only the changed
areas of a CSR's computer desktop screen. The result is a lower total cost of
ownership.



     In addition, our software is designed to integrate or be compatible with a
company's existing telephony and computer network hardware and software. Our
software is designed to run on a server which employs the Windows NT operating
system. In addition, our software can capture and record computer screen
activity from CSR workstations that are running any of a variety of operating
systems, including Windows 3.1, Windows 95/98, Windows NT, OS/2, Sun Solaris,
HP(UX)3270 and AS/400.


                                       43
<PAGE>   48


     The following diagram provides a graphical depiction of our software
solution:


    3.  Insert at Business Page 44. This graphic is a three level graphic.
    The top level is five three-dimensional cubes. Inside the first cube text
    states: "Voice and Data Recording". Inside the second cube text states: "Web
    Chat Recording". Inside the third cube text states: "Email Recording".
    Inside the fourth cube text states: "Contact Evaluation". Inside the fifth
    cube text states: "Performance Analysis". To the left of the five cubes,
    text states: eQuality Application Components. The text directly above each
    of the five-dimensional cubes states: "eQuality Call," "eQuality
    Interactive," "eQuality Response," "eQuality Evaluation" and "eQuality
    Analysis". The second level is a three-dimensional rectangle with an oval
    insert centered within the top of the three-dimensional rectangle. Inside
    the first rectangle, text states: "Core Technology Components." The oval
    component text states: "eQuality". To the left of the first rectangle text
    states: "eQuality Technology Platform." The third level is one
    three-dimensional rectangle with an oval insert centered within the top of
    the three-demensional rectangle. Inside the rectangle text states:
    "Integration Modules". The oval insert text states: "eQuality Connect". To
    the left of the rectangle is text stating: "eQuality Technology
    Integration".


     Our eQuality suite of products is comprised of the following modules:



     eQuality Call.  eQuality Call records a customer service representative's
voice interaction with a customer and the CSR's corresponding computer desktop
activities, such as data entry, screen navigation and data retrieval. The
captured voice and desktop activity can then be synchronized during replay,
allowing companies to observe and analyze complete customer interactions as they
actually occurred. This enables companies to evaluate the performance of CSRs,
determine whether the necessary technology resources for customer support are
available to the CSRs and ascertain whether the CSRs are making effective and
efficient use of these resources. Supervisors can use this information to train
CSRs, improve company systems and resources which are designed to support CSRs
and enhance the quality of the services being delivered to customers.



     eQuality Interactive and eQuality Response.  Our eQuality Interactive and
eQuality Response applications allow a company to record Internet interactions,
including Web chat, instant messaging, guided browser sessions and e-mail, based
on user-defined business rules. These applications enable companies to gauge the
effectiveness of their CSRs' Internet skills, refine newly


                                       44
<PAGE>   49


implemented Internet processes and optimize the effectiveness of their Web
technology deployments. In combination with eQuality Call, companies are able to
deliver consistently high standards of service regardless of the medium.



     eQuality Evaluation.  Our eQuality Evaluation application facilitates the
review, evaluation and scoring of CSRs, providing an immediate summary of a
CSR's performance. eQuality Evaluation Reporter, CSR supervisors can build
custom evaluation forms which are designed to collect information about aspects
of a CSR's performance that are most important to them. Supervisors and others
can input information regarding a CSR's performance into the form, which is then
collected in a database. The collected information can be retrieved, presented
in a summary format, analyzed and ultimately used to measure and improve a CSR's
performance.



     eQuality Evaluation can reveal problem areas, issues, trends and
opportunities. Supervisors and others with access to eQuality Evaluation can
review CSRs' performance and determine opportunities to increase their skill
levels through training. Supervisors can compare CSRs' performance to current
goals and provide more realistic future goals.



     Historically and at present, eQuality Call was and is licensed together
with our eQuality Evaluation software. To date, we have derived all of our
license revenues from the sale of these two products.



     The following diagram presents a sample screen taken from eQuality
Evaluation:


    [A screen of the eQuality Evaluation software. The tool bar is located on
    the top portion of the page. The remainder of the page contains data entry
    pull down menus and multilayered tab menus]


     eQuality Analysis.  eQuality Analysis provides a more comprehensive
analysis of customer interaction and CSR performance by bridging the disparate
information systems of a company. Using eQuality Analysis, a company can combine
data derived from eQuality Analysis with data derived from information obtained
from a company's other business systems, such as customer relationship
management and enterprise resource planning software and integrated telephony
applications. Combining multiple sources of data from within the company into a
common analysis


                                       45
<PAGE>   50


and reporting system allows for a more thorough evaluation of CSR and overall
contact center performance. Recognizing the importance of multi-channel contact
centers, we have designed eQuality Analysis to integrate with business systems
that collect data from a broad range of communications media. eQuality Analysis
became generally available during the quarter ended September 30, 1999, and we
have not yet recognized any revenues from eQuality Analysis.



     eQuality Analysis measures the performance of a company's contact center
based on criteria selected and weighted by the company. This performance index
allows a company to prioritize its key business drivers. For instance, a company
can evaluate quality scores obtained from eQuality Evaluation with sales
achievement data received from a sales tracking system to ensure CSRs are not
compromising the quality of their customer interactions to sell new products.



     eQuality Analysis features the flexibility to produce a wide array of
summary and detailed analyses in easy-to-use formats, such as reports, graphs
and tables. Reporting features include Web-publishing capabilities, which allow
contact center managers to create reports in an HTML format, view them online or
print them for distribution. Additionally, CSRs are able to view their scores by
simply accessing the corporate Intranet.



     The following diagram presents a sample screen taken from eQuality
Analysis:


    [A screen of the eQuality Analysis Software. The tool bar is located on the
    top portion of the page. Underneath the tool bar is the text and graphical
    display of information relating to the performance of a CSR]

PROFESSIONAL SERVICES

     Our professional services group plays an integral role in installing our
software and training and supporting our customers. Specifically, we provide the
expertise, professional consulting staff and technology tools to install our
software and provide ongoing support to our customers. Our experienced
installation professionals work with the customer to build a solid technical
infrastructure that supports our software applications.

                                       46
<PAGE>   51


     An initial implementation engagement typically lasts 30 to 45 days from the
date the software agreement is signed by a new customer, and involves the
planning, configuration, testing and installation of our software. We ordinarily
complete the actual software installation within three to five days. We believe
these installation projects allow our consultants and systems engineers to gain
industry-specific knowledge that can be used in future projects and products.


     In addition to installing our software and supporting our customers, our
professional services team works closely with our internal research and
development organization to help enhance our software solutions. Experience
gained by our professional services group through ongoing installation of our
software is regularly conveyed to our development staff. Our research and
development organization then capitalizes on this experience to design
enhancements to our software. Our services staff also maintains a technical
support hotline.

CUSTOMERS


     Our target customers include companies in a number of industries having at
least one contact center. As of December 29, 1999, we had licensed our software
to over 135 customers at over 325 sites. To date, customer installations have
ranged from as small as one contact center having 25 CSRs, to customers with 14
contact centers having an aggregate of approximately 7,000 CSRs. The following
table is a representative list of customers who have licensed our software:



<TABLE>
<CAPTION>
FINANCIAL SERVICES              TECHNOLOGY & TELECOM            OTHER
- ------------------              --------------------            -----
<S>                             <C>                             <C>
American Express                Alltel Communications           7C Ltd
Bank of America                 Bell Atlantic Mobile            ADP
BB&T                            BellSouth                       Carlson Wagonlit Travel
Capital One                     CCH                             Federal Express
Chase Manhattan Bank            CheckFree                       General Motors/Saturn
Fleet Bank                      EDS                             Georgia Pacific
Discover Financial Services,    GTE                             International Paper
  formerly Novus                MCI WorldCom                    Maytag
Liberty Health                  McLeod USA                      McKesson/HBOC
PNC Bank                        MediaOne                        Merck-Medco
VISA                            MTT Mobility                    Norcross Teleservices
Wells Fargo                     TCI                             PC ServiceSource
                                Travelocity.com                 Pepsi
                                WebLink Wireless                Promus Hotels
                                Xerox                           Sabre
</TABLE>



<TABLE>
<CAPTION>
UTILITIES                       RETAIL
- ---------                       ------
<S>                             <C>                             <C>
First Energy                    BMG Direct
Niagra Mohawk                   CompUSA
Northeast Utilities             Federated Department Stores
Southern California Edison      Fingerhut
Southern Company                Victoria's Secret
Wisconsin Power and Light
</TABLE>



     Two customers accounted for 28% of our revenues in 1997. Two other
customers accounted for 27% of our revenues in 1998. In 1999, no customer
accounted for 10% or more of our revenues.


SELECTED CUSTOMER EXAMPLES

GM/SATURN

     Saturn is a wholly owned subsidiary corporation of General Motors. The
Saturn customer assistance center is where Saturn customers call upon a skilled
team of customer support consultants and customer assistant managers from both
Saturn and Centrobe, an EDS company and a leading provider of enterprise
customer management solutions. Recording and analysis software is

                                       47
<PAGE>   52


an important component of the company's assistance center. In calculating the
number of Team Leaders on staff along with their annual salaries, Saturn
determined that eQuality has already decreased up to 50% of its workload,
measured by call monitoring time, through the automated recording process and
the subsequent evaluation processes.


PNC BANK

     PNC Bank Corporation is a diversified financial services organization. To
service the financial needs of regional community banking customers, PNC Bank
operates a nearly 900 person customer contact center -- the National Financial
Services Center. Voted one of the top five call centers in financial services,
this contact center processes more than 2.8 million customer interactions for
PNC Bank each month. In response to the company's need to provide
industry-leading customer service, PNC Bank leverages our recording application
to record a random sample of each financial services consultant's voice and data
interactions with customers every month. This information is used to properly
coach consultant's on customer service skills, trend customer needs and
requests, and ensure quality service in future customer interactions.

COMPUSA


     CompUSA is a leading computer retailer in the United States. The company
deployed eQuality in its call center services facility, which is responsible for
all technical support to CompUSA's individual and business customers, customized
help desk services for third party customers, and technical support outsourcing
for computer manufacturers and software publishers. The 120,000-square-foot
facility opened in July 1998 and has the capacity for over 1,000 agents. CompUSA
expects eQuality's business-driven recording capabilities to improve agent
interaction with customers and internal systems by simultaneously monitoring
agents' conversations and on-screen activities for improved coaching and
training sessions that result in better customer service.


7C LTD


     7C Ltd is a leading independent outsourced customer relationship management
specialist in the United Kingdom. The company implemented the eQuality solution
as part of 7C's recently announced L10 million, three-year expansion program to
become a major player in the European call center market and the leading
provider of Internet-based customer contact solutions. eQuality helps the
company not only see how well its people are servicing customers but also,
crucially, how well its technology is performing. 7C can determine immediately,
for example, if slow computer response times or screen sequencing are making
calls unnecessarily long and placing undue demand on staff.


PC SERVICESOURCE


     PC ServiceSource is a leading provider of complete and integrated service
logistics outsourcing solutions for both OEMs and service providers in the
personal computer industry. Approximately 150 sales services representatives
handle about 10,000 phone calls daily. Asking for the sale and "upselling" is a
skill that PC ServiceSource managers are enhancing through the use of the
eQuality voice and data recording solution. Its new training program places a
greater emphasis on the sales opportunities presented to sales service
representatives when they are interacting with customers. PC ServiceSource has
seen dramatic improvements and plans to continue regular training initiatives
designed to assist sales service representatives in increasing their sales,
while improving their skills with the help of our software.


                                       48
<PAGE>   53

PROMUS HOTEL CORPORATION


     Promus Hotel Corporation is the franchisor and operator of the Doubletree
Hotels Guest Suites and Resorts, Embassy Suites, Hampton Inn, Hampton Inn &
Suites, Homewood Suites, Club Hotels by Doubletree, Red Lion Hotels, Embassy
Vacation Resorts and Hampton Vacation Resorts brands. The eQuality solution has
enabled them to address specific service delivery and training issues as they
take place. Strengthening its service proactively and developing reservation
sales representatives' skill sets has been greatly enhanced with eQuality at
their central reservations office.


SALES AND MARKETING


     We sell our software primarily through a combination of a direct sales
force and resellers. We have 11 sales offices in the United States, one in
Canada and two in the United Kingdom. As of December 29, 1999, our sales and
marketing organization consisted of 51 employees worldwide.



     To date, substantially all of our revenues have been generated through our
direct sales force, which consists of 33 sales people in 13 locations. Our
direct sales force consists of sales agents and regional managers. In addition
to qualified leads generated internally, our direct sales force also pursues
qualified leads provided by companies with whom we have formal or informal
referral agreements. These agreements are not exclusive and may be terminated by
either party. Our direct sales force is responsible for the direct sales effort
and manages, negotiates and closes those sales.



     To expand the coverage and support of our direct sales force, we also
develop strategic marketing alliances with leading companies in our industry.
These relationships may include joint marketing campaigns and selling
strategies. Separate from our direct sales force, our business development
personnel are responsible for the initiation, negotiation and completion of
these partnerships. We currently have these relationships with Siebel Systems,
Clarify, Cisco/Geotel, Genesys, eShare, Kana, eGain, Brightware, Mustang and
Davox.


     In addition to our direct sales force, we have agreements with MCI WorldCom
and Rockwell under which they resell our software. To support this indirect
sales channel, our business development personnel provide information and
training to these companies' sales personnel so that they are better able to
educate potential customers about the benefits of our software and services. Our
agreements with our resellers are not exclusive and may be terminated by either
party.

     Our direct sales cycle typically begins with the qualification of a sales
lead or the request for a proposal from a prospective customer. The sales lead,
or request for a proposal, is followed by the qualification of the lead or
prospect, an assessment of the customer's requirements, a formal proposal,
presentations and product demonstrations, site visits to an existing customer
using our software and contract negotiation. The sales cycle can vary
substantially from customer to customer but typically lasts three to six months,
and is considered completed with the signing of the contract. Historically, most
of our customers have expanded their use of our solutions to expand the number
of CSRs at existing sites and to license additional contact centers, with a
minimal incremental sales effort on our part. This results from high levels of
customer satisfaction within our installed base. Since a majority of the
detailed project planning occurs during the installation at the first site, our
software can be used in production at additional sites in five to seven days.

     We use a variety of marketing programs to build awareness of Witness
Systems, our brand name and our software, as well as to attract potential
customers. These programs include market research, product and strategy updates
with industry analysts, public relations activities, direct mail and
relationship marketing programs, seminars, trade shows, speaking engagements and
Web site marketing. Our marketing organization also produces marketing materials
to support our sales efforts, that include brochures, data sheets and other
technical descriptions, presentations and demonstrations.

                                       49
<PAGE>   54

     The market for business software has experienced seasonal fluctuations in
demand. The first and third quarters of the year have been typically
characterized by lower levels of revenues. As our revenues grow, seasonal
fluctuations in our revenues may become more evident.

RESEARCH AND DEVELOPMENT

     We believe our software development capabilities are essential to our
strategy of enhancing our core technology, developing additional applications
incorporating that technology and maintaining the competitiveness of our
software. We devote a substantial portion of our resources to developing new
software and features, extending and improving our software technology and
researching new technological initiatives in our market. We believe that our
future success depends in part upon our ability to continue to enhance existing
software, respond to changing customer requirements and develop and introduce
new or enhanced software that incorporate new technological developments and
emerging industry standards.


     Our research and development expenditures for the years ended December 31,
1996, 1997 and 1998 and for the nine months ended September 30, 1999 were $1.1
million, $1.8 million, $3.5 million and $4.1 million, respectively. We intend to
continue to increase our investment in research and development in the future.
As of December 29, 1999, 51 of our employees were engaged in research and
development and software maintenance activities.


COMPETITION

     Our software and services compete in the emerging market for products that
record and analyze customer interactions. This market is intensely competitive
and experiences rapid changes in technology. We believe that we compete
effectively with our competitors. However, many of our current and potential
competitors may have longer operating histories, more established business
relationships, larger customer bases, a broader range of products and services,
greater name recognition and substantially greater financial, technical,
marketing, personnel, management, service, support and other resources than we
do. This could allow our current and potential competitors to respond more
quickly than we can to new or emerging technologies and changes in customer
requirements, better take advantage of acquisitions and other opportunities,
devote greater resources to the marketing and sale of their products and
services, and adopt more aggressive pricing policies. In addition, many of our
competitors market their products through resellers and companies that integrate
their technology and products with those of the competitor. These resellers and
technology partners of our competitors often have strong business relationships
with our customers and potential customers. Our competitors may use these
business relationships to market and sell their products and compete for
customers with us. We cannot assure you that our competitors will not offer or
develop products and services that are superior to ours, or that achieve greater
market acceptance. Our competitors include:

     - quality monitoring suppliers to the call and contact center industry,
       which historically have been companies that develop voice-only recording
       software;

     - traditional call logging vendors that have historically focused on
       providing products that record all calls made by or to the user,
       including emergency services, such as 911, and verification and liability
       users, such as trading floors and stock brokers;

     - systems integrators and consulting firms which design and develop custom
       systems and perform custom integration; and


     - new, larger and more established entities that may acquire, invest in or
       form joint ventures with providers of recording or performance enhancing
       software solutions, such as vendors of customer relationship management
       products, computer telephony companies and computer hardware, software
       and networking companies.


                                       50
<PAGE>   55

     In addition, we have developed, and intend to continue to develop,
relationships with companies that resell our software, companies that integrate
our software with their technology and products and companies that provide us
with customer referrals or leads. Some of these companies have similar, and
often more established, relationships with our competitors, and may recommend
the products and services of our competitors to customers instead of our
software and services. In addition, through their relationships with us, these
companies could learn about our software and the market for our software and
services and could develop and sell competing products and services.

     The principal competitive factors in our market include:

     - product performance, reliability and features;

     - user scalability and open architecture;

     - third party integration;

     - quality and speed of product implementation;

     - ease-of-use for customers;

     - analytic capabilities of the product;

     - how quickly new products and product enhancements can be brought to
       market;

     - customer support; and

     - pricing of products and services.


     We believe that we presently compete favorably with respect to each of
these competitive factors. However, we expect that competition will increase as
other established and emerging companies enter our market and as new products,
services and technologies are introduced. Increased competition may result in
price reductions, lower gross margins and loss of market share. This could
materially and adversely affect our business, financial condition and results of
operations.


PROPRIETARY RIGHTS

     General.  Our success depends to a significant degree on the legal
protection of our software and other proprietary technology rights. We rely on a
combination of patent, trade secret, copyright and trademark laws and
confidentiality and non-disclosure agreements with employees and third parties
to establish and protect our proprietary rights. These measures may not be
sufficient to protect our proprietary rights, and we cannot be certain that
third parties will not misappropriate our technology and use it for their own
benefit. Also, most of these protections do not preclude our competitors from
independently developing products with functionality or features substantially
equivalent or superior to our software. Any failure to protect our intellectual
property could have a material adverse effect on our business.

     Licenses.  Our licenses are designed to prohibit unauthorized use, copying
and disclosure of our software technology. When we license our software to
customers, we require license agreements containing confidentiality terms
customary in the industry in order to protect our proprietary rights in our
software. These agreements generally warrant that our software will materially
comply with our written documentation and is free of viruses and other illicit
code. We also warrant that we own the software we distribute, have not violated
the intellectual property rights of others and that our current software is Year
2000 compliant. We license our products in a format that does not permit the
users to change the software code. In addition, because we treat the source code
for our products as a trade secret, all employees and third parties who require
access to the source code are first required to sign non-disclosure agreements.

     Patents.  We have received a patent generally relating to our technology
that enables the recording of a CSR's computer desktop activities and the
synchronization of certain of these activities with the CSR's voice
interactions. Our patent also relates to our data capture technique
                                       51
<PAGE>   56


that records only particular changed regions of a CSR's computer screen. Our
patent was granted on May 31, 1996 and will expire on May 30, 2016. We are
currently evaluating whether to revise one aspect of the patent for our
synchronization techniques. If we are unsuccessful, we may not be able to
enforce any aspect of that patent against third parties who infringe it. We also
have two patent applications pending with the United States Patent and Trademark
Office. There is no guarantee that our pending applications will result in
issued patents or, if issued, will provide us with any competitive advantages.



     Trademarks and service marks.  We have United States trademark
registrations on the mark WITNESS, on our logo and on one additional mark, and
we have pending United States trademark applications for our marks eQuality and
Bringing eQuality to eBusiness. We also claim common law protections for other
marks we use in our business. Competitors of ours and others could adopt marks
similar to ours, or try to prevent us from using our marks, consequently
impeding our ability to build brand identity and possibly leading to customer
confusion.



     Copyrights.  We have seven pending copyright registrations covering the
most recent release of our eQuality software.


EMPLOYEES


     As of December 29, 1999, we had 171 full-time employees. Of these
employees, 51 were engaged in research and development and software maintenance,
51 were engaged in sales and marketing, 42 were engaged in professional services
and 27 were engaged in executive, finance, administration and operations.


     None of our employees are represented by a labor union or covered by a
collective bargaining agreement. We have not experienced any labor-related work
stoppages and consider our relations with our employees to be good.

FACILITIES

     Our principal administrative, sales, marketing, support, and research and
development facility is located in Alpharetta, Georgia. This facility consists
of approximately 31,200 square feet and is leased through July 2002. In
addition, we lease a total of 10 sales offices in the United States, one in
Canada and two in the United Kingdom for our direct sales force. We believe our
facilities are adequate for our current requirements.

LEGAL PROCEEDINGS

     We are not currently a party to any material legal proceedings.

                                       52
<PAGE>   57

                                   MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS


     Our executive officers and directors, the positions held by them, and their
ages as of December 29, 1999 are as follows:



<TABLE>
<CAPTION>
                   NAME                      AGE                    POSITION
                   ----                      ---                    --------
<S>                                          <C>   <C>
David B. Gould.............................  40    President, Chief Executive Officer and
                                                     Chairman of the Board
Jon W. Ezrine..............................  32    Chief Financial Officer
Russell E. Brown...........................  41    Vice President, Business Development
Jeffery S. Ford............................  49    Vice President, Operations
Colin Gallick..............................  46    Vice President, International Operations
Doug Gisby.................................  39    Chief Technology Officer and Vice
                                                   President, Engineering
Alain Livernoche...........................  40    Vice President, North American Sales
Nancy Y. Treaster..........................  38    Vice President, Marketing
James W. Judson, Jr........................  41    Director
Thomas J. Crotty...........................  41    Director
John Abraham...............................  44    Director
Joel Katz..................................  36    Director
</TABLE>



     David B. Gould has served as our President and Chief Executive Officer
since February 1999 and as Chairman of our Board since November 1999. From March
1996 to November 1998, Mr. Gould was Chief Executive Officer and Chairman of the
Board of InStream Corporation, a healthcare electronic commerce company. In
1998, InStream filed for liquidation under bankruptcy law. Prior to that, Mr.
Gould served as President of Digital Communications Associates, Inc.'s Remote
Access Division, now Attachmate Corporation, an enterprise information access
and management software vendor, from August 1994 to August 1995. From June 1986
to July 1994, Mr. Gould was employed by Management Science America, a developer
of enterprise solutions, where he held various management and executive level
positions in marketing, development and support, last serving as Vice President
of Financial Systems. Mr. Gould holds a BS in Econometrics from the University
of Pennsylvania and an MBA from Emory University.


     Jon W. Ezrine has served as our Chief Financial Officer since April 1997.
From June 1993 to March 1997, Mr. Ezrine served as Controller for SQL
Financials, now Clarus Corporation, a client/server application software vendor.
From April 1992 to June 1993, Mr. Ezrine served as Controller for ITL Interiors,
Inc., distributor of materials to real estate property management companies.
Prior to that, Mr. Ezrine was employed by Arthur Andersen & Co. as a Senior
Staff Accountant. Mr. Ezrine holds a BS in Finance from the University of
Virginia.

     Russell E. Brown joined us as Vice President of Business Development in
August 1999. From August 1993 to August 1999, Mr. Brown served in various
management positions with PeopleSoft Inc., a leading provider of client/server
application software products, most recently serving as Vice President of the
Sales/Retail Industry Business Unit. Mr. Brown holds a BS in Industrial
Management from the Georgia Institute of Technology.


     Jeffery S. Ford joined us as Vice President of Operations in July 1998.
Prior to that, Mr. Ford worked as an independent consultant from January 1998 to
June 1998. From July 1989 to December 1997, Mr. Ford served in various
management positions at Cyborg Systems, a leading software provider of human
resources applications, most recently serving as Vice President of Global


                                       53
<PAGE>   58

Development. Mr. Ford holds a BA in Behavioral Management from the Georgia
Institute of Technology.

     Colin Gallick joined us as Vice President of International Operations in
December 1998. From September 1996 to January 1998, Mr. Gallick served as Vice
President of FTP Software Inc., now NetManage, an international leader in the
design, development, marketing, sale, and support of connectivity software
products. From October 1991 to September 1996, Mr. Gallick served as Vice-
President and a director of Utopia Information Systems Inc., a supplier of help
desk applications and software. Mr. Gallick holds a degree in Marketing from
Bristol Polytechnic and an MS in Marketing from the University of Bath.

     Doug Gisby joined us as Chief Technology Officer & Vice President of
Engineering in March 1999. Prior to that, Mr. Gisby worked as an independent
consultant from March 1998 to February 1999. From January 1997 to February 1998,
Mr. Gisby served as Director of Engineering for Genesys Telecommunications
Laboratories, a provider of enterprise-wide platform and application software.
From May 1992 to January 1997, Mr. Gisby served in various management positions
at Rockwell International Corporation, a world leader in electronic controls and
communications, most recently serving as Director of Advance Technology within
the Electronic Commerce Division. Prior to that, Mr. Gisby served as Software
Development Manager with Aspect Telecommunications, a leading provider of
customer relationship management solutions, from January 1989 to May 1992. Mr.
Gisby holds a BS Degree in Computer Science from the University of
Staffordshire.

     Alain Livernoche has served as our Vice President of North American Sales
since June 1998. From January 1997 to June 1998, Mr. Livernoche served as Vice
President of Sales, Western Region for SQL Financials, now Clarus Corporation, a
client/server application software vendor. Prior to that, Mr. Livernoche served
in various management positions at Dun & Bradstreet Software, now GEAC, a
developer of enterprise solutions, most recently serving as Regional Vice
President. Mr. Livernoche holds a BS in Finance and Marketing from the
University of Montreal.


     Nancy Y. Treaster has served as our Vice President of Marketing since April
1997. Prior to that, Ms. Treaster spent thirteen years with Dun & Bradstreet
Software, now GEAC, a developer of enterprise solutions, serving in various
management positions, most recently serving as Director, SmartStream Product
Marketing/Management. Ms. Treaster holds a BS in Management Science from the
Georgia Institute of Technology.



     James W. Judson, Jr., our co-founder, is currently a member of our Board
and served as the Chairman of the Board of Directors from March 1997 to November
1999. From February 1998 to February 1999, Mr. Judson served as our Vice
President of Business Development and from September 1995 to February 1998 he
served as our President. Mr. Judson holds a BA in Politics from Wake Forest
University.


     Thomas J. Crotty has served as one of our directors since April 1997. Mr.
Crotty has served as General Partner of Battery Ventures, a venture capital
firm, since 1989. Mr. Crotty received a BA in Business from the University of
Notre Dame and a MBA in Finance from the Wharton School.


     John Abraham has served as one of our directors since March 1997. Mr.
Abraham has served as President and Chief Executive Officer of Add-Vision, Inc.,
a technology company specializing in electronic display and illumination
systems, since February 1998. From September 1997 to January 1998, he was
Executive Vice President and Chief Operating Officer of Add-Vision, Inc. From
March 1996 to November 1996, Mr. Abraham was a general partner at Geocapital
Partners, a venture capital firm. Mr. Abraham was Executive Vice President of
Compuware Corporation, a computer software developer from January 1995 to June
1995. From January 1994 to December 1994, he was Senior Vice President of
Mergers & Acquisitions of Compuware Corporation. Mr. Abraham was educated at
Columbia University and the University of Illinois.


                                       54
<PAGE>   59

     Joel Katz has served as one of our directors since July 1999. Mr. Katz
currently serves as Chief Financial Officer for Vignette Corporation, a global
provider of e-business software products and services. Prior to Vignette
Corporation, Mr. Katz served as Chief Financial Officer of Harbinger
Corporation, a leading worldwide provider of business-to-business eCommerce
software, from 1990 to 1999. Mr. Katz received a BBA in Accounting from the
University of Georgia.

BOARD COMMITTEES

     The audit committee consists of Mr. Katz, the chairman, and Messrs. Crotty
and Abraham. The audit committee recommends the selection of our independent
auditors and reviews the results and scope of the audit and other services
provided by them. In addition, the audit committee reviews and evaluates our
internal audit and control functions.

     The compensation committee consists of Mr. Crotty, the chairman, and
Messrs. Katz and Abraham. The compensation committee reviews the compensation
and benefits of all our officers, reviews general policies relating to
compensation and benefits of our employees and makes recommendations concerning
these matters to the board of directors. The compensation committee also
administers our amended and restated stock incentive plan and employee stock
purchase plan.

     The executive committee consists of Messrs. Gould and Crotty. The executive
committee will have the authority to act on behalf of the board of directors in
the management or direction of our business and affairs, to the extent
authorized by resolution of a majority of the board of directors and subject to
any limitations imposed by the laws of the State of Delaware.

DIRECTORS COMPENSATION

     Directors do not currently receive compensation for services performed in
their capacity as directors. We reimburse each director for reasonable expenses
they incur in attending meetings of our board of directors and its committees.
In addition, non-employee directors who are not employed by venture capital
firms are eligible to receive options to purchase our common stock under our
amended and restated stock incentive plan. The board of directors determines the
vesting schedule and exercise price for options granted to non-employee
directors.

TERMS OF DIRECTORS AND EXECUTIVE OFFICERS

     Immediately after the completion of this offering, our board of directors
will be divided into three classes, each serving for staggered three-year terms.
At each annual meeting of stockholders, a class of directors will be elected for
a three-year term to succeed the directors of the same class whose terms are
then expiring. Our bylaws provide that each class of directors will be elected
by a plurality of all votes cast at the meeting.

     Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been elected and qualified or until
their earlier resignation or removal. There are no family relationships among
any of our directors or executive officers.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.

                                       55
<PAGE>   60


EXECUTIVE COMPENSATION



     The following table sets forth the total compensation we paid during the
year ended December 31, 1999 to our Chief Executive Officer and our next four
most highly compensated executive officers whose salary and bonus for 1999
exceeded $100,000. These executive officers are referred to as the Named
Executive Officers elsewhere in this prospectus.



                           SUMMARY COMPENSATION TABLE



<TABLE>
<CAPTION>
                                                                           LONG-TERM
                                                                          COMPENSATION
                                                                             AWARDS
                                                                          ------------
                                                                           NUMBER OF
                                                  ANNUAL COMPENSATION      SECURITIES
                                                 ----------------------    UNDERLYING     ALL OTHER
 NAME AND PRINCIPAL POSITION(1)    FISCAL YEAR     SALARY       BONUS       OPTIONS      COMPENSATION
 ------------------------------    -----------   ----------   ---------   ------------   ------------
<S>                                <C>           <C>          <C>         <C>            <C>
David B. Gould...................     1999        $206,235     $30,384      413,226        $110,654(2)
  President and Chief
  Executive Officer
Alain Livernoche.................     1999         150,000      10,000           --          77,229(3)
  Vice President,
  North American Sales
Colin Gallick....................     1999         148,500       9,000      169,200          59,070(4)
  Vice President,
  International Operations
Jeffery S. Ford..................     1999         126,667      45,740        4,320             853(5)
  Vice President,
  Operations
Nancy Y. Treaster................     1999         122,500      20,675       16,398             819(5)
  Vice President,
  Marketing
</TABLE>


- ------------------------------


    (1) In February 1999, Mr. Richards resigned as our President and Chief
        Executive Officer. In connection with his resignation, we paid Mr.
        Richards severance in the amount of $192,500.


    (2) Reflects $109,835 for reimbursement of relocation expenses and $819 for
        insurance premiums. Mr. Gould became our President and Chief Executive
        Officer in February 1999.


    (3) Reflects $76,250 paid for commissions earned and $979 for insurance
        premiums.


    (4) Reflects $41,250 paid for commissions earned and a $17,820 automobile
        allowance.


    (5) Reflects insurance premiums.


                                       56
<PAGE>   61


OPTION GRANTS IN LAST FISCAL YEAR



     The following table sets forth all individual grants of stock options
during the period ended December 29, 1999 to each of the Named Executive
Officers. These options were granted with an exercise price equal to the fair
market value of our common stock on the date of grant as determined by our board
of directors based on third-party valuations, third-party transactions and other
relevant factors. All of the options are incentive stock options, except for
112,230 of Mr. Gould's options and 169,200 of Mr. Gallick's options which are
non-qualified, vest over four years, with 25% of the shares vesting one year
after the grant date and the remaining shares vesting ratably each month
thereafter, and have a term of 10 years. The 5% and 10% assumed annual rates of
compound stock price appreciation are prescribed by the rules and regulations of
the Securities and Exchange Commission and do not represent our estimate of
projection of the future trading prices of our common stock. There can be no
assurance that the actual stock price appreciation over the ten-year option term
will be at the assumed 5% and 10% levels or at any other defined level. Actual
gains, if any, on stock option exercises are dependent on numerous factors,
including our future performance, overall market conditions and the option
holder's continued employment with us throughout the entire vesting period and
option term, none of which are reflected in this table. The potential realizable
value is calculated by multiplying the fair market value per share of the common
stock on the date of grant as determined by the board of directors, which is
equal to the exercise price per share, by the stated annual appreciation rate
compounded annually for the option term, subtracting the exercise price per
share from the product, and multiplying the remainder by the number of shares
underlying the option granted.



<TABLE>
<CAPTION>
                                            INDIVIDUAL GRANTS                          POTENTIAL REALIZABLE
                       -----------------------------------------------------------       VALUE AT ASSUMED
                         NUMBER OF                                                     ANNUAL RATES OF STOCK
                        SECURITIES     PERCENT OF TOTAL                               PRICE APPRECIATION FOR
                        UNDERLYING     OPTIONS GRANTED                                      OPTION TERM
                          OPTIONS      TO EMPLOYEES IN    EXERCISE OR   EXPIRATION   -------------------------
        NAME              GRANTED        FISCAL YEAR      BASE PRICE       DATE          5%            10%
        ----           -------------   ----------------   -----------   ----------   -----------   -----------
<S>                    <C>             <C>                <C>           <C>          <C>           <C>
David B. Gould.......     300,996            16.2%           $1.66        2/2/09     $   314,440   $   796,852
  President and Chief     112,230             6.0             2.97        8/3/09         209,782       531,629
  Executive Officer
Alain Livernoche.....          --              --               --            --              --            --
  Vice President,
  North American
  Sales
Colin Gallick........     169,200             9.1             1.66        2/2/09         176,757       447,937
  Vice President,
  International
  Operations
Jeffery S. Ford......       4,320             0.2             2.22       5/24/09           6,022        15,262
  Vice President,
  Operations
Nancy Y. Treaster....      16,398             0.9             2.22       5/24/09          22,860        57,931
  Vice President,
  Marketing
</TABLE>


                                       57
<PAGE>   62


AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES



     The following table summarizes the value of the outstanding options held by
the Named Executive Officers at December 29, 1999. The value columns represent
the difference between $13.00 per share, representing the mid-point of our
potential offering price range of $12.00 to $14.00 per share, less the exercise
price paid or payable upon exercise of these options.



<TABLE>
<CAPTION>
                                                        NUMBER OF SECURITIES
                                                       UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                SHARES                         OPTIONS                IN-THE-MONEY OPTIONS
                               ACQUIRED                  AT FISCAL YEAR-END            AT FISCAL YEAR-END
                                  ON       VALUE     ---------------------------   ---------------------------
                               EXERCISE   REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
                               --------   --------   -----------   -------------   -----------   -------------
<S>                            <C>        <C>        <C>           <C>             <C>           <C>
David B. Gould...............  112,230    $    --      60,199         240,797       $682,592      $2,730,368
  President and Chief
  Executive Officer
Alain Livernoche.............   30,600     70,720      49,743         136,341        610,442       1,682,296
  Vice President, North
  American Sales
Colin Gallick................       --         --      42,300         126,900        479,635       1,438,905
  Vice President,
  International Operations
Jeffery S. Ford..............   30,600     47,430      23,643         105,057        273,733       1,212,895
  Vice President, Operations
Nancy Y. Treaster............   70,022    147,046      14,290          74,988        184,105         931,660
  Vice President, Marketing
</TABLE>


STOCK OPTION AND OTHER COMPENSATION PLAN

  Amended and Restated Stock Incentive Plan


     We have established a stock incentive plan, which has recently been amended
and restated. This plan is intended to promote our interests by providing
employees and key persons, such as non-employee directors and consultants, the
opportunity to purchase shares of common stock and to receive compensation based
upon appreciation in the value of those shares. We have reserved 3,486,000
shares of common stock for issuance under this plan. This plan provides for the
grant of four types of awards:


     - incentive stock options that qualify for tax benefits;

     - non-qualified stock options;

     - restricted stock awards; and

     - stock appreciation rights.


     Our plan is administered by the compensation committee of our board of
directors. The compensation committee has the authority to determine to whom
awards are granted, the terms of such awards, including the type of awards to be
granted, the exercise price, the number of shares subject to awards and the
vesting and exercisability of the awards. The term of a stock option granted
under the plan generally may not exceed 10 years.



     Beginning on January 1, 2001, and on the first day of each following fiscal
year, this plan authorizes our board of directors to automatically adjust the
number of shares of common stock available for issuance under this plan so that
the total number of shares reserved will equal the sum of:


     - the aggregate number of shares previously issued under this plan;

     - the aggregate number of shares subject to outstanding options granted
       under this plan; and

     - 5% of the number of shares outstanding on the last day of the preceding
       fiscal year.

                                       58
<PAGE>   63


The maximum annual increase in the number of shares, however, shall not exceed
1,800,000 in any calendar year. In addition, the board of directors, at its
discretion, may also issue a lower number of shares under this plan.



     As of December 29, 1999, there were options outstanding to purchase
2,702,768 shares of our common stock at a weighted average exercise price of
$2.07 per share. 532,489 shares of our common stock have been issued upon
exercise of options granted under our plan. In addition, there were 1,840,135
shares of common stock that could be issued under our amended and restated stock
incentive plan.


  Employee Stock Purchase Plan


     We have recently established the Witness Systems Employee Stock Purchase
Plan which will become effective upon the completion of this offering. The stock
purchase plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, allows employees to purchase our common stock through payroll
deductions for 85% of the fair market value of the common stock. Participation
in the stock purchase plan is voluntary. Employees may participate in the stock
purchase plan by authorizing payroll deductions of one to fifteen percent of
their base pay for each payroll period. At the end of each six-month offering
period, each participant in the stock purchase plan will receive an amount of
our common stock equal to the sum of that participant's payroll deductions
during the period divided by 85% of the lower of the fair market value of our
common stock at the beginning of the period, or the fair market value of our
common stock at the end of the period. No employee may participate in the stock
purchase plan if such employee owns or would own after the purchase of options
under this plan 5% or more of the voting power of all classes of our stock.



     There are currently 990,000 shares of common stock reserved for issuance
under the stock purchase plan. The number of shares of common stock available
for issuance under the stock purchase plan shall automatically increase on the
last trading day of the last month of each of fiscal years, beginning with the
fiscal year ending December 31, 2000 by a number of shares equal to 2% of the
total number of shares of common stock outstanding on the last trading day of
the month preceding the final month of each such fiscal year, but in no event
shall any such annual increase exceed 900,000 shares, as adjusted under the
terms of the plan. In addition, the board of directors, at its discretion, may
also issue a lower number of shares under this plan. We are permitted under the
stock purchase plan to purchase shares of common stock on the open market for
the purpose of reselling the shares to participants in the stock purchase plan.


  401(k) Plan

     We maintain a 401(k) plan to provide eligible employees with a tax
preferential savings and investment program. An employee becomes eligible to
participate in the 401(k) plan in the first month of the month following their
date of hire. Eligible employees may contribute a maximum of 20% of his or her
pre-tax salary, commissions and bonuses through payroll deductions, up to the
statutorily prescribed annual limit of $10,000 in calendar year 1999 to the
401(k) plan. The percentage elected by more highly compensated participants may
be required to be lower. In addition, at the discretion of the board of
directors, we may make discretionary profit-sharing contributions into the
401(k) plan for all eligible employees. To date we have made no contributions
into the 401(k) plan.

EMPLOYMENT AGREEMENTS, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS

     Generally, we do not enter into employment agreements with our employees.
The employment relationships with each executive officer are "at will". However,
we typically require each employee to enter into an agreement prohibiting the
employee from disclosing or using any of our confidential or proprietary
information without our permission and providing that the employee agrees to
assign to us all inventions developed during the course of employment. In
addition, the

                                       59
<PAGE>   64

employee agrees not to solicit any of our customers or employees or to work for
a competitor in the metropolitan Atlanta area for a period of time after
termination of his or her employment.


     However, we entered into a one-year employment agreement with David Gould,
our Chairman, President and Chief Executive Officer, which has particular
confidentiality and noncompetition related provisions that survive longer than
one year. This employment agreement was effective February 2, 1999, and was
amended on August 3, 1999. Upon the expiration of the current term in August
2000, the agreement automatically renews for additional one-year terms until
either party notifies the other of its intent to terminate the agreement. Under
the agreement, Mr. Gould is entitled to receive a base salary of $225,000 per
year and a discretionary bonus in the amount of up to $40,000 for the first year
of employment. In addition to his base salary, Mr. Gould is entitled to receive
supplemental bonuses totaling $360,000 between March 31, 2000 and March 31,
2002, regardless of continued employment. Mr. Gould also received on February 2,
1999, a stock option grant of 300,996 shares of common stock, exercisable at a
price of $1.66 per share, under the terms of our amended and restated stock
incentive plan. The options vest over a four-year period. Vesting accelerates
upon a change of control. In the event Mr. Gould's employment is terminated
without cause, or within six months of a change of control, which as defined in
the agreement includes a sale of our common stock in an underwritten public
offering, or if he resigns for good reason, he is entitled to a severance
payment equal to twelve times his monthly base salary. On August 3, 1999, Mr.
Gould was also granted an option to acquire 112,230 shares of common stock
exercisable at a price of $2.97 per share under our stock incentive plan. These
options vested immediately and Mr. Gould exercised his options with a payment
made by a $334,000 promissory note having terms and arrangements regarding our
reimbursement of Mr. Gould's interest payments that are similar to the terms and
arrangements in the March 31, 1999 note described in the next paragraph.



     We have also entered into a restricted stock award agreement with Mr. Gould
effective March 31, 1999. Under the terms of this agreement, Mr. Gould purchased
879,763 shares of our common stock at a price of $1.66 per share and paid for
these shares with a promissory note to us in the principal amount of $1,461,383.
The note has a nine year term with acceleration upon a change of control and
interest accrues at a fixed rate of 6.41% per annum. Mr. Gould's employment
agreement obligates us to reimburse him for all interest payments under the
note. Mr. Gould's note is a recourse obligation as to 25% of the principal and
100% of the interest. Of the purchased shares, 303,111 vested immediately upon
employment and the balance vest over a period ending on February 2, 2003. Upon
termination of Mr. Gould's employment with us, any unvested shares revert to us
for the original purchase price.



     Addendums to the stock option agreements with Mr. Ezrine, Mr. Brown, Mr.
Ford, Mr. Gallick, Mr. Gisby, Mr. Livernoche and Ms. Treaster, provide that
stock options awarded to the executive officer will automatically vest if the
executive officer's employment is terminated without good cause upon a change of
control of Witness Systems, as those terms are defined in the addendum, that
occurs prior to December 31, 2001. As of December 29, 1999, an aggregate of
1,247,222 stock options are subject to this change of control provision.



     In February 1999, we entered into separation agreements with Craig Richards
in connection with his resignation as President and Chief Executive Officer and
with Elizabeth Brown in connection with her resignation as Vice President of
Engineering. Our agreement with Mr. Richards entitled him to receive a severance
payment equal to twelve times his monthly base salary. In addition, we waived
our right to repurchase 280,901 of Mr. Richards' vested shares of common stock
and forgave an outstanding balance under a related promissory note for $108,486.
Mr. Richards delivered to us unvested options for 648,979 shares of common
stock. Our agreement with Ms. Brown entitled her to receive a severance payment
in the amount of $43,865.


                                       60
<PAGE>   65

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

     Our amended and restated certificate of incorporation and bylaws provide
that the liability of the directors for monetary damages shall be eliminated to
the fullest extent permissible under Delaware law and that we shall indemnify
our officers, employees and agents to the fullest extent permitted under the
Delaware law.

     Our amended and restated certificate of incorporation also provides that
our directors will not be personally liable to Witness Systems or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for:

     - any breach of the director's duty of loyalty to Witness Systems or its
       stockholders;

     - acts or omissions not in good faith or which involve intentional
       misconduct or a knowing violation of law;

     - unlawful payments of dividends or unlawful stock repurchases or
       redemptions; or

     - transactions from which the director derived an improper personal
       benefit.

     Any amendment, modification or repeal of these provisions will not
eliminate or reduce the effect of these provisions for any act or failure to
act, or any cause of action, suit or claim that would arise before the
amendment, modification or repeal. If Delaware law is amended to provide for
further limitations on the personal liability of directors of corporations for
breach of duty of care or other duty as a director, then the personal liability
of the directors will be so further limited to the greatest extent permitted by
Delaware law. This limitation of liability does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

     We intend to enter into agreements to indemnify our executive officers and
directors in addition to indemnification provided for in our amended and
restated certificate of incorporation. These agreements, among other things, may
require us to indemnify these individuals against liabilities that arise by
reason of their status or services as officers and directors, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
expenses incurred as a result of any proceedings against them for which they
could be indemnified.

     Currently, we have purchased a directors and officers liability insurance
policy in the amount of $1 million per loss, with a maximum aggregate liability
of $1 million.

                                       61
<PAGE>   66

                           RELATED PARTY TRANSACTIONS

SALES OF PREFERRED STOCK

  Series A Preferred Stock


     In March 1997, we issued and sold 3,184,000 shares of series A preferred
stock at a price of $2.145 per share to Battery Investment Partners IV, LLC,
Battery Ventures IV, L.P. and John Abraham, one of our directors, resulting in
net proceeds of $6.6 million. Thomas Crotty, one of our directors, is associated
with Battery Investment Partners IV, LLC and Battery Ventures IV, L.P.
Immediately before the consummation of this offering, each share of the series A
preferred stock will automatically convert into 1.8 shares of our common stock.


  Series B Preferred Stock


     In September 1998, we issued and sold 1,181,954 shares of series B
preferred stock at a price of $4.65 per share to Battery Investment Partners IV,
LLC, Battery Ventures IV, L.P. and John Abraham, one of our directors, resulting
in net proceeds of $5.5 million. Thomas Crotty, one of our directors, is
associated with Battery Investment Partners IV, LLC and Battery Ventures IV,
L.P. Immediately before the consummation of this offering, each share of the
series B preferred stock will automatically convert into 1.8 shares of our
common stock.


  Series C Preferred Stock

     In August 1999, we issued and sold 1,325,028 shares of series C preferred
stock at a price of $6.30 per share, resulting in net proceeds of $8.3 million.
The investors include the following persons who, along with their affiliates,
hold 5% or more of our capital stock:

<TABLE>
<CAPTION>
NAME OF INVESTOR                                            NUMBER OF SHARES   PURCHASE PRICE
- ----------------                                            ----------------   --------------
                                                                               (IN THOUSANDS)
<S>                                                         <C>                <C>
Noro-Moseley Partners IV, L.P.............................      317,460            $2,000
Noro-Moseley Partners IV-B, L.P...........................      317,122             1,998
Hambrecht & Quist California..............................       25,797               163
Hambrecht & Quist Employee Venture Fund, L.P. II..........       25,797               163
Access Technology Partners, L.P...........................      412,749             2,600
Access Technology Partners Brokers Fund, L.P..............        7,739                49
H&Q Witness Systems Investors, L.P........................       43,854               276
</TABLE>


     Immediately before the consummation of this offering, each share of the
series C preferred stock will automatically convert into 1.8 shares of our
common stock.


REGISTRATION RIGHTS


     Some of our directors and 5% stockholders are entitled to specified rights
related to the registration of their shares under the Securities Act. These
rights are described more fully under the section titled "Description of Capital
Stock" that is contained elsewhere in this prospectus.


COMMON STOCK PURCHASES AND SALES


     On January 15, 1997, we entered into stock repurchase agreements with four
of our officers to repurchase 3,214,845 shares of our common stock for notes
payable totaling $3.7 million. The notes were repaid in March 1997 concurrent
with the sale of series A preferred stock.



     On December 16, 1997, we sold restricted 929,880 shares of our common stock
to our former chief executive officer for $108,000 in return for a promissory
note. In February 1999, the officer resigned from our Company and the amount of
the note related to the 280,901 vested shares plus


                                       62
<PAGE>   67


all accrued interest was forgiven. The remainder of the note was cancelled in
connection with our repurchase at $0.12 per share of the 648,979 unvested
shares.



     In March 1999, we issued 879,763 shares of restricted common stock to Mr.
Gould in return for a note receivable of $1.5 million. In August 1999, Mr. Gould
was granted and exercised options to acquire 112,230 shares of our common stock
in exchange for a note receivable of $334,000. The notes effectively bear no
interest and mature on March 30, 2008. Such maturity date is accelerated if we
consummate a merger, consolidation or reorganization, sell substantially all of
our assets, or complete an initial public offering.



     On August 2, 1999, we sold 244,800 shares of restricted common stock which
consisted of 30,600 shares to each of the following officers: Mr. Gould, Mr.
Ezrine, Mr. Brown, Mr. Gisby, Mr. Ford, Mr. Gallick, Mr. Livernoche, and Ms.
Treaster. Each officer paid $90,950 for the shares by providing a full recourse
promissory note to us. The principal balance of each promissory note is due in
full on July 31, 2003, with interest of 7% payable in arrears annually. In
addition, on August 2, 1999, we sold 24,395 shares of restricted common stock to
Mr. Abraham for $72,401 in return for a full recourse promissory note. The
principal balance of the promissory note is due in full on July 31, 2003, with
interest of 7% payable in arrears annually.



     We entered into stock repurchase agreements with the following persons to
repurchase a total of 3,060,000 shares for $7.3 million in cash.



<TABLE>
<CAPTION>
                     NAME                        NO. OF SHARES   DOLLAR AMOUNT        DATE
                     ----                        -------------   -------------   --------------
                                                                 (IN THOUSANDS)
<S>                                              <C>             <C>             <C>
Mr. Judson.....................................    1,137,994        $3,382       August 2, 1999
Elizabeth Judson (Mr. Judson's spouse).........      104,006           309       August 2, 1999
Mr. Abraham....................................       18,000            54       August 2, 1999
Mr. Knous......................................      540,000         1,605       August 2, 1999
Mr. Beckett....................................    1,260,000         1,900       Sept. 10, 1998
</TABLE>


INDEMNIFICATION AGREEMENTS

     We intend to enter into agreements to indemnify our executive officers and
directors in addition to indemnification provided for in our amended and
restated certificate of incorporation. These agreements, among other things, may
require us to indemnify these individuals against liabilities that arise by
reason of their status or services as officers and directors, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
expenses incurred as a result of any proceedings against them for which they
could be indemnified.

POLICY ON FUTURE TRANSACTIONS

     Our board of directors has adopted a resolution whereby all future
transactions with related parties, including any loans from us to our officers,
directors and principal stockholders or their family members, must be approved
by a majority of the board of directors including a majority of the independent
and disinterested members of the board of directors or a majority of the
disinterested shareholders and must be on terms no less favorable to us than
could be obtained from unaffiliated third parties.

                                       63
<PAGE>   68


                       PRINCIPAL AND SELLING STOCKHOLDERS



     The following table presents information about the beneficial ownership of
our common stock as of December 29, 1999 by:


     - each person or entity who is known by us to be the beneficial owner of
       more than 5% of our outstanding common stock;

     - each of our directors;

     - each executive officer; and

     - all of our directors and executive officers as a group.


     Two of our stockholders have granted to the underwriters the option to
purchase up to 327,280 shares of common stock to cover over-allotments. Footnote
14 to the Principal and Selling Stockholders table below provides information
concerning the stock holdings of these stockholders after the offering if the
over-allotment option is exercised in full.



     For purposes of calculating the percentage beneficially owned, the number
of shares of common stock deemed outstanding prior to the offering includes
6,874,573 common shares outstanding as of December 29, 1999 and 10,403,771
shares issuable upon the automatic conversion of 3,272,890 shares of series A
preferred stock, including 88,890 shares issued as a dividend on the series A
preferred stock, into 5,891,204 shares of common stock, 1,181,954 shares of
series B preferred stock into 2,127,517 shares of common stock and 1,325,028
shares of series C preferred stock into 2,385,050 shares of common stock
immediately before the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to the
securities. The number of shares beneficially owned by a person includes shares
of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of December 29, 1999. The shares
issuable under these options are treated as if outstanding for computing the
percentage ownership of the person holding these options but are not treated as
if outstanding for the purposes of computing the percentage ownership of any
other person.


                                       64
<PAGE>   69

     Except as noted below, the business address of the named beneficial owner
is c/o Witness Systems, Inc., 1105 Sanctuary Parkway, Suite 210, Alpharetta,
Georgia 30004.


<TABLE>
<CAPTION>
                                                                                         PERCENT
                                                                                    BENEFICIALLY OWNED
                                                                                   --------------------
                                                              NUMBER OF SHARES      BEFORE      AFTER
                 NAME OF BENEFICIAL OWNER                    BENEFICIALLY OWNED    OFFERING    OFFERING
                 ------------------------                    ------------------    --------    --------
<S>                                                          <C>                   <C>         <C>
Battery Investment Partners IV, LLC (1)....................       7,812,888          45.2
Battery Ventures IV, L.P. (2)..............................       7,695,695          44.5
  20 William Street
  Wellesley, MA 02181
James W. Judson, Jr. (3)...................................       1,713,150          10.0
Noro-Moseley Partners, IV L.P. (4).........................       1,142,248           6.6
  9 North Parkway Square
  4200 Northside Parkway
  Atlanta, GA 30327
David B. Gould (5).........................................       1,142,991           6.6
W. Thomas Snyder...........................................       1,020,870           5.9
Kirk A. Knous..............................................         991,305           5.7
Hambrecht & Quist California (6)...........................         928,685           5.4
  One Bush Street
  San Francisco, CA 94104
John Abraham (7)...........................................          97,245             *
Nancy Treaster (8).........................................         120,629             *
Alain Livernoche (9).......................................         115,002             *
Colin Gallick (10).........................................          76,284             *
Jeffery Ford (11)..........................................          91,042             *
Joel G. Katz...............................................              --             *
Thomas C. Crotty (12)......................................       7,812,888          45.2
All directors and executive officers as a group (9 persons)
  (13).....................................................      11,169,230          64.6
</TABLE>


- ------------------------------

   * Represents beneficial ownership of less than 1% of the outstanding shares
     of common stock.


 (1) Consists of 7,695,695 shares held by Battery Ventures IV, L.P. and 117,193
     shares held by Battery Investment Partners IV, LLC. Battery Investment
     Partners IV, LLC is the managing partner of Battery Ventures IV, L.P.
     Thomas J. Crotty, Robert G. Barrett, Oliver D. Curme, Todd A. Dagres,
     Richard D. Frisbie and Kenneth P. Lawler are the general members and
     general partners of Battery Investment Partners IV, LLC and Battery
     Ventures IV, L.P., respectively.



 (2) Battery Investment Partners IV LLC is the managing partner of Battery
     Ventures IV, L.P. Thomas J. Crotty, Robert G. Barrett, Oliver D. Curme,
     Todd A. Dagres, Richard D. Frisbie and Kenneth P. Lawler are the general
     members and general partners of Battery Investment Partners IV, LLC and
     Battery Ventures IV, L.P., respectively.



 (3) Includes 227,104 shares held by Elizabeth A. Judson, Mr. Judson's spouse,
     and 810,000 shares held by the Judson 1998 Trust. Mr. Judson disclaims
     beneficial ownership of shares owned by Mrs. Judson and held by the Judson
     1998 Trust.



 (4) Includes shares held by Noro-Moseley Partners IV-B, L.P., an affiliate of
     Noro-Moseley Partners IV, L.P., Charles D. Moseley, Jack R. Kelly, Russell
     R. French, Charles A. Johnson, Alan J. Taetle and Allen S. Moseley are the
     general partners of Noro-Moseley Partners IV, L.P.



 (5) Includes 120,398 shares subject to options which are exercisable within 60
     days of December 29, 1999.



 (6) Includes 46,435 shares held directly by Hambrecht & Quist California,
     46,435 shares held by the Hambrecht & Quist Employee Venture Fund, L.P. II,
     13,930 shares held by the Access Technology Partners Brokers Fund, L.P.,
     78,937 shares held by H&Q Witness Systems Investors, L.P. and 742,948
     shares held by Access Technology Partners, L.P. Hambrecht & Quist
     California is the parent company of Hambrecht & Quist, LLC. The limited
     partnership interests of Hambrecht & Quist Employee Venture Fund, L.P. II
     and Access Technology Partners Brokers Fund, L.P. are held by employees of
     Hambrecht & Quist California or Hambrecht & Quist LLC, and the general
     partner of both of these funds is H&Q Venture Management LLC, a subsidiary
     of Hambrecht & Quist California. Employees of Hambrecht & Quist LLC and
     Hambrecht & Quist California also own a 98.1% limited partnership interest
     in H&Q Witness Systems Investors, L.P. and a subsidiary of Hambrecht &
     Quist California is its administrative general partner. The investment
     limited partner of H&Q Witness Systems Investors, L.P. is a limited
     liability company in which a group of Hambrecht & Quist LLC employees are
     members. Access Technology Partners, L.P. is a fund of outside investors
     that is managed by Access Technology Management, LLC, a subsidiary of
     Hambrecht & Quist California. The managing member of Access Technology
     Management, LLC is H&Q Venture Management, LLC. The managers of H&Q Venture
     Management, LLC are Daniel H. Case, III, Charles Walker and Stephen N.
     Machtinge. Messrs. Case, Walker and


                                       65
<PAGE>   70


     Machtinge disclaim beneficial ownership of shares held by Access Technology
     Partners, L.P., except to the extent of their pecuniary interest in these
     shares.



 (7) Includes 27,020 shares subject to options which are exercisable within 60
     days of December 29, 1999.



 (8) Includes 20,007 shares subject to options which are exercisable within 60
     days of December 29, 1999.



 (9) Includes 53,802 shares subject to options which are exercisable within 60
     days of December 29, 1999.



(10) Includes 45,684 shares subject to options which are exercisable within 60
     days of December 29, 1999.



(11) Includes 29,842 shares subject to options which are exercisable within 60
     days of December 29, 1999.



(12) Includes 7,695,695 shares held by Battery Ventures IV, L.P. and 117,193
     shares held by Battery Investment Partners IV, LLC. Mr. Crotty is a General
     Member of Battery Investment Partners IV, LLC, the managing partner of
     Battery Ventures IV, L.P. and therefore may be considered to share
     beneficial ownership of the shares held by Battery Ventures IV, L.P. and by
     Battery Investment Partners IV, LLC. Mr. Crotty disclaims beneficial
     ownership of these shares



(13) Includes Mr. Crotty's shares, which he disclaims beneficial ownership of,
     and 296,753 shares subject to options which are exercisable within 60 days
     of December 29, 1999.



(14) If the underwriters exercise their over-allotment option in full, Advanced
     Integrated Recorders will sell 210,280 shares of common stock in this
     offering and would remain the beneficial owner of 630,840 shares of common
     stock and Greyrock Capital will sell 117,000 shares of common stock,
     representing all of the shares it would own upon the exercise of its
     warrant to purchase common stock. The address for Advanced Integrated
     Recorders is 121 Whittendale Drive, Building 1, Moorestown, New Jersey
     08057. The address for Greyrock Capital is 10880 Wilshire Blvd., Suite
     1850, Los Angeles, California 90024.


                                       66
<PAGE>   71

                          DESCRIPTION OF CAPITAL STOCK

GENERAL


     Our authorized capital stock consists of 50,000,000 shares of common stock,
$.01 par value per share and 10,000,000 shares of preferred stock, $.01 par
value per share. As of December 29, 1999, we had 68 stockholders of record and
there were 17,278,345 shares of common stock outstanding, assuming the
conversion of all outstanding preferred stock into common stock upon the
completion of this offering and including 160,003 shares issued pursuant to
dividend rights held by our preferred stockholders. The following description of
our capital stock is a summary and is qualified in its entirety by the
provisions of our amended and restated certificate of incorporation and bylaws,
copies of which have been filed as exhibits to the registration statement of
which this prospectus is a part.



COMMON STOCK


     The holders of common stock are entitled to one vote per share for the
election of directors and on all other matters to be submitted to a vote of our
stockholders. Subject to the rights of any holders of preferred stock which may
be issued in the future, the holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the board of directors and
paid out of funds legally available for that purpose. In the event of our
dissolution, liquidation or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of all liabilities, subject
to the prior distribution rights of preferred stock, if any, then outstanding.
The holders of common stock have no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to our common stock. The outstanding shares of common stock are, and
the shares of common stock to be issued by us in connection with this offering
will be, duly authorized, validly issued, fully paid and nonassessable.

PREFERRED STOCK

     Under our amended and restated certificate of incorporation, our board of
directors is authorized, without further stockholder approval, to issue from
time to time up to an aggregate of 10,000,000 shares of preferred stock in one
or more series. The board also has the right to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of any
preferred stock issued, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of preferred stock with greater
rights, privileges and preferences than those applicable to the common stock may
adversely affect the voting power, market price and other rights and privileges
of the common stock, and may have the effect of delaying, deferring or
preventing a change of control of our company.

REGISTRATION RIGHTS


     Under the terms of an amended and restated registration rights agreement
dated as of September 30, 1999, as amended, stockholders holding an aggregate of
15,448,251 shares of capital stock, which includes the shares set forth below,
are entitled to registration rights under the Securities Act:



     - approximately 5,779,872 shares of series A, B and C preferred stock and
       shares of preferred stock resulting from the payment of preferred stock
       dividends, which will automatically convert into a total of 10,403,771
       shares of common stock upon the consummation of this offering;



     - 4,891,480 shares of common stock held by the stockholders who are parties
       to the amended and restated registration rights agreement, including our
       founding stockholders;

                                       67
<PAGE>   72


     - 117,000 shares of common stock that may be issued upon the exercise of a
       warrant held by Greyrock Capital; and



     - 20,000 shares of series B preferred stock that may be issued upon the
       exercise of a warrant held by Silicon Valley Bank which, upon the
       completion of this offering, if the warrant has not yet been exercised,
       will become exercisable for 36,000 shares of common stock.



     Beginning 180 days following the date of this prospectus, a majority of the
holders of series A and B preferred stock and a majority of holders of the
series C preferred stock may request us, on up to two occasions, to register
their shares of common stock, outstanding after conversion of the preferred
stock, for public resale. We are obligated to register the common stock of the
series A and series B preferred stockholders only if at least 20% of the total
shares of series A and B preferred stock request registration, or a lesser
percentage if the aggregate public offering price would exceed $5,000,000.
Further, holders of registrable securities may require on two separate occasions
within any twelve month period that we register their shares for public resale
on Form S-3 if the value of the securities to be registered is at least
$500,000. In the event our Board of Directors determines it is advisable to do
so, and as limited by the terms of the Amended and Restated Registration Rights
Agreement, we may defer such registration for up to 90 days.


     In the event we elect to register any of our shares of common stock for
purposes of effecting any public offering, the holders of the registrable
securities described above are entitled to include their shares of common stock
in the registration. We may reduce the number of shares requesting registration
in view of adverse market conditions. We plan to obtain waivers of these
registration rights with respect to this offering. All registration rights will
terminate five years following consummation of this offering.

WARRANTS


     As of December 29, 1999 there were outstanding warrants to purchase 117,000
shares of common stock at an exercise price of $2.58 per share. In addition,
there were warrants to purchase 20,000 shares of series B preferred stock at an
exercise price of $4.65 per share. Upon the completion of this offering, if the
warrant for the series B preferred has not yet been exercised, it will become
exercisable for 36,000 shares of common stock at an exercise price of $2.58 per
share.


ANTI-TAKEOVER EFFECTS OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW

  Anti-takeover provisions

     As noted above, our board of directors, without stockholder approval, has
the authority under our amended and restated certificate of incorporation to
issue preferred stock with rights superior to the rights of holders of common
stock. As a result, preferred stock could be issued quickly and easily, could
adversely affect the rights of holders of common stock and could be issued with
terms calculated to delay or prevent a change of control of Witness Systems or
make removal of management more difficult.


     Under Delaware law, all stockholder actions must be effected at a properly
called annual or special meeting or by written consent. Our bylaws provide that,
except as otherwise required by law, special meetings of our stockholders can
only be called by the board of directors, the chairman of the board or the chief
executive officer, and stockholder action may not be effected by written
consent. Our amended and restated certificate of incorporation also provides
that the board is divided into three classes, with each director assigned to a
class with a term of three years. In addition, our bylaws establish an advance
notice procedure for stockholder proposals to be brought before an annual
meeting of stockholders, including proposed nominations of persons for election
to the board.


                                       68
<PAGE>   73

     These provisions of our bylaws are intended to enhance the likelihood of
continuity and stability in the composition of our board of directors and in the
policies formulated by the board of directors and to discourage certain types of
transactions which may involve an actual or threatened change of control. Such
provisions are designed to reduce vulnerability to an unsolicited acquisition
proposal and, accordingly, could discourage potential acquisition proposals and
could delay or prevent a change in control. These provisions may also have the
effect of preventing changes in our management.

   Effect of Delaware Antitakeover Statute

     We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prevents publicly held Delaware
corporations from engaging in a "business combination" with an "interested
stockholder" for three years following the date of the transaction in which the
person became an interested stockholder, unless the business combination is
approved in a prescribed manner. For purposes of the statute, a "business
combination" includes a merger, consolidation or sale of more than 10% of assets
involving our company, and an "interested stockholder" is any entity or person
beneficially owning 15% or more of the outstanding voting stock of our company
and any entity or person affiliated with or controlling or controlled by such
entity or person.

LISTING

     The shares of common stock have been proposed to be listed for quotation on
the Nasdaq Stock Market under the symbol WITS.

TRANSFER AGENT AND REGISTRATION

     The transfer agent for our common stock is SunTrust Bank, Atlanta, Georgia.

                                       69
<PAGE>   74

                        SHARES ELIGIBLE FOR FUTURE SALE

     Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.


     After this offering, 21,078,345 shares of our common stock will be
outstanding, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the 3,800,000 shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining 17,278,345 shares
of common stock held by existing stockholders are "restricted securities" as
that term is defined in Rule 144 under the Securities Act. Restricted securities
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144 or 701 under the Securities Act,
which rules are summarized below.



     The following table indicates approximately when the 17,278,345 shares of
our common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:


                        ELIGIBILITY OF RESTRICTED SHARES
                         FOR SALE IN THE PUBLIC MARKET

<TABLE>
<S>                                                           <C>
At effective date...........................................
180 days after the effective date...........................
Thereafter upon expiration of one year holding periods......
</TABLE>

     Most of the restricted shares that will become available for sale in the
public market starting 180 days after the effective date will be subject to
volume and other resale restrictions under Rule 144 because the holders are our
affiliates.

RULE 144

     In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year, including any affiliate of ours, is entitled
to sell, within any three-month period, a number of shares that is not more than
the greater of:


     - 1% of the number of shares of common stock then outstanding, which will
       equal approximately 210,783 shares immediately after this offering; or


     - the average weekly trading volume of the common stock on the Nasdaq
       National Market during the four calendar weeks before a notice of the
       sale on Form 144 is filed.

     Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.

RULE 144(K)

     Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner other than an affiliate, is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

                                       70
<PAGE>   75

<TABLE>
<S>                                                           <C>
</TABLE>

RULE 701

     In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us under a stock option plan or
other written agreement can resell those shares 90 days after the effective date
of this offering in reliance on Rule 144, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.

LOCK-UP AGREEMENTS


     Except for holders of                shares of our common stock, all of our
executive officers, directors, stockholders and optionees who will hold an
aggregate of                shares of our common stock after this offering are
subject to lock-up agreements under which they have agreed not to transfer or
dispose of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock, for
a period of 180 days after the date of this prospectus, subject to some
exceptions. Transfers or dispositions can be made sooner with the prior written
consent of Hambrecht & Quist LLC or its successors.



STOCK PLANS



     Immediately after this offering, we intend to file registration statements
under the Securities Act covering approximately 5,532,903 shares of our common
stock issuable upon the exercise of stock options or reserved for issuance under
our amended and restated stock incentive plan and our employee stock purchase
plan. These registration statements are expected to be filed and become
effective as soon as practicable after the completion of this offering. Each
year as the number of shares reserved for issuance under these plans increases,
we will file amendments to the registration statements covering the additional
shares. As of December 29, 1999, options to purchase 2,702,768 shares of common
stock were issued and outstanding. When the lock-up agreements described above
expire, there will be vested options outstanding that will be exercisable to
acquire   shares of common stock, based on options outstanding as of December
29, 1999. As a result, shares registered under those registration statements
will, subject to vesting provisions and Rule 144 volume limitations applicable
to our affiliates, be available for sale in the open market immediately after
the 180 day lock-up agreements expire.


                                       71
<PAGE>   76

                                  UNDERWRITING

     Subject to the terms and conditions contained in an underwriting agreement
dated                     , the underwriters named below, through their
representatives, Hambrecht & Quist LLC, U.S. Bancorp Piper Jaffray Inc. and
SoundView Technology Group, Inc., have severally agreed to purchase from us the
respective numbers of shares of common stock set forth opposite their names
below:


<TABLE>
<CAPTION>
UNDERWRITERS                                                  NUMBER OF SHARES
- ------------                                                  ----------------
<S>                                                           <C>
Hambrecht & Quist LLC.......................................
U.S. Bancorp Piper Jaffray Inc..............................
SoundView Technology Group, Inc.............................
                                                                 ---------
          Total.............................................     3,800,000
                                                                 =========
</TABLE>



     The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us and the selling stockholders, our
counsel, counsel to the selling stockholders and the independent auditors. The
underwriters are obligated to purchase all shares of common stock offered by us
(other than those shares covered by the over-allotment option described below)
if they purchase any shares.



     The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us and the selling
stockholders. These amounts are shown assuming both no exercise and full
exercise of the underwriters' over-allotment option to purchase additional
shares.


<TABLE>
<CAPTION>
                                                                          PAID BY SELLING
                                        PAID BY WITNESS SYSTEMS            STOCKHOLDERS
                                      ---------------------------   ---------------------------
                                      NO EXERCISE   FULL EXERCISE   NO EXERCISE   FULL EXERCISE
                                      -----------   -------------   -----------   -------------
<S>                                   <C>           <C>             <C>           <C>
Per Share...........................  $              $              $              $
Total...............................  $              $              $              $
</TABLE>


     We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $950,000.


     The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at that price less a concession not in
excess of $     per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $          per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the underwriters. The representatives have
informed us that the underwriters do not intend to confirm discretionary sales
of more than 5% of the shares of common stock offered in this offering.


     We and the selling stockholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to purchase
up to 570,000 additional shares of common stock at the initial public offering
price, less the underwriting discount set forth on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares of common stock
offered hereby. We and the selling stockholders will be obligated, pursuant to
the option, to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option solely to cover
over-allotments, if any, made in connection with the sale of shares of common
stock offered hereby.


     The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

                                       72
<PAGE>   77


     We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act and
to contribute to payments the underwriters may be required to make in respect of
these liabilities.



     Substantially all of our stockholders, including the selling stockholders,
executive officers, directors and optionees who will own in the aggregate
               shares of common stock after the offering, have agreed not to,
without the prior written consent of Hambrecht & Quist LLC, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of any shares of common stock or any
securities convertible into or exchangeable or exercisable for shares of common
stock for a period of 180 days from the date of this prospectus, subject to some
exceptions. We have agreed that we will not, without the prior written consent
of Hambrecht & Quist LLC, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of common stock or any securities convertible into or exchangeable or
exercisable for shares of common stock for a period of 180 days following the
date of this prospectus, except that we may issue shares upon the exercise of
options granted prior to the date hereof and may grant additional options under
our stock option plans. Without the prior written consent of Hambrecht & Quist
LLC, any of these additional options shall not be exercisable during the 180 day
period.



     At our request, the underwriters have reserved up to                shares
of common stock offered hereby for sale at the initial public offering price to
our directors, officers, employees, business associates and related persons. The
number of shares of common stock available for sale to the general public will
be reduced by the number of reserved shares such persons purchase. Any reserved
shares which are not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered by this prospectus.
Persons who purchase reserved shares will be required to agree that they will
not, without the prior written consent of Hambrecht & Quist LLC, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of any shares of common stock or any
securities convertible into or exchangeable or exercisable for shares of common
stock for a period of 180 days from the date of this prospectus.



     Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be determined
by negotiation among us, the selling stockholders and the representatives of the
underwriters. Among the factors considered in determining the initial public
offering price will be prevailing market and economic conditions, our revenues
and earnings, market valuations of other companies engaged in activities similar
to ours, estimates of our business potential and our prospects, the present
state of our business operations, our management and other factors deemed
relevant.


     We have applied for quotation of the common stock on the Nasdaq National
Market under the symbol WITS.


     In our August 1999 private placement of series C convertible preferred
stock, Hambrecht & Quist California purchased 25,797 shares for $162,521.10,
Hambrecht & Quist Employee Venture Fund, L.P. II purchased 25,797 shares for
$162,521.10, Access Technology Partners Brokers Fund, L.P. purchased 7,739
shares for $48,755.70, 43,854 shares were purchased by H&Q Witness Systems
Investors, L.P. for $276,280.20 and 412,749 shares were purchased by Access
Technology Partners, L.P. for $2,600,318.70. Hambrecht & Quist California is the
parent company of Hambrecht & Quist LLC. The limited partnership interests of
Hambrecht & Quist Employee Venture Fund, L.P. II and Access Technology Brokers
Fund, L.P. are held by employees of Hambrecht & Quist California or Hambrecht &
Quist LLC, and the general partner of both of these funds is H&Q Venture
Management LLC, a subsidiary of Hambrecht & Quist California. Employees of
Hambrecht & Quist LLC and Hambrecht & Quist California also own a 98.1% limited
partnership interest in H&Q Witness Systems Investors, L.P. and a subsidiary of
Hambrecht & Quist California is its administrative general partner. The
investment limited partner of H&Q Witness Systems Investors,


                                       73
<PAGE>   78


L.P. is a limited liability company in which a group of Hambrecht & Quist LLC
employees are members. Access Technology Partners, L.P. is a fund of outside
investors that is managed by Access Technology Management, LLC, a subsidiary of
Hambrecht & Quist California. The managing member of Access Technology
Management, LLC is H&Q Venture Management, LLC. The managers of H&Q Venture
Management, LLC are Daniel H. Case, III, Charles Walker and Stephen N.
Machtinge. The purchases described above were made on the same terms as those
made by other investors in the private placement, including the purchase price
of $6.30 per share. Immediately before the consummation of this offering, each
share of series C preferred stock will automatically convert into 1.8 shares of
common stock.


     Persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. This
stabilizing, if commenced, may be discontinued at any time.

     There are restrictions on the offer and sale of the common stock in the
United Kingdom. All applicable provisions of the Financial Services Act 1986 and
the Public Offers of Securities Regulations 1995 with respect to anything done
by any person in relation to the common stock in, from or otherwise involving
the United Kingdom must be complied with.

     Each underwriter has also agreed that it has:

     - not offered or sold and prior to the date six months after the date of
       issue of the shares of common stock will not offer or sell any shares of
       common stock to persons in the United Kingdom except to persons whose
       ordinary activities involve them in acquiring, holding, managing or
       disposing of investments (as principal or agent) for the purpose of their
       businesses or otherwise in circumstances which have not resulted and will
       not result in an offer to the public in the United Kingdom within the
       meaning of the Public Offers of Securities Regulations 1995;

     - complied, and will comply with, all applicable provisions of the
       Financial Services Act 1986 of Great Britain with respect to anything
       done by it in relation to the shares of common stock in, from or
       otherwise involving the United Kingdom; and

     - only issued or passed on and will only issue or pass on in the United
       Kingdom any document received by it in connection with the issuance of
       the shares of common stock to a person who is of a kind described in
       Article 11(3) of the Financial Services Act 1986 (Investment
       Advertisements) (Exemptions) Order 1996 (as amended) of Great Britain or
       is a person to whom the document may otherwise lawfully be issued or
       passed on.

                                 LEGAL MATTERS

     The validity of the common stock offered by this prospectus will be passed
upon for us by Morris, Manning & Martin, L.L.P., Atlanta, Georgia. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Alston & Bird LLP, Atlanta, Georgia.

                                       74
<PAGE>   79

                                    EXPERTS


     The financial statements of Witness Systems included in this prospectus to
the extent and for the periods indicated in their reports have been audited by
KPMG LLP, independent public accountants and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing.


                             ADDITIONAL INFORMATION


     We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus is only a part of the registration
statement and does not contain all of the information included in the
registration statement. Further information with respect to Witness Systems and
the common stock offered hereby can be found in the registration statement and
the exhibits and schedules thereto. Statements made in this prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other documents filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. The registration
statement and the exhibits and schedules thereto may be inspected without charge
at the public reference facilities maintained by the Commission in Room 1024,
450 Fifth Street, N. W., Washington, D.C. 20549, and at the following regional
offices of the Commission: Seven World Trade Center, Room 1400, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N. W., Washington, D.C.
20549, Room 1024, at prescribed rates. The Public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, we are required to file electronic versions of these documents with
the Commission through the Commission's Electronic Data Gathering, Analysis, and
Retrieval (EDGAR) system. The Commission maintains an internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Information concerning Witness Systems is also available for
inspection at the offices of the Nasdaq Stock Market, Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.



     We intend to furnish to our stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information.


                                       75
<PAGE>   80

                             WITNESS SYSTEMS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................   F-2
Consolidated Balance Sheets as of December 31, 1997, 1998
   and September 30, 1999...................................   F-3
Consolidated Statements of Operations for the Years Ended
   December 31, 1996, 1997 and 1998 and for the Nine
   Months Ended September 30, 1999..........................   F-4
Consolidated Statements of Stockholders' Deficit for the
   Years Ended December 31, 1996, 1997 and 1998 and for
   the Nine Months Ended September 30, 1999.................   F-5
Consolidated Statements of Cash Flows for the Years Ended
   December 31, 1996, 1997 and 1998 and for the Nine
   Months Ended September 30, 1999..........................   F-6
Notes to Consolidated Financial Statements..................   F-7
</TABLE>

                                       F-1
<PAGE>   81

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Witness Systems, Inc.:

     We have audited the accompanying consolidated balance sheets of Witness
Systems, Inc. and subsidiary as of December 31, 1997 and 1998 and September 30,
1999, and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the years in the three-year period ended
December 31, 1998 and for the nine-month period ended September 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. 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 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 Witness
Systems, Inc. and subsidiary at December 31, 1997 and 1998 and September 30,
1999, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 and for the nine-month
period ended September 30, 1999 in conformity with generally accepted accounting
principles.

                                          /s/ KPMG LLP

Atlanta, Georgia

November 18, 1999, except for


  Note 12, as to which the


  date is December 27, 1999


                                       F-2
<PAGE>   82

                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                                     PRO FORMA
                                                                                                    CONVERTIBLE
                                                                                                     PREFERRED
                                                                                                     STOCK AND
                                                                                                   STOCKHOLDERS'
                                                                                                    DEFICIT AT
                                                                 DECEMBER 31,                      SEPTEMBER 30,
                                                              ------------------   SEPTEMBER 30,       1999
                                                               1997       1998         1999         (NOTE 1(D))
                                                              -------   --------   -------------   -------------
                                                                                                    (UNAUDITED)
<S>                                                           <C>       <C>        <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 2,092   $    912     $     52
  Accounts receivable, net of allowance for doubtful
    accounts of $100 in 1997, $300 in 1998 and $438 in
    1999....................................................      276      2,464        6,268
  Inventory.................................................      587         --           --
  Prepaid and other current assets..........................       13         58          700
                                                              -------   --------     --------
    Total current assets....................................    2,968      3,434        7,020
Property and equipment, net.................................      954      1,535        1,738
Other assets................................................       44         57          161
                                                              -------   --------     --------
                                                              $ 3,966   $  5,026     $  8,919
                                                              =======   ========     ========
LIABILITIES, CONVERTIBLE PREFERRED
  STOCK, AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Current portion of long-term debt.........................  $ 1,890   $    491     $    902
  Accounts payable..........................................      461        697          620
  Accrued expenses..........................................      632      2,114        4,932
  Deferred revenue..........................................    2,491      3,463        2,814
                                                              -------   --------     --------
    Total current liabilities...............................    5,474      6,765        9,268
Long-term debt, net of current portion......................       --      1,102        2,210
                                                              -------   --------     --------
    Total liabilities.......................................    5,474      7,867       11,478
                                                              -------   --------     --------
Convertible preferred stock, $.01 par value; redeemable;
  authorized 6,731,954 shares; stated at redemption value,
  net of unaccreted discount:
  Series A, 4,000,000 shares designated, 3,184,000 shares
    issued and outstanding; estimated redemption amount of
    $25,472 at September 30, 1999...........................    6,733      7,233        8,319              --
  Series B, 1,181,954 and 1,231,954 shares designated at
    December 31, 1998 and September 30, 1999, respectively;
    1,181,954 shares issued and outstanding at December 31,
    1998 and September 30, 1999; redemption amount of
    $5,496..................................................       --      5,477        5,479              --
  Series C, 1,500,000 shares designated, 1,325,028 shares
    issued and outstanding at September 30, 1999; estimated
    redemption amount of $10,600 at September 30, 1999......       --         --        8,315              --
                                                              -------   --------     --------        --------
    Total convertible preferred stock.......................    6,733     12,710       22,113              --
                                                              -------   --------     --------        --------
Commitments and contingencies
Stockholders' deficit:
  Preferred stock, $0.01 par value; no shares authorized,
    issued or outstanding, actual; 10,000,000 shares
    authorized pro forma, no shares issued or outstanding,
    pro forma...............................................       --         --           --              --
  Common stock, $.01 par value; authorized 50,000,000
    shares, 8,078,384, 8,206,240, and 10,302,163 shares
    issued at December 31, 1997 and 1998 and September 30,
    1999, respectively; 8,078,384, 6,946,240, and 6,862,379
    shares outstanding at December 31, 1997 and 1998 and
    September 30, 1999, respectively; 20,691,106 shares
    issued and 17,251,322 shares outstanding pro forma
    (unaudited).............................................       81         82          103             207
  Additional paid-in capital................................      604        137        5,062          27,071
  Accumulated deficit.......................................   (8,818)   (13,762)     (20,322)        (20,322)
  Notes receivable for stock................................     (108)      (108)      (2,594)         (2,594)
  Treasury stock, 1,260,000 and 3,439,784 common shares at
    December 31, 1998 and September 30, 1999, respectively,
    at cost.................................................       --     (1,900)      (6,921)         (6,921)
                                                              -------   --------     --------        --------
    Total stockholders' deficit.............................   (8,241)   (15,551)     (24,672)         (2,559)
                                                              -------   --------     --------        --------
                                                              $ 3,966   $  5,026     $  8,919
                                                              =======   ========     ========
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       F-3
<PAGE>   83

                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                    YEAR ENDED              NINE MONTHS ENDED
                                                   DECEMBER 31,               SEPTEMBER 30,
                                            ---------------------------   ---------------------
                                             1996      1997      1998        1998        1999
                                            -------   -------   -------   -----------   -------
                                                                          (UNAUDITED)
<S>                                         <C>       <C>       <C>       <C>           <C>
Revenues:
  License.................................  $   764   $ 3,775   $ 8,507     $ 5,595     $10,811
  Services................................      425     1,138     2,444       1,657       4,079
  Hardware................................      632     1,271     2,171       1,750          46
                                            -------   -------   -------     -------     -------
     Total revenues.......................    1,821     6,184    13,122       9,002      14,936
                                            -------   -------   -------     -------     -------
Cost of revenues:
  License.................................       30       164       310         218         258
  Services................................      622     1,204     2,526       1,863       2,596
  Hardware................................      920     1,574     2,482       1,995          46
                                            -------   -------   -------     -------     -------
     Total cost of revenues...............    1,572     2,942     5,318       4,076       2,900
                                            -------   -------   -------     -------     -------
     Gross profit.........................      249     3,242     7,804       4,926      12,036
Operating expenses:
  Sales and marketing.....................      291     2,016     6,147       4,236       7,409
  Research and development................    1,095     1,817     3,529       2,385       4,140
  General and administrative..............    1,058     1,684     2,141       1,458       2,556
  Charge for termination of distribution
     agreement............................       --        --       900         900          --
  Acquired in-process research and
     development..........................       --        --        --          --       3,506
  Other personnel costs...................       --        --        --          --         665
                                            -------   -------   -------     -------     -------
     Operating loss.......................   (2,195)   (2,275)   (4,913)     (4,053)     (6,240)
Interest income...........................        4        82        56          42          31
Interest expense..........................       --       (20)      (87)        (68)       (351)
                                            -------   -------   -------     -------     -------
     Loss before provision for income
       taxes..............................   (2,191)   (2,213)   (4,944)     (4,079)     (6,560)
Provision for income taxes................       --        --        --          --          --
                                            -------   -------   -------     -------     -------
     Net loss.............................   (2,191)   (2,213)   (4,944)     (4,079)     (6,560)
Preferred stock dividends and accretion...       --       (84)     (502)        (77)     (1,090)
                                            -------   -------   -------     -------     -------
     Net loss applicable to common
       stockholders.......................  $(2,191)  $(2,297)  $(5,446)    $(4,156)    $(7,650)
                                            =======   =======   =======     =======     =======
Net loss per share:
  Basic and diluted.......................  $ (0.21)  $ (0.32)  $ (0.78)    $ (0.57)    $ (1.18)
                                            =======   =======   =======     =======     =======
  Basic and diluted weighted-average
     common shares outstanding............   10,307     7,238     6,964       7,245       6,469
                                            =======   =======   =======     =======     =======
Unaudited pro forma net loss per share
  (note 1(l)):
  Basic and diluted.......................                      $ (0.37)                $ (0.43)
                                                                =======                 =======
  Basic and diluted weighted-average
     common shares outstanding............                       13,399                  15,276
                                                                =======                 =======
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       F-4
<PAGE>   84

                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                  COMMON STOCK
                                 ---------------                                             TREASURY STOCK
                                 NUMBER                                                    ------------------
                                   OF              ADDITIONAL                   NOTES      NUMBER
                                 SHARES             PAID-IN     ACCUMULATED   RECEIVABLE     OF      AMOUNT
                                 ISSUED   AMOUNT    CAPITAL       DEFICIT     FOR STOCK    SHARES   (AT COST)    TOTAL
                                 ------   ------   ----------   -----------   ----------   ------   ---------   --------
<S>                              <C>      <C>      <C>          <C>           <C>          <C>      <C>         <C>
Balances at December 31,
1995...........................  10,307    $103     $   583      $   (755)     $    --        --     $    --    $    (69)
Net loss.......................     --       --          --        (2,191)          --        --          --      (2,191)
                                 ------    ----     -------      --------      -------     ------    -------    --------
Balances at December 31,
  1996.........................  10,307     103         583        (2,946)          --        --          --      (2,260)
Purchase and retirement of
  treasury stock...............  (3,215)    (32)         --        (3,659)          --        --          --      (3,691)
Accretion on Series A
  convertible preferred
  stock........................     --       --         (30)           --           --        --          --         (30)
Dividends accrued on Series A
  convertible preferred
  stock........................     --       --         (54)           --           --        --          --         (54)
Exercise of stock options......     55        1           6            --           --        --          --           7
Sale of restricted common stock
  for notes....................    931        9          99            --         (108)       --          --          --
Net loss.......................     --       --          --        (2,213)          --        --          --      (2,213)
                                 ------    ----     -------      --------      -------     ------    -------    --------
Balances at December 31,
  1997.........................  8,078       81         604        (8,818)        (108)       --          --      (8,241)
Common stock granted for
  services.....................     40       --          25            --           --        --          --          25
Purchase of treasury stock.....     --       --          --            --           --     1,260      (1,900)     (1,900)
Accretion on Series A and
  Series B convertible
  preferred stock..............     --       --        (434)           --           --        --          --        (434)
Dividends accrued on Series A
  convertible preferred
  stock........................     --       --         (68)           --           --        --          --         (68)
Exercise of stock options......     88        1          10            --           --        --          --          11
Net loss.......................     --       --          --        (4,944)          --        --          --      (4,944)
                                 ------    ----     -------      --------      -------     ------    -------    --------
Balances at December 31,
  1998.........................  8,206       82         137       (13,762)        (108)    1,260      (1,900)    (15,551)
Accretion on Series A, Series
  B, and Series C convertible
  preferred stock..............     --       --      (1,039)           --           --        --          --      (1,039)
Dividends accrued on Series A
  convertible preferred
  stock........................     --       --         (51)           --           --        --          --         (51)
Exercise of stock options......    375        4         420            --         (333)       --          --          91
Fair value of common stock
  warrants issued..............     --       --         275            --           --        --          --         275
Repurchase of common stock.....     --       --          --            --           --     1,800      (5,350)     (5,350)
Issuance of common stock for
  notes........................    880        9       1,847            --       (2,261)     (270)        405          --
Fair value of shares issued for
  acquired in-process research
  and development..............    841        8       3,473            --           --        --          --       3,481
Forgiveness of note receivable
  for stock....................     --       --          --            --          108       650         (76)         32
Net loss.......................     --       --          --        (6,560)          --        --          --      (6,560)
                                 ------    ----     -------      --------      -------     ------    -------    --------
Balances at September 30,
  1999.........................  10,302     103       5,062       (20,322)      (2,594)    3,440      (6,921)    (24,672)
Pro forma unaudited:
  Conversion of Series A, B,
    and C preferred stock,
    including dividends on
    Series A preferred stock...  10,389     104      22,009            --           --        --          --      22,113
                                 ------    ----     -------      --------      -------     ------    -------    --------
  Pro forma balances at
    September 30, 1999
    (unaudited)................  20,691    $207     $27,071      $(20,322)     $(2,594)    3,440     $(6,921)   $ (2,559)
                                 ======    ====     =======      ========      =======     ======    =======    ========
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       F-5
<PAGE>   85

                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED              NINE MONTHS ENDED
                                                                DECEMBER 31,               SEPTEMBER 30,
                                                         ---------------------------   ---------------------
                                                          1996      1997      1998        1998        1999
                                                         -------   -------   -------   -----------   -------
                                                                                       (UNAUDITED)
<S>                                                      <C>       <C>       <C>       <C>           <C>
Cash flows from operating activities:
  Net loss.............................................  $(2,191)  $(2,213)  $(4,944)    $(4,079)    $(6,560)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
    Depreciation and amortization of property and
      equipment........................................       75       258       743         500         934
    Stock issued for in-process research and
      development......................................       --        --        --          --       3,481
    Other non-cash expenses............................       --        --       225          25         281
    Changes in operating assets and liabilities:
      Accounts receivable..............................     (528)      528    (2,388)     (1,211)     (3,942)
      Prepaid expenses and other assets................       37       (53)      (58)        (67)       (746)
      Inventory........................................     (210)     (295)      587         473          --
      Accounts payable.................................      126       288       236         359         (77)
      Accrued expenses.................................      504      (112)    1,482       1,284       2,818
      Deferred revenue.................................    2,353      (160)      972       1,043        (649)
                                                         -------   -------   -------     -------     -------
         Net cash flows provided by (used in) operating
           activities..................................      166    (1,759)   (3,145)     (1,673)     (4,460)
                                                         -------   -------   -------     -------     -------
Cash flows from investing activities -- purchase of
  property and equipment...............................     (181)   (1,073)   (1,324)       (937)     (1,137)
                                                         -------   -------   -------     -------     -------
Cash flows from financing activities:
  Net borrowings on (repayments of) working capital
    line of credit.....................................       --     1,000    (1,000)     (1,000)        402
  Proceeds from long-term debt.........................       --       890     1,000          --       3,000
  Repayments on long-term debt.........................       --        --      (297)       (223)     (1,718)
  Purchase of treasury shares..........................       --    (3,691)   (1,900)     (1,900)     (5,350)
  Proceeds from exercise of stock options..............       --         7        11          --          91
  Proceeds from sale of Series A convertible preferred
    stock, net.........................................       --     6,649        --          --          --
  Proceeds from sale of Series B convertible preferred
    stock, net.........................................       --        --     5,475       5,475          --
  Proceeds from sale of Series C convertible preferred
    stock, net.........................................       --        --        --          --       8,312
                                                         -------   -------   -------     -------     -------
         Net cash flows provided by financing
           activities..................................       --     4,855     3,289       2,352       4,737
                                                         -------   -------   -------     -------     -------
         Net (decrease) increase in cash and cash
           equivalents.................................      (15)    2,023    (1,180)       (258)       (860)
Cash and cash equivalents at beginning of period.......       84        69     2,092       2,092         912
                                                         -------   -------   -------     -------     -------
Cash and cash equivalents at end of period.............  $    69   $ 2,092   $   912     $ 1,834     $    52
                                                         =======   =======   =======     =======     =======
Supplemental disclosure of cash paid for interest......  $    --   $    20   $    87     $    65     $   209
                                                         =======   =======   =======     =======     =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-6
<PAGE>   86

                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            DECEMBER 31, 1996, 1997 AND 1998 AND SEPTEMBER 30, 1999

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(A) DESCRIPTION OF BUSINESS

     Witness Systems, Inc. develops, markets and licenses recording and analysis
software designed to enable customer contact centers to record and evaluate
customer interactions through one or more media, such as telephony and Web chat.
It is headquartered in Alpharetta, Georgia with other offices in the United
States and the United Kingdom.


     The Company was originally incorporated as a Georgia corporation ("Witness
Georgia") on May 26, 1988. Witness Systems Delaware, Inc., a Delaware
corporation ("Witness Delaware"), was incorporated on March 13, 1997 to effect a
merger with Witness Georgia. Effective March 14, 1997, the Board of Directors
approved an Agreement and Plan of Merger to merge Witness Georgia with Witness
Delaware. The surviving entity, Witness Systems Delaware, Inc. filed for a
corporate name change to Witness Systems, Inc. on March 18, 1997. These
financial statements reflect the financial position and results of operations
for both entities (the "Company") for all periods presented.


(B) PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiary, Witness Systems UK Limited. All
significant intercompany balances and transactions have been eliminated in
consolidation.

(C) UNAUDITED INTERIM INFORMATION

     The accompanying interim financial statements for the nine months ended
September 30, 1998 have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, such financial statements reflect all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position, results of operations and cash flows.

(D) UNAUDITED PRO FORMA CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT


     The Board of Directors has authorized the Company to file a registration
statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering. If the offering is
consummated as presently anticipated, each share of the Series A, Series B, and
Series C convertible preferred stock will automatically convert into 1.8 shares
of common stock. In addition, the Series A stockholders would be entitled to
payment of accrued dividends either in cash or in additional shares of Series A
convertible preferred stock. The Company has received a notification from the
Series A stockholders that they will elect to receive payment of all accrued
dividends with additional shares if the offering is consummated as presently
anticipated. The unaudited pro forma convertible preferred stock and
stockholders' deficit reflects the automatic conversion of Series A, Series B
and Series C convertible preferred stock, including the payment of $173,000 in
accrued dividends on the Series A convertible preferred stock with 80,653
additional preferred shares, into common stock as if such conversions had
occurred as of September 30, 1999.


(E) REVENUE RECOGNITION AND DEFERRED REVENUE


     The Company recognizes revenue in accordance with Statement of Position
("SOP") 97-2, Software Revenue Recognition, and SOP 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2. Revenue is derived from the sale of
software licenses, hardware, and software services and is


                                       F-7
<PAGE>   87
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)

allocated to each element of the arrangement based on the relative fair values
of the elements, which is established by the price charged when the respective
element is sold separately.



     Revenue from license fees and hardware is recognized when persuasive
evidence of an agreement exists, delivery of the product has occurred, the fee
is fixed or determinable and collectibility is probable.



     Software services include installation, training, and maintenance. Revenues
from installation and training are recognized upon performance of the related
services. Installation and training services are offered and billed as separate
elements of contracts and are not essential to the functionality of the
software.



     Maintenance is offered as a separate element and includes the right to
unspecified upgrades on a when-and-if available basis. Maintenance revenue is
deferred and recognized ratably over the term of the related contract, usually
one year. Specified upgrades are not typically offered to customers.



     In December 1998, the Accounting Standards Committee of the American
Institute of Certified Public Accountants issued SOP 98-9, Software Revenue
Recognition with Respect to Certain Transactions. SOP 98-9 is effective for
fiscal years beginning after March 15, 1999 and the Company does not expect a
material change to its accounting for revenues as a result of adopting the
provisions of SOP 98-9.



     Accounts receivable include amounts due from customers for which revenue
has been recognized. Deferred revenue consists of amounts collected from
customers for license and software services that have not met the criteria for
revenue recognition.


(F) CASH EQUIVALENTS

     The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.

(G) INVENTORY

     Inventory consists mainly of computer hardware purchased for customers and
is stated at the lower of cost or market. Cost is determined using the specific
identification method. As of December 31, 1998, the Company no longer maintains
inventory for resale.

(H) PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization on property and equipment is
calculated using the straight-line method over the shorter of the estimated
useful lives of the assets or the lease term. The estimated useful lives of the
assets are as follows:

<TABLE>
<S>                                                           <C>
Equipment and purchased software............................  2 years
Furniture and fixtures......................................  5 years
Leasehold improvements......................................  3 years
</TABLE>

                                       F-8
<PAGE>   88
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)
(I) RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

     Research and development costs are expensed as incurred. Costs incurred
subsequent to establishing technological feasibility, in the form of a working
model, are capitalized and amortized over their estimated useful lives. To date,
software development costs incurred after technological feasibility has been
established have not been material.

(J) INCOME TAXES

     The Company was taxed as an S Corporation pursuant to the Internal Revenue
Code during 1996. As such, the Company did not record any provisions for federal
or state income taxes since all earnings were passed through to, and the related
income tax liabilities were the responsibility of, the stockholders of the
Company.

     On January 1, 1997, the Company terminated its election to operate as an S
Corporation and became taxable as a C Corporation. Since the Company reported
operating losses with no recognizable benefit in 1996, the pro forma provision
for income taxes that would have been provided had the Company operated as a C
Corporation during 1996 would also be $0.

     From January 1, 1997 forward, 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.

(K) STOCK COMPENSATION

     The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"),
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense is
recorded on the date of grant only if the current estimated fair value of the
underlying stock exceeds the exercise price. The Company has also provided pro
forma disclosures as if the fair value-based method of accounting prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock Based Compensation, had been used to account for its fixed plan stock
options (note 6(a)).

(L) COMPUTATION OF HISTORICAL AND UNAUDITED PRO FORMA NET LOSS PER SHARE

     The Company has presented historical net loss per share pursuant to SFAS
No. 128, Earnings Per Share, and the Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 98. Pursuant to SFAS No. 128, unvested stock is
excluded from basic earnings per share and included in diluted earnings per
share if dilutive. Pursuant to SAB No. 98, common stock and convertible
preferred stock issued for nominal consideration, prior to the effective date of
the initial public offering, are required to be included in the calculation of
basic and diluted net loss per share, as if they were outstanding for all
periods presented. The Company has not had any such issuances or grants for
nominal consideration.

                                       F-9
<PAGE>   89
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)

     The unaudited pro forma net loss per share for the year ended December 31,
1998 and the nine months ended September 30, 1999 is calculated using the
historical weighted-average common shares outstanding and reflecting: (1) the
subsequent conversion of Series A, Series B and Series C convertible preferred
stock, assuming conversion of accrued dividends on the Series A convertible
preferred stock, into shares of the Company's common stock, as if such
conversions had occurred on January 1, 1998, or at the date of issuance, if
later; and (2) the vesting of certain restricted common shares held by an
officer of the Company which become fully vested upon the occurrence of an
initial public offering of the Company, as if such vesting became effective on
the date such shares were issued. The calculation excludes preferred stock
dividends and accretion of $502,000 and $1,090,000 for the year ended December
31, 1998 and the nine months ended September 30, 1999, respectively.



     Following is a reconciliation of the numerator and denominator used in the
calculation of historical and pro forma basic and diluted net loss per share (in
thousands, except per share data):



<TABLE>
<CAPTION>
                                                                                       NINE MONTHS
                                                          YEAR ENDED DECEMBER 31,         ENDED
                                                        ---------------------------   SEPTEMBER 30,
                                                         1996      1997      1998         1999
                                                        -------   -------   -------   -------------
<S>                                                     <C>       <C>       <C>       <C>
Historical:
  Net loss............................................  $(2,191)  $(2,213)  $(4,944)     $(6,560)
  Preferred stock dividends and accretion.............       --       (84)     (502)      (1,090)
                                                        -------   -------   -------      -------
          Net loss applicable to common
            stockholders..............................  $(2,191)  $(2,297)  $(5,446)     $(7,650)
                                                        =======   =======   =======      =======
  Basic and diluted common shares outstanding.........   10,307     7,238     6,964        6,469
                                                        =======   =======   =======      =======
  Basic and diluted net loss per share................  $ (0.21)  $ (0.32)  $ (0.78)     $ (1.18)
                                                        =======   =======   =======      =======
</TABLE>



     The Company has excluded all convertible preferred stock, warrants for
common and preferred shares, non-vested restricted common shares, and
outstanding stock options from the calculation of historical diluted net loss
per common share because all such securities are anti-dilutive for all periods
presented. The total number of shares excluded from the calculations of diluted
net loss per share were 0, 7,575,386, 10,304,502, and 13,586,061 for the years
ended December 31, 1996, 1997 and 1998, and for the nine months ended September
30, 1999, respectively. See notes 5 and 6 for further information on these
securities.


                                      F-10
<PAGE>   90
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)


<TABLE>
<CAPTION>
                                                                YEAR ENDED       NINE MONTHS ENDED
                                                             DECEMBER 31, 1998   SEPTEMBER 30, 1999
                                                             -----------------   ------------------
<S>                                                          <C>                 <C>
Unaudited pro forma:
  Historical basic and diluted common shares outstanding...         6,964               6,469
  Adjustment to reflect the anticipated initial public
     offering:
       Conversion of Series A preferred stock..............         5,776               5,776
       Conversion of Series B preferred stock..............           533               2,128
       Conversion of Series C preferred stock..............            --                 518
       Vesting of restricted common shares.................           126                 385
                                                                  -------             -------
  Pro forma basic and diluted common shares outstanding....        13,399              15,276
                                                                  =======             =======
          Unaudited pro forma basic and diluted net loss
            per share......................................       $ (0.37)            $ (0.43)
                                                                  =======             =======
</TABLE>


(M) SEGMENT REPORTING

     Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The Company operates
and manages its business in one segment, that being a software and services
provider to the customer interaction recording and analysis market.

(N) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value of the Company's long-term debt is estimated by discounting
the future cash flows of each instrument at rates estimated to be currently
available to the Company for similar instruments. The carrying value of the
Company's remaining financial instruments approximate fair value due to the
short-term nature of such instruments.

(O) REFERENCE TO PERIODS PRESENTED

     References within the notes to consolidated financial statements to 1996,
1997, 1998, and 1999 relate to the years ended December 31, 1996, 1997, and 1998
and to the nine months ended September 30, 1999, respectively.

(P) USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(Q) RECLASSIFICATIONS

     Certain amounts in the accompanying 1996, 1997 and 1998 financial
statements have been reclassified to conform to the presentation adopted in the
1999 financial statements.

                                      F-11
<PAGE>   91
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2.  PROPERTY AND EQUIPMENT

     Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------   SEPTEMBER 30,
                                                               1997     1998        1999
                                                              ------   ------   -------------
<S>                                                           <C>      <C>      <C>
Purchased software..........................................  $  120   $  453      $  755
Equipment...................................................     824    1,642       2,345
Furniture and fixtures......................................     310      451         577
Leasehold improvements......................................      --       32          38
                                                              ------   ------      ------
                                                               1,254    2,578       3,715
Less accumulated depreciation...............................     300    1,043       1,977
                                                              ------   ------      ------
                                                              $  954   $1,535      $1,738
                                                              ======   ======      ======
</TABLE>

3.  FINANCING ARRANGEMENTS

     Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ----------------   SEPTEMBER 30,
                                                               1997      1998        1999
                                                              ------    ------   -------------
<S>                                                           <C>       <C>      <C>
Term loan, interest payable in monthly installments at prime
plus 2% (10.25% at September 30, 1999), principal payable at
earlier of December 31, 2000 or upon an initial public
offering of the Company's equity securities, net of
unamortized discount of $165,500 at September 30, 1999......  $   --    $   --      $1,835
Equipment loan, payable in monthly principal installments of
  $41,667, plus interest at prime plus 2% (10.25% at
  September 30, 1999) through maturity, June 30, 2001.......      --        --         875
Revolving loan, interest payable in monthly installments at
  prime plus 2% (10.25% at September 30, 1999), principal
  payable on December 31, 2000..............................      --        --         402
Working capital line of credit, interest payable monthly at
  the prime rate............................................   1,000        --          --
Term note payable in 36 monthly installments of $24,719 plus
  interest at prime plus 1 1/4% (9% at December 31, 1998),
  through January 31, 2001..................................     890       593          --
Outstanding advances convertible to term note payable in 36
  monthly installments of $27,798 plus interest at prime
  plus 1 1/4% (9% at December 31, 1998), commencing June 30,
  1999, through May 31, 2002................................      --     1,000          --
                                                              ------    ------      ------
  Total long-term debt......................................   1,890     1,593       3,112
Less current portion (the 1997 balance was classified as
  current due to previous covenant violations)..............   1,890       491         902
                                                              ------    ------      ------
  Long-term debt, excluding current portion.................  $   --    $1,102      $2,210
                                                              ======    ======      ======
</TABLE>

     During 1997, the Company entered into a loan and security agreement (the
"Agreement") with a commercial bank that made borrowings available to the
Company under working capital and

                                      F-12
<PAGE>   92
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  FINANCING ARRANGEMENTS -- (CONTINUED)
equipment lines of credit. The working capital line of credit permitted the
Company to borrow the lesser of $1.0 million or 70% of eligible accounts
receivable, as defined in the Agreement, through July 1, 1998. The equipment
line of credit permitted the Company to obtain advances of up to $1.0 million
for all property and equipment purchases during the period from May 1, 1997
through December 31, 1997. The aggregate amount of advances outstanding under
the equipment line was $0.9 million as of December 31, 1997, which was converted
to a term note as of such date.


     In December 1998, the Agreement was amended (the "Amended Agreement") and
permitted the Company to borrow the lesser of $2.5 million or a variable
percentage of eligible accounts receivable through December 10, 1999 under the
working capital line of credit and provided the Company a $1.0 million committed
equipment line of credit for the period from December 11, 1998 through June 10,
1999. In connection with the Amended Agreement, the Company issued the
commercial bank a warrant to purchase 18,000 shares of the Company's common
stock for $2.58 per share (the "Bank Warrant") (see note 5(e)). The fair value
of the warrant was nominal in December 1998. There was no balance outstanding
under the working capital line of credit as of December 31, 1998.


     In April 1999, the Company entered into an additional finance loan (the
"Finance Loan") with the commercial bank which replaced the working capital line
of credit and permitted the Company to borrow the lesser of $4.0 million or 75%
of net eligible accounts receivable through the earlier of August 7, 1999 or the
closing of a financing transaction in which the Company received at least $4.0
million. Borrowings under the Finance Loan accrued interest at the prime rate
plus 2.5%. In connection with the Finance Loan, the Company cancelled the Bank
Warrant and issued the commercial bank warrants to purchase 20,000 shares of the
Company's Series B convertible preferred stock for $4.65 per share (see note
5(e)). The fair value of the warrant was estimated at $0.1 million in April 1999
and was recorded as debt discount and amortized over the term of the Finance
Loan.


     In June 1999, the Company refinanced all of its then existing borrowings
with another commercial lender (the "Lender"). Under the terms of the new loan
and security agreement (the "Loan Agreement"), the Company obtained a $2.0
million secured term loan (the "Term Loan"), a $1.0 million secured equipment
loan (the "Equipment Loan") and a $4.0 million working capital line of credit
(the "Revolving Loan"). The Revolving Loan permits the Company to borrow the
lesser of $4.0 million or 80% of eligible accounts receivable through the
maturity date of December 31, 2000. The Company remits its accounts receivable
collections for application against any advances, interest and fees on the
Revolving Loan. In connection with the Loan Agreement, the Company issued the
Lender a warrant to purchase 117,000 shares of the Company's common stock for
$2.58 per share (see note 5(e)). The fair value of the warrant was estimated at
$0.2 million in June 1999 and has been recorded as debt discount and is being
amortized over the term of the loans. The Loan Agreement is secured by
substantially all of the Company's assets, including intellectual property.



     The Company used the Black-Scholes model to estimate the fair value of the
warrants using the following assumptions: expected dividend yield of 0%;
risk-free interest rate of 6%; 5 year term; and 100% volatility.


     The Loan Agreement contains various negative covenants, including, but not
limited to, the prohibition of cash dividend payments to stockholders. At
September 30, 1999, the Company was in compliance with all such requirements.

                                      F-13
<PAGE>   93
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  FINANCING ARRANGEMENTS -- (CONTINUED)
     The aggregate maturities of long-term debt, exclusive of the unamortized
discount, for each of the two years subsequent to September 30, 1999 are as
follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- -------------------------
<S>                                                           <C>
2000........................................................  $  902
2001........................................................   2,375
                                                              ------
  Total long-term debt......................................  $3,277
                                                              ======
</TABLE>

4.  ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT


     In September 1999, the Company obtained certain in-process research and
development efforts ("IPR&D") for 841,120 shares of the Company's common stock
valued at $4.14 per share. As a result, the Company has recorded a charge of
$3.5 million in the accompanying consolidated statement of operations. The IPR&D
relates to the development of technology to store and retrieve substantially
larger volumes of data than the Company's software is currently capable of
storing and retrieving. At the date of the transaction, the results of the IPR&D
had not progressed to a stage where they met technological feasibility as
defined by SFAS No. 86, Accounting for the Cost of Computer Software to Be Sold,
Leased or Otherwise Marketed. As this was the Company's first attempt to develop
the desired technology, there existed a significant amount of uncertainty as to
the Company's ability to complete the development within a timeframe acceptable
to the market. Additionally, the amount of development required to enable the
acquired IPR&D to be compatible with the Company's primary product was
significant, which increased the uncertainty surrounding its successful
development. Management of the Company estimated it would have cost the Company
more than $3.5 million to develop the IPR&D internally and estimates it will
incur an additional $3.3 million to complete its development efforts. The IPR&D
does not have an alternative future use to the Company that has reached
technological feasibility.



5.  STOCKHOLDERS' DEFICIT


(A) STOCKHOLDERS' AGREEMENT

     All holders of the Company's preferred stock and certain holders of the
Company's common stock are parties to the Company's Stockholders' Agreement, as
amended in August 1999 to include the holders of Series C convertible preferred
stock. This agreement provides for a right of first refusal to the Company and
then to the preferred stockholders or their qualified transferees, as defined in
the agreement, to purchase any selling stockholders' shares at a price equal to
that determined by a third party. The agreement terminates upon the earlier of
(a) August 2, 2019, (b) completion of a qualified initial public offering, or
(c) the sale of the Company, as defined.

(B) STOCK REPURCHASES


     During 1997, the Company entered into Stock Repurchase Agreements with four
officers of the Company, under which the Company repurchased 3,214,845 shares of
the Company's common stock for notes payable totaling $3.7 million. The notes
were repaid in 1997 concurrent with the sale of Series A convertible preferred
stock. All of the treasury stock was retired during 1997.



     During 1998, the Company entered into a Stock Repurchase Agreement with a
stockholder of the Company, under which the Company repurchased 1,260,000 shares
of the Company's common stock for $1.9 million. These shares are included in
treasury stock as of December 31, 1998 and September 30, 1999.

                                      F-14
<PAGE>   94
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


5.  STOCKHOLDERS' DEFICIT -- (CONTINUED)


     In February 1999, the Company repurchased 648,979 shares of the Company's
common stock in connection with a forgiveness of a related note receivable (note
5(d)).



     In August 1999, the Company entered into Stock Repurchase Agreements with
three directors of the Company, under which the Company repurchased 1,800,000
shares of the Company's common stock for $5.4 million. Such consideration was
paid concurrent with the sale of the Series C convertible preferred stock (note
5(c)). These shares are included in treasury stock as of September 30, 1999.


(C) SALES OF CONVERTIBLE PREFERRED STOCK

     During 1997, the Company executed a Series A convertible preferred stock
("Series A") purchase agreement to sell 3,184,000 shares of Series A for $2.145
per share, resulting in net proceeds to the Company of $6.6 million. The Company
records accretion on Series A equal to the difference between the net proceeds
received and the redemption amount based on the greater of $2.145 per share or
the then fair value (estimated as $25.5 million as of September 30, 1999) using
the interest method from the original issuance date through the final redemption
date commencing September 24, 2003. Additionally, the Company is increasing the
value of the Series A by the contractual amount of cumulative preferred
dividends due each year to the Series A stockholders. The holders of Series A
shares are entitled to participation rights and cumulative preferred dividends
(payable at redemption or upon an initial public offering of the Company's
common stock) at $.02145 per share per annum to be paid in Series A shares or
cash.

     During 1998, the Company executed a Series B convertible preferred stock
("Series B") purchase agreement to sell 1,181,954 shares of Series B for $4.65
per share, resulting in net proceeds to the Company of $5.5 million. The Company
is recording accretion on Series B equal to the difference between the net
proceeds received and the redemption amount of $5.5 million using the interest
method from the original issuance date through the final redemption date
commencing September 24, 2003.

     In August 1999, the Company executed a Series C convertible preferred stock
("Series C") purchase agreement to sell 1,325,028 shares of Series C for $6.30
per share, resulting in net proceeds to the Company of $8.3 million. The Company
records accretion on Series C equal to the difference between the net proceeds
received and the redemption amount based on the greater of $6.30 per share or
the then fair value (estimated as $10.6 million as of September 30, 1999) using
the interest method from the original issuance date through the final redemption
date commencing September 24, 2003.


     The holders of the convertible preferred stock are entitled to, among other
substantial rights: (1) voting rights equivalent to the voting rights they would
hold as if their holdings were converted to common stock at 1.8 common shares
for each preferred share converted; (2) the right to name two members of the
Company's Board of Directors; (3) distribution and liquidation preferences; (4)
the option to convert to common stock at any time at 1.8 common shares for each
preferred share converted; (5) automatic conversion upon the effective date of a
qualified initial public offering at 1.8 common shares for each preferred share
converted; (6) certain anti-dilution provisions; (7) certain covenants requiring
convertible preferred stockholder authorization of transactions; and (8) a
mandatory redemption provision whereby the majority of holders of convertible
preferred stock may give redemption notice at any time after September 24, 2003
and cause the Company to redeem 50% of their shares within 60 days of receipt of
the redemption notice and to redeem the remainder on the first anniversary of
the first redemption date, with the


                                      F-15
<PAGE>   95
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


5.  STOCKHOLDERS' DEFICIT -- (CONTINUED)

redemption price for: Series A defined as the greater of the then fair market
value or the original cost plus all accrued but unpaid dividends; for Series B,
defined as the original cost plus all declared but unpaid dividends; and for
Series C, defined as the greater of the then fair market value or the original
cost plus all accrued but unpaid dividends. Additionally, the holders of
convertible preferred stock are party to a Registration Rights Agreement which
provides them with certain rights, including but not limited to, demand and
incidental registration rights.

(D) NOTES RECEIVABLE FROM STOCK SALES


     During 1997, the Company sold restricted common stock to an officer of the
Company for $0.1 million in return for a note receivable, all of which remained
outstanding as of December 31, 1997 and 1998. In February 1999, the officer
resigned from the Company and the amount of the note related to vested shares
plus all accrued interest was forgiven. The remainder of the note was canceled
in connection with the Company's repurchase of the unvested shares at $0.12 per
share (note 5(b)).



     In March 1999, the Company issued 879,763 shares of restricted common stock
to an officer of the Company in return for a note receivable of $1.5 million. In
August 1999, an officer of the Company was granted and exercised options to
acquire 112,230 shares of the Company's common stock in exchange for a note
receivable of $0.3 million. The notes effectively bear no interest and mature on
March 30, 2008. Such maturity date is accelerated if the Company (1) consummates
a merger, consolidation or reorganization, (2) sells substantially all of its
assets, or (3) completes an initial public offering.



     In August 1999, the Company issued 269,195 shares of common stock (from
treasury shares) to certain officers and directors of the Company in return for
individual notes receivable aggregating $0.8 million. The notes accrue interest
at 7% and mature on July 31, 2003. Such maturity date is accelerated if the
Company (1) consummates a merger, consolidation or reorganization, (2) sells
substantially all of its assets, (3) completes an initial public offering, (4)
terminates the employee for cause, or (5) receives the employee's resignation.


(E) WARRANTS


     In connection with the Amended Agreement (note 3), the Company granted a
warrant to a commercial bank to purchase 18,000 shares of common stock of the
Company for $2.58 per share. The warrant vested immediately with an initial
expiration date of December 10, 2003. The warrant agreement provided the holder
with a put right at fair market value in case of sale, merger, or consolidation
of the Company, as defined in the warrant agreement. In connection with the
Finance Loan, the warrant to purchase the 18,000 common shares was cancelled and
the Company granted a warrant to purchase 20,000 shares of the Company's Series
B for $4.65 per share. The warrant vested immediately, expires April 22, 2004
and remained outstanding and exercisable as of September 30, 1999. The warrant
agreement provides the holder with a put right at fair market value in case of
sale, merger, or consolidation of the Company, as defined in the warrant
agreement.



     In connection with the Loan Agreement (note 3), the Company granted a
warrant to purchase 117,000 shares of common stock of the Company for $2.58 per
share. The warrant vested immediately, expires June 24, 2004 and remained
outstanding and exercisable as of September 30, 1999. The warrant agreement
provides the holder with certain rights, including but not limited to, a


                                      F-16
<PAGE>   96
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


5.  STOCKHOLDERS' DEFICIT -- (CONTINUED)


put right at fair market value in case of sale, merger, or consolidation of the
Company, as defined in the warrant agreement.


6.  EMPLOYEE BENEFIT PLANS

(A) STOCK INCENTIVE PLAN


     In 1997, the Company adopted the Witness Systems, Inc. Stock Incentive Plan
(the "Plan") pursuant to which the Company's Board of Directors may grant up to
4,717,440 shares of common stock in the form of stock options, restricted stock
awards, or stock appreciation rights to employees and key persons affiliated
with the Company, as defined in the Plan document. The Plan remains in effect
until the earlier of the tenth anniversary of its effective date or the date on
which all reserved shares have been issued or are no longer available for use
under the Plan. Through September 30, 1999, the Company has issued 1,119,498
shares of restricted common stock. As of September 30, 1999, 530,242 shares
remain available for grant under the Plan. In November 1999, the Company amended
the Plan, authorized an additional 1,557,360 shares subject to grant, and
adopted a provision to increase the number of shares authorized each year.


     Options granted under the Plan and approved by the Board of Directors may
be incentive stock options ("ISO"), which qualify for certain tax benefits, or
nonqualified stock options. Only employees are eligible to receive ISOs, which
must be granted at a price not less than the estimated fair value of the stock
on the grant date, or not less than 110% of the estimated fair value if granted
to a participant who is a greater than 10% stockholder of the Company.
Nonqualified stock options may be granted to employees and key persons at a
price which may be greater than, equal to, or less than the estimated fair value
of the stock on the grant date. Option vesting terms are established by the
Board of Directors at the time of grant, and typically range from three to four
years. The expiration date of options granted under the Plan is determined at
the time of grant and may not exceed ten years from the date of the grant for a
non-10% owner of the Company, or five years from the date of the grant in the
case of an ISO granted to a participant who is a greater than 10% owner of the
Company.


     At September 30, 1999, 300,996 options were outstanding with an officer
which provide for accelerated vesting in the event that the Company completes an
initial public offering. At September 30, 1999, the Company also had 1,247,222
options outstanding with certain officers of the Company which provide for
accelerated vesting if the Company undergoes a change in control, as defined,
and if there is a significant reduction in each individual's respective
responsibilities within the Company, as defined.


                                      F-17
<PAGE>   97
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6.  EMPLOYEE BENEFIT PLANS -- (CONTINUED)
     The following summarizes stock option activity:


<TABLE>
<CAPTION>
                                                                          WEIGHTED-
                                                                           AVERAGE
                                                               NUMBER     EXERCISE
                                                              OF SHARES     PRICE
                                                              ---------   ---------
<S>                                                           <C>         <C>
Balance at January 1, 1997..................................         --     $  --
Granted.....................................................  1,074,739      0.12
Exercised...................................................    (56,144)     0.12
Cancelled...................................................   (149,668)     0.12
                                                              ---------     -----
Balance at December 31, 1997................................    868,927      0.12
Granted.....................................................    919,854      1.18
Exercised...................................................    (89,111)     0.12
Cancelled...................................................   (149,476)     0.14
                                                              ---------     -----
Balance at December 31, 1998................................  1,550,194      0.74
Granted.....................................................  1,555,020      2.17
Exercised...................................................   (375,041)     1.12
Cancelled...................................................   (262,679)     0.94
                                                              ---------     -----
Balance at September 30, 1999...............................  2,467,494     $1.54
                                                              =========     =====
</TABLE>


     The following table summarizes information about stock options outstanding
at September 30, 1999:


<TABLE>
<CAPTION>
                                                             EXERCISABLE
                               WEIGHTED-   WEIGHTED-  -------------------------
                                AVERAGE     AVERAGE                WEIGHTED-
   RANGE OF        NUMBER      REMAINING   EXERCISE    NUMBER       AVERAGE
EXERCISE PRICES  OUTSTANDING      LIFE       PRICE    OF SHARES  EXERCISE PRICE
- ---------------  -----------   ----------  ---------  ---------  --------------
<S>              <C>           <C>         <C>        <C>        <C>
  $0.21-$2.56       852,084    8.42 years   $0.64     205,366        $0.55
  $2.57-$2.99     1,109,592    9.34 years    1.66      60,199         1.66
  $3.00-$7.45       505,818    9.82 years    2.83          --           --
</TABLE>


     The weighted-average remaining contractual life of options outstanding at
September 30, 1999 was 9.12 years.

     The Company applies the provisions of APB No. 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its stock options
in the accompanying financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below (in thousands, except per share data):


<TABLE>
<CAPTION>
                                                            YEAR ENDED
                                                           DECEMBER 31,     NINE MONTHS ENDED
                                                          ---------------     SEPTEMBER 30,
                                                           1997     1998          1999
                                                          ------   ------   -----------------
<S>                                                       <C>      <C>      <C>
Historical net loss.....................................  $2,213   $4,944        $6,560
Pro forma net loss......................................   2,214    5,005         6,965
Pro forma basic and diluted net loss per share..........    0.32     0.79          1.24
</TABLE>



     The per share weighted-average fair value of stock options granted during
1997, 1998 and 1999 was $0.0125, $0.4167, and $0.75, respectively, on the date
of grant using the Black-Scholes option-


                                      F-18
<PAGE>   98
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6.  EMPLOYEE BENEFIT PLANS -- (CONTINUED)
pricing model (excluding a volatility assumption) with the following
weighted-average assumptions: 1997 -- expected dividend yield 0%, risk-free
interest rate of 6%, and an expected life of 7.26 years; 1998 -- expected
dividend yield 0%, risk-free interest rate of 6%, and an expected life of 7.51
years; 1999 -- expected dividend yield 0%, risk-free interest rate of 6%, and an
expected life of 7.20 years.

(B) RETIREMENT PLAN

     The Company maintains a tax-qualified defined contribution plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Employees are
eligible to participate the first of the month following their date of hire. The
401(k) Plan allows participants to contribute by salary reduction up to 20% of
eligible compensation, subject to Internal Revenue Service limitations. The
401(k) Plan also provides for discretionary employer matching contributions,
none of which were made during 1996, 1997, 1998, or 1999.

(C) EMPLOYEE STOCK PURCHASE PLAN


     In November 1999, the Company established an employee stock purchase plan
pursuant to Section 423 of the Internal Revenue Code. The plan covers 990,000
shares of the Company's common stock and would become effective upon an initial
public offering of the Company's common stock.


7.  ACCRUED EXPENSES

     Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------   SEPTEMBER 30,
                                                              1997     1998        1999
                                                              ----    ------   -------------
<S>                                                           <C>     <C>      <C>
Accrued wages, salaries, and employee benefits..............  $172    $  353      $1,503
Sales taxes payable.........................................   300       552       1,468
Reserve for sales returns and allowances....................    --       400         600
Other.......................................................   160       809       1,361
                                                              ----    ------      ------
                                                              $632    $2,114      $4,932
                                                              ====    ======      ======
</TABLE>

8.  OTHER PERSONNEL COSTS

     During 1999, the Company incurred $0.3 million of severance costs for
terminated executives and incurred $0.4 million for a bonus and relocation costs
in connection with recruiting a new executive.

9.  INCOME TAXES

     The Company did not record any income tax expense during the year ended
December 31, 1996 because it was operating as an S Corporation. Further, the pro
forma provision for income taxes for 1996 is $0 because the Company reported
operating losses with no recognizable benefit.

                                      F-19
<PAGE>   99
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9.  INCOME TAXES -- (CONTINUED)
     During 1997, 1998 and 1999, no income taxes were recorded because the
Company reported operating losses with no recognizable benefit. Income tax
expense (benefit) differed from the amounts computed by applying the statutory
U.S. federal income tax rate of 34% to loss before income taxes as a result of
the following (in thousands):

<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                                          DECEMBER 31,     NINE MONTHS ENDED
                                                        ----------------     SEPTEMBER 30,
                                                        1997      1998           1999
                                                        -----    -------   -----------------
<S>                                                     <C>      <C>       <C>
Computed "expected" tax benefit.......................  $(752)   $(1,681)       $(2,230)
Increase (decrease) in income taxes resulting from:
  State income taxes, net of federal income taxes.....    (55)      (191)          (203)
  Nondeductible items.................................     12         35             57
  Generation of research and experimentation credit
     carryforward.....................................    (35)      (150)           (40)
  Other, net..........................................    228        (92)           (25)
  Increase in valuation allowance.....................    602      2,079          2,441
                                                        -----    -------        -------
                                                        $  --    $    --        $    --
                                                        =====    =======        =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                        ----------------     SEPTEMBER 30,
                                                        1997      1998           1999
                                                        -----    -------   -----------------
<S>                                                     <C>      <C>       <C>
Deferred income tax assets:
  Accruals not deducted for tax.......................  $ 100    $   553        $   756
  Property and equipment, principally due to
     differences in depreciation......................      8        114            207
  Acquired in-process research and development........     --         --          1,367
  Net operating loss and research and experimentation
     credit carryforwards.............................    720      2,164          2,867
                                                        -----    -------        -------
     Total gross deferred tax assets..................    828      2,831          5,197
  Less valuation allowance............................   (602)    (2,681)        (5,122)
                                                        -----    -------        -------
     Net deferred income tax assets...................    226        150             75
Deferred income tax liabilities -- adjustment to
  accrual basis for income taxes......................   (226)      (150)           (75)
                                                        -----    -------        -------
                                                        $  --    $    --        $    --
                                                        =====    =======        =======
</TABLE>

     The net change in the valuation allowance for deferred income tax assets
for 1997, 1998 and 1999 was an increase of $0.6 million, $2.1 million, and $2.4
million, respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment.

                                      F-20
<PAGE>   100
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9.  INCOME TAXES -- (CONTINUED)
     At September 30, 1999, the Company has net operating loss and research and
experimentation credit carryforwards for federal income tax purposes of
approximately $6.7 million and $0.2 million, respectively, which expire in
varying amounts beginning in the year 2014.

     Approximately $0.2 million of the net operating loss carryforwards that the
Company may use to offset taxable income in future years is limited as a result
of an ownership change, as defined under Internal Revenue Code Section 382,
which occurred effective with the Company's sale of preferred stock in March
1997. Further restrictions on the Company's utilization of net operating losses
may result upon an initial public offering of the Company's common stock.

10.  COMMITMENTS AND CONTINGENCIES

(A) LEASES

     The Company leases certain office space under noncancelable operating lease
agreements which expire at various times through 2002 and provide for minimum
annual rentals as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S>                                                           <C>
1999........................................................  $  951
2000........................................................     750
2001........................................................     712
2002........................................................     376
                                                              ------
                                                              $2,789
                                                              ======
</TABLE>

     Rental expense under all lease agreements for 1996, 1997, 1998 and 1999 was
$0.1 million, $0.3 million, $0.5 million, $0.5 million, respectively.

(B) TERMINATION OF DISTRIBUTION AGREEMENT

     During 1998, the Company terminated an agreement with a distributor. The
Company agreed to pay $0.9 million in order to terminate the arrangement, all of
which was paid by December 31, 1998. The $0.9 million charge has been included
in the operating expense category of the Company's 1998 statement of operations.

11.  BUSINESS AND CREDIT CONCENTRATIONS

     Most of the Company's customers are located in the United States.

     Two customers accounted for 23% of the Company's revenue in 1996, two
customers accounted for 28% of the Company's revenue in 1997, two customers
accounted for 27% of the Company's revenue in 1998, and two customers accounted
for 16% of the Company's revenue in 1999. Total accounts receivable outstanding
from these major customers were approximately $0.6 million, $0.1 million, and
$1.3 million at December 31, 1997, 1998, and September 30, 1999, respectively.

     The Company generally does not require collateral on accounts receivable as
the majority of its customers are large, well established companies. The Company
estimates an allowance for doubtful accounts and sales returns and allowances
based on the creditworthiness of its customers, general economic conditions, and
other factors. Consequently, an adverse change in those factors could affect the
Company's estimate of its bad debts.

                                      F-21
<PAGE>   101
                      WITNESS SYSTEMS, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


12.  SUBSEQUENT EVENTS



     In November 1999, the Company amended its certificate of incorporation to
     increase the number of authorized common shares to a total of 50,000,000.



     On December 27, 1999, the Company's Board of Directors approved a 1.8-for-1
     stock split which became effective immediately. All common share
     information has been adjusted to reflect the stock split as if it had
     occurred at the inception of the Company.



13.  SUBSEQUENT EVENT (UNAUDITED)



     The estimated redemption value of the Series A and Series C preferred stock
     disclosed in the accompanying statements is based on management's estimate
     of the fair value of such shares as of September 30, 1999.



     The redemption value of the Series A and Series C preferred stock, assuming
     a fair value of $13 per common share, is $74.5 million and $31.0 million,
     respectively. The assumed fair value per common share represents the
     midpoint of the expected offering range as filed in the Company's
     registration statement with the Securities and Exchange Commission dated
     December 30, 1999.


                                      F-22
<PAGE>   102

2.  Inside back page portrays the following: In the center of the page is a
    circle with the stylized Witness logo inside. Inside the logo and underneath
    the logo text states: "WITNESS SYSTEMS INC". A line extends from the top of
    the circle to the top of the page at the end of this line is a circle in
    which text states: "1". A line extends from the left side of the circle to
    the left side of the page. At the end of this line is a circle in which text
    states: "2". A line extends from the bottom of the circle to the bottom of
    the page. At the end of this line is a circle in which text states: "3". In
    the top left hand portion of the page is a column of four bullet points.
    The first bullet point states: Comprehensive multimedia contact recording.
    The second bullet point states: Synchronized voice and data evaluation. The
    third bullet point states: Essential customer interaction recording. The
    fourth bullet point states: Mission-critical business-driven recording and
    analysis. In the bottom left hand corner of the page is a paragraph of text
    stating: "Organizations can also leverage WITNESS to optimize multimedia
    interactions by recording Web chat/instant messages as in this example in
    which WITNESS is monitoring a prospective online sale." Underneath the text
    is a screen shot of a web-browser screen with an overlaying box of text. The
    top right corner of the page has a paragraph of text which states: "WITNESS
    helps companies optimize CRM by letting users establish "business rules" to
    initiate recording of customer interactions from within CRM applications.
    These rules trigger recordings based on the entry of information in selected
    fields of the CRM solution." Below the text is a screen shot of our WITNESS
    software. The bottom right corner of the page has a paragraph of text which
    states: These CRM and multimedia recordings can then be evaluated using
    Performance Analyzer which measures contact center performance. This
    eliminates manual data collection and facilitates the accurate assessment of
    performance against expectations for metrics such as trouble ticket response
    time and average Web chat time, as in this example." Below the text is a
    screen shot of our Performance Analyzer software.


<PAGE>   103

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------


                                3,800,000 SHARES


                            WITNESS SYSTEMS INC LOGO

                                  COMMON STOCK
                              --------------------
                                   PROSPECTUS
                              --------------------


                                   CHASE H&Q

                           U.S. BANCORP PIPER JAFFRAY
                           SOUNDVIEW TECHNOLOGY GROUP
                              -------------------
                                           , 2000
                              -------------------

     YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES
OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.

     NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.

     UNTIL             , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SHARES OF COMMON STOCK MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATIONS TO
DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   104

                                    PART II

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
<S>                                                           <C>
Securities and Exchange Commission registration fee.........  $
National Association of Securities Dealers, Inc. fee........
Nasdaq Stock Market listing fee.............................
Accountants' fees and expenses..............................
Legal fees and expenses.....................................
Blue Sky fees and expenses..................................
Transfer Agent's fees and expenses..........................
Printing and engraving expenses.............................
Miscellaneous...............................................
                                                              --------
          Total Expenses....................................  $
                                                              ========
</TABLE>

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS


     Our amended and restated certificate of incorporation limits personal
liability for breach of the fiduciary duty of our directors to the fullest
extent provided by the Delaware General Corporation Law. Such provisions provide
that no director of Witness Systems shall have personal liability to us or to
our stockholders for monetary damages for breach of fiduciary duty of care or
other duty as a director. However, such provisions shall not eliminate or limit
the liability of a director


     - for any breach of the director's duty of loyalty to us or to our
       stockholders;

     - for acts or omissions not in good faith or which involve intentional
       misconduct or a knowing violation of law;

     - for voting or assenting to unlawful distributions; or

     - for any transaction for which the director derived an improper personal
       benefit.

     The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under our bylaws, any
agreement, a vote of our stockholders or otherwise. Our certificate of
incorporation eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law
and provides that the registrant shall fully indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was our director or
officer or is or was serving at our request as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.

     At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under our certificate of incorporation. We are not aware
of any threatened litigation or proceeding that may result in a claim for such
indemnification.


     Section 7 of the underwriting agreement filed as Exhibit 1.1 hereto also
contains provisions pursuant to which certain of our officers, directors and
controlling persons may be entitled to be indemnified by the underwriters named
therein.


                                      II-1
<PAGE>   105

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES

     During the past three years, Witness Systems has issued the securities set
forth below which were not registered under Section 5 of the Securities Act of
1933:


     On December 16, 1997, we sold restricted common stock to Mr. Richards for
$108,000 in return for a promissory note. In February 1999, Mr. Richards
resigned from Witness Systems and the amount of the note related to the 280,901
vested shares plus accrued interest was forgiven. The remainder of the note was
cancelled in connection with our repurchase at $0.12 per share of the 648,979
unvested shares.



     On March 18, 1997, we issued and sold 3,184,000 shares of series A
preferred stock at a price of $2.145 per share to Battery Investment Partners
IV, LLC, Battery Venture IV, L.P. and John Abraham resulting in net proceeds of
$6.6 million. Immediately before the consummation of this offering, each of the
series A preferred shares will be automatically converted into 1.8 shares of
common stock.



     On September 24, 1998, we issued and sold 1,181,954 shares of series B
preferred stock at a price of $4.65 per share to Battery Investment Partners IV,
LLC, Battery Venture IV, L.P. and John Abraham resulting in net proceeds of $5.5
million. Immediately before the consummation of this offering, each of the
series B preferred shares will be automatically converted into 1.8 shares of
common stock.



     On August 2, 1999, we issued and sold 1,325,028 shares of series C
preferred stock at a price of $6.30 per share to a group of venture capital
firms and an individual investor resulting in net proceeds of $8.3 million.
Immediately before the consummation of this offering, each of the series C
preferred shares will be automatically converted into 1.8 shares of common
stock.



     On September 30, 1999, we purchased certain assets from Advanced Integrated
Recorders, Inc. and issued 841,120 shares of common stock to Advanced Integrated
Recorders, Inc. as consideration for the assets.



     In March 1999, we issued 879,763 shares of restricted common stock to Mr.
Gould in return for a note receivable of $1.5 million.



     On August 2, 1999, we sold 30,600 shares of restricted common stock to each
of the following officers (for a total of 244,800 shares): Mr. Gould, Mr.
Ezrine, Mr. Brown, Mr. Gisby, Mr. Ford, Mr. Gallick, Mr. Livernoche, and Ms.
Treaster. Each officer paid $90,950 for the shares by providing a promissory
note to the company. The principal balance of each promissory note is due in
full on July 31, 2003, with interest of 7% payable in arrears annually. In
addition, on August 2, 1999, we sold 24,395 shares of restricted common stock to
Mr. Abraham for $72,401 in return for a promissory note. The principal balance
of the promissory note is due in full on July 31, 2006, with interest of 6.41%
payable in arrears annually.


     The issuance of securities in the transaction described above was deemed to
be exempt from registration under the Securities Act in reliance on Section 4(2)
and Regulation D of the Securities Act.

                                      II-2
<PAGE>   106

ITEM 16.  EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DESCRIPTION
- -------                                -----------
<C>       <C>  <S>
  1.1      --  Form of Underwriting Agreement.
  3.1+     --  Amended and Restated Articles of Incorporation of the
               Registrant.
  3.2+     --  Amended and Restated Bylaws of the Registrant.
  4.1+     --  See Exhibits 3.1 and 3.2 for provisions of the Amended and
               Restated Articles of Incorporation and Amended and Restated
               Bylaws of the Registrant defining rights of the holders of
               Common Stock of the Registrant.
  4.2*     --  Specimen Stock Certificate.
  5.1*     --  Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
               Registrant, as to the legality of the shares being
               registered.
 10.1+     --  Office Lease Agreement between Regency Park West Associates,
               L.P. and Witness Systems, Inc., dated April 15, 1997.
 10.2+     --  Landlord's Consent to Second Sublease, dated June 2, 1999
               and Second Sublease Agreement between Regency Park West
               Associates, L.P., as Landlord and Witness Systems, Inc., as
               Second Sublessee, dated May 28, 1999.
 10.3+     --  Amended and Restated Stock Incentive Plan of the Registrant.
 10.4*     --  Form of Stock Option Grant Certificate.
 10.5+     --  Form of Amendment to Stock Option Grant Certificate between
               Registrant and certain of the officers of the Registrant.
 10.6+     --  Employee Stock Purchase Plan of the Registrant.
 10.7+     --  Employment Agreement entered into between David B. Gould and
               the Registrant, effective February 2, 1999.
 10.8+     --  Promissory Note, dated March 31, 1999, between the
               Registrant and David Gould.
 10.9+     --  Restricted Stock Award Agreement, dated March 31, 1999,
               between the Registrant and David Gould.
 10.10+    --  Form of Promissory Note and Subscription Agreement, dated
               August 2, 1999, between the Registrant and certain of the
               officers of the Registrant.
 10.11+    --  Promissory Note and Subscription Agreement, dated August 2,
               1999, between the Registrant and John Abraham.
 10.12+    --  Form of Stock Repurchase Agreement between the Registrant
               and certain shareholders of the Registrant.
 10.13+    --  Loan and Security Agreement, dated June 24, 1999 between
               Greyrock Capital and the Registrant.
 10.14     --  Asset Purchase Agreement among Registrant and Advanced
               Integrators, Inc. and Formation, Inc. dated September 30,
               1999 and related Schedules and Exhibits.
 10.15     --  Warrant to Purchase Stock, dated June 24, 1999 between
               Greyrock Capital and the Registrant.
 10.16     --  Warrant to Purchase Stock, dated April 22, 1999 between
               Silicon Valley Bank and the Registrant.
 10.17+    --  Amended and Restated Registration Rights Agreement, dated as
               of August 2, 1999, as amended, among the Registrant and
               certain shareholders of the Registrant.
 10.18*    --  Subsidiary License and Distribution Agreement.
 10.19+    --  Form of Indemnification Agreement to be entered into between
               Registrant and each of its executive officers and directors.
</TABLE>


                                      II-3
<PAGE>   107


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DESCRIPTION
- -------                                -----------
<C>       <C>  <S>
 10.20+    --  Amendment No. 1 to Employment Agreement entered into between
               David B. Gould and the Registrant, dated as of August 4,
               1999.
 21.1+     --  List of Subsidiaries.
 23.1      --  Independent Auditors' Consent and Report on Financial
               Statement Schedule of KPMG LLP.
 23.2*     --  Consent of Morris, Manning & Martin, L.L.P. (included in
               Exhibit 5.1).
 24.1+     --  Powers of Attorney (included on signature page).
 27.1+     --  Financial Data Schedule (for SEC use only).
 27.2      --  Restated Financial Data Schedule (for SEC use only).
 99.1      --  Written Consent of Jupiter Communications, dated December
               22, 1999.
 99.2      --  Written Consent of META Group, Inc., dated December 22,
               1999.
 99.3      --  Written Consent of the PELORUS Group, dated December 22,
               1999.
 99.4      --  Written Consent of Yankee Group, dated December 28, 1999.
</TABLE>


- ------------------------------

 * To be filed by amendment

 + Previously filed

ITEM 17.  UNDERTAKINGS


     (a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.



     (b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.



     (c) The registrant hereby undertakes that:



          (i) For purposes of determining any liability under the Securities
     Act, the information omitted from the form of prospectus filed as part of
     this registration statement in reliance upon Rule 430A and contained in the
     form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of the
     registration statement as of the time it was declared effective.


          (ii) For purposes of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.

                                      II-4
<PAGE>   108

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Alpharetta, State of
Georgia on the 30th day of December, 1999.


                                          WITNESS SYSTEMS, INC.

                                          By:      /s/ DAVID B. GOULD
                                            ------------------------------------
                                                       David B. Gould
                                            Chairman of the Board, President and
                                                   Chief Executive Officer

                               POWER OF ATTORNEY


     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David B. Gould and Jon W. Ezrine, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and any subsequent registration
statements pursuant to Rule 462 of the Securities Act and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorney-in-fact
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.



     Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.



<TABLE>
<CAPTION>
                     SIGNATURE                                   TITLE                     DATE
                     ---------                                   -----                     ----
<C>                                                  <S>                             <C>

                /s/ DAVID B. GOULD                   Chairman of the Board,          December 30, 1999
- ---------------------------------------------------    President and Chief
                  David B. Gould                       Executive Officer (Principal
                                                       Executive Officer)

                 /s/ JON W. EZRINE                   Chief Financial Officer and     December 30, 1999
- ---------------------------------------------------    Secretary (Principal
                   Jon W. Ezrine                       Financial and Accounting
                                                       Officer)

             /s/ JAMES W. JUDSON, JR.                Director                        December 30, 1999
- ---------------------------------------------------
               James W. Judson, Jr.

               /s/ THOMAS J. CROTTY                  Director                        December 30, 1999
- ---------------------------------------------------
                 Thomas J. Crotty

                 /s/ JOHN ABRAHAM                    Director                        December 30, 1999
- ---------------------------------------------------
                   John Abraham

                 /s/ JOEL G. KATZ                    Director                        December 30, 1999
- ---------------------------------------------------
                   Joel G. Katz
</TABLE>


                                      II-5
<PAGE>   109

                             WITNESS SYSTEMS, INC.

                SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                    BALANCE AT   CHARGED TO   CHARGED TO                 BALANCE
                                    BEGINNING    COSTS AND      OTHER                   AT END OF
                                    OF PERIOD     EXPENSES     EXPENSES    DEDUCTIONS    PERIOD
                                    ----------   ----------   ----------   ----------   ---------
                                                             (IN 000'S)
<S>                                 <C>          <C>          <C>          <C>          <C>
Allowance for Doubtful Accounts:
  Year ended December 31, 1996....     $ --           --           --           --          --
  Year ended December 31, 1997....     $ --          100           --           --         100
  Year ended December 31, 1998....     $100          200           --           --         300
  Nine months ended September 30,
     1999.........................     $300          138           --           --         438
</TABLE>

<PAGE>   110

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DESCRIPTION
- -------                                -----------
<C>       <C>  <S>
 1.1       --  Form of Underwriting Agreement.
 3.1+      --  Amended and Restated Articles of Incorporation of the
               Registrant.
 3.2+      --  Amended and Restated Bylaws of the Registrant.
 4.1+      --  See Exhibits 3.1 and 3.2 for provisions of the Amended and
               Restated Articles of Incorporation and Amended and Restated
               Bylaws of the Registrant defining rights of the holders of
               Common Stock of the Registrant.
 4.2*      --  Specimen Stock Certificate.
 5.1*      --  Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
               Registrant, as to the legality of the shares being
               registered.
10.1+      --  Office Lease Agreement between Regency Park West Associates,
               L.P. and Witness Systems, Inc., dated April 15, 1997.
10.2+      --  Landlord's Consent to Second Sublease, dated June 2, 1999
               and Second Sublease Agreement between Regency Park West
               Associates, L.P., as Landlord and Witness Systems, Inc., as
               Second Sublessee, dated May 28, 1999.
10.3+      --  Amended and Restated Stock Incentive Plan of the Registrant.
10.4*      --  Form of Stock Option Grant Certificate.
10.5+      --  Form of Amendment to Stock Option Grant Certificate between
               Registrant and certain of the officers of the Registrant.
10.6+      --  Employee Stock Purchase Plan of the Registrant.
10.7+      --  Employment Agreement entered into between David B. Gould and
               the Registrant, effective February 2, 1999.
10.8+      --  Promissory Note, dated March 31, 1999, between the
               Registrant and David Gould.
10.9+      --  Restricted Stock Award Agreement, dated March 31, 1999,
               between the Registrant and David Gould.
10.10+     --  Form of Promissory Note and Subscription Agreement, dated
               August 2, 1999, between the Registrant and certain of the
               officers of the Registrant.
10.11+     --  Promissory Note and Subscription Agreement, dated August 2,
               1999, between the Registrant and John Abraham.
10.12+     --  Form of Stock Repurchase Agreement between the Registrant
               and certain shareholders of the Registrant.
10.13+     --  Loan and Security Agreement, dated June 24, 1999 between
               Greyrock Capital and the Registrant.
10.14      --  Asset Purchase Agreement among Registrant and Advanced
               Integrated Recorders, Inc. and Formation, Inc. dated
               September 30, 1999 and related Schedules and Exhibits.
10.15      --  Warrant to Purchase Stock, dated June 24, 1999 between
               Greyrock Capital and the Registrant.
10.16      --  Warrant to Purchase Stock, dated April 22, 1999 between
               Silicon Valley Bank and the Registrant.
10.17+     --  Amended and Restated Registration Rights Agreement, dated as
               of August 2, 1999, as amended, among the Registrant and
               certain shareholders of the Registrant.
10.18*     --  Subsidiary License and Distribution Agreement.
10.19+     --  Form of Indemnification Agreement to be entered into between
               Registrant and each of its executive officers and directors.
</TABLE>

<PAGE>   111


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DESCRIPTION
- -------                                -----------
<C>       <C>  <S>
10.20+     --  Amendment No. 1 to Employment Agreement entered into between
               David B. Gould and the Registrant, dated as of August 4,
               1999.
21.1+      --  List of Subsidiaries.
23.1       --  Independent Auditors' Consent and Report on Financial
               Statement Schedule of KPMG LLP.
23.2*      --  Consent of Morris, Manning & Martin, L.L.P. (included in
               Exhibit 5.1).
24.1+      --  Powers of Attorney (included on signature page).
27.1+      --  Financial Data Schedule (for SEC use only).
27.2       --  Restated Financial Data Schedule (for SEC use only).
99.1       --  Written Consent of Jupiter Communications, dated December
               22, 1999.
99.2       --  Written Consent of META Group, Inc., dated December 22,
               1999.
99.3       --  Written Consent of The PELORUS Group, dated December 22,
               1999.
99.4       --  Written Consent of Yankee Group, dated December 28, 1999.
</TABLE>


- ------------------------------

 * To be filed by amendment
 + Previously Filed

<PAGE>   1
                                                                     EXHIBIT 1.1


                             WITNESS SYSTEMS, INC.

                              3,800,000 SHARES(1)

                                  COMMON STOCK


                             UNDERWRITING AGREEMENT

                                                            ______________, 2000


HAMBRECHT & QUIST LLC
U.S. Bancorp Piper Jaffray Inc.
SoundView Technology Group, Inc.
  c/o Hambrecht & Quist LLC
  One Bush Street
  San Francisco, CA 94104

Ladies and Gentlemen:

         Witness Systems, Inc., a Delaware corporation (herein called the
Company), proposes to issue and sell 3,800,000 shares of its authorized but
unissued Common Stock, $.01 par value (herein called the Common Stock) (said
shares of Common Stock being herein called the Underwritten Stock). The Company
and the stockholders of the Company named in Schedule II hereto (herein
collectively called the Selling Securityholders), propose to grant to the
Underwriters (as hereinafter defined) an option to purchase up to 570,000
additional shares of Common Stock (herein called the Option Stock and with the
Underwritten Stock herein collectively called the Stock). The Common Stock is
more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.

         The Company and the Selling Securityholders severally hereby confirm
the agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and
warrant that you have been authorized by each of the other Underwriters to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.

         1. REGISTRATION STATEMENT. The Company has filed with the Securities
and Exchange Commission (herein called the Commission) a registration statement
on Form S-1 (No. 333-91383), including the related preliminary prospectus, for
the registration under the Securities Act of 1933, as amended (together with the
rules and regulations of the Commission thereunder, herein called the Securities
Act) of the Stock. Copies of such registration statement and of each amendment
thereto, if any, including the related preliminary prospectus (meeting the
requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.


- ---------------------------------------
1        Plus an option to purchase from the Company and the Selling
         Securityholders up to 570,000 additional shares to cover
         over-allotments.


<PAGE>   2

         The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.

         The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.

         2.       REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.

         (a)      The Company hereby represents and warrants as follows:

                  (i)      Each of the Company and its subsidiaries has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good standing
in all jurisdictions in which the character of the property owned or leased or
the nature of the business transacted by it makes qualification necessary
(except where the failure to be so qualified would not, singly or in the
aggregate, have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole).

                  (ii)     The Registration Statement has become effective
(other than any Rule 462(b) registration statement to be filed by the Company
after the date hereof); any Rule 462(b) registration statement filed after the
effectiveness of this Agreement will become effective no later than 7:00 p.m.,
San Francisco time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.

                  (iii)    The Registration Statement and the Prospectus comply,
and on the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which Option Stock is to be purchased, will not contain any untrue
statement

                                       2

<PAGE>   3

of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties in this subparagraph (iii) shall apply to statements in, or omissions
from, the Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.

                  (iv)     Since the respective dates as of which information is
given in the Prospectus, other than as set forth in the Registration Statement
and the Prospectus, (A) there has not occurred any material adverse change or
any development involving a prospective material adverse change in the business,
properties, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, (B) there has not been any material adverse change
or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its
subsidiaries, (C) neither the Company nor any of its subsidiaries has incurred
any material liability or obligation, direct or contingent and (D) except in the
ordinary course of business, neither the Company nor any of its subsidiaries has
entered into any transaction not referred to in the Prospectus.

                  (v)      The authorized capital stock of the Company conforms
to the description thereof contained in the Registration Statement and the
Prospectus. All of the outstanding shares of capital stock of the Company
(including, without limitation, the Stock to be sold by the Selling
Securityholders) have been duly authorized and validly issued, are fully paid
and non-assessable, conform to the description of the capital stock of the
Company contained in the Registration Statement and the Prospectus and are not
subject to any preemptive or similar rights. There are no preemptive or similar
rights to subscribe for or to purchase any securities of the Company.

                  (vi)     Prior to the Closing Date, the Stock to be issued and
sold by the Company, and the Stock to be sold by the Selling Securityholders,
will be authorized for quotation on the Nasdaq National Market. The form of
certificate evidencing the Stock complies in all material respects with the
applicable requirements of law, the Company's charter and bylaws and the Nasdaq
National Market.

                  (vii)    No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission. Each Preliminary
Prospectus filed as part of the Registration Statement as originally filed or as
part of any amendment thereto, or filed pursuant to Rule 424 under the
Securities Act, complied when so filed in all material respects with the
Securities Act, and did not contain an untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and warranties
set forth in this subparagraph (vii) shall apply to statements in, or omissions
from, any Preliminary Prospectus made in reliance upon and in conformity with
information herein or otherwise furnished in writing to the Company by or on
behalf of the Underwriters for use in such Preliminary Prospectus.

                  (viii)   There are no outstanding subscriptions, rights,
warrants, options, calls, convertible securities, commitments of sale or liens
granted or issued by the Company or any of its subsidiaries relating to or
entitling any person to purchase or otherwise to acquire any shares of the
capital stock of the Company or any of its subsidiaries, except as disclosed in
the Registration Statement and the Prospectus.

                  (ix)     The Stock has been duly authorized for issuance and
sale pursuant to this Agreement and, when issued and delivered to the
Underwriters against payment therefor as provided in


                                       3
<PAGE>   4

this Agreement, will be validly issued, fully paid and non-assessable and will
conform to the description thereof contained in the Registration Statement and
the Prospectus, and the issuance of the Stock will not be subject to any
preemptive or similar rights. No further approval or authority of the
stockholders or the Board of Directors of the Company is required for the
transfer and sale of the Stock to be sold by the Selling Securityholders or for
the issuance and sale of the Stock by the Company as contemplated herein.

                  (x)      The Company has no subsidiaries and owns no equity
interests in any other person, except that the Company owns, directly or
indirectly, all of the issued and outstanding capital stock of Witness Systems
UK Limited, a company organized under the laws of the Companies Act (United
Kingdom) ("Witness UK"). All of the outstanding shares of capital stock of the
Company's subsidiary have been duly authorized and validly issued, are fully
paid and non-assessable, and are owned by the Company free and clear of all
liens, encumbrances, equities, security interests, defects, adverse interests
and claims whatsoever. The Company has no direct or indirect significant
subsidiaries (as defined in Rule 1-02 of the Commission's Regulation S-X). [The
Company's subsidiary is not currently prohibited, directly or indirectly, from
(A) paying any dividends to the Company, (B) making any other distribution on
such subsidiary's capital stock, (C) repaying any loans or advances made to such
subsidiary by the Company, or (D) transferring any of such subsidiary's property
or assets to the Company, in each case except as disclosed in the Registration
Statement and the Prospectus.]

                  (xi)     Neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws or in default in the performance
of any obligation, agreement, covenant or condition contained in any indenture,
loan agreement, mortgage, lease or other agreement or instrument that is
material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound.

                  (xii)    None of the execution, delivery or performance of
this Agreement by the Company, the compliance by the Company with any provision
hereof or the consummation of the transactions contemplated hereby or by the
Registration Statement and the Prospectus will (A) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as have been obtained and such as may
be required under the securities or Blue Sky laws of the various states), (B)
conflict with or constitute a breach of any of the terms or provisions of, or a
default under, the charter or bylaws of the Company or any of its subsidiaries
or any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its subsidiaries, taken as a
whole, to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries or their respective property is bound,
(C) violate or conflict with any applicable law or any rule, regulation,
judgment, order or decree of any court or any governmental body or agency having
jurisdiction over the Company, any of its subsidiaries or their respective
property or (D) result in the suspension, termination or revocation of any
Authorization (as defined below) of the Company or any of its subsidiaries or
any other impairment of the rights of the holder of any such Authorization.

                  (xiii)   No Authorization or other action by, or notice to or
filing with, any court, governmental authority, regulatory body or other person
is required for the execution, delivery or perfomance of this Agreement, the
compliance by the Company with the provisions hereof or the consummation of the
transactions contemplated hereby or by the Registration Statement and the
Prospectus, except such as have been obtained and such as may be required under
state securities or Blue Sky laws in connection with the offer, sale and
distribution of the Stock by the Underwriters.

                                       4
<PAGE>   5

                  (xiv)    There are no legal or governmental proceedings
pending or threatened to which the Company or any of its subsidiaries is or
could be a party or to which any of their respective property is or could be
subject that are required to be described in the Registration Statement or the
Prospectus and are not so described; nor are there any statutes, rules,
regulations, laws, orders, decrees, judgments, contracts, instruments or other
documents or agreements that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement that are not so described or filed as required. Without limiting the
generality of the foregoing sentence, the Company has no reason to believe that
any legal or governmental proceedings will be instituted against it any or its
subsidiaries and, to the best knowledge of the Company, there exists no basis
for any legal or governmental proceedings to be instituted against it or any or
its subsidiaries.

                  (xv)     Neither the Company nor any of its subsidiaries has
violated any foreign, federal, state or local statute, rule, regulation, law,
order, decree or judgment (including, without limitation, any such statute,
rule, regulation, law, order, decree or judgment relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants (hereinafter called Environmental Laws), any
provisions of the Employee Retirement Income Security Act of 1974, as amended
(hereinafter called ERISA), or any provisions of the Foreign Corrupt Practices
Act or the rules and regulations promulgated thereunder), except for such
violations which, singly or in the aggregate, would not have a material adverse
effect on the business, properties, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.

                  (xvi)    Each of the Company and its subsidiaries has such
permits, licenses, consents, exemptions, franchises, authorizations and other
approvals (each, hereinafter called an Authorization) of, and has made all
filings with and notices to, all governmental or regulatory authorities and
self-regulatory organizations and all courts and other tribunals, including,
without limitation, under any applicable Environmental Laws, as are necessary to
own, lease, license and operate its respective properties and to conduct its
business, except where the failure to have any such Authorization or to make any
such filing or notice would not, singly or in the aggregate, have a material
adverse effect on the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole. Each such
Authorization is valid and in full force and effect and each of the Company and
its subsidiaries is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after notice
or lapse of time or both, would result in any other impairment of the rights of
the holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, properties, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.

                  (xvii)   There are no costs or liabilities (contingent or
otherwise) associated with Environmental Laws (including, without limitation,
any capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any Authorization, any
related constraints on operating activities and any potential liabilities to
third parties) or ERISA which would, singly or in the aggregate, have a material
adverse effect on the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.

                                       5
<PAGE>   6

                  (xviii)  This Agreement has been duly authorized, executed and
delivered by the Company.

                  (xix)    KPMG LLP are independent public accountants with
respect to the Company and its subsidiaries as required by the Securities Act.

                  (xx)     The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and its subsidiaries on the basis stated therein at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; all adjustments necessary for a
fair presentation of results for such periods have been made; the selected
financial information included in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) present fairly the information shown
therein and have been compiled on a basis consistent with the financial
statements presented therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company. No other financial statements, supporting schedules or other financial
information (whether pro forma financial statements or otherwise) are required
to be included in the Registration Statement or the Prospectus. As of the date
of the Prospectus, the Company is not engaged in substantive discussions with
any third party with respect to, or obligated to complete, any acquisitions for
which disclosure of pro forma financial information in the Prospectus is
required by the Securities Act.

                  (xxi)    The Company is not and, after giving effect to the
offering and sale of the Stock and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended.

                  (xxii)   Except as disclosed in the Registration Statement and
the Prospectus, there are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company or to include any securities of the Company in any
registration statement of the Company. Neither the filing of the Registration
Statement nor the offering or sale of the Stock as contemplated by this
Agreement gives rise to any rights for or relating to the registration of any
securities of the Company, except for such rights which have been waived or
satisfied by the inclusion of shares of Common Stock in the offering of Stock
contemplated hereby.

                  (xxiii)  The Company and its subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its subsidiaries, in each case free and clear of all liens,
encumbrances, equities, security interests, defects, adverse interests and
claims whatsoever, except such as are described in the Prospectus or such as do
not materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries, in each case except as described in the
Prospectus.

                                       6
<PAGE>   7

                  (xxiv)   The Company and its subsidiaries own or possess, or
can acquire on reasonable terms, all patents, patent rights, licenses,
inventions, domain names, computer programs, computer code, communications
protocols, copyrights, other software, know-how (including, without limitation,
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names (hereinafter called Intellectual Property) currently employed by
them in connection with the business now operated by them except (A) where the
failure to own or possess or otherwise be able to acquire such Intellectual
Property would not, singly or in the aggregate, have a material adverse effect
on the business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole, or (B) as disclosed in the
Registration Statement and the Prospectus. There are no legal or governmental
proceedings pending or threatened relating to any Intellectual Property that are
required to be described in the Registration Statement or the Prospectus and are
not so described; there are no contracts or other documents relating to any
Intellectual Property required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or the
Prospectus that are not so filed or described as required. The expiration of any
Intellectual Property owned or employed by the Company will not, singly or in
the aggregate, have a material adverse effect on the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.

                  (xxv)    Neither the Company nor any of its subsidiaries is
infringing or otherwise violating any Intellectual Property of others or has
received any notice of infringement of or conflict with asserted rights of
others with respect to any Intellectual Property, except for any such
infringement, violation or conflict which (A) would not, singly or in the
aggregate, have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, or (B) is disclosed in the Registration Statement and the Prospectus.
There are no legal or governmental proceedings pending or threatened relating to
any Intellectual Property which, singly or in the aggregate, would have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.

                  (xxvi)   The Company and each of its subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which they
are engaged; and neither the Company nor any of its subsidiaries (A) has
received notice from any insurer or agent of such insurer that substantial
capital improvements or other material expenditures will have to be made in
order to continue such insurance or (B) has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers at a cost that would
not, singly or in the aggregate, have a material adverse effect on the business,
properties, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.

                  (xxvii)  No relationship, direct or indirect, exists between
or among the Company or any of its subsidiaries on the one hand, and the
directors, officers, stockholders, customers or suppliers of the Company or any
of its subsidiaries on the other hand, which is required by the Securities Act
to be described in the Registration Statement or the Prospectus which is not so
described.

                  (xxviii) There is no (A) significant unfair labor practice
complaint, grievance or arbitration proceeding pending or threatened against the
Company or any of its subsidiaries before the National Labor Relations Board or
any state or local labor relations board, (B) strike, labor dispute, slowdown or
stoppage pending or threatened against the Company or any of its subsidiaries or
(C) union representation question existing with respect to the employees of the
Company and its


                                       7
<PAGE>   8

subsidiaries, except for such actions specified in clause (A), (B) or (C) above,
which, singly or in the aggregate, would not have a material adverse effect on
the business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole. To the best of the Company's
knowledge, no collective bargaining organizing activities are taking place with
respect to the Company or any of its subsidiaries.

                  (xxix)   The Company and each of its subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (A) transactions are executed in accordance with management's
general or specific authorizations; (B) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (C) access
to assets is permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

                  (xxx)    All material tax returns required to be filed by the
Company and each of its subsidiaries in any jurisdiction have been filed, other
than those filings being contested in good faith, and all material taxes,
including, without limitation, withholding taxes, penalties and interest,
assessments, fees and other charges due pursuant to such returns or pursuant to
any assessment received by the Company or any of its subsidiaries have been
paid, other than those being contested in good faith and for which adequate
reserves have been provided.


                  (xxxi)   The Company and its subsidiaries have complied and
are in compliance with all foreign, federal, state and local statutes,
executive orders, proclamations, regulations, rules, directives, decrees,
ordinances and similar provisions having the force or effect of law and all
judicial and administrative orders, rulings, determinations and common law
concerning the importation of merchandise, the export or reexport of products,
services and technology, and the terms and conduct of international transactions
applicable to the Company and its subsidiaries in connection with the conduct of
the business of the Company and its subsidiaries (including, without limitation,
as the same relates to record keeping requirements) (herein called International
Trade Laws and Regulations), except for such non-compliance which, singly or in
the aggregate, would not have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole; neither the Company nor any of its subsidiaries
has made or provided any false statement or omission to any agency of any
federal, state or local government, purchasers of products, or foreign
government or foreign agency, in connection with the exportation of merchandise
(including, without limitation, with respect to export licenses, exceptions and
other export authorizations and any filings required for or related to
exportation of any item), the importation of merchandise or other approvals
required by a foreign government or agency or any other requirement relating to
any International Trade Laws and Regulations.


                  (xxxii)  The Company has not offered, or caused the
Underwriters to offer, any Stock to any person pursuant to the Directed Share
Program (as defined below) with the intent to unlawfully influence (A) a
customer or supplier of the Company or any of its subsidiaries to alter the
customer's or supplier's level or type of business with the Company or any of
its subsidiaries or (B) a trade journalist or publication to write or publish
favorable information about the Company, any of its subsidiaries or their
products. As used herein, Directed Share Program means the offer and sale of
Stock described in the ____ paragraph under the caption "Underwriting" in the
Prospectus.


                  (xxxiii) The Company has reviewed its operations and the
operations of its subsidiaries to evaluate the extent to which the business or
operations of the Company or any of its subsidiaries will be affected by the
Year 2000 Problem (as defined below).



                                       8
<PAGE>   9
As a result of such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem has had or will have a material adverse
effect on the business, properties, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole, or result in any material
loss or interference with the business or operations of the Company or such
subsidiary. As used herein, the Year 2000 Problem means any risk that the
computer hardware or software used in the receipt, transmission, storage,
retrieval, retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of dates or
time periods occurring after December 31, 1999, function at least as effectively
as in the case of dates or time periods occurring prior to January 1, 2000.

                  (xxxiv)  All sales of the Company's securities prior to the
date hereof were at all relevant times duly registered under the Securities Act
and applicable foreign securities laws and state securities or Blue Sky laws or
were exempt from the registration requirements of the Securities Act and
applicable foreign and state securities laws, or if such securities were not
registered or exempt in compliance with the Securities Act and applicable
foreign and state securities laws, any private rights of action for rescission
or damages arising from the failure to register any such securities are time
barred by applicable statutes of limitations or equitable principles, including
laches.

                  (xxxv)   Each certificate signed by any officer of the Company
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the Underwriters as
to the matters covered thereby.

         (b)      Each of the Selling Securityholders hereby represents and
warrants as follows:


                  (i)      Such Selling Securityholder is a natural person or
has been duly incorporated or formed and is validly existing as a corporation,
limited liability company or partnership in good standing under the laws of its
jurisdiction of incorporation or formation.


                  (ii)     Such Selling Securityholder has, and on the Closing
Date and on any later date on which Option Stock is purchased will have, good
and marketable title to all the shares of Stock to be sold by such Selling
Securityholder hereunder, free and clear of all liens, encumbrances, equities,
security interests, defects, adverse interests and claims whatsoever, with full
right and authority to deliver the same hereunder, subject, in the case of each
Selling Securityholder, to the rights of               , as Custodian (herein
called the Custodian), and that upon the delivery of and payment for such shares
of the Stock hereunder, the several Underwriters will receive good and
marketable title thereto, free and clear of all liens, encumbrances, equities,
security interests, defects, adverse interests and claims whatsoever.

                  (iii)    Such Selling Securityholder has, and on the Closing
Date and any later date on which Option Stock is purchased will have, full legal
right, power and authority, and all authorization and approval required by law,
to enter into this Agreement and the Custody Agreement and Power of Attorney
referred to in Section 2(b)(iv), and to sell, assign, transfer and deliver the
Stock to be sold by such Selling Securityholder in the manner provided herein
and therein.

                  (iv)     Certificates in negotiable form for the shares of the
Stock to be sold by such Selling Securityholder have been placed in custody
under a Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the Stock
represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and the
Company, that the arrangements made by such Selling


                                       9
<PAGE>   10

Securityholder for such custody, including the Power of Attorney provided for in
such Custody Agreement, are to that extent irrevocable, and that the obligations
of such Selling Securityholder shall not be terminated by any act of such
Selling Securityholder or by operation of law, whether by the death or
incapacity of such Selling Securityholder (or, in the case of a Selling
Securityholder that is not an individual, the dissolution or liquidation of such
Selling Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur before the
delivery of such shares of the Stock hereunder, certificates for such shares of
the Stock shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death, incapacity, dissolution,
liquidation or other event had not occurred, regardless of whether the Custodian
shall have received notice of such death, incapacity, dissolution, liquidation
or other event.

                  (v)      This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Securityholder.

                  (vi)     The Custody Agreement entered into by, and the Power
of Attorney given by, such Selling Securityholder have been duly authorized,
executed and delivered by such Selling Securityholder, and such Custody
Agreement and Power of Attorney are valid and binding on such Selling
Securityholder, enforceable in accordance with their terms.

                  (vii)    None of the execution, delivery or performance of
this Agreement, such Custody Agreement or such Power of Attorney, the compliance
such Selling Securityholder with the provisions hereof or thereof or the
consummation of the transactions contemplated hereby or thereby will (A) require
any consent, approval, authorization or other order of, or qualification with,
any court or governmental body or agency (except such as have been obtained and
such as may be required under the securities or Blue Sky laws of the various
states), (B) conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or bylaws of such Selling
Securityholder or any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to such Selling Securityholder or (C)
violate or conflict with any applicable law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency having
jurisdiction over such Selling Securityholder or its property.

                  (viii)   Such Selling Securityholder has reviewed the
Registration Statement and Prospectus and, although such Selling Securityholder
has not independently verified the accuracy or completeness of all the
information contained therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that on
the Effective Date, the Registration Statement contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
and, on the Effective Date the Prospectus contained and, on the Closing Date and
any later date on which Option Stock is to be purchased, contains any untrue
statement of a material fact or omitted or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

                  (ix)     Each certificate signed by or on behalf of such
Selling Securityholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by such Selling
Securityholder to the Underwriters as to the matters covered thereby.

         3.       PURCHASE OF THE STOCK BY THE UNDERWRITERS.


         (a)      On the basis of the representations and warranties and subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell 3,800,000 shares of the Underwritten Stock to the several Underwriters, and
each of the Underwriters agrees to purchase from the Company



                                       10
<PAGE>   11

the respective aggregate number of shares of Underwritten Stock set forth
opposite its name in Schedule I. The price at which such shares of Underwritten
Stock shall be sold by the Company and purchased by the several Underwriters
shall be $_____ per share. In making this Agreement, each Underwriter is
contracting severally and not jointly; except as provided in paragraphs (b) and
(c) of this Section 3, the agreement of each Underwriter is to purchase only the
respective number of shares of the Underwritten Stock specified in Schedule I.

         (b)      If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or, in the case of such a failure or
refusal to purchase Option Stock, the Company and the Selling Securityholders
shall immediately give notice thereof to you, and the non-defaulting
Underwriters shall have the right within 24 hours after the receipt by you of
such notice to purchase, or procure one or more other Underwriters to purchase,
in such proportions as may be agreed upon between you and such purchasing
Underwriter or Underwriters and upon the terms herein set forth, all or any part
of the shares of the Stock which such defaulting Underwriter or Underwriters
agreed to purchase. If the non-defaulting Underwriters fail so to make such
arrangements with respect to all such shares and portion, the number of shares
of the Stock which each non-defaulting Underwriter is otherwise obligated to
purchase under this Agreement shall be automatically increased on a pro rata
basis to absorb the remaining shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase; provided, however, that the
non-defaulting Underwriters shall not be obligated to purchase the shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such shares of the Stock exceeds 10% of the total number
of shares of the Stock which all Underwriters agreed to purchase hereunder. If
the total number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase shall not be purchased or absorbed in accordance
with the two preceding sentences, the Company and, in the case of such a failure
or refusal to purchase Option Stock, the Selling Securityholders, shall have the
right, within 24 hours next succeeding the 24-hour period above referred to, to
make arrangements with other underwriters or purchasers satisfactory to you for
purchase of such shares and portion on the terms herein set forth. In any such
case, either you or the Company and, in the case of such a failure or refusal to
purchase Option Stock, the Selling Securityholders, shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company and, in
the case of such a failure or refusal to purchase Option Stock, the Selling
Securityholders, shall make arrangements within the 24-hour periods stated above
for the purchase of all the shares of the Stock which the defaulting Underwriter
or Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
and, in the case of such a failure or refusal to purchase Option Stock, the
Selling Securityholders, to any non-defaulting Underwriter and without any
liability on the part of any non-defaulting Underwriter to the Company and, in
the case of such a failure or refusal to purchase Option Stock, the Selling
Securityholders. Nothing in this paragraph (b), and no action taken hereunder,
shall relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.

         (c)      On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company and the Selling Securityholders grant an option to the several
Underwriters to purchase, severally and not jointly, up to 570,000 shares in the
aggregate of the Option Stock from the Company and the Selling Securityholders
at the same price per share as the Underwriters shall pay for the Underwritten
Stock. Said option may be exercised only to

                                       11
<PAGE>   12

cover over-allotments in the sale of the Underwritten Stock by the Underwriters
and may be exercised in whole or in part at any time (but not more than once) on
or before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
shares of the Option Stock as to which the several Underwriters are exercising
the option. The number of shares of Option Stock to be sold by each Seller (as
defined below) shall be equal to the number set forth opposite the name of such
Seller on Schedule III hereto or, if the Underwriters exercise such option for
less than the full number of shares of Option Stock available under such option,
the number of shares of Option Stock to be sold by each Seller shall be equal to
(a) the aggregate number of shares for which the option shall have been
exercised, multipled by (b) a fraction, the numerator of which is the number of
shares set forth opposite the name of such Seller on Schedule III hereto, and
the denominator of which is the total number of shares of Option Stock set forth
in the first sentence of this Section 3(c). As used in the preceding sentence,
Seller shall mean each of the Company and each Selling Securityholder. The
number of shares of the Option Stock to be purchased by each Underwriter shall
be the same percentage of the total number of shares of the Option Stock to be
purchased by the several Underwriters as such Underwriter is purchasing of the
Underwritten Stock, as adjusted by you in such manner as you deem advisable to
avoid fractional shares. Delivery of certificates for the shares of Option
Stock, and payment therefor, shall be made as provided in Section 5 hereof.

         4.       OFFERING BY UNDERWRITERS.

         (a)      The terms of the initial public offering by the Underwriters
of the Stock to be purchased by them shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.

         (b)      The information set forth under "Underwriting" in the
Registration Statement, any Preliminary Prospectus and the Prospectus relating
to the Stock filed by the Company (insofar as such information relates to the
Underwriters) constitutes the only information furnished by the Underwriters to
the Company for inclusion in the Registration Statement, any Preliminary
Prospectus, and the Prospectus, and you on behalf of the respective Underwriters
represent and warrant to the Company that the statements made therein are
correct.

         5.       DELIVERY OF AND PAYMENT FOR THE STOCK.

         (a)      The Stock shall be delivered by or on behalf of the Sellers,
with any transfer taxes thereon duly paid by the respective Sellers, to
Hambrecht & Quist LLC through the facilities of The Depository Trust Company
(herein called the DTC), for the respective accounts of the several
Underwriters, against payment to the Sellers of the purchase price therefor as
provided herein. The certificates representing the Stock shall be made available
for inspection not later than 7:00 a.m., San Francisco time, on the business day
prior to the Closing Date or such other date on which the Option Stock is
purchased hereunder, as applicable, at the office of the DTC or its designated
custodian (such office is herein called the Designated Office). The date for the
delivery of and payment for Underwritten Stock and the Option Stock (if the
option granted under Section 3(c) hereof shall have been exercised not later
than 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date) shall be the [fourth] business day after the date of this
Agreement, or at such time on such other day, not later than seven full business
days after such [fourth] business day, as shall be agreed upon in writing by the
Company, the Selling Securityholders and you. The date and hour of such delivery
and payment (which may be postponed as provided in Section 3(b) hereof) are
herein called the Closing Date.

                                       12
<PAGE>   13

         (b)      If the option granted by Section 3(c) hereof shall be
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, the date for the delivery of and payment for the
Option Stock shall be the third business day after the exercise of such option.

         (c)      Payment for the Stock purchased from the Company shall be made
to the Company or its order, and payment for the Stock purchased from the
Selling Securityholders shall be made to the Custodian, for the account of the
Selling Securityholders, in each case by wire transfer of Federal or other funds
immediately available in New York City. Such payment shall be made upon
delivery of certificates for the Stock through the facilities of the DTC for the
respective accounts of the several Underwriters as set forth herein. The Stock
shall be represented by definitive certificates, if requested by the
Underwriters, and shall be registered in such name or names and shall be in such
denominations as you may request at least one business day before the Closing
Date, in the case of Underwritten Stock, and at least one business day prior to
the purchase thereof, in the case of the Option Stock.

         It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check or other funds shall not have been received by you on the Closing
Date or any later date on which Option Stock is purchased for the account of
such Underwriter. Any such payment by you shall not relieve such Underwriter
from any of its obligations hereunder.

         The documents to be delivered on behalf of the parties hereto pursuant
to this Agreement on the Closing Date or any later date on which Option Stock is
purchased hereunder shall be delivered at the offices of Alston & Bird LLP, 1201
West Peachtree Street, Atlanta, Georgia 30309-3424 and the Stock shall be
delivered at the Designated Office, all on the Closing Date or such later date
on which Option Stock is purchased, as the case may be.

         6.       FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. Each of the Company and the Selling Securityholders
respectively covenants and agrees as follows:

         (a)      The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act.

         (b)      The Company will promptly notify each Underwriter in the event
of (i) the request by the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company and
the Selling Securityholders will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be issued,
to obtain the withdrawal thereof at the earliest possible moment.

         (c)      The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each

                                       13
<PAGE>   14

post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.

         (d)      If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the initial
public offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act.

         (e)      Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.

         (f)      The Company will cooperate, when and as requested by you, in
the qualification of the Stock for offer and sale under the securities or Blue
Sky laws of such jurisdictions as you may designate and, during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, in keeping such qualifications in good standing under said securities or
Blue Sky laws; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Stock.

         (g)      During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission (including, without limitation, any information required by Rule 463
of the Commission under the Securities Act).

                                       14
<PAGE>   15

         (h)      Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.

         (i)      The Company agrees to pay all costs and expenses incident to
the performance of its obligations under this Agreement, including, without
limitation, all costs and expenses incident to (i) the preparation, printing and
filing with the Commission and the National Association of Securities Dealers,
Inc. (herein called the NASD) of the Registration Statement, any Preliminary
Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies
of any Preliminary Prospectus and of the several documents required by paragraph
(c) of this Section 6 to be so furnished, (iii) the printing of this Agreement
and related documents delivered to the Underwriters, (iv) the preparation,
printing and filing of all supplements and amendments to the Prospectus referred
to in paragraph (d) of this Section 6, (v) the furnishing to you and the
Underwriters of the reports and information referred to in paragraph (g) of this
Section 6 and (vi) the printing and issuance of stock certificates, including,
without limitation, the transfer agent's fees. The Selling Securityholders agree
to pay all costs and expenses incident to the performance of their respective
obligations under this Agreement, including, without limitation, any transfer
taxes incident to the transfer to the Underwriters of the shares of Stock being
sold by the Selling Securityholders.

         (j)      The Company agrees to reimburse you, for the account of the
several Underwriters, for Blue Sky fees and related disbursements (including,
without limitation, counsel fees and disbursements and cost of printing
memoranda for the Underwriters) paid by or for the account of the Underwriters
or their counsel in qualifying the Stock under state securities or Blue Sky laws
and in the review of the offering by the NASD.

         (k)      The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholders hereby agree to pay and shall
not affect any agreement which the Company and the Selling Securityholders may
make, or may have made, for the sharing of any such expenses and costs.

         (l)      The Company and each of the Selling Securityholders hereby
agree that, without the prior written consent of Hambrecht & Quist LLC on behalf
of the Underwriters, the Company or such Selling Securityholder, as the case may
be, will not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i) sell,
offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company upon the exercise of
options granted under the stock option plans of the Company (herein called the
Option Plans), all as described under the caption "Capitalization" in the
Preliminary Prospectus, and (C) options to purchase Common Stock granted under
the Option Plans.

         (m)      If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of


                                       15
<PAGE>   16

which in your opinion the market price for the Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.

         (n)      The Company is familiar with the Investment Company Act of
1940, as amended, and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company was not
and will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder.

         (o)      The Company will comply with the Securities Act, the
Securities Exchange Act of 1934 (herein called the Exchange Act) and the rules
and regulations of the Commission, so as to permit the completion of the
distribution of the Stock as contemplated in this Agreement and the Prospectus.

         (p)      The Company shall apply the net proceeds of its sale of the
Stock as set forth in the Prospectus under the caption "Use of Proceeds."

         (q)      None of the Company, any of its subsidiaries or any Selling
Securityholder will take, directly or indirectly, any action designed to cause
or result in, or that has constituted or might reasonably be expected to
constitute, the stabilization or manipulation of the price of the Common Stock.

         (r)      The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for the Common Stock.

         7.       INDEMNIFICATION AND CONTRIBUTION.

         (a)      Subject to the provisions of paragraph (f) of this Section 7,
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless each Underwriter and each person (including, without
limitation, each partner or officer thereof) who controls any Underwriter within
the meaning of Section 15 of the Securities Act from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, the common law or otherwise, and the Company and the Selling
Securityholders jointly and severally agree to reimburse each such Underwriter
and controlling person for any legal or other expenses (including, without
limitation, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including, without limitation, the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including, without limitation, any Rule 462(b) registration statement), or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or


                                       16
<PAGE>   17

supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company and the Selling Securityholders
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated, (2)
the indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof and (3) each Selling
Securityholder shall only be liable under this paragraph with respect to (A)
information pertaining to such Selling Securityholder furnished by or on behalf
of such Selling Securityholder expressly for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (B) facts that would constitute a breach of any
representation or warranty of such Selling Securityholder set forth in Section
2(b) hereof. The indemnity agreements of the Company and the Selling
Securityholders contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.

         (b)      Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration Statement
on his own behalf or pursuant to a power of attorney, each of its directors,
each other Underwriter and each person (including, without limitation, each
partner or officer thereof) who controls the Company or any such other
Underwriter within the meaning of Section 15 of the Securities Act, and the
Selling Securityholders from and against any and all losses, claims, damages or
liabilities joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or the common law
or otherwise and to reimburse each of them for any legal or other expenses
(including, without limitation, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including, without limitation, the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including, without limitation, any Rule 462(b) registration
statement) or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading or (ii) any untrue statement or alleged untrue statement of a
material fact contained in the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, if such statement or
omission was made in reliance upon and in conformity with information furnished
as herein stated. The indemnity agreement of each Underwriter contained in this
paragraph (b) shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Stock.

                                       17
<PAGE>   18

         (c)      Each party indemnified under the provision of paragraphs (a)
and (b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.

         (d)      If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities,


                                       18
<PAGE>   19

or actions in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Securityholders on the one hand and the Underwriters on the other shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the Stock received by the Company and the Selling
Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.

         The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.

         Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).

         (e)      Neither the Company nor the Selling Securityholders will,
without the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought hereunder
(whether or not such Underwriter or any person who controls such Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act is a party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of such
Underwriter and each such controlling person from all liability arising out of
such claim, action, suit or proceeding.

         (f)      The liability of each Selling Securityholder under the
indemnity and reimbursement agreements contained in the provisions of this
Section 7 and Section 11 hereof shall be limited to an amount equal to the
initial public offering price of the stock sold by such Selling Securityholder
to the Underwriters. The Company and the Selling Securityholders may agree, as
among themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.

                                       19
<PAGE>   20

         (g)      The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.

         8.       TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including, without limitation, all costs
and expenses referred to in paragraphs (i) and (j) of Section 6 hereof.

         9.       CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the Stock shall be subject to
the performance by the Company and the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:

         (a)      The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.

         (b)      The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing the Stock,
all corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Alston & Bird LLP, counsel for the Underwriters.

         (c)      You shall have received from (A) Morris, Manning & Martin,
LLP, counsel for the Company, (B) ______________, counsel for the Selling
Securityholders, and (C) __________________, patent counsel for the Company,
opinions, addressed to the Underwriters and dated the Closing Date, covering the
matters set forth in Annex A, Annex B and Annex C hereto,


                                       20
<PAGE>   21

respectively, and if Option Stock is purchased at any date after the Closing
Date, additional opinions from each such counsel, addressed to the Underwriters
and dated such later date, confirming that the statements expressed as of the
Closing Date in such opinions remain valid as of such later date.

         (d)      You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Prospectus, other than as set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement), (A) there has not occurred any material adverse change
or any development involving a prospective material adverse change in or
affecting the business, properties, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business, (B) there has not been any
material adverse change or any development involving a prospective material
adverse change in the capital stock or in the long-term debt of the Company or
any of its subsidiaries, (C) neither the Company nor any of its subsidiaries has
incurred any material liability or obligation, direct or contingent and (D)
except in the ordinary course of business, neither the Company nor any of its
subsidiaries has entered into any transaction not referred to in the Prospectus
(exclusive of any amendments or supplements thereto subsequent to the date of
this Agreement), (iv) neither the Company nor any of its subsidiaries has any
material contingent obligations which are not disclosed in the Registration
Statement and the Prospectus, (v) there are not any pending or known threatened
legal proceedings to which the Company or any of its subsidiaries is a party or
of which property of the Company or any of its subsidiaries is the subject which
are material and which are not disclosed in the Registration Statement and the
Prospectus, (vi) there are not any franchises, contracts, leases or other
documents which are required to be filed as exhibits to the Registration
Statement which have not been filed as required, (vii) the representations and
warranties of the Company herein are true and correct in all material respects
as of the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and (viii) there has not been any material change
in the market for securities in general or in political, financial or economic
conditions from those reasonably foreseeable as to render it impracticable in
your reasonable judgment to make a public offering of the Stock, or a material
adverse change in market levels for securities in general (or those of companies
in particular) or financial or economic conditions which render it inadvisable
to proceed.

         (e)      You shall have received on the Closing Date and on any later
date on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.

         (f)      You shall have received from KPMG LLP, a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later date on
which Option Stock is purchased, confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the

                                       21
<PAGE>   22

Original Letter are accurate as of the Closing Date or such later date, as the
case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in your
sole judgment, makes it impractical or inadvisable to proceed with the public
offering of the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.

         (g)      You shall have received from KPMG LLP a letter stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's financial statements as at [LATEST BALANCE SHEET DATE], did not
disclose any weakness in internal controls that they considered to be material
weaknesses.

         (h)      You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.

         (i)      Prior to the Closing Date, the Stock to be issued and sold by
the Company shall have been duly authorized for quotation on the Nasdaq National
Market.

         (j)      On or prior to the Closing Date, you shall have received from
all of the Company's directors, officers, and stockholders agreements, in form
reasonably satisfactory to Hambrecht & Quist LLC, stating that without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such
person or entity will not, for a period of 180 days following the commencement
of the public offering of the Stock by the Underwriters, directly or indirectly,
(i) sell, offer, contract to sell, make any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock or (ii) enter
into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.

         In addition, you shall have received on the Closing Date and on any
later date on which Option Stock is purchased, such additional documents
(including, without limitation, opinions of counsel, letters, certificates and
agreements) as you may reasonably request. All the agreements, opinions,
certificates and letters mentioned above or elsewhere in this Agreement shall be
deemed to be in compliance with the provisions hereof only if Alston & Bird LLP,
counsel for the Underwriters, shall be satisfied that they comply in form and
scope.

         In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including, without limitation, all costs
and expenses referred to in paragraphs (i) and (j) of Section 6 hereof, and (ii)
if this Agreement is terminated by you because of any

                                       22
<PAGE>   23

refusal, inability or failure on the part of the Company or the Selling
Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including,
without limitation, reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the transactions contemplated
hereby.

         10.      CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.

         In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including, without limitation, all costs
and expenses referred to in paragraphs (i) and (j) of Section 6 hereof.

         11.      REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Securityholders hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.

         12.      PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.

         13.      NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist
LLC, One Bush Street, San Francisco, California 94104, with copies to Hambrecht
& Quist LLC, 3414 Peachtree Road, N.E., Monarch Plaza, Suite 1020, Atlanta,
Georgia, Attention:


                                       23
<PAGE>   24

Mr. Joseph H. Estes, and Alston & Bird LLP, 1201 West Peachtree Street, Atlanta,
Georgia 30309-3424, Attention: Bryan E. Davis, Esq.; if to the Company, shall be
mailed, telegraphed or delivered to it at its office, 1105 Sanctuary Parkway,
Suite 210, Alpharetta, Georgia 30004, Attention: Chief Executive Officer, with a
copy to Morris, Manning & Martin, LLP, 1600 Atlanta Financial Center, 3343
Peachtree Road, N.E., Atlanta, Georgia 30326, Attention: Jeffrey L. Schulte,
Esq.; and if to the Selling Securityholders, shall be mailed, telegraphed or
delivered to the Selling Securityholders in care of the Company at the address
of the Company set forth above, with a copy to Morris, Manning & Martin, LLP as
set forth above. All notices given by telegraph shall be promptly confirmed by
letter.

         14.      MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or the Selling Securityholders or their respective
directors or officers, and (c) delivery and payment for the Stock under this
Agreement; provided, however, that if this Agreement is terminated prior to the
Closing Date, the provisions of paragraphs (l) and (m) of Section 6 hereof shall
be of no further force or effect.

         This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

         This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.


                                       24
<PAGE>   25



         Please sign and return to the Company and to the Selling
Securityholders in care of the Company the enclosed duplicates of this letter,
whereupon this letter will become a binding agreement among the Company, the
Selling Securityholders and the several Underwriters in accordance with its
terms.

                                   Very truly yours,

                                   WITNESS SYSTEMS, INC.



                                   By:
                                      ---------------------------------------
                                        Name:
                                        Title:


                                   Selling Securityholders

                                   [List Names]



                                   By:
                                      ---------------------------------------
                                        Name:
                                        Title:  Attorney-in-Fact


The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.

HAMBRECHT & QUIST LLC
U.S. BANCORP PIPER JAFFRAY INC.
SOUNDVIEW TECHNOLOGY GROUP, INC.

By:  Hambrecht & Quist LLC


By:
   ----------------------------------------------
       Name:
       Title:  Managing Director

Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.


                                       25
<PAGE>   26

                                   SCHEDULE I

                                  UNDERWRITERS


                                                            NUMBER OF SHARES
                          UNDERWRITERS                      TO BE PURCHASED
                          ------------                      ---------------

Hambrecht & Quist LLC.....................................
U.S. Bancorp Piper Jaffray Inc............................
SoundView Technology Group, Inc...........................























                  Total...................................       3,800,000
                                                                 =========

<PAGE>   27






                                   SCHEDULE II

                             SELLING SECURITYHOLDERS



    NAME AND ADDRESS OF                                       NUMBER OF SHARES
  SELLING SECURITYHOLDERS                                        TO BE SOLD
  -----------------------                                     -----------------








     Total........................................
                                                                   =====




<PAGE>   28


                                  SCHEDULE III

                                 OPTIONAL STOCK
<TABLE>
<CAPTION>


                                                                       NUMBER OF SHARES
                         NAME OF SELLER                                   TO BE SOLD
                         --------------                                ----------------

<S>                                                                    <C>
Witness Systems, Inc...........................................
[Add Selling Securityholders]







     Total.....................................................              570,000
                                                                             =======
</TABLE>





<PAGE>   1
                                                                  EXHIBIT 10.14





                            ASSET PURCHASE AGREEMENT

                            DATED SEPTEMBER 30, 1999

                                     AMONG

                             WITNESS SYSTEMS, INC.

                                      AND

                      ADVANCED INTEGRATED RECORDERS, INC.

                                      AND

                                FORMATION, INC.
<PAGE>   2

                            ASSET PURCHASE AGREEMENT


         This Asset Purchase Agreement (the "Agreement") is made and entered
into this 30th day of September, 1999 by and among Advanced Integrated
Recorders, Inc., a Delaware corporation with offices located at 121 Whittendale
Drive, Moorestown, New Jersey 08057 (the "Seller"), Witness Systems, Inc., a
Delaware corporation with offices located at 1105 Sanctuary Parkway, Suite 210,
Alpharetta, Georgia 30004 (the "Purchaser"), and Formation, Inc., a New Jersey
corporation with offices located at 121 Whittendale Drive, Building 1,
Moorestown, New Jersey 08057 (the "Shareholder"). Purchaser, Seller and
Shareholder are referred to collectively herein as the "Parties" and are each
referred to as a "Party".

                                   RECITALS:

         Shareholder owns 100% of the issued and outstanding voting common
stock of Seller.

         On the terms and subject to the conditions set forth herein, the
Parties desire to enter into this Agreement, pursuant to which Purchaser will
purchase from Seller, and Seller will sell to Purchaser, all of Seller's assets
related to its software product marketed under the "AIR2000" mark (excluding
the "AIR2000" trademark and the goodwill associated with such mark) as
described on Exhibit A (collectively, the "Assigned Software"), and Seller
shall license from Purchaser the right to use, modify and distribute the
Assigned Software according to the terms of a separate License Agreement of
even date herewith.

         In consideration of the mutual representations, warranties and
covenants and subject to the conditions herein contained, the parties hereto
agree as follows:

1.       Purchase and Sale of the Assets; Related Agreements.

         1.1.     Purchased Assets. On the terms and subject to the conditions
contained in this Agreement, on the Closing Date (as defined in Section 3.1),
Purchaser shall purchase from Seller, and Seller shall sell, convey, assign,
transfer and deliver to Purchaser, the Purchased Assets (as hereinafter
defined), free and clear of all security interests, liens, options, charges and
other restrictions whatsoever (hereinafter referred to as the "Encumbrances")
except for the Permitted Encumbrances referenced in Section 4.4 below. The term
"Purchased Assets" means all the following assets, properties, rights, titles
and interests principally related to the Assigned Software, including prior
modifications, prior versions and prior releases applicable to any operating
environment, with all technical materials, modifications, customizations, and
information, whether tangible or intangible, of Seller on the date hereof, but
excluding all Excluded Assets as defined in Section 1.2:

                  (a)    (i) all copyrights, patents and registrations and
         applications for registration of copyrights and patents for the
         Assigned Software, including continuations, extensions and renewals
         thereof and improvements thereto; (ii) all right, title and interest
         in the Assigned Software (excluding the mark "AIR2000" and the
         goodwill associated therewith); (iii) all flow charts, specifications,
         designs and plans for the Assigned



                                     - 2 -
<PAGE>   3

         Software; and (iv) any copies and tangible embodiments of the
         foregoing (items (i) through (iv) are collectively referred to herein
         as the "Intellectual Property");

                  (b)    all rights to receive mail and other communications
         addressed to Seller relating to ownership or infringement of the
         Purchased Assets after the Closing Date, with reference to the
         foregoing issues; provided that Seller may provide copies to Purchaser
         of mail and other communications addressed to Seller relating to
         infringement of the Purchased Assets arising prior to the Closing
         Date; and

                  (c)    all rights to damages and payments for infringements
         or misappropriations of the Assigned Software that arise after the
         Closing Date and the right to sue and recover for infringements or
         misappropriations thereof that arise after the Closing Date.

         1.2.     Excluded Assets. Notwithstanding the foregoing, all other
assets of the Seller, including without limitation the following assets related
to the Purchased Assets, are excluded from the Purchased Assets (the "Excluded
Assets"):

                  (a)    all cash and cash equivalents on hand and in banks,
         certificates of deposit, commercial paper, stocks, bonds and other
         liquid investments of Seller;

                  (b)    the rights in the mark "AIR2000" and all applications
         and applications for registration of said mark and the goodwill
         associated with such mark;

                  (c)    Seller's rights under or pursuant to this Agreement
         (including, without limitation, Seller's rights to the Payment Shares
         (as defined in Section 2.1));

                  (d)    Seller's general ledger and accounting records;

                  (e)    Seller's accounts receivable for goods and services
         provided by Seller prior to, on or after the Closing (as referred to
         in Section 3.1) (the "Accounts Receivable");

                  (f)    all proprietary information, excluding the
         Intellectual Property, of Seller, including, without limitation,
         customer and prospect lists and market studies;

                  (g)    all maintenance and support service rights in respect
         of the Assigned Software;

                  (h)    all Customer License Agreements, Distribution
         Agreements and Supplier License Agreements that are not Assigned
         Agreements (as such terms are defined in Section 4.5(a));

                  (i)    all rights to damages and payments for infringements
         or misappropriation of the Assigned Software arising on or before the
         Closing Date only to the extent such damages and payments accrue
         through and until the Closing Date; and

                  (j)    Seller's inventory.



                                     - 3 -
<PAGE>   4

         1.3.     License Agreement. At the Closing the Parties shall enter
into the license agreement in the form of Exhibit B (the "License Agreement")
relating to Seller's license to the Assigned Software.

         1.4.    Employee Matters. Purchaser shall have the right to offer
employment, effective as of the Closing Date, to the employees of Seller listed
on Schedule 1.4 and Seller shall use its best efforts to cause the Employees
listed on Schedule 1.4 to become employees of Purchaser effective as of the
Closing Date. As used herein, "best efforts" shall not require Seller to pay
any money or other consideration, or waive any material rights with respect to
such employees. If the employees listed on Schedule 1.4 do not accept
Purchaser's offer of employment effective as of the Closing Date and the
transactions contemplated by this Agreement close, then Seller will make
available to Purchaser, at no cost to Purchaser, the equivalent of two (2) full
time employees of Seller to provide development and engineering services as
requested by Purchaser until January 31, 2000 at a location designated by
Purchaser.

         1.5.     Office Space and Equipment. Seller will make available to
Purchaser until January 31, 2000, at no charge, the office space and testing
equipment designated at the location indicated in Schedule 1.5.

         1.6.     Release of Information. From the date hereof until five (5)
years thereafter, neither Seller nor Shareholder shall cause or permit the
release of any oral or written statement, advertisement, information, or
publicity referring to either the relationship of the Parties or the
transactions contemplated by this Agreement without Purchaser's prior written
consent, except (i) as required by law or judicial proceeding after Purchaser
has been provided a reasonable opportunity to obtain a protective order or
other remedy to prevent such disclosure, or (ii) the limited disclosure
described below in this paragraph. Each Party acknowledges and agrees that the
Parties may (i) disclose this Agreement and the relationship of the Parties to
its legal and accounting advisors only in connection with seeking advice from
same, and (ii) to third parties only as necessary to obtain the consents and
approvals and effectuate the transfers of title contemplated by this Agreement.
After the Closing Date, Purchaser shall provide Seller a statement regarding
the transactions contemplated by this Agreement that Seller may provide to
third parties on a case by case basis. Prior to filing a copy of Purchaser's
registration statement on Form S-1 (or any successor form to Form S-1),
Purchaser shall provide Seller a form of the description of the transactions
contemplated by this Agreement, if any, that will be included in the
registration statement for informational purposes only. Purchaser shall provide
Seller a copy of any material changes to said description. Seller shall have no
obligation to indemnify Purchaser or any underwriter for any liability arising
from the description of the transactions contemplated by this Agreement that
are included in a registration statement; provided, however, that nothing
herein shall limit Seller's indemnification obligation in Section 9(b) of the
Registration Rights Agreement (as defined in Section 1.7 below).

         1.7.     Registration Rights. Purchaser grants to Seller piggyback
registration rights according to the terms of the Amended and Restated
Registration Rights Agreement dated August 2, 1999 attached hereto as Exhibit C
as amended by Amendment No. 1 dated as of the Closing Date, the form of which
is attached hereto as Exhibit D (collectively, the "Registration Rights
Agreement") for up to Four Hundred and Sixty Seven Thousand and Two Hundred and
Eighty Nine (467,289) shares of Purchaser's $.01 par value voting common stock
less the number



                                     - 4 -
<PAGE>   5

of shares that remain subject to or have been forfeited under the Escrow
Agreement attached hereto as Exhibit E and the number of shares that have been
redeemed under Section 8.4 of this Agreement. The Registration Rights Agreement
shall govern any registration of the Registered Shares, including registration
priorities, registration fees, and indemnification in connection therewith.

2.       Purchase Price; Assumption of Liabilities.

         2.1.     Amount of Purchase Price. In consideration for the purchase
of the Purchased Assets, Purchaser agrees to assume the Assumed Liabilities and
deliver to Seller Four Hundred and Sixty Seven Thousand and Two Hundred and
Eighty Nine (467,289) shares of Purchaser's $.01 par value voting common stock
(the "Payment Shares") subject to the provisions of Section 2.6 regarding the
deposit of Ninety Three Thousand and Four Hundred and Fifty Eight (93,458)
shares in escrow and subject to the registration rights and restrictions on
transfer described in Section 1.7.

         2.2.     Agreement Regarding Current Customers of Seller. Purchaser
shall not assume any of Seller's customer agreements (the "Customer
Agreements") nor any of the liabilities associated with such Customer
Agreements.

         2.3.     Assumed Liabilities. Purchaser agrees to and will at the
Closing assume and agrees to pay, discharge and perform when due those
liabilities and obligations, whether direct or indirect, absolute or
contingent, accrued or unaccrued, due or to become due, liquidated or
unliquidated, choate or inchoate, directly arising out of Purchaser's use or
ownership of the Purchased Assets after the Closing Date (collectively, the
"Assumed Liabilities" and individually, an "Assumed Liability").
Notwithstanding the foregoing, the Assumed Liabilities shall not include any
liability resulting from (i) an inaccurate representation or warranty made by
Seller or Shareholder in this Agreement, or (ii) resulting from any default in
the performance of any of the covenants or agreements made by Seller or
Shareholder in this Agreement. This paragraph shall not limit Seller and
Shareholder's indemnification obligations to Purchaser under Section 8 hereof.
Purchaser, Seller and Shareholder acknowledge and agree that except for the
Assumed Liabilities expressly stated herein, Purchaser assumes no other
liabilities or obligations under the transactions contemplated by this
Agreement. By way of example and not limitation, Seller's sublicensee's use of
the Purchased Assets on or after the Closing Date shall not be an Assumed
Liability.

         2.4.     Excluded Liabilities. Notwithstanding any provisions in this
Agreement to the contrary, the Assumed Liabilities shall not include any
liabilities of Seller not expressly assumed pursuant to Section 2.3 (the
"Excluded Liabilities"). The Excluded Liabilities shall include those
liabilities and obligations, whether direct or indirect, absolute or
contingent, accrued or unaccrued, due or due to become due, liquidated or
unliquidated, choate or inchoate, directly arising out of Seller's or its
sublicensee's use of the Purchased Assets before the Closing Date, or from
Seller's use of the Purchased Assets on or after the Closing Date.

         2.5.     Allocation of the Purchase Price Among the Purchased Assets.
The Purchase Price shall be allocated among each item or class of the Purchased
Assets in accordance with Schedule 2.5 hereto. Seller and Purchaser agree that
they will prepare and file their federal and



                                     - 5 -
<PAGE>   6

any state or local income tax returns based on such allocation of the Purchase
Price. Seller and Purchaser agree that they will prepare and file any notices
or other filings required pursuant to Section 1060 of the Internal Revenue Code
of 1986, as amended, and that any such notices or filings will be prepared
based on such allocation of the Purchase Price.

         2.6.     Escrow Agreement. As security for Seller's and Shareholder's
indemnification obligations set forth in Sections 8.1 and 8.3, Seller shall
deposit in escrow with the escrow agent named in the Escrow Agreement attached
hereto as Exhibit E, Ninety Three Thousand and Four Hundred and Fifty Eight
(93,458) shares of Purchaser's $.01 par value voting common stock (the "Escrow
Shares"), which shall be deducted from the Payment Shares referenced in Section
2.1 above and held in escrow until December 31, 2000. All fees and expenses of
the Escrow Agent shall be paid by Purchaser.

         2.7.     Certain Taxes and Expenses. Purchaser shall pay all sales,
use, transfer, documentary stamp and other similar taxes and all recording,
filing and other fees and costs with respect to the sale and purchase of the
Purchased Assets (other than any federal or state income tax on any gain
recognized by Seller on the sale of the Purchased Assets). Whether or not the
transactions contemplated by this Agreement are consummated, Seller and
Purchaser shall each bear its respective accounting, legal, financial advisory
and other expenses incurred in connection with the transactions contemplated by
this Agreement.

3.       Closing.

         3.1.     Time and Place of the Closing. The closing (the "Closing") of
the purchase and sale of the Purchased Assets shall take place at the offices
of Morris Manning & Martin, LLP, Atlanta, GA, at 10:00 A.M., local time, the
second business day following the date on which all conditions to Closing
contained in Sections 6 and 7 have been satisfied or complied with or, if not
all conditions have been satisfied or complied with, all such conditions which
have not been so satisfied or complied with have been waived by the party
entitled to the benefit of such condition (the "Closing Date"). The Parties may
mutually agree on a different Closing Date or location for the Closing.

         3.2.     Procedure at the Closing. At the Closing, the parties agree
to take the following steps in the order listed below (provided, however, that
upon their completion of all such steps shall be deemed to have occurred
simultaneously);

                  (a)    Seller shall deliver to Purchaser a Certificate in the
         form of Exhibit F hereto, certifying that each of the conditions to
         the obligation of Purchaser to purchase the Purchased Assets from
         Seller which is set forth in Section 6 of this Agreement has been
         satisfied or waived.

                  (b)    Purchaser shall deliver to Seller a Certificate in the
         form of Exhibit G hereto, certifying that each of the conditions to
         the obligations of Seller to sell the Purchased Assets to Purchaser
         which is set forth in Section 7 in this Agreement has been satisfied
         or waived.



                                     - 6 -
<PAGE>   7

                  (c)    Seller shall deliver to Purchaser such documents and
         instruments, including a Bill of Sale in the form of Exhibit H hereto,
         as shall be sufficient to vest in Purchaser good and marketable title
         to the Purchased Assets, free and clear of all Encumbrances (except
         for the Permitted Encumbrances referenced in Section 4.4 below).

                  (d)    Purchaser shall deliver to Seller instruments, in the
         form of Exhibit I hereto, as shall be sufficient to effect the
         assumption by Purchaser of the Assumed Liabilities.

                  (e)    Seller shall deliver to Purchaser a copy of the object
         code and the source code for the Assigned Software (each in electronic
         and written forms) and copies of all documentation and form agreements
         related to the Assigned Software.

                  (f)    Purchaser and Seller shall execute and deliver a cross
         receipt acknowledging receipt from the other, respectively, of the
         Purchased Assets and the portion of the Payment Shares to be delivered
         at Closing.

                  (g)    Seller shall deliver to Purchaser an opinion from
         counsel for Seller in the form attached as Exhibit J.

                  (h)    Seller shall deliver to Purchaser the Instrument of
         Accession in the form attached as Exhibit K.

                  (i)    Purchaser shall deliver to Seller an opinion from
         counsel for Purchaser in the form attached as Exhibit L.

                  (j)    Seller and Purchaser shall execute and deliver the
         License Agreement and the Escrow Agreement.

         3.3      Further Assurances. At or after the Closing, each Party shall
each prepare, execute and deliver, at the preparer's expense (provided that all
filing, registration and maintenance fees of any government or regulatory
agency shall be paid by the requesting party), such further instruments of
conveyance, sale, assignment or transfer and shall take or cause to be taken
such other or further action as any party shall reasonably request of any other
party at any time or from time to time as necessary in order to perfect,
confirm or evidence in the Purchaser title to all or any part of the Purchased
Assets or to consummate, in any other manner, the terms and provisions of this
Agreement. Nothing in this Agreement shall have an affect on the provisions
regarding the payment of taxes or escrow fees.

4.       Representations and Warranties of Seller and Shareholder. In order to
induce Purchaser to enter into this Agreement and to consummate the
transactions contemplated hereunder, Seller and Shareholder jointly and
severally, make the following representations and warranties as of the date
hereof and as of the Closing Date:

         4.1.     Organization, Power and Authority of Seller. Seller is a
corporation duly organized and legally existing in good standing under the laws
of Delaware and has full corporate power and authority to own or lease its
properties and operate its business, to enter into this Agreement and to carry
out the transactions and agreements contemplated hereby



                                     - 7 -
<PAGE>   8

(collectively, the "Transactions"). All of Seller's issued and outstanding
shares of voting common stock are owned by Shareholder.

         4.2.     Due Authorization; Binding Obligation. The execution,
delivery and performance of this Agreement and the consummation of the
Transactions have been duly authorized by necessary corporate action of Seller.
This Agreement has been duly executed and delivered by Seller and is a valid
and binding obligation of Seller, enforceable in accordance with its terms.
Neither the execution and delivery of this Agreement nor the consummation of
the Transactions will: (i) conflict with or violate any provision of the
articles of incorporation or bylaws of Seller, or of any law, ordinance or
regulation or any decree or order of any court or administrative or other
governmental body which is either applicable to, binding upon or enforceable
against Seller; or (ii) result in any breach of or default under any mortgage,
contract, agreement, indenture, will, trust or other instrument which is either
binding upon or enforceable against Seller or the Purchased Assets.

         4.3.     Tax Matters. Except as set forth on Schedule 4.3, Seller and
Shareholder have no knowledge of any tax deficiency proposed or threatened
against Seller related to the Purchased Assets. There are no tax liens upon any
Purchased Assets. All taxes and other assessments and levies related to the
Purchased Assets that Seller was required by law to withhold or to collect have
been duly withheld and collected, and have been paid over to the proper
governmental entity. Under its contracts with its customers for sales or
licenses of Assigned Software, such customers are liable for any and all sales
or use taxes imposed by virtue of or with respect to such sales or licenses. As
of the Closing Date, Seller will have paid and discharged all taxes,
assessments, excises and levies relating to the Purchased Assets for which it
is obligated and which are then due and payable.

         4.4.     Good Title to and Condition of the Purchased Assets. Seller
has good and marketable title to all of the Purchased Assets, free and clear of
all Encumbrances of every kind, nature, and description whatsoever, except
those set forth in Schedule 4.4 (the "Permitted Encumbrances").

         4.5.     Intellectual Property Rights of Seller.

                  (a)    Definitions. As used in this Agreement, and in
         addition to any other terms defined in this Agreement, the following
         terms shall have the following meanings.

                         A.   "Distributor" means a reseller, value-added
        reseller, original equipment manufacturer, distributor, or similar
        entity that is authorized, by oral or written agreement, to distribute
        the Assigned Software.

                         B.   "Distributor Agreement" means a license agreement
         or other written or oral agreement or permission between Seller and a
         Distributor authorizing Distributor to distribute the Assigned
         Software.

                         C.   "Customer License Agreement" means a license
         agreement or other written or oral agreement or permission, other than
         a Distributor Agreement, by



                                     - 8 -
<PAGE>   9

         which Seller has granted to any third party any rights regarding the
         Assigned Software or any Intangibles thereof.

                         D.   "Supplier License Agreement" means a license
         agreement or other written or oral agreement or permission by which a
         third party has granted to Seller any rights regarding any Assigned
         Software or any Intangibles.

                         E.   "Registration" means any governmental filing,
         whether federal, state, local, foreign or otherwise, related to
         Assigned Software or any Intangible, including, without limitation,
         all registrations of patents, copyrights, and all re-issues,
         divisions, continuations, renewals, extensions and
         continuations-in-part thereof.

                         F.   "Intangible" means, with respect to the Assigned
         Software:

                              (i)       Inventions, whether or not patentable,
                  that are conceived by Seller's employees or independent
                  contractors prior to the Closing Date that relate in whole or
                  in part to the Assigned Software;

                              (ii)      Copyrights, Registrations thereof and
                 applications for Registration thereof;

                              (iii)     Trade secrets and confidential business
                  information embodied in the Assigned Software (namely
                  inventions, whether patentable or unpatentable and whether or
                  not reduced to practice, know-how, drawings, flow charts,
                  processes, specifications and copyrightable works); and

                              (iv)      The exclusive (except for the license
                 granted to Seller under the License Agreement) right to use
                 all of the foregoing forever.

                         G.   "Third Party Distributed Software" means software
         (excluding the Assigned Software) that has been incorporated into the
         Assigned Software prior to the Closing Date.

                  (b)    Identification.

                         A.   Exhibit A is an accurate and complete list and
         description of the Assigned Software and the Third Party Distributed
         Software (including a name, product description, the language in which
         it is written and the type of hardware platform(s) on which it runs
         and all other software used by Seller that is necessary to use,
         market, license, sell, modify, update, and/or create derivative works
         of the Assigned Software.

                         B.   Schedule 4.5(b) (i) contains a complete list of
         each Registration of Seller; (ii) identifies each pending Registration
         of Seller; (iii) identifies each application for or Registration
         regarding the Intangibles and Assigned Software of Seller which have
         been withdrawn, abandoned, or have lapsed or been denied; and (iv)
         specifies any advice to Seller with respect to each such Registration
         or protectability of the Intangibles and Assigned Software,
         summarizing such advice. Schedule 4.5(b) indicates Seller's ownership
         of such items or the source of Seller's right to use such items.



                                     - 9 -
<PAGE>   10

                         C.   Schedule 4.5(b) also identifies each Customer
         License Agreement, together with the term thereof, and each source
         code escrow agreement and agreement granting a source code license
         entered into by Seller and relating to any Intangibles and Assigned
         Software identified in such Customer License Agreement.

                         D.   Schedule 4.5(b) also identifies each Distributor
         Agreement, together with the term thereof, and each source code escrow
         agreement and agreement granting a source code license entered into by
         Seller and relating to any Intangibles and Assigned Software
         identified in such Distributor Agreement.

                         E.   Schedule 4.5(b) also identifies each Supplier
         License Agreement, together with the term thereof, all royalties or
         other amounts due thereon, and each source code escrow agreement
         entered into by the provider or licensor thereof running to the
         benefit of Seller and relating to any Intangibles and Assigned
         Software identified in such Supplier License Agreement.

                         F.   The company has no patents, patent applications,
         patent disclosures, re-issues, divisions, continuations, renewals,
         extensions and continuations-in-part thereof and improvements thereto.

                  (c)    Ownership and Right to License.

                         A.   Except as set forth on Schedule 4.5(c), Seller
         has good and marketable title to the Assigned Software and Intangibles
         attributable to the Assigned Software. Seller has the full right to
         use all of the Assigned Software, and Intangibles attributable
         thereto, as used by Seller in its business as currently conducted,
         free and clear of any liens, claims, charges or encumbrances which
         would affect the use of such Assigned Software in connection with the
         operation of Seller's business as currently conducted.

                         B.   Except as set forth on Schedule 4.5(c) no rights
         of any third party other than those rights set forth on Schedule
         1.1(b) are necessary to use, market, license, sell, modify, update,
         and/or create derivative works for the Assigned Software as to which
         Seller takes any such action in its business as currently conducted.

                         C.   Neither the Assigned Software nor Intangibles, or
         their respective past or current uses by or through Seller has
         violated or infringed upon, or is violating or infringing upon, any
         copyright or trade secret of any person or entity and to Seller's and
         Shareholder's knowledge neither the Assigned Software nor Intangibles,
         or their respective past or current uses by or through Seller has
         violated or infringed upon, or is violating or infringing upon, any
         patent of any person or entity. Seller has performed all obligations
         imposed upon it with regard to the Licensed Software which are
         required to be performed by Seller on or prior to the date hereof, and
         neither Seller nor, to the knowledge of Seller and Shareholder, any
         other party, is in breach of or default thereunder in any respect, nor
         to Seller's knowledge, is there any event which with notice or lapse
         of time or both would constitute a default thereunder.



                                    - 10 -
<PAGE>   11

                         D.   To the knowledge of Seller and Shareholder, no
         person is violating or infringing upon, or has violated or infringed
         upon at any time, any of Seller's rights to any of the Assigned
         Software or Intangibles listed on Schedule 4.5(c).

                         E.   None of the Assigned Software or Intangibles
         listed on Schedule 4.5(c) are owned by or registered in the name of
         Shareholder, any current or former owner, shareholder, partner,
         director, executive, officer, employee, salesman, agent, customer, or
         contractor of Seller or Shareholder, nor does any such person have any
         interest therein or right thereto, including, but not limited to, the
         right to royalty payments. Except as set forth on Schedule 4.5(c),
         Seller has granted no third party any exclusive rights related to any
         Assigned Software.

                         F.   No litigation is pending and no claim has been
         made against Seller or, to the knowledge of Seller and Shareholder, is
         threatened, which contests the right of Seller to sell or license to
         any person or entity or use any of the Assigned Software. No former
         employer of any employee or consultant of Seller has made a claim
         against Seller or, to the knowledge of Seller and Shareholder, against
         any other person, that Seller or such employee or consultant is
         misappropriating or violating the Intangibles of such former employer.

                         G.   Seller is not a party to or bound by and, upon
         the consummation of the Transactions contemplated by this Agreement,
         Purchaser will not be a party to or bound by (as a result of any acts
         or agreements of Seller), any license or other agreement requiring the
         payment by Seller or its assigns of any royalty or license payment,
         excluding such agreements relating to the Assigned Software to the
         extent such royalty or license payment is expressly set forth on
         Schedule 4.5(c).

                         H.   Except as set forth on Schedule 4.5(c), the
         Assigned Software, and the Intangibles thereunder are fully
         transferable to Purchaser in the manner contemplated in this
         Agreement.

                         I.   Seller has supplied Purchaser with correct and
         complete copies of all Customer License Agreements, Distributor
         Agreements and Supplier License Agreements.

                         J.   Except as set forth on Schedule 4.5(c), all
         Supplier License Agreements may be assigned to Purchaser free of cost
         or expense without obtaining the consent or approval of any other
         person.

                         K.   Schedule 4.5(c) identifies all individuals
         compensated at an annual rate in excess of $30,000.00 who have
         contributed to the development of the Assigned Software.



                                    - 11 -
<PAGE>   12



                  (d)    Performance.

                         A.   Except as set forth on Schedule 4.5(d), the
         current release of the Assigned Software performs substantially in
         accordance with the specifications set forth on Exhibit L, and no
         written claim has been made or, to the knowledge of Seller and
         Shareholder, is threatened, that the Assigned Software fails to
         perform as set forth in the immediately preceding clause.

                         B.   Except as set forth on Schedule 4.5(d), to
         Seller's knowledge, there are no defaults either by Seller or a third
         party, under any of the Customer License Agreements, Distributor
         Agreements or Supplier License Agreements, which would impair Seller's
         ability to fulfill its obligations to Purchaser under this Agreement
         or demonstrate material problems with the Assigned Software identified
         by Seller's or its Distributor's customers.

                         C.   Except as set forth on Schedule 4.5(d), with
         respect to the Assigned Software (except for any Licensed Software):

                              (i)       Seller maintains machine-readable
                  master-reproducible copies, reasonably complete technical
                  documentation and/or user manuals for the most current
                  releases or versions thereof and for all earlier releases or
                  versions thereof currently being supported by Seller;

                              (ii)      In each case, the machine-readable
                  copy substantially conforms to the corresponding source code
                  listing;

                              (iii)     Such Assigned Software is written in
                  the language set forth on Schedule 4.5(d), for use on the
                  hardware set forth on Schedule 4.5(d) with standard operating
                  systems; and

                              (iv)      Such Assigned Software can be
                  maintained and modified by reasonably competent Seller
                  programmers familiar with such language, hardware and
                  operating systems.

                  (e)    Millennium Compliance. Except as set forth on Schedule
         4.5(e), the Assigned Software and to the knowledge of Seller and
         Shareholder the Third Party Distributed Software are "Millennium
         Compliant." For the purposes of this Agreement "Millennium Compliant"
         means, with respect to such software product, that:

                         A.   The functions, calculations, and other computing
         processes (collectively, "Processes") perform in an accurate manner
         regardless of the date in time on which the Processes are actually
         performed and regardless of the date input, whether before, on, or
         after January 1, 2000, and whether or not the dates are affected by
         leap years;



                                    - 12 -
<PAGE>   13

                         B.   It accepts, stores, sorts, extracts, sequences,
         and otherwise manipulates date inputs and date values, and return and
         display date values, in an accurate manner regardless of the dates
         used, whether before, on, or after January 1, 2000;

                         C.   It will function without interruptions caused by
         the date in time on which the Processes are actually performed or by
         the date input to the Assigned Software and the Third Party
         Distributed Software, whether before, on, or after January 1, 2000;

                         D.   It accepts and responds to two (2) digit year and
         four (4) digit year date input in a manner that resolves any
         ambiguities as to the century in a defined, predetermined, and
         accurate manner;

                         E.   It displays, prints, and provides electronic
         output of date information in ways that are unambiguous as to the
         determination of the century; and

                         F.   With respect to the Assigned Software only, it
         has been tested by Seller to determine whether it is Millennium
         Compliant. Seller shall deliver the test plans and results of such
         tests upon written request from Purchaser. Seller shall notify
         Purchaser immediately of the results of any tests or any claim or
         other information that indicates the Assigned Software is not
         Millennium Compliant.

        (f)    Trade Secrets and Confidential Information. Set forth on Schedule
4.5(f) is a complete and accurate list of all persons to whom Assigned Software
source code has been disclosed or otherwise provided (each a "Source Code
Recipient"). Seller has executed a written agreement with each Source Code
Recipient, obligating the Source Code Recipient to proper obligations of
confidentiality. Seller has taken reasonable steps to protect the proprietary
rights in the Assigned Software source code including all trade secrets and
confidential information relating thereto.

         4.6.     Compliance with Laws by Seller. Seller is in compliance in
all material respects with all laws, regulations and orders applicable to
Seller and the Purchased Assets. Seller has not received notification of any
asserted past or present failure to comply with any laws related to the
Purchased Assets, and to the best of the knowledge of Seller and Shareholder,
no proceeding with respect to any such violation is contemplated.

         4.7.     Litigation Involving Seller. Except as provided in Schedule
4.7, there are no actions, suits, claims, governmental investigations or
arbitration proceedings pending or, to the best knowledge of Seller and
Shareholder, threatened, against or affecting any of the Purchased Assets, nor,
to the best knowledge of Seller and Shareholder, reasonable basis therefor.
There are no outstanding orders, decrees or stipulations issued by any federal,
state, local or foreign judicial or administrative authority in any proceeding
related to any Purchased Assets to which Seller is or was a party.

         4.8.     Brokers' and Finder's Fees. Neither Seller or Shareholder is
obligated to pay any fees or expenses of any broker or finder in connection
with the origin, negotiation, or execution of this Agreement or in connection
with any of the Transactions.



                                    - 13 -
<PAGE>   14

         4.9.     Consents and Approvals. Except as set forth in Schedule 4.9,
no consent, authorization or approval of, or exemption by, or filing with, any
governmental, public or self-regulatory body or authority (a "Governmental
Agency") or any other third party is required in connection with the execution,
delivery and performance by Seller of this Agreement or the consummation of the
Transactions.

         4.10.    Payment Shares. Seller understands that: (i) the Payment
Shares to be issued pursuant to this Agreement have not been, and as of the
Closing Date will not be, registered under the Securities Act of 1933, as
amended, or under any state securities laws; (ii) the Payment Shares are being
offered and issued in reliance upon Federal and state exemptions for
transactions not involving any public offering; and (iii) the certificates
representing the shares of Payment issued under this Agreement will bear the
following legends:

                  "The securities represented by this certificate have
                  not been registered under the Securities Act of 1933
                  or applicable state securities laws. These
                  securities have been acquired for investment and not
                  with a view to distribution or resale, and may not
                  be sold mortgaged, pledged, hypothecated or
                  otherwise transferred without an effective
                  registration statement for such securities under the
                  Securities Act of 1933 and applicable state
                  securities laws, or the availability of an exemption
                  from the registration provisions of the Securities
                  Act of 1933 and applicable state securities laws."

         Seller further represents that: (i) the Seller is acquiring the
Payment Shares solely for the Seller's own account for investment purposes and
not with a view to the distribution thereof within the meaning of the
Securities Act of 1933, as amended (except as contemplated by the registration
rights set forth in Section 1.7 or as permitted under applicable securities
laws); (ii) the Seller has had the opportunity to obtain information and ask
questions and receive answers as desired in order to evaluate the merits and
risks inherent in holding the Payment Shares; (iii) the Seller has not been
offered the Payment Shares by any form of general advertising or general
solicitation; (iv) the Seller is able to bear the economic risk and lack of
liquidity inherent in holding the Payment Shares; (v) Shareholder is a
corporation with total assets in excess of $5,000,000; (vi) Shareholder was not
formed for the specific purpose of acquiring the Payment Shares; (vii)
Shareholder owns all issued and outstanding common stock of Seller; and (viii)
Seller has no other class of stock other than common stock.

         4.11.    Disclaimers. THE WARRANTIES SET FORTH IN THIS SECTION 4 ARE
MADE FOR THE BENEFIT OF PURCHASER ONLY. THE REMEDIES DESCRIBED IN SECTION 8 ARE
THE SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF THE WARRANTIES MADE IN THIS
SECTION 4. THERE ARE NO OTHER WARRANTIES, REPRESENTATIONS OR CONDITIONS,
WHETHER WRITTEN OR ORAL, EXPRESS OR IMPLIED, WITH RESPECT TO THE SUBJECT MATTER
OF THIS AGREEMENT, THE PURCHASED ASSETS, OR ANY OTHER GOODS OR SERVICES
PROVIDED BY SELLER, INCLUDING ANY IMPLIED WARRANTIES OR CONDITIONS OF
MERCHANTABILITY OR AGAINST INFRINGEMENT OR IMPLIED WARRANTIES OR CONDITIONS OF
FITNESS FOR A PARTICULAR PURPOSE.



                                    - 14 -
<PAGE>   15

5.       Representations and Warranties of Purchaser. In order to induce Seller
to enter into this Agreement and consummate the Transactions, Purchaser makes
the following representations and warranties:

         5.1.     Organization, Power and Authority of Purchaser. Purchaser is
a corporation duly organized and validly existing under the laws of the State
of Delaware, with full corporate power and authority to enter into this
Agreement and to carry out the Transactions and agreements contemplated hereby.

         5.2.     Due Authorization; Binding Obligation. The execution,
delivery and performance of this Agreement and the consummation of the
Transactions have been duly authorized by all necessary corporate actions of
Purchaser. This Agreement has been duly executed and delivered by Purchaser and
is a valid and binding obligation of Purchaser, enforceable in accordance with
its terms. Neither the execution and delivery of this Agreement nor the
consummation of the Transactions will: (i) conflict with or violate any
provision of the articles of incorporation or bylaws of Purchaser or of any
decree or order of any court or administration or other governmental body which
is either applicable to, binding upon or enforceable against Purchaser; or (ii)
result in any breach of or default under any mortgage, contract, agreement,
indenture, will, trust or other instrument which is either binding upon or
enforceable against Purchaser.

         5.3.     Payment Shares. Purchaser has taken all actions necessary to
authorize and approve the issuance of the Payment Shares, and as of the Closing
Date the Payment Shares will, when issued to the Seller in accordance herewith,
be duly authorized, validly issued, fully paid and nonassessable and free and
clear of all security interests, or other claims, liens or encumbrances of any
kind, other than those caused by Seller or the Shareholder. All persons and
entities that have preemptive rights, rights of first refusal or similar rights
to acquire from the Purchaser any securities of the Purchaser as a result of
the issuance of the Payment Shares to Seller have waived such rights. In
reliance upon Seller's representations and warranties in Section 4.10, the
issuance of the Payment Shares is exempt from registration under the Securities
Act of 1933, as amended, and under applicable state securities laws.

         5.4.     Capital Structure. As of the date hereof and as of the
Closing Date, the total authorized capital stock of Purchaser consists of
15,000,000 shares of common stock, at a par value of one cent ($.01) per share,
4,000,000 shares of Series A convertible preferred stock, par value $0.01 per
share, 1,231,954 Series B Convertible Preferred Stock, par value $0.01 per
share, and 1,500,000 Series C Convertible Preferred Stock, par value $0.01 per
share. All of such shares have been duly authorized and validly issued, and are
fully paid and nonassessable shares of common and preferred stock of Purchaser.

         5.5.     Compliance with Laws by Purchaser. Purchaser is in compliance
with all laws, regulations and orders applicable to Purchaser. Purchaser has
not received notification of any asserted past or present failure to comply
with any laws, and to the best of the knowledge of Purchaser, no proceeding
with respect to any such violation is contemplated.

         5.6.     Litigation Involving Purchaser. Except as provided in
Schedule 5.6, there are no actions, suits, claims, governmental investigations
or arbitration proceedings pending or, to the best knowledge of Purchaser,
threatened, against or affecting Purchaser, nor, to the best



                                    - 15 -
<PAGE>   16

knowledge of Purchaser, reasonable basis therefor. There are no outstanding
orders, decrees or stipulations issued by any federal, state, local or foreign
judicial or administrative authority in any proceeding to which Purchaser is or
was a party.

         5.7.     Brokers' and Finder's Fees. Purchaser is not obligated to pay
any fees or expenses of any broker or finder in connection with the origin,
negotiation or execution of this Agreement or in connection with any of the
Transactions.

         5.8      Financial Statements. Purchaser has delivered to Seller
correct and complete copies of: (i) financial statements of Purchaser,
consisting of a consolidated balance sheet as of December 31, 1997 and 1998 and
the related statements of income and cash flows for the years then ended, which
were audited by KPMG LLP, independent public accountants; and (ii) unaudited
monthly financial statements of Purchaser, consisting of a consolidated balance
sheet as of June 30, 1999 and the related statement of income and cash flows
for the six months then ended. All such audited and unaudited financial
statements are referred to herein collectively as the "Financial Statements."
The Financial Statements are, consistent in all material respects with the
books and records of Purchaser, and there have not been or will not be any
material transactions that have not been or will not be recorded in the
accounting records underlying such Financial Statements. The Financial
Statements have been, prepared in accordance with generally accepted accounting
principles, consistently applied ("GAAP"), and the Financial Statements,
including the related notes, present fairly the financial position and assets
and liabilities of Purchaser as of the dates thereof, and the results of
operations and cash flows for the periods then ended in accordance with GAAP,
subject, in the case of unaudited Financial Statements, to normal year-end
adjustments and the absence of notes.

         5.9      Disclaimers. THE WARRANTIES SET FORTH IN THIS SECTION 5 ARE
MADE FOR THE BENEFIT OF SELLER AND SHAREHOLDER ONLY. THE REMEDIES DESCRIBED IN
SECTION 8 ARE THE SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF THE WARRANTIES MADE
IN THIS SECTION 5. THERE ARE NO OTHER WARRANTIES, REPRESENTATIONS OR
CONDITIONS, WHETHER WRITTEN OR ORAL, EXPRESS OR IMPLIED, WITH RESPECT TO THE
SUBJECT MATTER OF THIS AGREEMENT, INCLUDING ANY IMPLIED WARRANTIES OR
CONDITIONS OF MERCHANTABILITY OR AGAINST INFRINGEMENT OR IMPLIED WARRANTIES OR
CONDITIONS OF FITNESS FOR A PARTICULAR PURPOSE.

6.       Conditions to the Obligation of Purchaser. The obligation of Purchaser
to purchase the Purchased Assets shall be subject to the fulfillment at or
prior to the Closing Date of each of the following conditions:

         6.1.     Accuracy of Representations and Warranties and Compliance
with Obligations. The representations and warranties of Seller contained in
this Agreement shall have been true and correct at and as of the date hereof in
all material respects, and they shall be true and correct at and as of the
Closing Date in all material respects with the same force and effect as though
made at and as of that time. Seller shall have performed and complied with in
all material respects all of its obligations required by this Agreement to be
performed or complied with at or prior to the Closing Date. Seller shall have
delivered to Purchaser a certificate, dated as of the Closing Date and signed
by the President of Seller, certifying that such representations and



                                    - 16 -
<PAGE>   17

warranties are thus true and correct and that all such obligations have been
thus performed and complied with.

         6.2.     Receipt of Necessary Consents. All consents and approvals
identified in Schedule 6.2 shall have been obtained and shown by written
evidence reasonably satisfactory to Purchaser or shall have been waived by
Purchaser.

         6.3.     No Adverse Litigation. There shall not be pending or
threatened any action or proceeding by or before any court or other
governmental body which shall seek to restrain, prohibit or invalidate the sale
of the Purchased Assets to Purchaser or any other transaction contemplated
hereby, or which might materially affect the right of Purchaser to own the
Purchased Assets.

         6.4.     Closing Documents. All documents to be delivered at the
Closing pursuant to this Agreement, including without limitation those referred
to in Section 1.3 and Article 3 hereof, shall have been duly executed and
delivered.

         6.5.     Employment of Jim Albert. Jim Albert, an employee of Seller
effective as of the date hereof, shall accept Purchaser's offer of employment
effective as of the Closing Date.

         6.6.     No Material Adverse Changes. There shall be no material
adverse change in the condition of the Assigned Software from the condition of
the Assigned Software as of August 10, 1999.

7.       Conditions to the Obligation of Seller. The obligation of Seller to
sell the Purchased Assets shall be subject to the fulfillment at or prior to
the Closing Date of each of the following conditions:

         7.1.     Accuracy of Representations and Warranties and Compliance
with Obligations. The representations and warranties of Purchaser contained in
this Agreement shall have been true and correct at and as of the date hereof in
all material respects, and they shall be true and correct at and as of the
Closing Date in all material respects with the same force and effect as though
made at and as of that time. Purchaser shall have performed and complied with
all of its obligations required by this Agreement to be performed or complied
with at or prior to the Closing Date. Purchaser shall have delivered to Seller
a certificate, dated as of the Closing Date and signed by its Chief Financial
Officer, certifying that such representations and warranties are thus true and
correct and that all such obligations have been thus performed and complied
with.

         7.2.     No Adverse Litigation. There shall not be pending or
threatened any action or proceeding by or before any court or other
governmental body which shall seek to restrain, prohibit or invalidate the sale
of the Purchased Assets by Seller or any other transaction contemplated hereby
or which, in the judgment of Seller, makes it inadvisable to proceed with the
sale of the Purchased Assets.

         7.3.     Closing Documents. All documents to be delivered at the
Closing pursuant to this Agreement, including without limitation those referred
to in Section 1.3 and Article 3 hereof, shall have been duly executed and
delivered.



                                    - 17 -
<PAGE>   18

8.       Indemnification.

         8.1.     Agreement by Seller and Shareholder to Indemnify. Seller and
Shareholder, jointly and severally (Seller and Shareholder, referred to as the
"Seller Indemnifying Parties"), agree that they will indemnify and hold
harmless Purchaser and Purchaser's officers, directors, shareholders, agents,
successors and permitted assigns (collectively, the "Purchaser Indemnified
Parties") harmless in respect of the aggregate of all "Seller Indemnifiable
Damages" of Purchaser. For this purpose, "Seller Indemnifiable Damages" means
the aggregate of all expenses, losses, costs, deficiencies, liabilities and
damages (including related reasonable counsel fees and expenses) incurred or
suffered by the Purchaser Indemnified Parties (i) resulting from any inaccurate
representation or warranty made by Seller or Shareholder in or pursuant to this
Agreement, (ii) resulting from any default in the performance of any of the
covenants or agreements made by Seller or Shareholder in this Agreement, or
(iii) resulting from any Excluded Liabilities, excluding Seller Indemnifiable
Damages resulting from a patent infringement claim. This Section 8.1 and
Section 8.3, below state Seller Indemnifying Parties' sole liability, and the
Purchaser Indemnified Parties' sole and limited remedies, under this Agreement.

         8.2.     Agreements by Purchaser to Indemnify. Purchaser agrees to
indemnify and hold Seller and Shareholder and their respective officers,
directors, shareholders, agents, successors and assigns (collectively, the
"Seller Indemnified Parties") harmless in respect of the aggregate of all
"Purchaser Indemnifiable Damages" of Seller. For this purpose, "Purchaser
Indemnifiable Damages" means the aggregate of all expenses, losses, costs,
deficiencies, liabilities and damages (including related counsel fees and
expenses) incurred or suffered by any of the Seller Indemnified Parties (i)
resulting from any inaccurate representation or warranty made by Purchaser or
pursuant to this Agreement, (ii) resulting from any default in the performance
of any of the covenants or agreements made by Purchaser in this Agreement, or
(iii) resulting from any Assumed Liabilities, excluding Purchaser Indemnifiable
Damages resulting from a patent infringement claim that is not otherwise
indemnified by Seller and Shareholder under this paragraph based on an
inaccuracy in the representations and warranties made in Section 4.5(c)C. This
Section 8.2 together with Sections 8.2 and 8.3 hereof, states Purchaser's sole
liability, and Seller's sole and limited remedies, under this Agreement.

         8.3.     Matters Involving Third Parties. If any third party shall
notify any Party (the "Indemnified Party") with respect to any matter which may
give rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 8 then the Indemnified Party shall
notify each Indemnifying Party thereof promptly; provided, however, that no
delay on the part of the Indemnified Party in notifying any Indemnifying Party
shall relieve the Indemnifying Party from any liability or obligation hereunder
unless (and then solely to the extent) the Indemnifying Party thereby is
damaged. In the event any Indemnifying Party notifies the Indemnified Party
within 20 days after the Indemnified Party has given written notice of the
matter that the Indemnifying Party is assuming the defense thereof, (i) the
Indemnifying Party will defend the Indemnified Party against the matter with
counsel of its choice satisfactory to the Indemnified Party, (ii) the
Indemnified Party may retain separate co-counsel at its sole cost and expense,
(iii) the Indemnified Party will not consent to the entry of any judgment or
enter into any settlement with respect to the matter without the written
consent of the Indemnifying Party (not to be unreasonably withheld or delayed),
and (iv) the Indemnifying Party will not



                                    - 18 -
<PAGE>   19

consent to the entry of any judgment with respect to the matter, or enter into
any settlement which does not include a provision whereby the plaintiff or
claimant in the matter releases the Indemnified Party from all liability with
respect thereto, without the written consent of the Indemnified Party (not to
be withheld or delayed unreasonably). In the event no Indemnifying Party
notifies the Indemnified Party within 20 days after the Indemnified Party has
given notice of the matter that the Indemnifying Party is assuming the defense
thereof, however, the Indemnified Party may defend against, or enter into any
settlement with respect to, the matter in any manner it may deem appropriate.

         8.4.     Limitation on Seller's and Shareholder's Indemnification
Obligations. Notwithstanding anything to the contrary contained in this
Agreement, the parties hereto agree that (i) Seller and Shareholder shall not
have any liability for indemnification under Section 8 unless the aggregate of
all Seller Indemnifiable Damages for which Seller and Shareholder would, but
for this proviso, be liable exceeds an amount equal to, on a cumulative basis,
One Hundred Thousand Dollars ($100,000), and then only to the extent of any
such excess; and (ii) Seller's and Shareholder's maximum aggregate liability
under Section 8, shall not exceed Two Million and Five Hundred Thousand Dollars
($2,500,000). All indemnity obligations which the Seller or Shareholder may
have to the Purchaser Indemnified Parties shall be satisfied as follows:

                  (i)      first, by setting off such Seller Indemnifiable
         Damages from the Escrow Shares based on the Fair Market Value (as
         hereinafter defined) of the Escrow Shares;

                  (ii)     second, to the extent the Seller Indemnifiable
         Damages exceed the Fair Market Value of the Escrow Shares, Purchaser
         shall have the right to satisfy any additional Seller Indemnifiable
         Losses by transferring to Seller all or a portion of the Payment
         Shares (based on the Fair Market Value (as hereinafter defined) of the
         Payment Shares) held by Seller in satisfaction of such additional
         Seller Indemnifiable Losses; and

                  (iii)    third, payment to Purchaser in cash or a cash
         equivalent of the amount of Seller Indemnifiable Damages in excess of
         the Fair Market Value of the Escrow Shares and the Payment Shares
         redeemed by Purchaser under subparagraphs "(i)" and "(ii)" above.

"Fair Market Value" for purposes of this Section 8 and for the Escrow Agreement
shall mean the greater of (x) $5.35 per share or (y) the fair market value of
the common stock of Purchaser at the time a claim made under Section 8 is
resolved as determined by a reputable independent appraiser mutually acceptable
to Purchaser and Seller, or in the absence of agreement between the Parties,
the average of the two fair market values determined by reputable independent
appraisers one of which is selected by Seller and the other by Purchaser.
Seller and Purchaser shall pay the fees and expenses of the independent
appraiser it selects, or shall share equally the fees and expenses of the
independent appraiser selected jointly by the Parties.

         8.5.     Limitation of Purchaser's Indemnification Obligations.
Notwithstanding anything to the contrary contained in this Agreement, the
parties hereto agree that (i) Purchaser shall not have any liability for
indemnification under Section 8 unless the aggregate of all Purchaser
Indemnifiable Damages for which Purchaser would, but for this proviso, be
liable exceeds an amount equal to, on a cumulative basis, One Hundred Thousand
Dollars ($100,000), and then



                                    - 19 -
<PAGE>   20

only to the extent of any such excess; and (ii) Purchaser maximum aggregate
liability under Section 8, shall not exceed Two Million and Five Hundred
Thousand Dollars ($2,500,000).

         8.6.     Survival. This Section 8 and each of the representations and
warranties made by Seller and Purchaser in Sections 4 and 5 of this Agreement
or pursuant hereto shall survive until the second anniversary of the Closing
Date, notwithstanding any investigation at any time made by or on behalf of
either party, and thereafter all such representations and warranties and right
of indemnity shall be extinguished. Notwithstanding the preceding sentence,
there shall be no time limit to bring a claim based on indemnification for
Assumed Liabilities or Excluded Liabilities.

9.       Miscellaneous.

         9.1.     Amendment and Modification. The parties hereto may amend,
modify and supplement this Agreement in such manner as may be agreed upon by
them in writing.

         9.2.     Limitation of Liability. EXCEPT TO THE EXTENT THAT ARTICLE 8
PROVIDES TO THE CONTRARY, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY HAVE ANY
LIABILITY TO THE OTHER PARTY FOR ANY CONSEQUENTIAL, EXEMPLARY, INCIDENTAL,
INDIRECT, OR SPECIAL DAMAGES OR COSTS (INCLUDING ATTORNEYS' FEES) OR LOSS OF
GOODWILL, LOSS OF PROFITS RESULTING FROM ANY CLAIM (INCLUDING ANY CAUSE OF
ACTION IN CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY, OR PRODUCTS LIABILITY)
REGARDING THIS AGREEMENT OR RESULTING FROM OR IN CONNECTION WITH THE USE OF OR
INABILITY TO USE, OR PERFORMANCE OR NONPERFORMANCE OF, THE PURCHASED ASSETS,
ANY THIRD-PARTY SOFTWARE, OR ANY OTHER GOODS OR SERVICES PROVIDED BY SELLER, OR
ANY COMPONENT THEREOF, EVEN IF THE PARTY ALLEGEDLY LIABLE HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES OR COSTS.

         9.3.     Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
assigns, heirs and legal representatives. Each Party's rights and/or
obligations under this Agreement, including any rights to receive payments
hereunder, may be assigned, in whole or in part, provided that the assignment
of obligations shall not relieve such assigning party of its obligations
(including any liabilities) arising under this Agreement. The assigning Party
shall give the non-assigning Party prompt written notice following any such
assignment.

         9.4.     Entire Agreement. This Agreement and the exhibits and
schedules attached hereto contain the entire agreement of the parties hereto
with respect to the purchase of the Purchased Assets and the other transactions
contemplated herein, and supersede all prior understandings and agreements of
the parties with respect to the subject matter hereof. Any reference herein to
this Agreement shall be deemed to include the schedules and exhibits attached
hereto.

         9.5.     Headings. The descriptive headings in this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.



                                    - 20 -
<PAGE>   21

         9.6.     Execution in Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, and all
of which together will constitute one and the same instrument.

         9.7.     Notices. Any notice, request, information or other document
to be given hereunder to any of the Parties by any other Party shall be in
writing and delivered personally or sent by certified mail, postage prepaid, as
follows:

         If to Seller, addressed to:

                             Advanced Integrated Recorders, Inc.
                             121 Whittendale Drive
                             Building 1
                             Moorestown, NJ 08057
                             Attn: President and Chief Executive Officer

         with a copy to:

                             Pepper Hamilton LLP
                             Suite 400
                             1235 Westlakes Drive
                             Berwyn, PA 19312-2401
                             Attn: James D. Rosener, Esquire

         If to Shareholder, addressed to:

                             Formation, Inc.
                             121 Whittendale Drive
                             Building 1
                             Moorestown, NJ 08057
                             Attn: President and Chief Executive Officer

         with a copy to:

                             Pepper Hamilton LLP
                             Suite 400
                             1235 Westlakes Drive
                             Berwyn, PA 19312-2401
                             Attn: James D. Rosener, Esquire

         If to Purchaser, addressed to:

                             Witness Systems, Inc.
                             1105 Sanctuary Parkway
                             Suite 200
                             Alpharetta, Georgia 30144
                             Attn: Chief Executive Officer



                                    - 21 -
<PAGE>   22

         with a copy to:

                             Morris, Manning & Martin, LLP
                             1600 Atlanta Financial Center
                             3343 Peachtree Road, N.E.
                             Atlanta, GA 30328
                             Attn: John C. Yates, Esq.

Any party may change the address to which notices hereunder are to be sent to
it by giving written notice of such change of address in the manner herein
provided for giving notice. Any notice delivered personally shall be deemed to
have been given on the date it is so delivered, and any notice delivered by
registered or certified mail shall be deemed to have been given on the date it
is received or refused, if delivery is refused.

         9.8.     Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey applicable to
contracts made and to be performed herein.

         9.9.     Termination. This Agreement may be terminated and the
Transactions may be abandoned at any time prior to Closing:

                  (i)      by mutual consent of the Seller and the Purchaser;

                  (ii)     by any Party if the Closing shall not have occurred
         by September 30, 1999, unless the failure to close shall have been
         caused by the failure of the party seeking to terminate to have
         performed its obligations under this Agreement; or

                  (iii)    unless terminated pursuant to subsection "(i)"
         above, by any Party in the event of a material breach by any other
         party of any representation or warranty in this Agreement (including
         the Schedules and Exhibits) or any certificate, instrument or other
         document delivered pursuant hereto by such party in any material
         respect, or a breach by any party of any covenant of such party set
         forth herein in any material respect and such breach continues for 15
         days after written notice thereof.

         9.10.    Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 9.9(i) hereof by Purchaser, on the one hand,
or Seller or Shareholder, on the other hand, written notice thereof shall
forthwith be given to the other Parties specifying the provision hereof
pursuant to which such termination is made, and this Agreement shall become
void and have no effect upon the other Parties delivery of confirmation to the
terminating Party of their agreement to terminate this Agreement. If Purchaser,
Seller or Shareholder terminate this Agreement pursuant to Section 9.9(iii)
then the terminating party shall have the right to pursue all of its legal
remedies for breach of contract.



                                    - 22 -
<PAGE>   23

         9.11.    Bulk Sales Act. Seller has requested and Purchaser has agreed
to waive any compliance, if applicable, with respect to the applicable Bulk
Sales Act(s) or statutes. In exchange for said waiver, the Seller shall
indemnify and hold Purchaser harmless from and against any and all claims,
actions, causes of action, liabilities or judgements which may be asserted, or
recovered against the Purchaser, by reason of the Purchaser's waiver or the
Seller's non-compliance, if applicable, with any applicable Bulk Sales
legislation.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the day and year first above written.

                               PURCHASER:

                                   Witness Systems, Inc.



                                   By:   /s/ Jon W. Ezrine
                                         ---------------------------------------

                                   Name: Jon W. Ezrine
                                         ---------------------------------------

                                   Title: Chief Financial Officer
                                         ---------------------------------------


                               SELLER:

                                   Advanced Integrated Recorders, Inc.



                                   By:   /s/ R. Nim Evatt
                                         ---------------------------------------

                                   Name: R. Nim Evatt
                                         ---------------------------------------

                                   Title: President and Chief Executive Officer
                                         ---------------------------------------


                      [SIGNATURES CONTINUED ON NEXT PAGE]



                                    - 23 -
<PAGE>   24

                                SHAREHOLDER:

                                    Formation, Inc.



                                    By:   /s/ R. Nim Evatt
                                       -----------------------------------------

                                    Name:  R. Nim Evatt
                                         ---------------------------------------

                                    Title: President and Chief Executive Officer
                                          --------------------------------------



                                    - 24 -

<PAGE>   25




                           SCHEDULES OF THE SELLER TO

                            ASSET PURCHASE AGREEMENT

                                     AMONG

                             WITNESS SYSTEMS, INC.,


                      ADVANCED INTEGRATED RECORDERS, INC.

                                      And

                                FORMATION, INC.

                                     Dated

                               September 30, 1999
<PAGE>   26

                            SCHEDULES OF THE SELLER

                                     TO THE

                            ASSET PURCHASE AGREEMENT


         The contents of the following Schedules are (i) exceptions to the
representations, warranties and covenants of the Seller as set forth in the
Asset Purchase Agreement (the "Agreement") or (ii) descriptions referred to in
the Agreement. Capitalized terms used and not otherwise defined herein shall
have the meanings given to such terms in the Agreement.

         Schedule numbers used herein correspond to section numbers in the
Agreement. Any matter disclosed in any part of the Seller's Schedules shall
constitute disclosure for the purposes of all of the Seller's Schedules and
representations and warranties contained in the Agreement regardless of whether
such matter is specifically cross-referenced or scheduled with respect to a
particular representation or warranty so long as the manner and extent of such
disclosure is sufficient to identify the facts and circumstances sought to be
disclosed in such other Schedules or with respect to such other representation
or warranty. The disclosure of any matter in the Schedules shall not
necessarily be deemed an indication that such matter is material or is required
to be disclosed. Headings have been inserted on the sections of the Schedules
for convenience of reference only and shall be given no substantive or
interpretive effect whatsoever.

         To the extent that any representation or warranty contained in the
Agreement is limited or qualified by the materiality of the matters to which
the representation or warranty is given, the inclusion of any matter in the
following Schedules does not constitute a determination by the Seller that such
matters are material. Nor in such cases where a representation or warranty is
given or other information is provided shall the disclosure of any matter in
the following Schedules imply that any other, undisclosed matter having a
greater value or other significance is material.

         The inclusion in the following Schedules of any matter or document
shall not imply any representation, warranty or undertaking not expressly given
in the Agreement nor shall such disclosure be taken as extending the scope of
any of the representations or warranties. Nothing in the following Schedules
constitutes an admission of any liability or obligation of the Seller to any
third party, nor an admission against the Seller's interests.
<PAGE>   27

                               Index to Schedules

<TABLE>
<CAPTION>
Schedules                  Description
- ---------                  -----------
<S>                        <C>
1.4                        Current Employees
1.5                        Office Space and Testing Equipment
2.5                        Allocation of Purchase Price
4.3                        Tax Matters
4.4                        Permitted Encumbrances
4.5(b)                     Registration and Agreements
4.5(c)                     Ownership and Right to License
4.5(d)                     Performance
4.5(e)                     Millennium Compliance
4.5(f)                     Source Code Recipient
4.7                        Litigation
4.9                        Consents and Approvals
</TABLE>



                                     - 3 -
<PAGE>   28

                                  Schedule 1.4

                               Current Employees

                  The current employees to whom Purchaser may offer employment
are as follows: Jim Albert, Jeffrey Iannone and Daniel Spohrer.



                                     - 4 -
<PAGE>   29

                                  Schedule 1.5

                       Office Space and Testing Equipment

                  Office Space: The office space will be located at 121
Whittendale Drive, Building 1, Moorestown, NJ 08057. Three offices will be
required. The current lab space is 20' x 35'. This space will be shared between
Seller development and Purchaser development, with the Purchaser development
occupying no more than 50% of this space.

                  Equipment: Seller will provide a desktop PC in each of the
three offices as well as five AIR2000 development workstations for the
Purchaser development.



                                     - 5 -
<PAGE>   30

                                  Schedule 2.5

                          Allocation of Purchase Price

The purchase price shall be allocated to software and each party acknowledges
that the purchase of this software does not constitute the acquisition of an
applicable trade or business and does not necessitate the filing of Form 8594
as required under section 1060 of the Internal Revenue Code of 1986, as
amended.

Assigned Software = $2,500,000



                                     - 6 -
<PAGE>   31
                                  Schedule 4.3

                                  Tax Matters

None.



                                     - 7 -
<PAGE>   32

                                  Schedule 4.4

                             Permitted Encumbrances

                  None except with regard to end-user license rights that have
been granted to Seller's customers in the ordinary course of business.



                                     - 8 -
<PAGE>   33

                                Schedule 4.5(b)

                          Registration and Agreements

1.       A Copyright Registration Application was filed on or about December
         22, 1998, seeking a federal copyright in the text of the user's manual
         and computer program for the AIR2000 software. On the same date, a
         Certificate of Registration was issued. The registration number is TX
         4-859-985.

2.       An Application for Registration of AIR2000 Trademark was filed on or
         about October 5, 1998.

3.       An Amendment to the Application for Registration of the AIR2000
         Trademark was filed on or about July 29, 1999.

4.       Customer License Agreements: There are no source code escrow
         agreements or agreements granting a source code license. Discussions
         have occurred between Lockheed Martin and Seller regarding
         establishing a source code escrow at some point in the future;
         however, as of this date, this has not yet been accomplished.
         Additionally, certain customers have seen a portion of the Assigned
         Software source code as set forth on Schedule 4.5(f). Seller, in the
         ordinary course of business, grants object code licenses to end-users
         and to integrators which integrate the Assigned Software into their
         product for sale to their respective customers. These licenses are
         granted according to Seller's standard License Agreement for Advanced
         Integrated Recorders' Software. The Seller's end-users are: U.S. Navy,
         Telephonics, Digicomp, Lockheed Martin, IBM - United Kingdom, Mitre

5.       Distributor Agreements: All Customer License Agreements described in
         number 4 above include distribution rights except with regard to the
         U.S. Navy.

6.       Supplier License Agreements:  None.



                                     - 9 -
<PAGE>   34

                                Schedule 4.5(c)

                         Ownership and Right to License

                  Seller has granted liens on all of its assets to Silicon
Valley Bank ("SVB"), pursuant to a Loan and Security Agreement dated July 10,
1998 between SVB, Seller and Shareholder; and to Shareholder, pursuant to an
Asset Purchase Agreement dated May 1, 1997 between Shareholder and Seller.
Seller will deliver to Purchaser a copy of a UCC-3 partial release executed by
SVB in respect of the Purchased Assets and a copy of a copyright lien release
executed by SVB in respect of the copyright referred to on Schedule 4.5(b) on
the Closing Date. Promptly following the Closing Date, SVB will file said UCC-3
and copyright lien releases. Seller shall also deliver a copy of an executed
lien release by Shareholder in respect of the Purchased Assets.

                  The software that is licensed by Seller from third parties
and incorporated into the Assigned Software is as follows:

                  1.       ASP132
                  2.       Catalyst Socket Tools Library
                  3.       Date and Time Picker, Gauge Package
                  4.       Tardis 2000 for Windows NT
                  5.       Windows NT
                  6.       Ghost Software
                  7.       Bit Stream Synchronous SW
                  8.       Visual Basic Language Mgr Pro
                  9.       Various drivers and services from certain third
                           parties are required by Windows to support the
                           various adapter cards in the Windows NT environment.

The above-referenced software products have been licensed to Seller according
to shrink wrap license agreements.

                  The individuals who are compensated at an annual rate of more
than $30,000 and who have contributed to the development of the Assigned
Software are as follows:

                  1.       Jim Albert
                  2.       Ira Weinstein
                  3.       Amy Turner
                  4.       Jeffrey McClenton
                  5.       Jeffrey Iannone
                  6.       Daniel Spohrer



                                    - 10 -
<PAGE>   35

                                Schedule 4.5(d)

                                  Performance

                  The Assigned Software is written in the language and
developed for use on the hardware as set forth on Exhibit A.

                  There have been several issues with the Assigned Software
which have been addressed and resolved as follows:

                  1.     E-mails Received From Customers:

                  A.     Shortages - For Navy Lot 1, there were shortages in
the area of mechanical parts and some parts were dimensioned incorrectly. This
problem was solved in Lot 2 by pre-assembling the Reproducer Rack at AIR before
shipment to the customer, improving the outgoing QA inspection of AIR2000
systems and imposing corrective action on Seller's vendor of mechanical
components.

                  B.     Site Problems - Camp Pendleton had installation and
operational problems. Eventually the entire recorder system was replaced. This,
coupled with changes implemented in subsequent software releases, has solved
their problems. Additionally, Pensacola had problems on installation. All of
the problems raised have been fixed either by component replacement or software
changes.

                  C.     FSK Failure - FSK failed to work with the FSK display
types used at Charleston and several other sites. This problem was fixed at
Charleston and subsequently released.

                  D.     UPS Failure - The UPS failed to come back on line when
powered by a backup generator. It turned out that a configuration dipswitch
setting was not set properly for use in an environment with backup generators.
Changes to the UPS configuration were implemented in the factory as well as in
the technical manual.

                  E.     Software Failures - There were some problems in the
"Media Scheduler" functionality discovered by the Navy. A software problem
resulted in a failure in the Navy's Y2K verification test. These problems have
been addressed in a subsequent software release.

                  F.     Faulty components needing replacement - Keyboards and
tape drives have been replaced. Some mechanical components have been replaced.



                                    - 11 -
<PAGE>   36


                  2.     Customer Handling Process

                  Seller has a general procedure in place for handling customer
complaints. A customer reports a problem via the AIR 800 number, or
alternatively via an e-mail to Seller's support staff. An engineer will then
call the customer to help fix the problem over the phone.

                 Operational issues are typically corrected in the following
manner: A request to the customer for an error trace log may be initiated. Upon
receipt of the trace log, the engineer will analyze the failure and contact the
customer with the results.

                 If the solution to the problem involves replacing a failed
component, the engineer will forward the problem to QA. QA will contact the
customer, and assign an RMA number for the return of the failed components.

                 If the solution to the problem involves a software
modification, the engineer will attempt to provide a workaround. A PTR will be
assigned to the problem. Depending on the urgency of the problem and the
availability of a workaround, the problem may be fixed immediately via a hot
patch, or in a subsequent maintenance or new feature release.

                 Feature suggestions offered by the customer are entered into
the PTR database for consideration in future product releases.

                 All customer problems handled via the foregoing process are
entered into the Support Database.

                  3.     Support Database

                  There is some overlap between the e-mails discussed above and
the problems noted in the Support Database. While the majority of the problems
reported are resolved, some are open waiting for failed components replaced
under RMA to be returned, some are software incidents which are in process, and
some are waiting for customer input (i.e. trace logs).



                                    - 12 -
<PAGE>   37

                                Schedule 4.5(e)

                             Millennium Compliance

None.



                                    - 13 -
<PAGE>   38

                                Schedule 4.5(f)

                             Source Code Recipient

                  There are no source code license agreements. However, certain
customers have seen a small portion of the Assigned Software source code only
for purposes of compiling the Assigned Software. These entities are required by
Seller to delete the source code once the compiling has been completed.
Furthermore, each of these entities has entered into a Non-Disclosure Agreement
with regard to the Assigned Software. The only entities that have seen this
portion of the source code are Lockheed Martin and Digicomp. Seller will use
commercially reasonable efforts to obtain from Lockheed Martin and Digicomp
agreements to delete the source code or written confirmation that the source
code has been deleted, and will provide said agreements or written
confirmations to Purchaser within 90 days from the Closing Date. Additionally,
Seller will use commercially reasonable efforts to obtain a Non-Disclosure
Agreement with Digicomp and will provide said Non-Disclosure Agreement to
Purchaser within 90 days from the Closing Date.



                                    - 14 -
<PAGE>   39

                                  Schedule 4.7

                                   Litigation

None.



                                    - 15 -
<PAGE>   40

                                  Schedule 4.9

                             Consents and Approvals

1.       Consent is required under the Loan and Security Agreement dated July
         10, 1998 among Silicon Valley Bank, Shareholder and Seller, but will
         be obtained by Seller on or before the Closing Date.


2.       Consent is required under the Asset Purchase Agreement dated May 1,
         1997 between Shareholder and Seller, but will be obtained by Seller on
         or before the Closing Date.



                                    - 16 -
<PAGE>   41

                   Exhibit A           Description of Assigned Software

                   Exhibit B           License Agreement

                   Exhibit C           Amendment to Amended and Restated
                                       Registration Rights Agreement,
                                       dated August 2, 1999

                   Exhibit D           Restated Amendment No. 1 to the
                                       Amended and Restated Registration
                                       Rights Agreement, dated August 2,
                                       1999

                   Exhibit E           Escrow Agreement

                   Exhibit F           Certificate of Seller

                   Exhibit G           Certificate of Purchaser

                   Exhibit H           Bill of Sale

                   Exhibit I           Assignment and Assumption Agreement

                   Exhibit J           Seller's Opinion of Counsel

                   Exhibit K           Instrument of Accession

                   Exhibit L           Purchaser's Opinion of Counsel

                   Exhibit M           Assigned Software Specification



                                    - 17 -
<PAGE>   42

                                   EXHIBIT A

                     To the Asset Purchase Agreement among
                 Witness Systems, Inc. and Advanced Integrated
                      Recorders, Inc. and Formation, Inc.

                        Description of Assigned Software



                  Product Description: The Assigned Software Marketed under the
trademark "AIR2000" is a complete Record and Replay solution for a variety of
interfaces including: Voice, Bit Synchronous Serial, FSK (Navy Proprietary),
TCP/IP and UDP/IP sockets, and X-11 Screen Capture. The architecture of the
Assigned Software is expandable to accommodate additional interfaces. The
Assigned Software consists of the following deliverables:

                  -        AIR2000 System Software (i.e. the main application)
                           that runs on the AIR2000 Rackmount System Hardware.

                  -        AIR2000 DXLC, which runs on a Unix Workstation to
                           form an interface layer between the AIR2000 System
                           Software and X-11 R6 server resident on the Unix
                           workstation for X-11 screen record and replay.

                  -        AIR2000 O/S Image, which is a binary image of the
                           Operating System, Drivers, Services and Middleware
                           required to interface and run the AIR2000 System
                           Software on the AIR2000 Rackmount System Hardware
                           (i.e. it is the "platform software" required to run
                           the application).

                  -        AIR2000 configuration Floppies which are generated
                           by the AIR2000 Configuration Manager Program. The
                           configuration floppies contain date used to
                           configure both the Application and the O/S Image for
                           use at a specific customer site.

                  -        AIR2000 Diagnostic Floppy/Emergency Boot Floppy,
                           which are used for maintenance of the system.

                  The Assigned Software is developed in Microsoft Visual C++
and Visual Basic, utilizing the Microsoft Visual Development Studio
environment. AIR2000 DXLC is developed under Unix with OSF gnu compilers. The
hardware platform system is the AIR2000 Rackmount System. The Assigned Software
is Windows NT based, and will contain either a Pentium or Pentium II processor
with a minimum speed of 200Mhz. The platform is based on an industrial 19"
rackmountable PC with passive backplane technology. The processor is located on
a Single Board Computer card assembly located in a designated PCI/ISA slot on
the backplane. Tape drives available for use in the platform are the Exabyte
Mammoth I (8mm AME tape technology) and the Seagate Scorpion (DDS-3 tape
technology). The Exabyte EZ-17 Tape Library is also available as an alternative
to a tape transport. Interfaces to the user's environment are provided



                                    - 18 -
<PAGE>   43

by technology specific interface adapter cards and other cards inserted into
the backplane for Analog Voice; Bit Synchronous Serial; TCP; UDP/IP or Screen
Capture via Ethernet or CDDI; and External Alarm.

                  The software that is licensed by Seller from third parties
and incorporated into the Assigned Software is as follows:

                  1.       ASP132
                  2.       Catalyst Socket Tools Library
                  3.       Date and Time Picker, Gauge Package
                  4.       Tardis 2000 for Windows NT
                  5.       Windows NT
                  6.       Ghost Software
                  7.       Bit Stream Synchronous SW
                  8.       Visual Basic Language Mgr Pro
                  9.       Various drivers and services from certain third
                           parties are required by Windows to support the
                           various adapter cards in the Windows NT environment.


The Assigned Software includes all object code, source code, technical manuals,
compilation procedures, execution procedures, flow charts, programmers notes,
user manuals and other documentation thereof, whether in machine readable form,
programming language or any other language or symbols and whether stored,
encoded, recorded or written on disk, tape, film, memory device, paper or other
media of any nature related to the Assigned Software.



                                    - 19 -
<PAGE>   44

                                   EXHIBIT B

                     To the Asset Purchase Agreement among
                 Witness Systems, Inc. and Advanced Integrated
                      Recorders, Inc. and Formation, Inc.

                               LICENSE AGREEMENT

                                 [See Attached]



                                    - 20 -

<PAGE>   45
                           SOFTWARE LICENSE AGREEMENT


         THIS SOFTWARE LICENSE AGREEMENT (the "Agreement") entered into this
30th day of September, 1999 ("Effective Date") by and between Witness Systems,
Inc., a corporation existing under the laws of the state of Delaware with its
principal address at 1105 Sanctuary Parkway, Suite 210, Alpharetta, Georgia
30004 ("WSI"), and Advanced Integrated Recorders, Inc., a corporation existing
under the laws of the state of Delaware with its principal address at 121
Whittendale Drive, Building 1, Moorestown, New Jersey 08057 ("Air").

                                    RECITALS

         A.       WSI is the owner of a software application identified on
Exhibit A (the "Software"); and

         B.       Air is desirous of obtaining a license to use the Software
under the terms of this Agreement and WSI is willing to license the Software to
Air under the terms of this Agreement.

         NOW THEREFORE, in consideration of the terms and covenants herein, and
other good and valuable consideration, WSI and Air agree as follows:

1.       LICENSE.

         1.1.     GRANT OF LICENSE. Subject to the terms and conditions herein,
WSI hereby grants to Air, and Air hereby accepts, a world-wide, fully paid,
irrevocable and non-cancelable royalty free and perpetual license to use,
reproduce, modify, distribute and sublicense (except as provided in Section 5)
the Software (in object code and source code form) and create derivative works
(as defined in the U.S. Copyright Act, as amended) ("Derivative Works") of the
Software in the following markets:

                  (i)      the Air Traffic Control Market defined in Exhibit
         B-1 (such license relative to the Air Traffic Control Market is
         referred to as the "Air Traffic Control Market License");

                  (ii)     each market segment of the Air Exclusive Field
         defined in Exhibit B-2 (each such market segment is referred to as a
         "Market Segment" and are collectively referred to as the "Market
         Segments," and such license relative to each Market Segment is
         referred to as the "Market Segment License"); and

                  (iii)    any market other than the markets covered by the WSI
         Exclusive Field (such WSI Exclusive Field being defined in Exhibit
         B-3), Air Traffic Control Market, or the Market Segments (such other
         markets are referred to collectively as the "Other Markets," and such
         license relates to the Other Markets is referred to as the "Other
         Markets License").

         1.2.     APPOINTMENT OF DISTRIBUTORS. WSI grants Air the right to
further grant to parties who will further sublicense or distribute the Software
(each, a "Distributor" and collectively, the "Distributors") the rights in
Section 1.1 and this Section 1.2, in whole or in part; provided, however, that
(i) WSI is provided written notice of the name of the Distributor that is
appointed; and (ii) Air enters into a written agreement with each Distributor
that is consistent with the rights granted in Section 1.1 and includes
provisions that are substantially similar to the provisions of Sections 1.2
<PAGE>   46

and 1.3, if applicable, and 1.5, 1.6, 1.8, 3.1, 3.3, 3.5, 4, and 5 as if such
provisions applicable to Air were with respect to the Distributor.
Notwithstanding the terms of this paragraph, Air shall have no obligation to
provide WSI the name of a Distributor if the Distributor is only granted a
license to the object version of the Software and the Distributor is only
authorized to distribute the object version of the Software to a limited number
of end users identified to Air through one or more of a series of other
Distributors.

         1.3.     SOURCE CODE LICENSES GRANTED BY AIR AND ITS DISTRIBUTORS.
Except with respect to Compilation Licenses, defined in Section 1.6 below, and
Section 1.2 above, the right of Air and its Distributors to sublicense Software
source code under the license granted in Section 1.1 and Section 1.2 with
respect to the Software source code is contingent upon Air's and the
Distributor's compliance with the following requirements:

         (i)      WSI is provided written notice of the name of the sublicensee
         to whom the Software source code license is granted;

         (ii)     The Software source code is only licensed and distributed to
         Air's licensees ("Source Code Licensees") after a written agreement is
         executed by the Source Code Licensee that includes provisions
         substantially in the form of Sections 1, 2(b), (c), (d), (f) and (g),
         4, and 6 (the "Required Provisions"), set forth on Exhibit C (the
         "License Agreement"), Exhibit D (the "Source Code License
         Supplement"), and Exhibit E, if applicable; and

         (iii)    Air provides WSI prompt written notice of any material breach
         or alleged material breach by the Source Code Licensee of the license
         provisions of the Source Code License Agreement and Air cooperates
         with WSI's request of Air to enforce the license provisions of Source
         Code License Agreement if WSI reasonably believes that such breach has
         occurred.

         1.4.     EXCLUSIVITY.

         (a)      DEFINITION; EXCLUSIVE; DISTRIBUTOR. As used in this
Agreement, the term "Exclusive" has the meaning in subparagraph (i) below as
such term is used in connection with the Air Exclusive Field, and the meaning
in subparagraph (ii) below as such term is used in connection with the Air
Traffic Control Market. For purposes of Section 1.4, "distributor" means any
third party which is not an end user.

                  (i)      AIR EXCLUSIVE FIELD. WSI shall use its reasonable
efforts to obtain the written agreement of WSI's existing (as of the Effective
Date) and future distributors not to distribute the Software, in whole or in
part, to third parties in or to a Market Segment. If (i) WSI's distributors do
not agree in writing to the limitations set forth in the preceding sentence, or
(ii) WSI's distributors agree to such limitations, but in any event distribute
the Software, in whole or in part, in or to a Market Segment, then WSI shall
pay Air the royalties set forth in Section 2.2(ii) applicable to such
distribution of Software by WSI's distributors. WSI shall not distribute the
Software, in whole or in part, directly to end users in or to a Market Segment
unless WSI pays Air the royalties set forth in Section 2.2(i).

                  (ii)     AIR TRAFFIC CONTROL MARKET. WSI shall use its
reasonable efforts to obtain the written agreement of WSI's existing (as of the
Effective Date) and future distributors not to distribute the Software, in
whole or in part, to third parties in the Air Traffic Control Market. If (i)
WSI's distributors do not agree in writing to the limitations set forth in the
preceding sentence, or



                                     - 2 -
<PAGE>   47

(ii) WSI's distributors agree to such limitations, but in any event distribute
the Software, in whole or in part, in or to the Air Traffic Control Market,
then, WSI shall pay Air the royalties set forth in Section 2.3(ii) applicable
to such distribution of Software by WSI's distributors. WSI shall not
distribute the Software, in whole or in part, directly to end users in the Air
Traffic Control Market, except that if Witness unintentionally and
inadvertently sells or distributes the Software or if an end user uses the
Software, in whole or in part, in the Air Traffic Control Market, then WSI
shall pay Air the royalties set forth in Section 2.3(i).

         (b)      DEFINITION; NON-EXCLUSIVE. As used in this Agreement, the
term "Non-exclusive" has the meaning in subparagraph (i) below as such term is
used in connection with the Air Exclusive Field, and the meaning in
subparagraph (ii) below as such term is used in connection with the Air Traffic
Control Market and the meaning in subparagraph (iii) below as such term is used
in connection with the Other Markets License.

                  (i)      AIR EXCLUSIVE FIELD. WSI and its distributors will
not owe royalties for and will not be restricted in any way from distributing
the Software, in whole or in part, in a Market Segment.

                  (ii)     AIR TRAFFIC CONTROL MARKET. WSI and its distributors
will not owe royalties for and will not be restricted in any way from
distributing the Software, in whole or in part, to the Air Traffic Control
Market.

                  (iii)    OTHER MARKET LICENSE. WSI and its distributors will
not owe royalties for and will not be restricted in any way from distributing
the Software, in whole or in part, to the Other Markets.

         (c)      AIR TRAFFIC CONTROL MARKET LICENSE. Air's Air Traffic Control
Market License shall be Exclusive as of the Effective Date and shall continue
to be Exclusive through and until such time as (i) WSI (or its successor or
potential purchaser) pays Air $2,500,000 in cash, and (ii) upon the occurrence
of a WSI Change of Control (as defined below). Upon the occurrence of both of
the foregoing events, the Air Traffic Control Market License shall immediately
and automatically convert from an Exclusive license to a Non-exclusive license.
As used in this paragraph, a "WSI Change of Control" means the sale to another
person or entity of 50% or more of the voting securities of WSI, the sale to
another person or entity of all or substantially all of WSI's assets, or a
person or entity obtains the right to appoint or elect a majority of WSI's
Board of Directors.

         (d)      AIR EXCLUSIVE FIELD LICENSE. With respect to each Market
Segment, Air's Air Exclusive Field License in that Market Segment shall be
Exclusive as of the Effective Date and shall continue to be Exclusive through
and until such time as (i) the cumulative amount of royalties paid by WSI to
Air according to the terms of Section 2.2 for that Market Segment equal to or
greater than $400,000, or (ii) the cumulative amount of royalties paid by WSI
to Air according to the terms of Section 2.2 for all Market Segments is equal
to or greater than $1,000,000. Upon the occurrence of the event described in
item "(i)" of the preceding sentence, Air's Exclusive for the applicable Market
Segment shall immediately and automatically convert from an Exclusive license
to a Non-exclusive license; and upon the occurrence of the event described in
item "(ii)" of the preceding sentence, Air's Exclusive for all Market Segments
shall immediately and automatically convert from an Exclusive license to a
Non-exclusive license to the extent the Market Segments have not previously
converted to a Non-exclusive license.



                                     - 3 -
<PAGE>   48

         (e)      OTHER MARKETS LICENSE. Air's Other Markets License shall be
Non-exclusive.

         (f)      LIMITATION ON REMEDIES. Notwithstanding the other terms of
this Agreement, Air shall not be entitled to injunctive or equitable relief of
any kind for a breach or violation of the exclusivity terms set forth in this
Agreement by WSI, WSI's distributors, and their respective Software licensees.
The royalties set forth in Section 2 shall be Air's sole and exclusive remedy
in the event of any breach or violation of the exclusivity terms set forth in
this Agreement by WSI, WSI's distributors, and their respective Software
licensees plus reasonable and verifiable fees (including attorneys fees), costs
and expenses incurred in the enforcement of its rights under this Agreement.

         (g)      ACCELERATED TERMINATION OF EXCLUSIVE RIGHTS. Upon the
occurrence of a WSI Change of Control (as defined in Section 1.4(c)), WSI, its
successor, or potential purchaser may pay in cash the remaining balance of the
amounts set forth in Section 1.4(d) to convert Air's Exclusive license in one
or more Market Segments to a Non-exclusive license.

         1.5.     TRADEMARKS. Air may not use any of the identifying marks of
WSI, including without limitation, any trademarks, service marks or trade names
of WSI, without the express prior written consent of WSI. WSI may not use any
of the identifying marks of Air, including without limitation, any trademarks,
service marks or trade names of Air, without the express prior written consent
of Air.

         1.6.     AIR SUBLICENSE AGREEMENTS. Air shall require sublicensees of
the Software to execute a written agreement that is (i) not inconsistent with
this Agreement, and (ii) includes, at a minimum, provisions that are
substantially similar to the terms of (a) the Required Provisions of the
License Agreement, (b) if applicable, the Integrator License, Distributor
License or Compilation License, and (c) if Air grants a license to modify
source code, the Source Code License Supplement. "Integrator License" means a
license to integrate the Software into other products, as more fully described
in Exhibit E; "Distributor License" means a license to further distribute the
Software, as more fully described in Exhibit E; "Compilation License" means the
right to use the source code exclusively to compile the Software into object
code, as more fully described in Exhibit E. Notwithstanding the foregoing, Air
need not replace its agreements with licensees as of the Effective Date,
provided, that all such licensees are listed on Exhibit F and all such
licensees are licensing the Software only according to the terms of Air Shrink
Wrap License Agreement attached to Exhibit F.

         1.7.     LIMITATION ON SOURCE CODE LICENSES GRANTED BY WSI.
Notwithstanding anything herein to the contrary, for a period of twenty four
(24) months after the Effective Date, WSI agrees not to license the Software
source code unless WSI enters into a written agreement with the licensee of the
Software source code that provides for the Licensee's agreement to be bound by
the terms of exclusivity set forth in Section 1.

         1.8.     WSI AUDIT RIGHTS. With respect to Air's Software license
agreements with Air's Distributors (whether the Software source code or object
code is licensed) and with respect to Air's agreements with its Source Code
Licensees and with respect to Air's agreement with a permitted assignee of this
Agreement, WSI shall have the right to one of the following options, such
option to be determined by Air: (i) have an independent third party who is
reasonably acceptable to Air audit, upon reasonable notice to Air, the Required
Provisions and the provisions of the Integrator License,



                                     - 4 -
<PAGE>   49

Distributor License, Compilation License and Source Code Supplement; permitted
assignees; provided that such third party is obligated to terms of
non-disclosure protecting the confidentiality of the records and documents
reviewed and that such third party provides WSI only a summary of the results
of such audit, excluding the identity of the parties (other than Air) thereto;
or (ii) Air shall provide WSI a copy of Air's agreements with the Distributor,
Source Code Licensee, or permitted assignee, provided, that Air may redact any
confidential information in said agreements.

2. FEES.

         2.1.     AIR LICENSE FEES. The rights granted to Air in this Agreement
are royalty-free. Air shall be liable for all sales, use, value-added or
similar taxes payable on the Software arising from Air's license and
distribution of the Software.

         2.2.     ROYALTIES; AIR EXCLUSIVE FIELD.

                  (i)      WSI DIRECT LICENSES. During the term that Air's
rights in a Market Segment are Exclusive, WSI shall pay Air three percent (3%)
of (x) all net Software license fees received by WSI from end users in respect
of that Market Segment less (y) the amounts described in Section 2.4.

                  (ii)     DISTRIBUTOR LICENSES. During the term that Air's
rights in a Market Segment are Exclusive, WSI shall pay Air three percent (3%)
of (x) all net Software license fees received by WSI from WSI distributors in
respect of an application in that Market Segment, less (y) the amounts
described in Section 2.4.

         2.3.     ROYALTIES; AIR TRAFFIC CONTROL MARKET.

                  (i)      WSI DIRECT LICENSES. During the term that Air's Air
Traffic Control Market License is Exclusive, WSI shall pay Air ten percent
(10%) of (x) all net Software license fees received by WSI from end users in
respect of the Air Traffic Control Market, less (y) the amounts described in
Section 2.4.

                  (ii)     DISTRIBUTOR LICENSES. During the term that Air's Air
Traffic Control Market License is Exclusive, WSI shall pay Air ten percent
(10%) of (x) all net Software license fees received by WSI from WSI's
distributors in respect of the Air Traffic Control Market, less (y) the amounts
described in Section 2.4.

         2.4.     ROYALTY DEDUCTIONS. WSI shall deduct from all amounts owed to
Air hereunder, all taxes, duties, sales taxes, value added taxes, and similar
taxes and duties arising from WSI's and its distributor's distribution and
license of the Software. WSI shall have the right to make reasonable allowances
and price adjustments and to accept reasonable returns from WSI's and its
distributor's licensees. In each case, WSI shall charge back to Air's account
any amounts previously paid or credited to Air with respect to such allowances,
adjustments, or returns.

         2.5.     SOFTWARE LICENSE FEES. WSI may determine in its sole
discretion the price offered for the Software. WSI may bundle the Software with
other products (the "Other Products") and offer the resulting product (the
"Bundled Product"). Air shall pay the royalties set forth in this Section 2
based on the proportionate value of the Software in comparison to the
proportionate value of the Other Products. The fees that WSI generally charges
for the Other Products and the Software separately shall be presumed to
represent the relative values of the unbundled products.



                                     - 5 -
<PAGE>   50

         2.6.     PAYMENT TERMS. No later than thirty (30) days after the last
day of each calendar quarter (the "Reported Calendar Quarter"), WSI will
deliver to Air (i) a report indicating those licenses that WSI and its
distributors granted during the Reported Calendar Quarter that WSI owes a
royalty according to the terms of this Agreement together with supporting
documentation, and (ii) payment in U.S. dollars in immediately available funds
of the applicable royalty amount according to the terms of this Agreement. Upon
termination of all of Air's Exclusive licenses set forth herein, WSI shall no
longer be obligated to deliver the report described in this paragraph.

         2.7.     AIR AUDIT RIGHTS. Upon delivery of reasonable written notice
to WSI, Air and its representatives shall from time to time have the right to
have an independent third party reasonably acceptable to WSI audit all records
and documents that are related to the Software licenses granted by WSI and its
distributors in the Air Traffic Control Market and the Market Sections during
the time that Air has an Exclusive license in such markets and for a period
equal to the statute of limitation in Georgia pertaining to contract claims.
WSI shall grant such access to such records and documents during the times
described in the preceding sentence.

3.       PROPRIETARY RIGHTS; SOFTWARE.

         3.1.     Air hereby acknowledges and agrees that the Software,
excluding any public domain code and third party code, is the exclusive
property of WSI subject to the rights of Air and that notwithstanding any other
provision of this Agreement, title to the Software, excluding any public domain
code and third party code, shall remain exclusively vested in WSI. Air hereby
acknowledges and agrees that WSI shall retain all right, title and interest in
and to any modifications or improvements made by WSI to the Software, and Air
shall have no right or license in or to such Derivative Works.

         3.2.     WSI hereby acknowledges and agrees that Air shall retain all
right, title and interest in and to any modifications or improvements made by
Air to the Software, and WSI shall have no right or license in or to such
Derivative Works.

         3.3.     WSI reserves all rights not expressly granted herein. Except
as set forth in this Agreement, no express or implied license or right of any
kind is granted to Air regarding the Software.

         3.4.     Air shall take reasonable measures, at WSI's cost and expense
if such measures are outside of the ordinary course of Air's business, to
protect the ability of either WSI or Air or both, to prevent unauthorized
persons or entities from knowing, using, receiving, reproducing, marketing,
selling, distributing, transferring, translating, modifying, disassembling,
decompiling, or reverse engineering the Software or creating Derivative Works
based on the Software.

         3.5.     Air shall include the following notice on the Software's
splash screens, any media that contains the Software, and related
documentation:

         "Portions. Copyright (C) [INSERT DATE OF FIRST PUBLICATION]-1999 by
Witness System, Inc. All rights reserved worldwide."

         3.6.     Air agrees to notify WSI of any infringements, unauthorized
use or possession of the Software, WSI's other Confidential Information, or of
any patents, copyrights, trade secrets, or other proprietary or property rights
belonging to WSI. Air agrees to provide reasonable assistance to



                                     - 6 -
<PAGE>   51

WSI, at WSI's cost and expense, in connection with any matter pertaining to
protection of WSI's patents, copyrights, trade secrets, or other proprietary or
property rights belonging to WSI.

4.       CONFIDENTIALITY AND NONDISCLOSURE.

         4.1.     WSI'S CONFIDENTIAL INFORMATION. Air hereby acknowledges and
agrees that the Software source code, excluding any public domain code and
third party code, together with all information, material and data contained
therein, is confidential and proprietary to WSI (collectively, the "WSI
Confidential Information").

         4.2.     NONDISCLOSURE. Except as expressly authorized herein, Air
hereby agrees that it shall hold in strict confidence, and shall not permit the
disclosure or reproduction of the WSI Confidential Information and all
information or data contained therein, including without limitation,
proprietary computer programs, documentation, generated output, modifications
and conversions. The terms of the non-disclosure obligations set forth in this
Section 4 shall remain in effect for as long as such WSI Confidential
Information remains a trade secret, but in any event for a period of five (5)
years after the WSI Confidential Information is disclosed to Air; except that
notwithstanding the above such terms shall not apply to information that (i) is
disclosed to Air by a third party under no obligation of confidentiality to
WSI, (ii) is or becomes generally known through no fault of Air; or (iii) is
approved for release by WSI.

         4.3.     RESTRICTION OF ACCESS. Air agrees to take all commercially
appropriate and necessary steps to insure that unauthorized persons shall not
have access to the Software source code Air and agrees to restrict access to,
and the display of, all materials, information and data referred to in Sections
4.1 and 4.2 above to such employees, independent contractors and sublicensees
of Air who:

         (i)      need to have direct access to the Software source code or a
visual display thereof to enable Air or its sublicensees to utilize the
Software source code as contemplated by this Agreement; and

         (ii)      have agreed in writing to treat the Software source code and
such other material, information and data which WSI treats as being
confidential or proprietary in accordance with this Section 4 and to comply
with all other provisions of this Agreement.

5.       SUBLICENSE TERMINATION AND REMEDIES.

         5.1.     WSI may terminate a License Agreement or Source Code License
Supplement, respectively, (whether or not such agreement is with an end user or
a Distributor) upon the occurrence of either of the following events, or both,
with respect to such agreement:

         (i)      A Software sublicense is granted to a sublicensee that does
not comply with Section 1.6 hereof and Air or the Distributor granting such
sublicense, as the case may be, fails to correct the inconsistency within sixty
(60) days after WSI provides Air a written request to correct such
inconsistency.

         (ii)     A sublicensee commits a material breach of the Required
Provisions, Distributor License, Integrator License, or Compilation License or
the terms of the Source Code License Supplement and the sublicensee fails to
cure such breach within sixty (60) days after WSI provides Air written notice
of such breach. Upon termination of a sublicense, the sublicensee whose rights



                                     - 7 -
<PAGE>   52

are terminated shall promptly return all copies of the Software to Air or have
an officer of the sublicensee certify in writing that all copies of the
Software in the sublicensee's possession or control have been destroyed.

         5.2.     If a sublicensee continues to use or distribute the Software
after such termination or if Air, its Distributor or their sublicensees breach
the terms of Section 4, then WSI will not have an adequate remedy at law;
therefore, injunctive or other equitable relief (without the necessity of
posting bond) would be appropriate to restrain such unauthorized use or
disclosure, whether threatened or actual.

6.       RESPONSIBILITIES OF AIR.

         6.1.     Air shall be exclusively responsible for the supervision,
management and control of its use of the Software, including, but not limited
to, (i) assuming proper operating methods, (ii) establishing adequate back-up
plans, when permissible, and (iii) providing support to end users to whom it
distributes the Software.

         6.2.     Air acknowledges that as a part of its obligations to WSI,
that Air's agreement with its Distributors and Air's sublicensees may not (i)
impose any liabilities upon WSI, and (ii) grant any warranty of any kind to any
third party on behalf of WSI.

         6.3.     WSI may not (i) enter into any agreement with a third party
that imposes any liabilities on Air, or (ii) grant any warranty of any kind to
any third party on behalf of Air.

         6.4.     Upon WSI's request, Air shall enforce the terms of the
Required Provisions with its sublicensees, its Distributors, and its
Distributor's sublicensees. If Air decides to file a legal action against a
sublicensee, its Distributor, or its Distributor's sublicensee for a breach of
one or more of the Required Provisions, then prior to filing such action Air
shall provide WSI reasonable written notice of such action and shall provide
WSI an opportunity to join as a party to the litigation.

         6.5.     Air shall not be liable for any breach by any sublicensee
(including Distributors) or any third party of any provisions of this
Agreement, any sublicense agreement or otherwise; provided, however that
nothing in this paragraph shall limit the provisions of Section 6.4.

7.       WARRANTY DISCLAIMER; LIMITATION OF LIABILITY.

         THE SOFTWARE IS PROVIDED "AS-IS." WSI DISCLAIMS ALL WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
NEITHER AIR NOR WSI SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, OR
CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOST DATA OR USE OR LOST
PROFITS, HOWEVER ARISING, EVEN IF WSI OR AIR, AS APPLICABLE, HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES. WSI SHALL HAVE NO LIABILITY FOR DAMAGES
UNDER THIS AGREEMENT (WHETHER IN CONTRACT OR TORT) FOR THE SOFTWARE UNLESS SUCH
LIABILITY ARISES DIRECTLY FROM WSI'S BREACH OF THE TERMS OF SECTION 6.3 IN
WHICH CASE WSI'S LIABILITY SHALL BE LIMITED TO THE AMOUNT OF AIR'S DIRECT
DAMAGES ARISING THEREFROM. THE FOREGOING LIMITATION OF LIABILITY SHALL BE
APPLIED SEPARATE AND APART FROM ANY LIMITATION OF



                                     - 8 -
<PAGE>   53

LIABILITY IN ANY OTHER AGREEMENT. AIR SHALL HAVE NO LIABILITY FOR DAMAGES UNDER
THIS AGREEMENT (WHETHER IN CONTRACT OR TORT) UNLESS SUCH LIABILITY ARISES
DIRECTLY FROM AIR'S BREACH OF THE TERMS OF SECTION 6.2 IN WHICH CASE AIR'S
LIABILITY SHALL BE LIMITED TO THE AMOUNT OF AIR'S DIRECT DAMAGES ARISING
THEREFROM. WSI SHALL HAVE NO LIABILITY FOR DAMAGES UNDER THIS AGREEMENT
(WHETHER IN CONTRACT OR TORT) UNLESS SUCH LIABILITY ARISES DIRECTLY FROM WSI'S
BREACH OF THE TERMS OF SECTION 6.3 IN WHICH CASE WSI'S LIABILITY SHALL BE
LIMITED TO THE AMOUNT OF AIR'S DIRECT DAMAGES ARISING THEREFROM.
NOTWITHSTANDING THE TERMS OF THIS PARAGRAPH, NOTHING IN THIS AGREEMENT SHALL
LIMIT WSI'S ABILITY TO RECOVER ECONOMIC DAMAGES RESULTING FROM UNAUTHORIZED USE
OF THE SOFTWARE BY AIR, ITS DISTRIBUTORS OR THEIR SUBLICENSEES SUBJECT TO THE
PROVISIONS OF SECTION 6.5; PROVIDED THAT ANY SUCH LIABILITY OF AIR SHALL NOT
EXCEED $2,500,000 IN THE AGGREGATE. NOTWITHSTANDING THE TERMS OF THIS
PARAGRAPH, NOTHING IN THIS AGREEMENT SHALL LIMIT AIR'S ABILITY TO RECOVER THE
ROYALTIES OWED UNDER THIS AGREEMENT OR OTHERWISE. THE PARTIES AGREE TO THE
ALLOCATION OF LIABILITY RISK SET FORTH IN THIS SECTION. THIS LIMITATION OF
LIABILITY IS INTENDED TO APPLY WITHOUT REGARD TO WHETHER OTHER PROVISIONS OF
THIS AGREEMENT HAVE BEEN BREACHED OR HAVE PROVEN INEFFECTIVE.

8.       INDEMNIFICATION.

         8.1.     Air shall indemnify, defend and hold WSI and its directors,
officers, employees and agents harmless (collectively, the "WSI Indemnified
Parties"), from and against the any Adverse Consequences (as defined below)
that any of the WSI Indemnified Parties may suffer, sustain or become subject
to, arising out of a breach of Section 6.2.

         8.2.     WSI shall indemnify, defend and hold Air and its directors,
officers, employees and agents harmless (collectively, the "Air Indemnified
Parties"), from and against any Adverse Consequences (as defined below) that
any of the Air Indemnified Parties may suffer, sustain or become subject to,
arising out of a breach of Section 6.3.

         8.3.     For purposes of this Section 8, "Adverse Consequences" means
all charges, complaints, actions, suits, proceedings, hearings, investigations,
claims, demands, costs of defense, judgments, orders, decrees, stipulations,
injunctions, damages, dues, penalties, fines, costs, amounts paid in
settlement, liabilities, taxes, security interests, losses, expenses, and fees,
including without limitation all reasonable attorneys' fees and court costs.

         8.4.     This Section 8 does not affect the indemnification
obligations of the parties under the Asset Purchase Agreement between the
parties hereto, of even date herewith.

9.       MISCELLANEOUS.

         9.1.     ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties relating to the subject matter hereof and shall
be binding on them and on their permissible successors, heirs and assigns, and
shall inure to their respective benefits. Any amendments, or



                                     - 9 -
<PAGE>   54

alternatives or supplementary provisions must be made in writing and duly
executed by an authorized representative or agent of each of the parties
hereto.

         9.2.     NON-WAIVER. The failure in one or more instances of a party
to insist upon performance of any of the terms, covenants or conditions of this
Agreement, or to exercise any right or privilege in this Agreement conferred,
or the waiver by said party of any breach of any of the terms, covenants or
conditions of this Agreement, shall not be construed as thereafter waiving any
such terms, covenants, conditions, rights or privileges, but the same shall
continue and remain in full force and effect as if no such forbearance or
waiver had occurred.

         9.3.     ASSIGNMENT. This Agreement and all rights and obligations may
not be assigned in whole or in part by either party (by operation of law or
otherwise) without the prior written consent of the other, except that (i)
either party may assign its rights indivisibly in connection with a
reorganization, sale or other disposition of substantially all the assets or
voting stock of that party's business relating to the licensed software to an
acquiring person or entity, provided, that prior written notice is provided to
the non-assigning party, and (ii) nothing in this paragraph shall limit the
right to grant Software sublicenses. The acquiring person or entity must agree
in writing to comply with the assigning party's obligations under, and to be
bound by, this Agreement. This Agreement shall be binding upon, and inure to
the benefit of and be enforceable by, the parties and their respective
successors and permitted assigns.

         9.4.     COMPLIANCE WITH LAWS. Each of WSI and Air shall comply in all
material respects with applicable laws in the performance of its respective
obligations under this Agreement. With respect to any applicable export laws, a
party exporting or importing the Software shall be responsible for complying
with all applicable laws and regulations relating to such export or import of
the Software.

         9.5.     NOTICES. All communications between the parties with respect
to any of the provisions of this Agreement ("Notices") shall be in writing, and
shall be sent by personal delivery or by airmail, facsimile transmission or
other commercial means of rapid delivery, postage or costs of transmission and
delivery prepaid, to Air or WSI as set forth in the preamble of this Agreement,
until such time as either party provides the other not less than ten (10) days'
prior written notice of a change of address in accordance with these
provisions. Notices sent by facsimile transmission or by other means of rapid
delivery (means intended to be delivered to the receiving party within at least
two (2) business days of being sent) shall be deemed given on the day such
Notice was transmitted or delivered, provided that reasonable proof of
transmission or delivery is retained by the sending party. Other Notices shall
be deemed to have been given upon receipt by the other party.

         9.6.     COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall constitute but one instrument.


                    [SIGNATURES CONTAINED IN FOLLOWING PAGE]



                                    - 10 -
<PAGE>   55

         9.7.     CONSTRUCTION AND APPLICABLE LAW. The parties understand and
acknowledge that they have each been represented by counsel in connection with
the preparation, execution and delivery of this Agreement. This Agreement shall
not be construed against any party for having drafted it. This Agreement shall
be governed and controlled as to validity, enforcement, interpretation, effect
and in all other respects by the internal laws of the state of Georgia.

         9.8.     DISPUTE RESOLUTION. The parties agree to the dispute
resolution provisions set forth in Exhibit G.

         9.9.     LEGAL FEES. If any dispute arising out of this Agreement is
litigated between the parties, the prevailing party shall be entitled to
recover its reasonable attorneys' fees in addition to any other relief to which
it may be entitled.

         9.10.    SEVERABILITY. If any provision of this Agreement shall be
found invalid or unenforceable for any reason, in whole or in part, then such
provision shall be deemed modified, restricted, or reformulated to the extent
and in the manner necessary to render the same valid and enforceable, or shall
be deemed excised from this Agreement, as the case may require, and this
Agreement shall be construed and enforced to the maximum extent permitted by
law, as if such provision had been originally incorporated herein as so
modified, restricted, or reformulated or as if such provision had not been
originally incorporated herein, as the case may be. The parties further agree
to seek a lawful substitute for any provision found to be unlawful; provided,
that, if the parties are unable to agree upon a lawful substitute, the parties
desire and request that a court or other authority called upon to decide the
enforceability of this Agreement modify those restrictions in this Agreement
that, once modified, will result in an agreement that is enforceable to the
maximum extent permitted by the law in existence at the time of the requested
enforcement.

         9.11.    EXHIBITS AND RECITALS. All Exhibits attached hereto are
specifically incorporated herein by reference and the recitals set forth above
are hereby incorporated as part of this Agreement as if fully set forth herein.


WITNESS SYSTEMS, INC., a Delaware          ADVANCED INTEGRATED RECORDERS,
corporation                                INC., a Delaware corporation



SIGNATURE:                                 SIGNATURE:
          -----------------------------              --------------------------
NAME:                                      NAME:
          -----------------------------              --------------------------
TITLE:                                     TITLE:
          -----------------------------              --------------------------



                                    - 11 -
<PAGE>   56

                                   EXHIBIT A

                            Description of Software

                  The Software is a Record and Replay solution for a variety of
interfaces including: Voice, Bit Synchronous Serial, FSK (Navy Proprietary),
TCP/IP and UDP/IP sockets, and X-11 Screen Capture. The Software consists of
the following deliverables:

                  -        AIR2000 System Software (i.e. the main application)
                           that runs on the AIR2000 Rackmount System Hardware.

                  -        AIR2000 DXLC, which runs on a Unix Workstation to
                           form an interface layer between the AIR2000 System
                           Software and X-11 R6 server resident on the Unix
                           workstation for X-11 screen record and replay.

                  -        AIR2000 O/S Image, which is a binary image of the
                           Operating System, Drivers, Services and Middleware
                           required to interface and run the AIR2000 System
                           Software on the AIR2000 Rackmount System Hardware
                           (i.e. it is the "platform software" required to run
                           the application).

                  -        AIR2000 configuration Floppies which are generated
                           by the AIR2000 Configuration Manager Program. The
                           configuration floppies contain date used to
                           configure both the Application and the O/S Image for
                           use at a specific customer site.

                  -        AIR2000 Diagnostic Floppy/Emergency Boot Floppy,
                           which are used for maintenance of the system.
<PAGE>   57

                                  EXHIBIT B-1
                   DEFINITION OF AIR TRAFFIC CONTROL MARKET

The "AIR Traffic Control Market" shall include applications of the Software
used to record and replay data in the field of aviation, whether on the ground
or in the air, over wide area networks and/or local area networks, by means of
any communication media including but not limited to satellite, radar,
telecommunications or digital. Notwithstanding the foregoing, the Air Traffic
Control Market does not include the Witness Exclusive Field as defined in
Exhibit B-3 in the field of aviation.



                                    - 12 -
<PAGE>   58

                                  EXHIBIT B-2
                              AIR EXCLUSIVE FIELD

The "AIR Exclusive Field" shall consist of the four specific "Segments" set
forth below. Notwithstanding the foregoing, these Segments do not include any
application or use of the Software that would reasonably be within the Witness
Exclusive Field as defined in Exhibit B-3 for each of the items listed below.

         1.       Security and Surveillance (not including any anti-fraud or
                  fraud detection during a customer, employee, etc.
                  interaction.)

         2.       Government (federal, state, local or foreign), Intelligence
                  and Military

         3.       Public Safety including air, sea, rescue and transportation

         4.       Manufacturing process control.



                                    - 13 -
<PAGE>   59

                                  EXHIBIT B-3

                     DEFINITION OF WITNESS EXCLUSIVE FIELD

Any applications of the Software that include the utilization of record and
replay technology for the purpose of :

         (a)      Monitoring customer interactions, to provide measurement
                  systems, reporting and quality control to support an
                  enterprise's sales, human resources, customer care and
                  customer support activities, or:

         (b)      Monitoring Accounting, Financial, Enterprise Resource
                  Planning or Customer Relationship Management Processes and
                  workflows and applications (not including manufacturing
                  processes and control).




"Customer Interactions" means interactions between customers and the enterprise
via telephone, fax, email, internet, internet chat, computer data, or video to
transfer information.

In the context of the Witness Exclusive Field, a "customer" is defined as any
party interacting with the enterprise who is an employee, buyer, seller,
business partner, vendor, creditor, debtor or any other stakeholder or
constituent of the enterprise. Interactions between manufacturing process,
control, security, equipment of facility sensors or devices, and other
mechanical, electromechanical, or biologic instrument and the enterprise are
not included in the Witness Exclusive Field.



                                    - 14 -
<PAGE>   60

                                   EXHIBIT C

                               LICENSE AGREEMENT





                                    - 15 -
<PAGE>   61

                                   EXHIBIT D

                         SOURCE CODE LICENSE SUPPLEMENT





                                    - 16 -
<PAGE>   62

                                   EXHIBIT E

                          OPTIONAL PROVISIONS TO AIR'S
                       STANDARD FORM OF LICENSE AGREEMENT

RIDER 1        INTEGRATOR LICENSE

In addition to the license granted in Section 1, subject to the terms and
conditions set forth herein, AIR grants you the non-exclusive license to
integrate the Software Product into other products and to sublicense the
Software Product in conjunction with the sale of such other products. You will
be responsible for ensuring that your customers agree to the terms and
conditions of AIR's end-user license.

RIDER 2        DISTRIBUTOR LICENSE

In addition to the License granted in Section I, subject to the terms and
conditions set forth herein, AIR grants you the non-exclusive license to
distribute the Software Product to others. You will be responsible for ensuring
that end users of the Software Product agree to the terms and conditions of
AIR's end-user license.

RIDER 3        COMPILATION LICENSE

AIR grants you access to the Software Product in source code form for the sole
and exclusive purpose of compiling the Software Product into object code. You
agree to delete all copies of the source code from your system promptly after
the Software Product has been compiled into object code. You will not modify
the source code in any way. You will not retain any copies of the source code.
You agree to comply with the confidentiality provisions set forth in Section 6
hereof, at all times, with respect to such source code.



                                    - 17 -
<PAGE>   63

                                   EXHIBIT F
                 LIST OF AIR LICENSEES AS OF THE EFFECTIVE DATE

U.S. Navy, Telephonics, Digicomp, Lockheed Martin, IBM - United Kingdom, Mitre
The above named licenses licensed the Software prior to the Effective Date
pursuant to the terms of the Attached Shrink Wrap License Agreement.



                                    - 18 -
<PAGE>   64

                                   EXHIBIT G

                               DISPUTE RESOLUTION

         1.    SCOPE OF ARBITRATION. All disputes between WSI and Air arising
out of or relating to this Agreement shall be resolved by final and binding
arbitration conducted in accordance with and subject to the provisions of the
United States Arbitration Act, 9 U.S.C. ss.ss. 1 et seq. even though this
Agreement provides that it will be governed by New Jersey law, provided,
however, that prior to filing a demand for arbitration, the parties shall
attempt to resolve their disputes through negotiation, and, if the dispute
remains unresolved, by non-binding mediation, as provided in this Exhibit G.

         2.    MEETING BEFORE ARBITRATION. In the event there is a dispute
arising out of or relating to this Agreement, the parties first shall attempt
to resolve the dispute by negotiations between senior executives of the parties
who have authority to settle the controversy. The disputing party shall give
the other party written notice of the dispute. Within twenty days after receipt
of said notice, the receiving party shall submit a written response to the
disputing party. The notice and response shall include (a) a statement of each
party's position and a summary of the evidence and arguments supporting its
position, and (b) the name and title of the executive who will represent that
party. The executives shall meet at a mutually acceptable time and place within
thirty days after the date of receipt of the disputing party's notice and,
after that, as often as they reasonably deem necessary to exchange relevant
information and to attempt to resolve the dispute. If the matter is not
resolved within sixty days after the receipt of the disputing party's notice,
or if the party receiving said notice will not meet within thirty days, then
either party may initiate mediation of the dispute according to the terms
provided below.

         3.    MEDIATION BEFORE ARBITRATION. In the event any dispute arising
out of or relating to this Agreement is not resolved by negotiation as provided
in the preceding paragraph, then, prior to filing a demand for arbitration,
either party shall, if it still wishes to resolve the dispute, refer the
dispute to mediation, i.e., an informal, non-binding conference or conferences
between the parties in which a mediator will seek to guide the parties to a
resolution of the dispute. The mediation shall take place in Atlanta, Georgia
if requested by WSI, and shall take place in Philadelphia, Pennsylvania if
requested by Air. The mediation shall be conducted under the auspices of the
American Arbitration Association ("AAA") office in the city where the mediation
is to be conducted. The parties are free to select any mutually acceptable
mediator from the list provided by such AAA office. If the parties cannot agree
or have no particular choice of mediator, then a list and resumes of available
mediators will be sent to the parties, each of whom shall inform the AAA of
those mediators who are acceptable, provided that at least one such mediator
shall be designated acceptable. The AAA shall then select a mediator who is
acceptable to both parties. The mediation shall occur within sixty days after
the request for mediation. The fees and costs of the mediation shall conform to
the then current fee schedule at the AAA and, in the absence of an agreement to
the contrary, shall be borne equally by each party.



                                    - 19 -
<PAGE>   65

         4.    ARBITRATION. If the dispute is not finally resolved within
thirty days after the first day of the mediation, then either party may demand
arbitration by filing a demand for arbitration. The arbitration shall be
conducted under the auspices of the AAA. An arbitration demanded by WSI shall
take place in Atlanta, Georgia and an arbitration demanded by Air shall take
place in Philadelphia, Pennsylvania. The arbitration shall be conducted by one
arbitrator mutually agreed upon by WSI and Air, under the Commercial
Arbitration Rules of the AAA, except that the parties shall have any right to
discovery as would be permitted under the Federal Rules of Civil Procedure for
a period of ninety days following the selection of the arbitrator, and the
arbitrator shall resolve any dispute which arises in connection with such
discovery. The fees and costs of the AAA and the arbitrator shall, in the
absence of an agreement to the contrary, be borne equally by each party. The
prevailing party shall be entitled to an award of costs, expenses and
reasonable attorneys' fees. Judgment upon the award (which shall not include
punitive damages under any circumstances) rendered by the arbitrator may be
entered in any court of competent jurisdiction.

         5.    LIMITATION OF ACTIONS. Any request for a meeting to resolve a
dispute, as provided in paragraph 2 of this Exhibit G, must be served upon the
other party no later than one year from the date that the facts giving rise to
such dispute occurred.

         6.    EXCLUSION OF REQUEST FOR INTERIM INJUNCTIVE RELIEF.
Notwithstanding this Exhibit G, either party may apply to any court of
competent jurisdiction for a temporary restraining order, preliminary
injunction or other interim injunctive relief, as may be necessary to protect
such party's intellectual property rights or confidential information.



                                    - 20 -
<PAGE>   66

                                   EXHIBIT C


                     To the Asset Purchase Agreement among
                 Witness Systems, Inc. and Advanced Integrated
                      Recorders, Inc. and Formation, Inc.

                   Amended and Restated Registration Rights
                        Agreement dated August 2, 1999





                                    - 21 -
<PAGE>   67

                              AMENDED AND RESTATED
                          REGISTRATION RIGHTS AGREEMENT


         This AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT dated as of
August 2, 1999, by and among WITNESS SYSTEMS, INC., a Delaware corporation (the
"Company"), each of those current shareholders of the Company defined
hereinbelow as the "Founders" and the "Series A and B Shareholders," and those
certain parties to the Stock Purchase Agreement (defined below) who are
purchasing Series C Shares (defined below) coincident with the execution and
delivery of this Agreement and are identified hereinbelow as the Purchasers (the
"Purchasers").

                                   WITNESSETH:

         WHEREAS, the Company, the Founders and the Series A and B Shareholders
are parties to that certain Registration Rights Agreement dated as of March 18,
1997, as amended pursuant to Amendment No. 1 to Registration Rights Agreement
(the "Existing Registration Rights Agreement"), whereby the Founders and the
Series A and B Shareholders were granted certain registration rights with
respect to certain securities of the Company;

         WHEREAS, pursuant to the terms of the Stock Purchase Agreement dated as
of the date hereof by and among the Company and the Purchasers (the "Stock
Purchase Agreement"), the Company is issuing to the Purchasers an aggregate of
up to 1,325,028 shares (the "Series C Shares") of the Company's Series C
Convertible Preferred Stock;

         WHEREAS, as an inducement to the Purchasers to enter into the Stock
Purchase Agreement, the Company desires to grant to the Purchasers certain
registration rights with respect to the Series C Shares, and the Company, the
Founders and Series A and B Shareholders desire to amend and restate the
Existing Registration Rights Agreement;

         NOW, THEREFORE, in consideration of the premises set forth herein, the
parties hereto agree as follows:

         1.       Certain Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:

                  "Commission" shall mean the Securities and Exchange
         Commission, or any other federal agency at the time administering the
         Securities Act.

                  "Common Stock" shall mean the Common Stock, $.01 par value, of
         the Company, as constituted as of the date of this Agreement.

                  "Conversion Shares" shall mean shares of Common Stock issued
         or issuable upon conversion of the Preferred Shares, and any shares of
         capital stock received in respect thereof.



<PAGE>   68

                  "Exchange Act" shall mean the Securities Exchange Act of 1934,
         as amended, or any similar federal statute, and the rules and
         regulations of the Commission thereunder, all as the same shall be in
         effect at the time.

                  "Founders" shall mean Tom Snyder, Jim Judson, Steve Beckett
         and Kirk Knous.

                  "Preferred Shares" shall mean shares of the Company's Series A
         Convertible Preferred Stock, Series B Convertible Preferred Stock and
         Series C Convertible Preferred Stock, each $.01 par value per share.

                  "Purchasers" as defined in the recitals to this Agreement.

                  "Registration Expenses" shall mean the expenses so described
         in Section 8.

                  "Restricted Stock" shall mean (1) the Conversion Shares,
         excluding Conversion Shares which have been (a) registered under the
         Securities Act pursuant to an effective registration statement filed
         thereunder and disposed of in accordance with the registration
         statement covering them or (b) publicly sold pursuant to Rule 144 under
         the Securities Act, and (2) for purposes of Section 5 hereof, up to
         3,940,200 shares of Common Stock held by the Founders, but excluding
         shares of Common Stock which have been (a) registered under the
         Securities Act pursuant to an effective registration statement filed
         thereunder and disposed of in accordance with the registration
         statement covering them, or (b) publicly sold pursuant to Rule 144
         under the Securities Act.

                  "Securities Act" shall mean the Securities Act of 1933, as
         amended, or any similar federal statute, and the rules and regulations
         of the Commission thereunder, all as the same shall be in effect at the
         time.

                  "Selling Expenses" shall mean the expenses so described in
         Section 8.

                  "Series A and B Restricted Stock" means shares of Restricted
         Stock constituting Conversion Shares issued or issuable upon conversion
         of the Series A Convertible Preferred Stock or the Series B Convertible
         Preferred Stock, or any shares of capital stock received in respect
         thereof.

                  "Series A and B Shareholders" shall mean the holders of the
         Company's Series A Convertible Preferred Stock and the holders of the
         Company's Series B Convertible Preferred Stock.

                  "Series C Restricted Stock" means shares of Restricted Stock
         constituting Conversion Shares issued or issuable upon conversion of
         the Series C Convertible Preferred Stock, or any shares of capital
         stock received in respect thereof.

         2.       Restrictive Legend. Each certificate representing Preferred
Shares, Conversion Shares or Restricted Stock shall, except as otherwise
provided in this Section 2 or in Section 3, be stamped or otherwise imprinted
with a legend substantially in the following form:


                                       2
<PAGE>   69

                  "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
         REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE
         SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
         NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD
         MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN
         EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE
         SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS, OR THE
         AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE
         SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS."

A certificate shall not bear such legend if in the opinion of counsel reasonably
satisfactory to the Company (it being agreed that each of Testa, Hurwitz &
Thibeault, LLP, and Jones, Day, Reavis & Pogue shall be satisfactory) the
securities being sold thereby may be publicly sold without registration under
the Securities Act.

         3.       Notice of Proposed Transfer. Prior to any proposed transfer of
any Preferred Shares, Conversion Shares or Restricted Stock (other than under
the circumstances described in Sections 4, 5 or 6), the holder thereof shall
give written notice to the Company of its intention to effect such transfer.
Each such notice shall describe the manner of the proposed transfer and, if
requested by the Company, shall be accompanied by an opinion of counsel
reasonably satisfactory to the Company (it being agreed that each of Testa,
Hurwitz & Thibeault, LLP, and Jones, Day, Reavis & Pogue shall be satisfactory)
to the effect that the proposed transfer may be effected without registration
under the Securities Act, whereupon the holder of such stock shall be entitled
to transfer such stock in accordance with the terms of its notice; provided,
however, that no such opinion of counsel shall be required for a transfer to one
or more partners of the transferor (in the case of a transferor that is a
partnership), to one or more members of the transferor (in the case of a
transferor that is a limited liability company), or to an affiliated corporation
(in the case of a transferor that is a corporation). Each certificate for
Preferred Shares or Conversion Shares transferred as above provided shall bear
the legend set forth in Section 2, except that such certificate shall not bear
such legend if (i) such transfer is in accordance with the provisions of Rule
144 (or any other rule permitting public sale without registration under the
Securities Act) or (ii) the opinion of counsel referred to above is to the
further effect that the transferee and any subsequent transferee (other than an
affiliate of the Company) would be entitled to transfer such securities in a
public sale without registration under the Securities Act. The restrictions
provided for in this Section 3 shall not apply to securities which are not
required to bear the legend prescribed by Section 2 in accordance with the
provisions of that Section.

         4.       Required Registration.

                  (a)      The holders of Series A and B Restricted Stock
constituting at least a majority of the total shares of Series A and B
Restricted Stock then outstanding may request the Company to register under the
Securities Act all or any portion of the shares of Series A and B Restricted
Stock held by such requesting holder or holders for sale in the manner specified
in such notice, provided that the shares of Series A and B Restricted Stock for
which registration has been requested shall constitute at least 20% of the total
shares of Series A and B Restricted Stock originally issued (or any lesser
percentage if the reasonably anticipated aggregate price to the public of such
public offering would exceed $5,000,000).


                                       3
<PAGE>   70

                  (b)      The holders of Series C Restricted Stock constituting
at least a majority of the total shares of Series C Restricted Stock then
outstanding may request the Company to register under the Securities Act all or
any portion of the shares of Restricted Stock held by such requesting holder or
holders for sale in the manner specified in such notice.

                  (c)      For purposes of this Section 4 and Sections 5, 6,
13(a) and 13(d), the term "Restricted Stock" shall be deemed to include the
number of shares of Restricted Stock which would be issuable to a holder of
Preferred Shares upon conversion of all shares of Preferred Stock held by such
holder at such time, provided, however, that the only securities which the
Company shall be required to register pursuant hereto shall be shares of Common
Stock, and provided, further, however, that, in any underwritten public offering
contemplated by this Section 4 or Sections 5 and 6, the holders of Preferred
Shares shall be entitled to sell such Preferred Shares to the underwriters for
conversion and sale of the shares of Common Stock issued upon conversion
thereof. Notwithstanding anything to the contrary contained herein, no request
may be made under this Section 4 within 120 days after the effective date of a
registration statement filed by the Company covering a firm commitment
underwritten public offering in which the holders of Restricted Stock shall have
been entitled to join pursuant to Sections 5 or 6.

                  (d)      Following receipt of any notice under this Section 4,
the Company shall immediately notify all holders of Restricted Stock (including
the Founders) and Preferred Shares from whom notice has not been received and
such holders shall then be entitled within 30 days thereafter to request the
Company to include in the requested registration all or any portion of their
shares of Restricted Stock. The Company shall use its best efforts to register
under the Securities Act, for public sale in accordance with the method of
disposition specified in the notice from requesting holders described in
paragraph (a) above, the number of shares of Restricted Stock specified in such
notice (and in all notices received by the Company from other holders within 30
days after the giving of such notice by the Company). If such method of
disposition shall be an underwritten public offering, the holders of a majority
of the shares of Restricted Stock to be sold in such offering may designate the
managing underwriter of such offering, subject to the approval of the Company,
which approval shall not be unreasonably withheld or delayed. The Company shall
be obligated to register Restricted Stock pursuant to this Section 4 on two
occasions only in respect of requests by the holders of Series A and B Preferred
Stock, and on two occasions only in respect of requests by the holders of Series
C Preferred Stock, provided, however, that such obligation shall be deemed
satisfied only when a registration statement covering all shares of Restricted
Stock specified in notices received as aforesaid, for sale in accordance with
the method of disposition specified by the requesting holders, shall have become
effective and, if such method of disposition is a firm commitment underwritten
public offering, all such shares shall have been sold pursuant thereto.

                  (e)      The Company (or at the option of the Company, the
holders of Common Stock) shall be entitled to include in any registration
statement referred to in this Section 4, for sale in accordance with the method
of disposition specified by the requesting holders, shares of Common Stock to be
sold by the Company or such other holders for its own account, except as and to
the extent that, in the opinion of the managing underwriter (if such method of
disposition shall be an underwritten public offering), such inclusion would
adversely affect the marketing of the Restricted Stock to be sold. Except for
registration statements on Form S-4, S-8 or any

                                       4
<PAGE>   71

successor thereto, the Company will not file with the Commission any other
registration statement with respect to its Common Stock, whether for its own
account or that of other stockholders, from the date of receipt of a notice from
requesting holders pursuant to this Section 4 until the completion of the period
of distribution of the registration contemplated thereby.

                  (f)      In respect of a request for registration pursuant to
Section 4(a) if in the opinion of the managing underwriter the inclusion of all
of the Restricted Stock requested to be registered under this Section would
adversely affect the marketing of such shares, after any shares to be sold by
the Company or other holders of Common Stock have been excluded, then Series C
Restricted Stock shall be next excluded to the extent so necessary, and then
shares to be sold by the remaining holders of Restricted Stock shall be excluded
in such manner that the shares to be sold shall be allocated among the selling
holders pro rata based on their ownership of Restricted Stock.

                  (g)      In respect of a request for registration pursuant to
Section 4(b) if in the opinion of the managing underwriter the inclusion of all
of the Restricted Stock requested to be registered under this Section would
adversely affect the marketing of such shares, after any shares to be sold by
the Company or other holders of Common Stock have been excluded, then shares of
Restricted Stock other than Series C Restricted Stock shall be next excluded to
the extent necessary and then shares to be sold by the remaining holders of
Series C Restricted Stock shall be excluded in such manner that the shares to be
sold shall be allocated among such selling holders pro rata based on their
ownership of Restricted Stock.

         5.       Incidental Registration. If the Company at any time (other
than pursuant to Section 4 or Section 6) proposes to register any of its
securities under the Securities Act for sale to the public, whether for its own
account or for the account of other security holders or both (except with
respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Restricted Stock for sale to the public), each
such time it will give written notice to all holders of outstanding Restricted
Stock of its intention so to do. Upon the written request of any such holder,
received by the Company within 30 days after the giving of any such notice by
the Company, to register any of its Restricted Stock, the Company will use its
best efforts to cause the Restricted Stock as to which registration shall have
been so requested to be included in the securities to be covered by the
registration statement proposed to be filed by the Company, all to the extent
requisite to permit the sale or other disposition by the holder (in accordance
with its written request) of such Restricted Stock so registered. In the event
that any registration pursuant to this Section 5 shall be, in whole or in part,
an underwritten public offering of Common Stock, the number of shares of
Restricted Stock to be included in such an underwriting may be reduced (pro rata
among the requesting holders based upon the number of shares of Restricted Stock
held by such requesting holders) if and to the extent that the managing
underwriter shall be of the opinion that such inclusion would adversely affect
the marketing of the securities to be sold by the Company therein, provided,
however, that such number of shares of Restricted Stock held by the Founders or
such other requesting holders of Restricted Stock shall not be reduced if any
shares are to be included in such underwriting for the account of any person
other than the Company, the Founders or such other requesting holders of
Restricted Stock, and, provided, further, that in no event shall the number of
shares of Restricted Stock included in the offering be reduced below twenty
percent (20%) of the total number of shares of Common Stock

                                       5
<PAGE>   72

included in such offering, unless the offering is the Company's initial public
offering of the Company's securities in which case the number of shares of
Restricted Stock to be included by the holders may be reduced or eliminated
entirely as set forth above. Notwithstanding the foregoing provisions, the
Company may withdraw any registration statement referred to in this Section 5
without thereby incurring any liability to the holders of Restricted Stock.

         6.       Registration on Form S-3.

                  (a)      Subject to the limit of two registrations hereunder
in any 12 month period, if at any time (i) a holder or holders of Series A and B
Restricted Stock then outstanding request that the Company file a registration
statement on Form S-3 or any successor thereto for a public offering of all or
any portion of the shares of Restricted Stock held by such requesting holder or
holders, the reasonably anticipated aggregate price to the public of which would
exceed $500,000, and (ii) the Company is a registrant entitled to use Form S-3
or any successor thereto to register such shares, then the Company shall use its
best efforts to register under the Securities Act on Form S-3 or any successor
thereto, for public sale in accordance with the method of disposition specified
in such notice, the number of shares of Restricted Stock specified in such
notice.

                  (b)      Subject to the limit of two registrations hereunder
in any 12 month period, if at any time (i) a holder or holders of Series C
Restricted Stock then outstanding request that the Company file a registration
statement on Form S-3 or any successor thereto for a public offering of all or
any portion of the shares of Restricted Stock held by such requesting holder or
holders, the reasonably anticipated aggregate price to the public of which would
exceed $500,000, and (ii) the Company is a registrant entitled to use Form S-3
or any successor thereto to register such shares, then the Company shall use its
best efforts to register under the Securities Act on Form S-3 or any successor
thereto, for public sale in accordance with the method of disposition specified
in such notice, the number of shares of Series C Restricted Stock specified in
such notice.

                  (c)      Whenever the Company is required by this Section 6 to
use its best efforts to effect the registration of Restricted Stock, each of the
procedures and requirements of Section 4 (including but not limited to the
requirement that the Company notify all holders of Restricted Stock from whom
notice has not been received and provide them with the opportunity to
participate in the offering) shall apply to such registration, provided,
however, that except as provided above there shall be no limitation on the
number of registrations on Form S-3 which may be requested and obtained under
this Section 6.

                  (d)      Notwithstanding anything to the contrary set forth in
this Agreement, the Company's obligation under this Agreement to register
Restricted Stock under the Securities Act on registration statements
("Registration Statements") may, upon the reasonable determination of the Board
of Directors made only once during any 12-month period, be suspended in the
event and during such period as unforeseen circumstances (including without
limitation (i) an underwritten primary offering by the Company (which includes
no secondary offering) if the Company is advised in writing by its underwriters
that the registration of the Restricted Stock would have a material adverse
effect on the Company's offering, or (ii) pending negotiations relating to, or
consummation of, a transaction or the occurrence of an event which would require


                                       6
<PAGE>   73

additional disclosure of material information by the Company in Registration
Statements or such other filings, as to which the Company has a bona fide
business purpose for preserving confidentiality or which renders the Company
unable to comply with Securities and Exchange Commission (the "SEC")
requirements) exist (such unforeseen circumstances being hereinafter referred to
as a "Suspension Event") which would make it impractical or unadvisable for the
Company to file the Registration Statements or such other filings or to cause
such to become effective. Such suspension shall continue only for so long as
such event is continuing but in no event for a period longer than ninety (90)
days. The Company shall notify the holders of Preferred Shares of the existence
and nature of any Suspension Event.

         7.       Registration Procedures. If and whenever the Company is
required by the provisions of Sections 4, 5 or 6 to use its best efforts to
effect the registration of any shares of Restricted Stock under the Securities
Act, the Company will, as expeditiously as possible:

                  (a)      prepare and file with the Commission a registration
statement (which, in the case of an underwritten public offering pursuant to
Section 4, shall be on Form S-1 or other form of general applicability
satisfactory to the managing underwriter selected as therein provided) with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for the period of the distribution
contemplated thereby (determined as hereinafter provided);

                  (b)      prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for the period specified in paragraph (a) above and comply with the
provisions of the Securities Act with respect to the disposition of all
Restricted Stock covered by such registration statement in accordance with the
sellers' intended method of disposition set forth in such registration statement
for such period;

                  (c)      furnish to each seller of Restricted Stock and to
each underwriter such number of copies of the registration statement and each
such amendment and supplement thereto (in each case including all exhibits) and
the prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Restricted Stock covered by such registration statement;

                  (d)      use its best efforts to register or qualify the
Restricted Stock covered by such registration statement under the securities or
"blue sky" laws of such jurisdictions as the sellers of Restricted Stock or, in
the case of an underwritten public offering, the managing underwriter reasonably
shall request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;

                  (e)      use its best efforts to list the Restricted Stock
covered by such registration statement with any securities exchange on which the
Common Stock of the Company is then listed;


                                       7
<PAGE>   74

                  (f)      immediately notify each seller of Restricted Stock
and each underwriter under such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event of which the Company has knowledge as a
result of which the prospectus contained in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, and promptly
prepare and furnish to such seller a reasonable number of copies of a prospectus
supplemented or amended so that, as thereafter delivered to the purchasers of
such Restricted Stock, such prospectus shall not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing;

                  (g)      if the offering is underwritten and at the request of
any seller of Restricted Stock, use its best efforts to furnish on the date that
Restricted Stock is delivered to the underwriters for sale pursuant to such
registration: (i) an opinion dated such date of counsel representing the Company
for the purposes of such registration, addressed to the underwriters and to such
seller, to such effect as reasonably may be requested by counsel for the
underwriters or by such seller or its counsel, and (ii) a letter dated such date
from the independent public accountants retained by the Company, addressed to
the underwriters and to such seller, stating that they are independent public
accountants within the meaning of the Securities Act and that, in the opinion of
such accountants, the financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request;

                  (h)      make available for inspection by each seller of
Restricted Stock, any underwriter participating in any distribution pursuant to
such registration statement, and any attorney, accountant or other agent
retained by such seller or underwriter, reasonable access to all financial and
other records, pertinent corporate documents and properties of the Company, as
such parties may reasonably request, and cause the Company's officers, directors
and employees to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement;

                  (i)      cooperate with the selling holders of Restricted
Stock and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Restricted Stock to be
sold, such certificates to be in such denominations and registered in such names
as such holders or the managing underwriters may request at least two business
days prior to any sale of Restricted Stock; and

                  (j)      permit any holder of Restricted Stock which holder,
in the sole and exclusive judgment, exercised in good faith, of such holder,
might be deemed to be a controlling person of the Company, to participate in
good faith in the preparation of such registration or comparable statement and
to require the insertion therein of material, furnished to the Company in
writing, which in the reasonable judgment of such holder and its counsel should
be included.


                                       8
<PAGE>   75

                  For purposes of Section 7(a) and 7(b) and of Section 4(c), the
period of distribution of Restricted Stock in a firm commitment underwritten
public offering shall be deemed to extend until each underwriter has completed
the distribution of all securities purchased by it, and the period of
distribution of Restricted Stock in any other registration shall be deemed to
extend until the earlier of the sale of all Restricted Stock covered thereby and
120 days after the effective date thereof.

                  In connection with each registration hereunder, the sellers of
Restricted Stock will furnish to the Company in writing such information
requested by the Company with respect to themselves and the proposed
distribution by them as reasonably shall be necessary in order to assure
compliance with federal and applicable state securities laws.

                  In connection with each registration pursuant to Sections 4, 5
or 6 covering an underwritten public offering, the Company and each seller agree
to enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.

         8.       Expenses. All expenses incurred by the Company in complying
with Sections 4, 5 and 6, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the National Association of Securities Dealers, Inc.,
transfer taxes, fees of transfer agents and registrars, costs of any insurance
which might be obtained and fees and disbursements of one counsel for the
sellers of Restricted Stock, but excluding any Selling Expenses, are called
"Registration Expenses". "Selling Expenses" shall include (i) all underwriting
discounts and commissions applicable to the sale of Restricted Stock; and (ii)
expenses of any registration proceeding begun pursuant to Section 4 or 6, the
request of which has been subsequently withdrawn by all of the requesting
holders, in which case such expenses shall be borne by the holders of Restricted
Stock requesting or causing such withdrawal unless, such withdrawal is a result
of an adverse change or material development in the Company's business or
prospects or, with respect to registrations under Section 4, the holders of at
least two-thirds of the securities to be registered agree to forfeit their right
to one demand registration pursuant to Section 4.

                  The Company will pay all Registration Expenses in connection
with each registration statement under Sections 4, 5 or 6. All Selling Expenses
in connection with each registration statement under Sections 4, 5 or 6 shall be
borne by the participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than the Company (except to the
extent the Company shall be a seller) as they may agree.

         9.       Indemnification.

                  (a)      In the event of a registration of any of the
Restricted Stock under the Securities Act pursuant to Sections 4, 5 or 6, the
Company will indemnify and hold harmless each seller of such Restricted Stock
thereunder, its officers and directors, each underwriter of such Restricted
Stock thereunder and each other person, if any, who controls such seller or
underwriter

                                       9
<PAGE>   76

within the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such seller, officer, director,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such Restricted Stock was registered under the Securities
Act pursuant to Sections 4, 5 or 6, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any blue sky application or other document executed by the Company specifically
for that purpose or based upon written information furnished by the Company
filed in any state or other jurisdiction in order to qualify any or all of the
Restricted Stock under the securities laws thereof (any such application,
document or information herein called a "Blue Sky Application"), (iii) any
violation by the Company or its agents of any rule or regulation promulgated
under the Securities Act applicable to the Company or its agents and relating to
action or inaction required of the Company in connection with such registration,
or (iv) any failure to register or qualify the Restricted Stock in any state
where the Company or its agents has affirmatively undertaken or agreed in
writing that the Company (the undertaking of any underwriter chosen by the
Company being attributed to the Company) will undertake such registration or
qualification on the seller's behalf and will reimburse each such seller, and
such officer and director, each such underwriter and each such controlling
person for any reasonable legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action, provided, however, that the Company will not be liable in
any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by any such seller, any such underwriter or any such controlling
person in writing specifically for use in such registration statement or
prospectus.

                  (b)      In the event of a registration of any of the
Restricted Stock under the Securities Act pursuant to Sections 4, 5 or 6, each
seller of such Restricted Stock thereunder, severally and not jointly, will
indemnify and hold harmless the Company, each person, if any, who controls the
Company within the meaning of the Securities Act, each officer of the Company
who signs the registration statement, each director of the Company, each other
seller of Restricted Stock, each underwriter and each person who controls any
underwriter within the meaning of the Securities Act, against all losses,
claims, damages or liabilities, joint or several, to which the Company or such
officer, director, other seller, underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the registration statement under which such Restricted Stock was
registered under the Securities Act pursuant to Sections 4, 5 or 6, any
preliminary prospectus or final prospectus contained therein or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any amendment or supplement thereof, or any Blue Sky Application
and will reimburse the Company and each such officer, director, other seller,
underwriter and controlling person for any reasonable legal or other


                                       10
<PAGE>   77

expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that such seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such seller, as such, furnished in writing to the Company by such seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of each seller shall not exceed the
proceeds received by such seller from the sale of Restricted Stock covered by
such registration statement.

                  (c)      Promptly after receipt by an indemnified party
hereunder of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party hereunder, notify the indemnifying party in writing thereof, but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to such indemnified party other than under this
Section 9 and shall only relieve it from any liability which it may have to such
indemnified party under this Section 9 if and to the extent the indemnifying
party is prejudiced by such omission. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 9 for any legal expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation and of liaison with counsel so selected,
provided, however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that the interests of the indemnified party reasonably
may be deemed to conflict with the interests of the indemnifying party, the
indemnified party shall have the right to select a separate counsel and to
assume such legal defenses and otherwise to participate in the defense of such
action, with the expenses and fees of such separate counsel and other expenses
related to such participation to be reimbursed by the indemnifying party as
incurred.

                  (d)      The indemnities provided in this Section 9 shall
survive the transfer of any Restricted Stock by such holder.

         10.      Changes in Common Stock or Preferred Stock. If, and as often
as, there is any change in the Common Stock or the Preferred Stock by way of a
stock split, stock dividend, combination or reclassification, or through a
merger, consolidation, reorganization or recapitalization, or by any other
means, appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue with respect to the Common
Stock or the Preferred Stock as so changed.

         11.      Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Stock to the public without registration,
at all times after 90 days after any registration statement


<PAGE>   78

covering a public offering of securities of the Company under the Securities Act
shall have become effective, the Company agrees to:

                  (a)      make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act;

                  (b)      use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and

                  (c)      furnish to each holder of Restricted Stock forthwith
upon request a written statement by the Company as to its compliance with the
reporting requirements of such Rule 144 and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as such
holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing such holder to sell any Restricted Stock without
registration.

         12.      Representations and Warranties of the Company. The Company
represents and warrants to the Series A and B Shareholders and to the Purchasers
as follows:

                  (a)      The execution, delivery and performance of this
Agreement by the Company have been duly authorized by all requisite corporate
action and will not violate any provision of law, any order of any court or
other agency of government, the Charter or By-laws of the Company or any
provision of any indenture, agreement or other instrument to which it or any or
its properties or assets is bound, conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument or result in the creation or imposition
of any lien, charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company.

                  (b)      This Agreement has been duly executed and delivered
by the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms, except to the extent the
indemnification provisions herein may be deemed not enforceable.

         13.      Miscellaneous.

                  (a)      All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
(including without limitation transferees of any Preferred Shares or Restricted
Stock), whether so expressed or not, provided, however, (i) that registration
rights conferred herein on the holders of shares of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock or Series A and B
Restricted Stock shall only inure to the benefit of a transferee of such shares
if there is transferred to such transferee at least 20% of the total shares of
Restricted Stock originally issued pursuant to the Stock Purchase Agreements in
respect of the Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock, dated March 18, 1997 and September 24, 1998, respectively, to
the direct or indirect transferor of such transferee

                                       12
<PAGE>   79

or such transferee is a party hereto or a partner, member, shareholder or
affiliate of a party hereto and (ii) that registration rights conferred herein
on the holders of Series C Convertible Preferred Stock or Series C Restricted
Stock shall only inure to the benefit of a transferee of such shares if there is
transferred to such transferee the total shares of Restricted Stock originally
issued pursuant to the Stock Purchase Agreement in respect of the Series C
Convertible Preferred Stock of even date herewith, to the direct or indirect
transferor of such transferee or 20% of such total shares, whichever is less, or
such transferee is a party hereto or a partner, member, shareholder or affiliate
of a party hereto.

                  (b)      All notices, requests, consents and other
communications hereunder shall be in writing and shall be mailed by certified or
registered mail, return receipt requested, postage prepaid, or telexed, in the
case of non-U.S. residents, addressed as follows:

                  if to the Company or any other party hereto, at the address of
         such party set forth in the Purchase Agreement or in a certain
         Stockholders' Agreement by and among the parties hereto dated as of the
         date hereof;

                  if to any subsequent holder of Preferred Shares or Restricted
         Stock, to it at such address as may have been furnished to the Company
         in writing by such holder;

or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Preferred Shares or
Restricted Stock) or to the holders of Preferred Shares or Restricted Stock (in
the case of the Company) in accordance with the provisions of this paragraph.

                  (c)      This Agreement shall be construed and enforced in
accordance with and governed by the General Corporation Law of the State of
Delaware as to matters within the scope thereof, and as to all other matters
shall be governed by and construed in accordance with the internal laws of the
State of Georgia.

                  (d)      This Agreement may not be amended or modified, and no
provision hereof may be waived, without the written consent of the Company and
the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
outstanding shares of Restricted Stock, which in every event must include the
holders of at least sixty-six and two-thirds percent (66-2/3%) in interest of
the outstanding Conversion Shares. Notwithstanding the foregoing, no such
amendment or modification shall be effective if and to the extent that such
amendment or modification either (a) creates any additional affirmative
obligations to be complied with by any or all of the Purchasers or (b) grants to
any one or more Purchasers any rights more favorable than any rights granted to
all other Purchasers or otherwise treats any one or more Purchasers differently
than all other Purchasers.

                  (e)      This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

                                       13
<PAGE>   80

                  (f)      The obligations of the Company to register shares of
Series A and B Restricted Stock under Sections 4, 5 or 6 shall terminate five
years after completion of an underwritten public offering of shares of Common
Stock in which the net proceeds received by the Company shall be at least $10
million and the price paid by the public for such shares shall be at least $8.58
per share (appropriately adjusted to reflect any subdivision or combination of
Common Stock). The obligations of the Company to register shares of Series C
Restricted Stock under Sections 4, 5 or 6 shall terminate 5 years after
completion of an underwritten public offering of shares of Common Stock in which
the net proceeds received by the Company shall be at least $30 million and the
price paid by the public for such shares shall be at least $12.60 per share if
the public offering is closed on or prior to the first anniversary of the date
hereof and $18.90 per share thereafter (appropriately adjusted to reflect any
subdivision or combination of Common Stock).

                  (g)      If requested in writing by the underwriters for the
initial underwritten public offering of securities of the Company, each holder
of Restricted Stock who is a party to this Agreement shall agree not to sell
publicly any shares of Restricted Stock or any other shares of Common Stock
(other than shares of Restricted Stock or other shares of Common Stock being
registered in such offering), without the consent of such underwriters, for a
period of not more than 180 days following the effective date of the
registration statement relating to such offering; provided, however, that all
persons entitled to registration rights with respect to shares of Common Stock
who are not parties to this Agreement, all executive officers and directors of
the Company and all other holders of more than one percent (1%) of the voting
securities of the Company shall also have agreed not to sell publicly their
Common Stock under the circumstances and pursuant to the terms set forth in this
Section 13(g).

                  (h)      Notwithstanding the provisions of Section 7(a), the
Company's obligation to file a registration statement, or cause such
registration statement to become and remain effective, shall be suspended for a
period not to exceed 90 days in any 24-month period if there exists at the time
material non-public information relating to the Company which, in the reasonable
opinion of the Company, should not be disclosed.

                  (i)      The Company shall not grant to any third party any
registration rights more favorable than any of those contained herein, so long
as any of the registration rights under this Agreement remains in effect.

                  (j)      If any provision of this Agreement shall be held to
be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.

This Agreement constitutes the entire agreement among the parties with respect
to the subject matter hereof and supercedes all prior agreements and
understandings between them or any of them as to such subject matter, including
without limitation, the Existing Registration Rights Agreement.


                                       14
<PAGE>   81

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.


                           THE COMPANY:

                           WITNESS SYSTEMS, INC.


                           By: /s/ Jon W. Ezrine
                           -------------------------------------
                           Name:  Jon W. Ezrine
                           Title: Chief Financial Officer

                           FOUNDERS:


                           /s/ W. Thomas Snyder
                           -------------------------------------
                           W. Thomas Snyder

                           /s/ James W. Judson, Jr.
                           -------------------------------------
                           James W. Judson, Jr.

                           /s/ Steven Beckett
                           -------------------------------------
                           Steven Beckett

                           /s/ Kirk Knous
                           -------------------------------------
                           Kirk Knous





                                       15
<PAGE>   82


                              SERIES A AND B SHAREHOLDERS:

                              BATTERY VENTURES IV, L.P.

                              By:  Battery Partners IV, LLC


                                       By: /s/ Thomas J. Crotty
                                           -------------------------
                                           Member Manager





                       [SIGNATURES CONTINUED ON NEXT PAGE]


















                                       16
<PAGE>   83


       [SIGNATURES TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]

                                         BATTERY INVESTMENT
                                         PARTNERS IV, LLC


                                         By: /s/ Thomas J. Crotty
                                             ----------------------------------
                                              Member Manager


                                         /s/ John Abraham
                                             ----------------------------------
                                         John Abraham


                                         PURCHASERS:

                                         NORO-MOSELEY PARTNERS IV, L.P.

                                         By:  MKFJ-IV, L.L.C., General Partner

                                              By: /s/ Allan S. Moseley
                                                  -----------------------------
                                                  Member


                                         NORO-MOSELEY PARTNERS IV-B, L.P.


                                         By:  MKFJ-IV, L.L.C., General Partner

                                              By: /s/ Allan S. Moseley
                                                  -----------------------------
                                                  Member


                                         HAMBRECHT & QUIST CALIFORNIA,
                                         a California corporation


                                         By: /s/ Robert N. Savios
                                             ----------------------------------
                                         Name:  Robert N. Savios
                                         Title: Tax Director-Attorney-in-Fact


                       [SIGNATURES CONTINUED ON NEXT PAGE]

                                       17
<PAGE>   84


       [SIGNATURES TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]

                            HAMBRECHT & QUIST EMPLOYEE
                            VENTURE FUND, L.P. II, a
                            Delaware limited partnership

                            By:  H&Q VENTURE MANAGEMENT,
                                 L.L.C., a Delaware limited liability
                                 company, its General Partner

                            By: /s/ Robert N. Savios
                               ------------------------------------------------
                            Name:  Robert N. Savios
                            Title: Tax Director-Attorney-in-Fact


                            ACCESS TECHNOLOGY PARTNERS, L.P., a Delaware
                            limited partnership

                            By:  ACCESS TECHNOLOGY
                                 MANAGEMENT, L.L.C., a Delaware
                                 limited liability company, its General Partner

                                 By: H&Q VENTURE MANAGEMENT,
                                     L.L.C., a Delaware limited liability
                                     ompany, its Managing Member


                                  By: /s/ Robert N. Savios
                                       ----------------------------------------
                                  Name: Robert N. Savios
                                  Title: Tax Director-Attorney-in-Fact


                            ACCESS TECHNOLOGY PARTNERS BROKERS FUND, L.P.

                            By:    H&Q VENTURE MANAGEMENT, L.L.C.,
                                   a Delaware limited liability company, its
                                   General Partner

                                   By: /s/ Robert N. Savios
                                       ----------------------------------------
                                   Name: Robert N. Savios
                                   Title: Tax Director-Attorney-in-Fact

                       [SIGNATURES CONTINUED ON NEXT PAGE]



                                       18

<PAGE>   85


[SIGNATURES TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]



                             H&Q WITNESS SYSTEMS INVESTORS, LP, a
                             California limited partnership

                             By:      H&Q VENTURE ASSOCIATES,
                                      a California corporation, its
                                      General Partner

                             By: /s/ Robert N. Savios
                                 ----------------------------------------------
                             Name: Robert N. Savios
                             Title: Tax Director-Attorney-in-Fact



                             THE PRODUCTIVITY FUND IV, L.P., a
                             Delaware limited partnership

                             By:      FIRST ANALYSIS MANAGEMENT
                                      COMPANY IV, LLC, a Delaware limited
                                      liability company, its General Partner

                                      By:      FIRST ANALYSIS
                                               CORPORATION, a Delaware
                                               Corporation, Member


                                      By: /s/ Mark Koulogeorge
                                          -------------------------------------
                                      Name: Mark Koulogeorge
                                      Title:












                       [SIGNATURES CONTINUED ON NEXT PAGE]



                                       19
<PAGE>   86


[SIGNATURES TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT]


                           THE PRODUCTIVITY FUND IV ADVISORS
                           FUND, L.P., a Delaware limited partnership
                           Delaware limited partnership

                           By:      FIRST ANALYSIS MANAGEMENT
                                    COMPANY IV, LLC, a Delaware limited
                                    liability company, its General Partner

                                    By:      FIRST ANALYSIS
                                             CORPORATION, a Delaware
                                             Corporation, Member

                                    By:   /s/ Mark Koulogeorge
                                          -----------------------------------
                                    Name: Mark Koulogeorge
                                    Title:




                        /s/ John P. Implay, Jr.
                        -----------------------------------------------------
                        JOHN P. IMLAY JR.















                                       21
<PAGE>   87
                                    EXHIBIT D

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.

                       Amendment No. 1 to the Amended and
                     Restated Registration Rights Agreement
                              Dated August 2, 1999


                                      -30-

<PAGE>   88
                                  AMENDMENT TO
               AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

         This amendment (the "Amendment") to the Amended and Restated
Registration Rights Agreement dated August 2, 1999 attached hereto as Exhibit A
is made and entered into the 30th day of September, 1999, by and among Witness
Systems, Inc., a Delaware corporation (the "Company"), each of Tom Snyder, Jim
Judson, Steve Beckett and Kirk Knous (collectively, the "Founders") and those
current shareholders of the Company referred to in the Registration Rights
Agreement as the "Series A and B Shareholders" and the "Purchasers," Advanced
Integrated Recorders, Inc. ("AIR"), Greyrock Capital, a division of
NationsCredit Commercial Corporation ("Greyrock"), and Silicon Valley Bank
("SVB"). The Amended and Restated Registration Rights Agreement as amended by
this Amendment is referred to in this Amendment as the "Registration Rights
Agreement." The foregoing Parties to the Registration Rights Agreement as
amended by this Amendment are collectively referred to as the "Parties." Each
capitalized term in this Amendment shall have the meaning ascribed to such term
in the Amended and Restated Registration Rights Agreement dated August 2, 1999
unless such capitalized term is otherwise defined in this Amendment.



                              W I T N E S S E T H:

         WHEREAS, the Company, Founders, the Series A and B Shareholders and the
Purchasers are Parties to the Registration Rights Agreement whereby the Series A
and B Shareholders and the Purchasers were granted certain registration rights
with respect to certain securities of the Company;

         WHEREAS, pursuant to the terms of the Asset Purchase Agreement dated as
of the date hereof (the "Asset Purchase Agreement") by and among the Company,
AIR and Formation, Inc., the Company is issuing to AIR 467,289 shares of
Company's $.01 par value voting common stock (the "AIR Shares") as consideration
for Company's purchase of certain of AIR's assets;

         WHEREAS, as an inducement to AIR to enter into the Asset Purchase
Agreement, the Company desires to grant to AIR certain registration rights with
respect to the AIR Shares, and the Company, the Founders, Series A and B
Shareholders and the Purchasers desire to amend the Registration Rights
Agreement in conjunction therewith;

         WHEREAS, pursuant to that Warrant to Purchase Stock dated as of June
24, 1999 ("Greyrock Warrant") Company issued a warrant to Greyrock and granted
certain registration rights to Greyrock in Exhibit B thereto;

         WHEREAS, the Parties desire to add Greyrock as a party to the
Registration Rights Agreement and replace the registration rights granted in the
Greyrock Warrant with the registration rights set forth in Section 5 of the
Registration Rights Agreement;


<PAGE>   89

         WHEREAS, pursuant to that Warrant to Purchase Stock dated as of April
22, 1999 ("SVB Warrant") Company issued a warrant to SVB and granted certain
registration rights to SVB in Exhibit B thereto; and

         WHEREAS, the Parties desire to add SVB as a party to the Registered
Rights Agreement and replace the registration rights granted in the SVB Warrant
with the registration rights set forth in Section 5 of the Registration Rights
Agreement.

         NOW, THEREFORE, in consideration of the premises set forth herein, the
Parties hereto agree as follows:

         1.       By executing this Amendment, AIR, SVB, and Greyrock shall be
deemed to be added as Parties to the Registration Rights Agreement subject to
the terms and conditions of the Registration Rights Agreement.

         2.       The following definition is hereby added to Section 1 of the
Registration Rights Agreement:

         "Warrant Shares" mean those shares of Common Stock issued or issuable
         (i) upon conversion of the Preferred Shares issued or issuable upon
         exercise by SVB of the warrant to purchase 20,000 shares of the
         Company's Series B Convertible Preferred Stock held by SVB or its
         assignee according to the terms of the SVB Warrant or (ii) upon
         exercise by Greyrock of the warrant to purchase 65,000 shares of the
         Company's Common Stock held by Greyrock or its assignee according to
         the terms of the Greyrock Warrant.

         3.       Section 1 of the Registration Rights Agreement is amended by
deleting the definition of "Restricted Stock" in its entirety and inserting in
lieu thereof the following definition:

         "Restricted Stock" shall mean (1) the Conversion Shares, excluding
         Conversion Shares which have been (a) registered under the Securities
         Act pursuant to an effective registration statement filed thereunder
         and disposed of in accordance with the registration statement covering
         them or (b) publicly sold pursuant to Rule 144 under the Securities
         Act; (2) for purposes of Section 5 hereof, up to 3,940,200 shares of
         Common Stock held by the Founders, but excluding shares of Common Stock
         which have been (a) registered under the Securities Act pursuant to an
         effective registration statement filed thereunder and disposed of in
         accordance with the registration statement covering them, or (b)
         publicly sold pursuant to Rule 144 under the Securities Act; (3) for
         purposes of Section 5 hereof, the Warrant Shares issued or issuable
         upon the exercise of the SVB Warrant to purchase up to 20,000 Series B
         Preferred Shares, excluding SVB's Warrant Shares which have been (a)
         registered under the Securities Act pursuant to an effective
         registration statement filed thereunder and disposed of in accordance
         with the registration statement covering them or (b) publicly sold
         pursuant to Rule 144 under the Securities Act or (c) privately sold;
         (4) for purposes of Section 5 hereof, the Warrant Shares issued or
         issuable upon the exercise of the Greyrock Warrant to purchase up to
         65,000 shares of Common Stock, excluding Greyrock's Warrant Shares
         which have been (a) registered under the Securities Act pursuant to an
         effective registration statement filed thereunder and disposed


<PAGE>   90

         of in accordance with the registration statement covering them or (b)
         publicly sold pursuant to Rule 144 under the Securities Act or (c)
         privately sold; and (5) for purposes of Section 5 hereof, up to 467,289
         shares of Common Stock held by AIR, excluding any such shares (a) that
         remain subject to or have been forfeited under the Escrow Agreement
         attached as Exhibit D to the Asset Purchase Agreement, or (b) which
         have been redeemed under Section 8.4 of the Asset Purchase Agreement,
         or (c) which have been privately sold, or (d) which have been
         registered under the Securities Act pursuant to an effective
         registration statement filed thereunder and disposed of in accordance
         with the registration statement covering them or (e) which have been
         publicly sold pursuant to Rule 144 under the Securities Act.

         4.       Section 5 of the Registration Rights Agreement is amended by
striking this Section in its entirety and inserting in lieu thereof the
following:

         Incidental Registration. If the Company at any time (other than
         pursuant to Section 4 or Section 6) proposes to register any of its
         securities under the Securities Act for sale to the public, whether for
         its own account or for the account of other security holders or both
         (except with respect to registration statements on Forms S-4, S-8 or
         another form not available for registering the Restricted Stock for
         sale to the public), each such time it will give written notice to all
         holders of outstanding Restricted Stock of its intention so to do. Upon
         the written request of any such holder, received by the Company within
         30 days after the giving of any such notice by the Company, to register
         any of its Restricted Stock, the Company will use its best efforts to
         cause the Restricted Stock as to which registration shall have been so
         requested to be included in the securities to be covered by the
         registration statement proposed to be filed by the Company, all to the
         extent requisite to permit the sale or other disposition by the holder
         (in accordance with its written request) of such Restricted Stock so
         registered. In the event that any registration pursuant to this Section
         5 shall be, in whole or in part, an underwritten public offering of
         Common Stock, the number of shares of Restricted Stock to be included
         in such an underwriting may be reduced if and to the extent that the
         managing underwriter shall be of the opinion that such inclusion would
         adversely affect the marketing of the securities to be sold by the
         Company therein, provided, however, that such reduction is made
         according to the following order of priority among the Parties:

         1)       First:   All of Greyrock's Restricted Stock, all of SVB's
                  Restricted Stock and up to 116,822 shares of AIR's Restricted
                  Stock shall be included in a registration pursuant to this
                  Section 5 (pro rata among the requesting holders named in this
                  Subparagraph 1 based upon the number of shares held by such
                  requesting holders eligible for the priority set forth in this
                  subparagraph), but only up to the total number of shares of
                  Restricted Stock that the managing underwriter allows to be
                  included in such registration;



<PAGE>   91



         2)       Second:  All remaining shares of Restricted Stock held by all
                  other holders of Restricted Stock and AIR's Restricted Stock
                  remaining after application in full of the priority set forth
                  in the above subparagraph shall be included in a registration
                  pursuant to this Section 5 (pro rata among the requesting
                  holders based upon the number of shares of Restricted Stock
                  held by such requesting holders); provided, however, that such
                  number of shares of Restricted Stock held by the Founders or
                  such other requesting holders of Restricted Stock shall not be
                  reduced if any shares are to be included in such underwriting
                  for the account of any person other than the Company, the
                  Founders or such other requesting holders of Restricted Stock;

                  provided, further, that in no event shall the number of shares
                  of Restricted Stock included in the offering be reduced below
                  twenty percent (20%) of the total number of shares of Common
                  Stock included in such offering, unless the offering is the
                  Company's initial public offering of the Company's securities
                  in which case the number of shares of Restricted Stock to be
                  included by the holders may be reduced or eliminated entirely
                  as set forth above. Notwithstanding the foregoing provisions,
                  the Company may withdraw any registration statement referred
                  to in this Section 5 without thereby incurring any liability
                  to the holders of Restricted Stock.

         5.       Section 10 of the Registration Rights Agreement shall be
applicable with respect to the Warrant Shares.

         6.       Section 13(a) of the Registration Rights Agreement is amended
by striking this Section in its entirety and inserting in lieu thereof the
following:

                  All covenants and agreements contained in this Agreement by or
                  on behalf of any of the parties hereto shall bind and inure to
                  the benefit of the respective successors and assigns of the
                  parties hereto (including without limitation transferees of
                  any Preferred Shares or Restricted Stock), whether so
                  expressed or not, provided, however, (i) that registration
                  rights conferred herein on the holders of shares of Series A
                  Convertible Preferred Stock and Series B Convertible Preferred
                  Stock or Series A and B Restricted Stock shall only inure to
                  the benefit of a transferee of such shares if there is
                  transferred to such transferee at least 20% of the total
                  shares of Restricted Stock originally issued pursuant to the
                  Stock Purchase Agreements in respect of the Series A
                  Convertible Preferred Stock and Series B Convertible Preferred
                  Stock, dated March 18, 1997 and September 24, 1998,
                  respectively, to the direct or indirect transferor of such
                  transferee or such transferee is a party hereto or a partner,
                  member, shareholder or affiliate of a party hereto; (ii) that
                  registration rights conferred herein on the holders of Series
                  C Convertible Preferred Stock or Series C Restricted Stock
                  shall only inure to the benefit of a transferee of such shares
                  if there is transferred to such transferee the total shares of
                  Restricted Stock originally issued pursuant to the Stock
                  Purchase Agreement in respect of the Series C Convertible
                  Preferred Stock of even date herewith, to the direct or
                  indirect transferor of such transferee or 20% of such total
                  shares, whichever is less, or such transferee is a party
                  hereto or a partner, member, shareholder or affiliate of a
                  party hereto; (iii) that, notwithstanding anything to the


<PAGE>   92

                  contrary contained in this Agreement, registration rights
                  conferred herein on SVB shall only inure to the benefit of a
                  transferee of such shares if there is transferred to such
                  transferee at least 20% of the total shares of Warrant Shares
                  originally issued to SVB pursuant to the SVB Warrant or such
                  transferee is a party hereto or a partner, member, shareholder
                  or affiliate of a party hereto; (iv) that registration rights
                  conferred herein on Greyrock shall only inure to the benefit
                  of a transferee of such shares if there is transferred to such
                  transferee at least 20% of the total shares of Warrant Shares
                  originally issued to Greyrock pursuant to the Greyrock Warrant
                  or such transferee is a party hereto or a partner, member,
                  shareholder or affiliate of a party hereto; and (v) that
                  registration rights conferred herein on AIR shall only inure
                  to the benefit of a transferee of such shares if there is
                  transferred to such transferee at least 20% of the total
                  shares of AIR Shares originally issued to AIR pursuant to the
                  Asset Purchase Agreement or such transferee is a party hereto
                  or a partner, member, shareholder or affiliate of a party
                  hereto.

         7.       Greyrock and the Company agree that the registration rights
granted in Section 5 of the Registration Rights Agreement supersede the terms
and conditions of Exhibit B of the Greyrock Warrant in its entirety. All terms
of the Greyrock Warrant, excluding the provisions of Exhibit B of the Greyrock
Warrant, shall remain in full force and effect. In the event a conflict between
the terms of the Greyrock Warrant (excluding the provisions of Exhibit B of the
Greyrock Warrant) and the provisions of the Registration Rights Agreement, the
provisions of the Greyrock Warrant shall govern and control in all respects.

         8.       SVB and the Company agree that the registration rights granted
in Section 5 of the Registration Rights Agreement supersede the terms and
conditions of Exhibit B of the SVB Warrant in its entirety. All terms of the SVB
Warrant, excluding the provisions of Exhibit B of the SVB Warrant, shall remain
in full force and effect. In the event a conflict between the terms of the SVB
Warrant, excluding the provisions of Exhibit B of the SVB Warrant, and the
provisions of the Registration Rights Agreement, the provisions of the SVB
Warrant shall govern and control in all respects.

         9.       This Amendment constitutes the entire agreement among the
Parties with respect to the subject matter hereof and supersedes all prior
agreements and understandings between them or any of them as to such subject
matter.



<PAGE>   93



         10.      This Amendment may be executed in any number of counterparts,
each of which will be deemed to be an original and all of which together will
constitute one and the same instrument.

         IN WITNESS WHEREOF, the Parties have executed this Amendment as of the
date first above written.


                                  THE COMPANY:

                                  WITNESS SYSTEMS, INC.

                                  By:
                                     ------------------------------------------
                                  Title:
                                        ---------------------------------------


                                  ADVANCED INTEGRATED
                                  RECORDERS, INC.

                                  By:
                                     ------------------------------------------
                                  Title:
                                        ---------------------------------------


                                  GREYROCK CAPITAL,
                                  a division of NationsCredit
                                  Commercial Corporation

                                  By:
                                     ------------------------------------------
                                  Title:
                                        ---------------------------------------



                                  SILICON VALLEY BANK


                                  By:
                                     ------------------------------------------
                                  Title:
                                        ---------------------------------------



                       [SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>   94


                                  FOUNDERS:


                                  ----------------------------------
                                  W. Thomas Snyder

                                  ----------------------------------
                                  James W. Judson, Jr.

                                  ----------------------------------
                                  Steven Beckett

                                  ----------------------------------
                                  Kirk Knous




                                  SERIES A AND B SHAREHOLDERS:

                                  BATTERY VENTURES IV, L.P.

                                  By:  Battery Partners IV, LLC

                                  By:
                                     -------------------------------
                                               Member Manager


                                  BATTERY INVESTMENT PARTNERS IV, LLC

                                  By:
                                     -------------------------------
                                               Member Manager



                                     -------------------------------
                                     John Abraham



                       [SIGNATURES CONTINUED ON NEXT PAGE]


<PAGE>   95


                                  SERIES C SHAREHOLDERS:


                                  NORO-MOSELEY PARTNERS IV, L.P.

                                  By:  MKFJ-IV, L.L.C.,
                                       Its General Partner


                                       By:
                                          -------------------------------------
                                          A Member


                                  NORO-MOSELEY PARTNERS IV-B, L.P.

                                  By:  MKFJ-IV, L.L.C.,
                                       Its General Partner


                                       By:
                                          -------------------------------------
                                          A Member


                                  HAMBRECHT & QUIST CALIFORNIA, a
                                  California corporation

                                  By:
                                     ------------------------------------------
                                     Name:
                                          -------------------------------------
                                     Title:
                                           ------------------------------------


                       [SIGNATURES CONTINUED ON NEXT PAGE]


<PAGE>   96


                            HAMBRECHT & QUIST EMPLOYEE
                            VENTURE FUND, L.P. II, a Delaware
                            limited partnership

                            By: H&Q VENTURE MANAGEMENT,
                                L.L.C., a Delaware limited liability
                                company, its General Partner

                                By:
                                   --------------------------------------
                                   Name:
                                        ---------------------------------
                                   Title:
                                         --------------------------------


                            ACCESS TECHNOLOGY PARTNERS, L.P.,
                            a Delaware limited partnership

                            By: ACCESS TECHNOLOGY
                                MANAGEMENT, L.L.C.,, a Delaware
                                limited liability company, its General Partner

                                By:  H&Q VENTURE MANAGEMENT,
                                     L.L.C., a Delaware limited liability
                                     company, its Managing Member

                                By:
                                   --------------------------------------
                                   Name:
                                        ---------------------------------
                                   Title:
                                         --------------------------------


                            ACCESS TECHNOLOGY PARTNERS
                            BROKERS FUND, L.P., a Delaware limited
                            partnership

                            By: H&Q VENTURE MANAGEMENT, L.L.C.,
                                a Delaware limited liability company, its
                                General Partner

                                By:
                                   --------------------------------------
                                   Name:
                                        ---------------------------------
                                   Title:
                                         --------------------------------

                       [SIGNATURES CONTINUED ON NEXT PAGE]


<PAGE>   97



                            H&Q WITNESS SYSTEMS INVESTORS, LP,
                            a California limited partnership

                            By: H&Q VENTURE ASSOCIATES,
                                a California corporation, its
                                General Partner

                                By:
                                   --------------------------------------
                                   Name:
                                        ---------------------------------
                                   Title:
                                         --------------------------------


                            THE PRODUCTIVITY FUND IV, L.P., a
                            Delaware limited partnership

                            By: First Analysis Management Company IV,
                                LLC, a Delaware limited liability company,
                                its General Partner

                                By: First Analysis Corporation, a Delaware
                                    corporation

                                By:
                                   --------------------------------------
                                   Name:
                                        ---------------------------------
                                   Title:
                                         --------------------------------


                            THE PRODUCTIVITY FUND IV ADVISORS
                            FUND, L.P., a Delaware limited partnership

                            By: First Analysis Management Company IV,
                                LLC, a Delaware limited liability company,
                                its General Partner

                                By: First Analysis Corporation, a Delaware
                                    corporation

                                By:
                                   --------------------------------------
                                   Name:
                                        ---------------------------------
                                   Title:
                                         --------------------------------


                       [SIGNATURES CONTINUED ON NEXT PAGE]


<PAGE>   98



                                    ---------------------------------
                                    JOHN P. IMLAY, JR.



<PAGE>   99



                                    EXHIBIT A

               AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

                                 AUGUST 2, 1999


<PAGE>   100


                                    EXHIBIT E

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.

                                ESCROW AGREEMENT

                                 [See Attached]

                                      -31-

<PAGE>   101


                                ESCROW AGREEMENT

         THIS ESCROW AGREEMENT (the "Agreement") is made and entered into as of
the 30th day of September, 1999 by and between Advanced Integrated Recorders,
Inc., a Delaware corporation with offices located at 121 Whittendale Drive,
Moorestown, New Jersey 08057 ("AIR"), Witness Systems, Inc., a Delaware
corporation with offices located at 1105 Sanctuary Parkway, Suite 210,
Alpharetta, Georgia 30004 ("WSI"), and SunTrust Bank, Atlanta, a Georgia banking
corporation, as escrow agent ("Escrow Agent").

                                    RECITALS

         WHEREAS, WSI, AIR and Formation, Inc., a New Jersey corporation,
entered into an Asset Purchase Agreement dated September 30, 1999 (the "Asset
Purchase Agreement");

         WHEREAS, the Asset Purchase Agreement provides that at the Closing
certain shares of WSI common stock to be issued pursuant to the Asset Purchase
Agreement and otherwise distributable to AIR pursuant thereto will be deposited
in escrow pursuant to this Agreement; and

         WHEREAS, each capitalized term that is used but not otherwise defined
herein shall have the meaning assigned to it in the Asset Purchase Agreement.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the mutual premises and covenants
contained in the Asset Purchase Agreement and herein, the parties agree as
follows:

                                    ARTICLE I

                      ESCROW APPOINTMENT AND ESCROW SHARES

         1.1 THE ESCROW AGENT APPOINTMENT. WSI and Air hereby appoint and
designate SunTrust Bank, Atlanta, as the Escrow Agent to receive, hold and
distribute the Escrow Shares (as hereinafter defined) in accordance with the
terms of this Agreement. The Escrow Agent hereby accepts its appointment as the
Escrow Agent and agrees to hold, administer and disburse the Escrow Fund and any
income, interest or other amounts received thereon in accordance with the terms
hereof. The Escrow Agent shall have no obligations or responsibilities in
connection with the Asset Purchase Agreement or any other agreement between any
of the parties to the Asset Purchase Agreement, other than this Agreement.

         1.2 ESCROW SHARES. Pursuant to the Section 2.6 of the Asset Purchase
Agreement, Air shall deposit into an escrow account with the Escrow Agent (the
"Escrow Account") stock certificates in the name of AIR representing an
aggregate of 93,458 shares of the WSI common stock to be received by AIR
pursuant to the Asset Purchase Agreement (collectively, the "Escrow Shares").
AIR shall concurrently therewith execute a stock power with respect to their
respective Escrow Shares, which stock power shall be delivered to the Escrow
Agent and attached to the certificate representing their respective Escrow
Shares. The Escrow Shares shall be held and distributed by the Escrow Agent, in
accordance with the terms and conditions of this Agreement.

<PAGE>   102

                                   ARTICLE II

                              APPLICATION OF ESCROW

         2.1 APPLICATION OF ESCROW SHARES TO CLAIMS. If WSI shall have a claim
against AIR pursuant to Section 8.1 of the Asset Purchase Agreement, it shall
promptly give written notice thereof to AIR and the Escrow Agent, including in
such notice a brief description of the facts upon which such claim is based and
the amount thereof and the number of Escrow Shares out of the Escrow Account
(rounded to the nearest whole share) that is equal to the amount of such claim
divided by the Fair Market Value (defined below) of such shares. Unless AIR
gives written notice to the Escrow Agent contesting the delivery of such Escrow
Shares within thirty (30) days following receipt of such notification from WSI,
the Escrow Agent shall promptly after such thirty (30) day period deliver out of
the Escrow Account to WSI the number of Escrow Shares requested by WSI. If AIR
gives such written notice contesting the delivery of such Escrow Shares to the
Escrow Agent within thirty (30) days following receipt of notification from WSI
as described above, the Escrow Agent shall not release any Escrow Shares from
the Escrow Account until the rights of AIR and WSI with respect to the Escrow
Shares have been agreed upon between AIR and WSI or until such rights are
finally determined by arbitration or a court of competent jurisdiction. The
Escrow Agent may rely on any determination by any such arbitration or court of
competent jurisdiction. If any such arbitration or court shall determine that
the Escrow Shares are to be delivered out of the Escrow Account to WSI, the
Escrow Agent shall, within ten (10) business days following receipt of a copy of
such determination, deliver out of the Escrow Account to WSI the number of
Escrow Shares (rounded to the nearest whole share) that is equal to the amount
of such claim divided by the Fair Market Value of such shares. "Fair Market
Value" for purposes of Section 8 of the Asset Purchase Agreement and for this
Agreement shall mean the greater of (x) $5.35 per share or (y) the fair market
value of the common stock of WSI at the time a claim made under Section 8 of the
Asset Purchase Agreement is resolved as determined by a reputable independent
appraiser mutually acceptable to WSI and AIR, or in the absence of agreement
between the parties, the average of the two fair market values determined by
reputable independent appraisers one of which is selected by AIR and the other
by WSI.

         2.2 DISTRIBUTION OF ESCROW SHARES. The Escrow Shares in the Escrow
Account not distributed to WSI in accordance with Section 2.1 hereof shall be
held by the Escrow Agent until December 31, 2000 at which time the Escrow Agent
shall distribute the Escrow Shares deposited into the Escrow Account pursuant to
Article I hereof to AIR, less (i) AIR's Escrow Shares that may have been
delivered to WSI pursuant to Section 2.1 hereof and (ii) AIR's Escrow Shares
(rounded to the nearest whole share) equal to the amount of all pending claims
asserted by WSI under Section 8.1 of the Asset Purchase Agreement. The Escrow
Shares in the Escrow Account, not so distributed pursuant to this Section 2.2
shall be retained by the Escrow Agent until all such pending claims against AIR
are resolved, as provided in Section 2.1 above, and all of the Escrow Shares in
the Escrow Account deliverable to WSI as a result thereof, if any, shall have
been delivered to WSI; provided, however, that upon the disposition of any such
claims against AIR prior to the disposition of all such claims against AIR, the
Escrow Agent shall deliver to AIR such number of Escrow Shares (rounded to the
nearest whole share) in the Escrow Account, as is most nearly equal on the day
of such distribution to the excess of the aggregate Fair Market Value of such
Escrow Shares over 100% of the amount of the remaining aggregate claims against
AIR as determined above.

         2.3 OWNERSHIP OF ESCROW SHARES; VOTING RIGHTS. AIR shall have all
indicia of ownership of the respective Escrow Shares while they are held in
escrow, including, without limitation, the rights to vote such shares and
receive dividends and distributions thereon and the obligations to pay all
income taxes of Seller with respect thereto; provided, however, that any other
shares or securities into which such respective Escrow Shares may be changed or
for which they may be exchanged pursuant to corporate

                                      -2-

<PAGE>   103

action of WSI affecting holders of WSI Common Stock generally shall be delivered
to and held by the Escrow Agent in escrow and shall be subject to the provisions
of this Agreement.

         2.4 ARBITRATION. Any controversy involving this Agreement shall be
settled by arbitration in Philadelphia, Pennsylvania in accordance with the
Rules of the American Arbitration Association, and judgment upon the award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof. The cost and expenses (including counsel fees) of any such arbitration
shall be borne by the party against whom the award is rendered.

                                   ARTICLE III

                                  MISCELLANEOUS

         3.1 NOTICES. Any notice or other communication required or permitted to
be given to the parties hereto shall be deemed to have been given if delivered,
or the next business day if sent by a reputable overnight courier, or two (2)
days after mailing by certified or registered mail, return receipt requested,
first class postage prepaid, addressed as follows (or at such other address as
the addressed party may have substituted by notice pursuant to this Section
3.1):

                  (a)      If to WSI to:

                           Witness Systems, Inc.
                           1105 Sanctuary Parkway
                           Suite 200
                           Alpharetta, Georgia  30144
                           Attn:  Chief Executive Officer


                           with a copy to:

                           Morris, Manning & Martin, LLP
                           1600 Atlanta Financial Center
                           3343 Peachtree Road, NE
                           Atlanta, GA  30326
                           Attn:  John C. Yates
                           Telephone:  (404) 504-5444
                           Telecopy:  (404) 365-9532

                  (b)      If to AIR:

                           Advanced Integrated Recorders, Inc.
                           121 Whittendale Drive
                           Building 1
                           Moorestown, NJ 08057
                           Attn:  President and Chief Executive Officer

                                      -3-
<PAGE>   104


                           with a copy to:

                           Pepper Hamilton LLP
                           Suite 400
                           1235 Westlakes Drive
                           Berwyn, PA  19312-2401
                           Attn:   James D. Rosener, Esquire

                  (c)      If to the Escrow Agent:

                           SunTrust Bank, Atlanta
                           Corporate Trust Department
                           25 Park Place
                           24th Floor
                           Atlanta, Georgia  30303-2900
                           Attn:  Rebeccah Fisher
                           Phone:  (404) 588-7262
                           Fax:  (404) 588-7335

         3.2 TERMINATION. This Agreement shall terminate upon the mutual written
express agreement of WSI and AIR. In any event, this Agreement terminates when
all of the Escrow Shares in the Escrow Account have been distributed according
to its terms.

         3.3 INTERPRETATION. The validity, construction, interpretation and
enforcement of this Agreement shall be determined and governed by the laws of
the State of New Jersey. The invalidity or unenforceability of any provision of
this Agreement or the invalidity or unenforceability of any provision as applied
to a particular occurrence or circumstance shall not affect the validity or
enforceability of any of the other provisions of this Agreement or the
applicability of such provision, as the case may be.

         3.4 DEFINED TERMS. All capitalized terms not otherwise defined herein
shall have the meanings assigned to them in the Asset Purchase Agreement.

         3.5 COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement.

         3.6 ESCROW AGENT.

             (a) All documents, including any instrument necessary for the
negotiation or other transfer of escrow assets, deposited with this Agreement
are approved by the parties hereto, other than the Escrow Agent, and said Escrow
Agent shall not be obliged to inquire as to the form, manner of execution or
validity of these documents or any document hereafter deposited pursuant to the
provisions hereof, nor shall said Escrow Agent be obliged to inquire as to the
identity, authority or rights of the persons executing the same. Said Escrow
Agent shall be liable under this Agreement only for its gross negligence or
willful misconduct in the performance of his duties expressly set forth in this
Escrow Agreement. The Purchaser agrees to pay to the Escrow Agent upon demand
all liabilities, fees and expenses incurred by Escrow Agent by reason of this
Escrow. In case of conflicting demands upon it, said Escrow Agent may withhold
performance of this escrow until such time as said conflicting demands shall
have been withdrawn or the rights of the respective parties shall have been
settled by court adjudication, arbitration, joint order or otherwise.

                                      -4-
<PAGE>   105


             (b) Any notice which the Escrow Agent is required or desires
to give hereunder to any of the undersigned shall be in writing and may be given
by mailing the same to the address of the undersigned (or to such other address
as said undersigned may have theretofore substituted therefor by written
notification to the Escrow Agent), by overnight courier, registered or first
class mail, postage prepaid. For all purposes hereof any notice so mailed shall
be as effectual as though served upon the person of the undersigned to whom it
was mailed at the time it is deposited in the United States mail by the Escrow
Agent whether or not such undersigned thereafter actually receives such notice.
Notices to the Escrow Agent shall be in writing and shall not be deemed to be
given until actually received by the Escrow Agent. Whenever under the terms
hereof the time for giving a notice or performing an act falls upon a Saturday,
Sunday or bank holiday, such time shall be extended to the Escrow Agent's next
business day.

             (c) Liability of The Escrow Agent. In performing its duties
under this Agreement, or upon the claimed failure to perform its duties
hereunder, the Escrow Agent shall have no liability or obligation to anyone for
any damages, losses or expenses incurred as a result of the Escrow Agent's
acting or failing to act with respect to this agreement except for the Escrow
Agent's willful misconduct or gross negligence. The Escrow Agent shall be
entitled to rely upon any instrument, not only as to its due execution, validity
and effectiveness, but also as to the truth and accuracy of any information
contained therein, which the Escrow Agent shall in good faith believe to be
genuine, to have been signed or presented by the person or parties purporting to
sign the same and to conform to the provisions of this Agreement, and the Escrow
Agent shall not incur any liability under this agreement as a result of such
reliance. The Escrow Agent may consult legal counsel selected by it in the event
of any dispute or question of the construction of any of the provisions hereof
or of its duties hereunder or seek the assistance of a court of competent
jurisdiction, and shall incur no liability and shall be fully protected in
acting in accordance with the opinion or instruction of such counsel or such
court. WSI and Air hereby severally and jointly agree to indemnify and hold
harmless the Escrow Agent, its officers, directors, employees and agents against
any and all losses, claims, causes of action, damages, liabilities and expenses,
including reasonable costs of investigation and counsel fees and expenses and
disbursement, which may be imposed upon or incurred by the Escrow Agent or any
such officer, director, employee or agent in connection with the Escrow Agent's
acceptance of appointment as Escrow Agent hereunder, or the performance of its
duties hereunder, including any litigation arising from this Agreement or
involving the subject matter hereof of the Escrow Shares deposited hereunder,
provided that such losses, claims, causes of action, damages, liabilities and
expenses are not the result of willful misconduct or gross negligence by the
Escrow Agent or its officers, directors, employees or agents. The parties to
this Agreement agree that the indemnification afforded to the Escrow Agent
pursuant to this paragraph 3.6(c) shall survive the termination of this
Agreement. WSI shall indemnify, defend and hold Air harmless from or against any
losses, claims, causes of action, damages, liabilities and expenses, including
reasonable costs of investigation and counsel fees and expenses and disbursement
which may be imposed upon or incurred by Air as a result of Air's obligations
under this Section 3.6(c), except for losses, claims, causes of action, damages,
liabilities and expenses, including reasonable costs of investigation and
counsel fees and expenses and disbursement arising directly or indirectly from
Air's negligence or willful misconduct.

             (d) The Escrow Agent's duties and responsibilities shall be
limited to those expressly set forth in this Escrow Agreement and the Escrow
Agent shall not be subject to, nor obliged to recognize, any other agreement
between, or direction or instruction of, any or all of the parties hereto even
though reference thereto may be made herein; provided, however, with the Escrow
Agent's written consent, this Escrow Agreement may be amended at any time or
times by an instrument in writing signed by all the then parties in interest.

                                      -5-
<PAGE>   106

             (e) If any property subject hereto is at any time attached,
garnished or levied upon, under any court order, or in case the payment,
assignment, transfer, conveyance or delivery of any such property shall be
stayed or enjoined by any court order, or in case any order, judgment or decree
shall be made or entered by any court affecting such property, or any party
thereof, then in any of such events, the Escrow Agent is authorized, in his sole
discretion, to rely upon and comply with any such order, writ, judgment or
decree, which he is advised by legal counsel of his own choosing is binding upon
him, and if he complies with any such order, writ, judgment or decree, he shall
not be liable to any of the parties thereto or to any other person, firm, or
corporation by reason of such compliance, even though such order, writ, judgment
or decree may be subsequently reversed, modified, annulled, set aside or
vacated.

             (f) The Escrow Agent may resign by giving five (5) days'
written notice by registered or first class mail sent to the undersigned at
their respective addresses herein set forth; and thereafter, subject to the
provisions of the preceding paragraph hereof, shall deliver all remaining
deposits in said escrow upon the joint written and signed order of the
undersigned.

             (g) Escrow Agent's fee for performing its duties under this
Agreement shall be Two Thousand Dollars ($2,000.00) (which includes a $500
document review fee). Escrow Agent's fees shall be paid by Witness Systems at
the time of execution of this Agreement.

         3.7 FRACTIONAL SHARES. WSI and the Escrow Agent shall not be obligated
to deliver any fractional shares of stock under this Escrow Agreement. In the
event that at any time the number of shares to be delivered would otherwise
include a fraction, WSI and/or the Escrow Agent shall deliver instead a number
of shares equal to the nearest integer thereto.

         IN WITNESS WHEREOF, the parties hereto have duly executed this Escrow
Agreement as of the date first above written.

SUNTRUST BANK, ATLANTA,                    ADVANCED INTEGRATED
as Escrow Agent                            RECORDERS, INC.


By:                                        By:
   ------------------------                   -----------------------------

Name:                                      Name:
     ----------------------                   -----------------------------

Title: Trust Officer                       Title: President and Chief
      ---------------------                      --------------------------
                                                  Executive Officer
                                                 --------------------------

WITNESS SYSTEMS, INC.


By:
   --------------------------------

Name:
     ------------------------------

Title: Chief Financial Officer
      -----------------------------


                                      -6-
<PAGE>   107


                                    EXHIBIT F

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.

                              CERTIFICATE OF SELLER


                                      -32-

<PAGE>   108


                                    EXHIBIT G

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.

                            CERTIFICATE OF PURCHASER

                                      -33-

<PAGE>   109
                                   CERTIFICATE

                                       OF

                              WITNESS SYSTEMS, INC.



         Reference is made to the Asset Purchase Agreement, dated September 30,
1999 (the "Agreement"), among Formation, Inc., a New Jersey corporation (the
"Shareholder"), Advanced Integrated Recorders, Inc., a Delaware corporation (the
"Seller") and Witness Systems, Inc., a Delaware Corporation (the "Purchaser").
Capitalized terms used and not otherwise defined herein shall have the meanings
assigned to such terms in the Agreement. This certificate is delivered pursuant
to Section 7.1 and Section 3.2(b) of the Agreement. Each of the undersigned
hereby certifies as follows:

         1. Purchaser has performed and complied with in all material respects
all of its obligations required by the Agreement to be performed or complied
with at or prior to the date hereof.

         2. The representations and warranties of Purchaser contained in the
Agreement are true and correct in all material respects at and as of the date
hereof, as if made at and as of the date hereof.

         3. Each of the conditions to the obligations of Seller and Shareholder
to sell the Purchased Assets to Seller which is set forth in Section 7 of the
Agreement has been satisfied.

         IN WITNESS WHEREOF, the undersigned have executed this Certificate on
this 30th day of September, 1999.



                              WITNESS SYSTEMS, INC.


                              ------------------------------------------------
                              Jon Ezrine
                              Chief Financial Officer, Secretary and Treasurer

<PAGE>   110



                                    EXHIBIT H

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.

                                  BILL OF SALE


                                      -34-

<PAGE>   111
                                  BILL OF SALE

         This Bill of Sale ("Bill of Sale") is entered into as of the 30th day
of September, 1999 by and between Advanced Integrated Recorders, Inc., a
Delaware with offices located at 121 Whittendale Drive, Moorestown, New Jersey
08057 (the "Seller"), and Witness Systems, Inc., a Delaware corporation with
offices located at 1105 Sanctuary Parkway, Suite 210, Alpharetta, Georgia 30004
(the "Purchaser"), in connection with that certain Asset Purchase Agreement by
and among Seller, Purchaser and Formation, Inc., dated September 30, 1999 (the
"Asset Purchase Agreement"). Capitalized terms not otherwise defined herein
shall have the meaning ascribed to them in the Asset Purchase Agreement.

         WHEREAS, Seller desires to assign, transfer, convey, and deliver to
Purchaser certain of Seller's assets attached hereto as Exhibit A purchased by
Purchaser pursuant to the Asset Purchase Agreement and defined as "Purchased
Assets" therein ("Purchased Assets");

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Seller and Purchaser agree as
follows:

         1. Seller hereby sells, transfers, assigns, conveys and delivers to
Purchaser and its successors and assigns, forever all of their right, title and
interest in and to all of the Purchased Assets free and clear of all liens,
claims, charges and encumbrances of any nature whatsoever, to have and to hold
the same and each and all thereof unto Purchaser and its successors and assigns
forever, to its and their own use and benefit forever.

         2. Seller hereby covenants and agrees with Purchaser that they shall
duly execute and deliver all such further instruments of sale, transfer,
assignment, and conveyance and all such notices, releases, acquittances,
certificates of title, and other documents as may be necessary more fully to
sell, transfer, assign, and convey to and vest in Purchaser the Purchased Assets
hereby sold, transferred, assigned, and conveyed or intended so to be.

         3. This Bill of Sale shall not be deemed to supersede any of the
provisions of the Asset Purchase Agreement. In the event of any conflict between
the provisions of the Asset Purchase Agreement and this Bill of Sale, the former
shall be controlling.

         4. All of the terms and provisions of this Bill of Sale shall be
binding upon Seller, its successors and assigns, and shall inure to the benefit
of Purchaser, its successors and assigns.

         5. This Bill of Sale shall be governed by the laws of the State of New
Jersey applicable to contracts made and to be performed therein.

                       [SIGNATURE CONTINUED ON NEXT PAGE]



<PAGE>   112



         6. This Bill of Sale may be executed in two or more counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.

         IN WITNESS WHEREOF, the parties hereto have duly executed this Bill of
Sale as of the date first written above.

PURCHASER:                        SELLER:

Witness Systems, Inc.             Advanced Integrated Recorders, Inc.


By:                               By:
   ---------------------------       ------------------------------
Name: Jon W. Ezrine               Name:
     -------------------------         ----------------------------

Title: Chief Executive Officer    Title: President and CEO
      ------------------------          ---------------------------

                                      -2-



<PAGE>   113


                                    EXHIBIT A

                            LIST OF PURCHASED ASSETS

A.  ASSIGNED SOFTWARE DESCRIPTION

                  Product Description: AIR2000 is a complete Record and Replay
solution for a variety of interfaces including: Voice, Bit Synchronous Serial,
FSK (Navy Proprietary), TCP/IP and UDP/IP sockets, and X-11 Screen Capture. The
architecture of the AIR2000 is expandable to accommodate additional interfaces.
The product software consists of the following deliverables ("Assigned
Software"):

                  -        AIR2000 System Software (i.e. the main application)
                           that runs on the AIR2000 Rackmount System Hardware.

                  -        AIR2000 DXLC, which runs on a Unix Workstation to
                           form an interface layer between the AIR2000 System
                           Software and X-11 R6 server resident on the Unix
                           workstation for X-11 screen record and replay.

                  -        AIR2000 O/S Image, which is a binary image of the
                           Operating System, Drivers, Services and Middleware
                           required to interface and run the AIR2000 System
                           Software on the AIR2000 Rackmount System Hardware
                           (i.e. it is the "platform software" required to run
                           the application).

                  -        AIR2000 configuration Floppies which are generated by
                           the AIR2000 Configuration Manager Program. The
                           configuration floppies contain date used to configure
                           both the Application and the O/S Image for use at a
                           specific customer site.

                  -        AIR2000 Diagnostic Floppy/Emergency Boot Floppy,
                           which are used for maintenance of the system.

                  The Assigned Software is developed in Microsoft Visual C++ and
Visual Basic, utilizing the Microsoft Visual Development Studio environment.
AIR2000 DXLC is developed under Unix with OSF gnu compilers. The hardware
platform system is the AIR2000 Rackmount System. It is Windows NT based, and
will contain either a Pentium or Pentium II processor with a minimum speed of
200Mhz. The platform is based on an industrial 19" rackmountable PC with passive
backplane technology. The processor is located on a Single Board Computer card
assembly located in a designated PCI/ISA slot on the backplane. Tape drives
available for use in the platform are the Exabyte Mammoth I (8mm AME tape
technology) and the Seagate Scorpion (DDS-3 tape technology). The Exabyte EZ-17
Tape Library is also available as an alternative to a tape transport. Interfaces
to the user's environment are provided by technology specific interface adapter
cards and other cards inserted into the backplane for Analog Voice; Bit
Synchronous Serial; TCP; UDP/IP or Screen Capture via Ethernet or CDDI; and
External Alarm.

                                      -3-

<PAGE>   114

                  The software that is licensed by Seller from third parties and
incorporated into the Assigned Software is as follows:

                  1.       ASP132
                  2.       Catalyst Socket Tools Library
                  3.       Date and Time Picker, Gauge Package
                  4.       Tardis 2000 for Windows NT
                  5.       Windows NT
                  6.       Ghost Software
                  7.       Bit Stream Synchronous SW
                  8.       Visual Basic Language Mgr Pro
                  9.       Various drivers and services from certain third
                           parties are required by Windows to support the
                           various adapter cards in the Windows NT environment.


B.  OTHER ASSETS

         1. The following intellectual property of Seller: (i) all copyrights,
patents and registrations and applications for registration of copyrights and
patents for the Assigned Software, including continuations, extensions and
renewals thereof and improvements thereto; (ii) all right, title and interest in
the Assigned Software (excluding the mark "AIR2000" and the goodwill associated
therewith); (iii) all flow charts, specifications, designs and plans for the
Assigned Software; and (iv) any copies and tangible embodiments of the
foregoing;

         2. All rights to receive mail and other communications addressed to
Seller relating to ownership or infringement of the Purchased Assets, with
reference to the foregoing issues; provided that Seller may retain a copy of
mail and other communications addressed to Seller relating to infringement of
the Purchased Assets arising prior to the Closing Date; and

         3. All rights to damages and payments for infringements or
misappropriations of the Assigned Software that arise after the Closing Date and
the right to sue and recover for infringements or misappropriations thereof that
arise after the Closing Date.

                                      -4-

<PAGE>   115


                                    EXHIBIT I

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.

                       ASSIGNMENT AND ASSUMPTION AGREEMENT


                                      -35-

<PAGE>   116


                       ASSUMPTION AND ASSIGNMENT AGREEMENT

         This Assumption and Assignment Agreement (this "Agreement") is entered
into as of the 30th day of September, 1999 by and between Advanced Integrated
Recorders, Inc., a Delaware corporation with offices located at 121 Whittendale
Drive, Moorestown, New Jersey 08057 (the "Seller"), and Witness Systems, Inc., a
Delaware corporation with offices located at 1105 Sanctuary Parkway, Suite 210,
Alpharetta, Georgia 30004 (the "Purchaser"), in connection with that certain
Asset Purchase Agreement by and among Seller, Purchaser and Formation, Inc.,
dated September 30, 1999 (the "Asset Purchase Agreement"). Capitalized terms not
otherwise defined herein shall have the meaning ascribed to them in the Purchase
Agreement.

         WHEREAS, the Asset Purchase Agreement provides for the assumption by
Purchaser of certain liabilities and obligations of Seller as set forth in
Schedule 2.3 to the Asset Purchase Agreement and by this reference incorporated
herein (the "Assumed Liabilities") and the assignment to Purchaser of Seller's
rights associated with the liabilities and obligations assumed.

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Seller and Purchaser agree as
follows:

         1. Seller hereby assigns, transfers, and conveys to Purchaser and its
successors and assigns forever all of its right, title and interest, powers,
remedies, benefits, options and privileges in, to and under, at law or in
equity, the Assumed Liabilities, to have and to hold the same and each and all
thereof unto Purchaser and its successors and assigns forever, to its and their
own use and benefit forever.

         2. Purchaser hereby assumes and agrees to perform, discharge and
satisfy, after the date hereof, all of the Assumed Liabilities of Seller.
Purchaser shall not have any obligation, duty or liability for any liabilities
not expressly assumed or for any obligation, duty or liability arising or
accruing on or before the date hereof.

         3. Seller hereby covenants and agrees with Purchaser that it shall duly
execute and deliver all such further instruments of sale, transfer, assignment,
and conveyance and all such notices, releases, acquittances, certificates of
title, and other documents as may be necessary more fully to sell, transfer,
assign, and convey to and vest in Purchaser the rights of Seller under the
Assumed Liabilities hereby sold, transferred, assigned, and conveyed or intended
so to be.

         4. This Agreement shall not be deemed to supersede any of the
provisions of the Asset Purchase Agreement.

         5. All of the terms and provisions of this Agreement shall be binding
upon Seller, its successors and assigns, and shall inure to the benefit of
Purchaser, its successors and assigns.

         6. This Agreement shall be governed by the laws of the State of New
Jersey applicable to contracts made and to be performed therein.

                                      -1-
<PAGE>   117

         7. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.

         IN WITNESS WHEREOF, Purchaser and Seller have executed this Agreement
as of the date first written above.

PURCHASER:                           SELLER:

Witness Systems, Inc.                Advanced Integrated Recorders, Inc.



By:                                  By:
   ----------------------------         ----------------------------------
Name:                                Name:
     --------------------------           --------------------------------

Title: Chief Financial Officer       Title: President & CEO
      ------------------------             -------------------------------


                                      -2-
<PAGE>   118


                                    EXHIBIT J

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.

                           SELLER'S OPINION OF COUNSEL


                                      -36-
<PAGE>   119
<TABLE>
<S>                         <C>                                      <C>
                                MORRIS, MANNING & MARTIN
                            A LIMITED LIABILITY PARTNERSHIP
                                                                        WASHINGTON, D.C. OFFICE
                                    ATTORNEYS AT LAW
                              1600 ATLANTA FINANCIAL CENTER          MORRIS, MANNING & MARTIN, LLP
                                3343 PEACHTREE ROAD, N.E.                 THE COLORADO BUILDING
                                                                           1341 G STREET, N.W.
                               ATLANTA, GEORGIA 30326-1044                      SUITE 610
                                 TELEPHONE 404 233-7000                  WASHINGTON, D.C. 20005
                                 FACSIMILE 404 365-9532                  TELEPHONE 202 408-5153
                                  E-MAIL [email protected]                  FACSIMILE 202 408-5146

                                         MEMBER,                            NORTHSIDE OFFICE
                               COMMERCIAL LAW AFFILIATES                        SUITE 150
CHARLES R. BEAUDROT, JR.         WITH INDEPENDENT FIRMS              5775-B PEACHTREE DUNWOODY ROAD
DIRECT DIAL 404 504-7753      IN PRINCIPAL CITIES WORLDWIDE              ATLANTA, GEORGIA 30342
                                                                         TELEPHONE 404 255-6900
                                                                         FACSIMILE 404 843-2317
</TABLE>

                               September 30, 1999

Advanced Integrated Recorders, Inc.
121 Whittendale Drive
Building 1
Moorestown, New Jersey  03057

         Re:      Asset Purchase Agreement by and among Witness Systems, Inc.,
                  Advanced Integrated Recorders, Inc. and Formation, Inc.
                  ("Asset Purchase Agreement")

Ladies and Gentlemen:

         We have acted as special counsel to Witness Systems, Inc., a Delaware
corporation (the "Purchaser"), in connection with the sale of the Seller's
software product marketed under the "AIR2000" mark and certain assets relating
thereto (the "Transaction"), as further described in the Asset Purchase
Agreement, dated of even date herewith (the "Asset Purchase Agreement"), by and
among Formation, Inc., a New Jersey corporation (the "Shareholder"), and
Advanced Integrated Recorders, Inc., a Delaware corporation (the "Seller"). This
opinion is being delivered to you pursuant to Section 3.2(i) of the Asset
Purchase Agreement.

         Certain capitalized terms used and not otherwise defined herein shall
have the meanings assigned to such terms in the Asset Purchase Agreement.

         We have participated in the negotiation and preparation of the Asset
Purchase Agreement and have examined the corporate proceedings of the Purchaser
in connection with the authorization, execution and delivery of the Asset
Purchase Agreement and the approval of the transactions contemplated thereby. In
rendering the opinion expressed below, we have examined and relied on executed
copies of the following documents (each of which is dated of even date herewith
unless otherwise provided):

                  (i)      Software License Agreement, between the Seller and
                           the Purchaser;

                  (ii)     Escrow Agreement, among the Purchaser and the Seller,
                           and Sun Trust Bank, Atlanta, as the Escrow Agent;

                  (iii)    Bill of Sale, between the Purchaser and the Seller;
<PAGE>   120

MORRIS, MANNING & MARTIN
A LIMITED LIABILITY PARTNERSHIP


September 30, 1999
Page 2

                  (iv)     Assignment and Assumption Agreement, between the
                           Purchaser and the Seller;

                  (v)      Amendment No. 1 to the Amended and Restated
                           Registration Rights Agreement, between the Purchaser,
                           the Seller and the other parties listed therein; and

                  (vi)     Instrument of Accession, by the Seller and accepted
                           by the Purchaser.

         The documents listed in (i) - (vi) above, together with the Asset
Purchase Agreement, shall sometimes be collectively referred to in this letter
as the "Transaction Documents."

         The opinions expressed in this letter are limited to the laws of the
State of Georgia and applicable federal laws as applied therein except as to the
opinions contained in paragraph 1 as to which the general corporation law of the
State of Delaware is also addressed. For purposes of this opinion we have
assumed at your request that the Transaction Documents (contrary to their terms
which provide they are governed by the law of New Jersey) will be interpreted
and enforced in accordance with the laws of the state of Georgia. We express no
opinion, by implication or otherwise, as to the extent to which such provisions
providing for choice of governing law will be given affect. The following
matters, including their effects and the effects of non-compliance are not
covered by implication or otherwise in this Opinion: statutes, administrative
decisions, and rules and regulations of any county, municipality or subdivision;
law relating to permissible rates, computation or disclosure of interest;
antitrust and unfair competition law; securities law (other than with respect to
the opinion in item 5 below); the law of fiduciary obligations; pension and
employee benefit law; federal reserve regulations; the law of fraudulent
transfer; environmental law; land use and subdivision law; bulk transfer law;
tax law; patent, copyright, trademark or other intellectual property law;
racketeering law; health and safety law; labor law or law with respect to
national or local emergency.

         Whenever an opinion is qualified by words "to our knowledge," "known to
us," or words or similar meaning, the quoted words mean the current awareness of
the lawyer who signs this opinion letter, any lawyer in the firm who is
primarily responsible for providing the response concerning the particular issue
addressed and any lawyer in this firm who has reviewed any of the Transaction
Documents or has been involved in the negotiation or drafting of the Transaction
Documents. Knowledge for these purposes does not include information that is
known to lawyers outside of this group or which might be obtained from a review
of any files maintained by or on behalf of this firm for or with respect to the
client.


<PAGE>   121
MORRIS, MANNING & MARTIN
A LIMITED LIABILITY PARTNERSHIP


September 30, 1999
Page 3

         This opinion letter is as of the date indicated and we disclaim any
obligation to advise you of any matter or fact or law occurring thereafter,
irrespective of whether brought to our attention, that might otherwise affect
the analysis or conclusions contained herein.

         For purposes of this opinion, we have, with your permission, assumed
without independent investigation that:

         1.       Each natural person acting on behalf of any party other than
the Purchaser has sufficient legal competency to carry out such person's role in
the consummation of the Transaction.

         2.       Each document submitted to us is accurate and complete, each
document purporting to be an original is authentic, and each document purporting
to be a copy conforms to an authentic original, and all signatures thereon are
genuine.

         3.       There is no understanding or agreement not embodied in the
Transaction Documents between the parties which would modify any of the terms of
the Transaction Documents or any right or obligation of the parties.

         As to matters of fact relevant to the opinions expressed herein, we
relied upon representations and warranties contained in the Transaction
Documents and upon certificates of officers of the Purchaser.


         1.       The Purchaser is a corporation validly existing and in good
standing under the laws of the State of Delaware. The Purchaser is in good
standing in the State of Delaware. Purchaser has all requisite corporate power
and authority necessary to own and operate its properties, to carry on its
business as presently being conducted, and to execute, deliver and perform the
Transaction Documents to which it is a party.

         2.       The execution, delivery and performance of Purchaser of the
Transaction Documents to which it is a party, has been duly authorized by all
requisite corporate action by the Purchaser, as applicable. Each Transaction
Document to which the Purchaser is a party has been duly executed and delivered
by such party, and each Transaction Document constitutes the legal, valid and
binding obligation of the Purchaser, as applicable, enforceable in accordance
with its respective terms.


         3.       The execution, delivery and performance by each of the Seller
and the Shareholder of the Transaction Documents to which it is a party does
not:


                  (a)      violate any provision of law, statute, rule or
regulation, or violate any ruling, writ, injunction, order, judgment or decree
of any court, administrative agency or other

<PAGE>   122
MORRIS, MANNING & MARTIN
A LIMITED LIABILITY PARTNERSHIP


September 30, 1999
Page 4

governmental body applicable to Purchaser, as applicable, or any of its
respective properties or assets or

                  (b)      conflict with or violate any terms of the Certificate
of Incorporation or Bylaws of Purchaser.


         4.       The issuance, sale and delivery of the Payment Shares has been
duly authorized by all requisite corporate action by the Purchaser, and sold and
delivered in accordance with the Asset Purchase Agreement, will be validly
issued and outstanding, fully paid in non-assessable shares of the Purchaser.


         5.       The issuance and sale of the Payment Shares to the Seller
pursuant to the Asset Purchase Agreement does not require registration or
qualification in the Securities Act of 1933 as amended.

         The enforceability of the Transaction Documents may be limited by:

                  (i)      Possible unenforceability of provisions providing for
choice of applicable law.

                  (ii)     The effect of bankruptcy, insolvency, reorganization,
moratorium and other similar laws affecting the rights and remedies of
creditors. This includes the effect of the Federal Bankruptcy Code in its
entirety, including matters of contract rejection, fraudulent conveyance and
obligation, turn-over, preference, equitable subordination, automatic stay,
conversion of a non-recourse obligation into a recourse obligation, and
substantive consolidation. This also includes state laws regarding fraudulent
transfers, obligations, and conveyances, including O.C.G.A. ss. 18-2-20, et
seq., and state receivership laws.

                  (iii)    The effect of general principles of equity, whether
applied by a court of law or equity. This includes the following concepts: (a)
principles governing the availability of specific performance, injunctive relief
or other traditional equitable remedies; (b) principles affording traditional
equitable defenses (e.g., waiver, laches and estoppel); (c) good faith and fair
dealing; (d) reasonableness; (e) materiality of the breach; (f) impracticability
or impossibility of performance; (g) the effect of obstruction, failure to
perform or otherwise to act in accordance with an agreement by any person other
than Company; (h) the effect of Section 1-102(3) of the Uniform Commercial Code;
and (i) unconscionability.

                  (iv)     The possible unenforceability of provisions requiring
indemnification to the extent rendered invalid by O.C.G.A. ss.13-8-2 or to the
extent providing for indemnification as to negligence or willful misconduct of
the indemnitee and possible unenforceability of provisions requiring release or
exemption from liability for actions or inactions to the extent such actions or
inactions involve negligence, willful misconduct or are otherwise contrary to
public policy.
<PAGE>   123
MORRIS, MANNING & MARTIN
A LIMITED LIABILITY PARTNERSHIP


September 30, 1999
Page 5

                  (v)      The possible unenforceability of provisions imposing
liquidated damages to the extent any such provisions are deemed to be penalties
or forfeitures.

                  (vi)     The possible unenforceability of waivers or advance
consents that have the effect of waiving statutes of limitation, marshalling of
assets or similar requirements, or as to the jurisdiction of courts, the venue
of actions, the right to jury trial or, in certain cases, notice.

                  (vii)    The possible unenforceability of provisions that
waivers or consents by a party may not be given effect unless in writing or in
compliance with particular requirements or that a person's course of dealing,
course of performance, or the like or failure or delay in taking actions may not
constitute a waiver of related rights or provisions or that one or more waivers
may not under certain circumstances constitute a waiver of other matters of the
same kind.

                  (viii)   The effect of course of dealing, course of
performance, or the like, that would modify the terms of an agreement or the
respective rights or obligations of the parties under an agreement.

                  (ix)     The possible unenforceability of provisions that
enumerated remedies are not exclusive or that a party has the right to pursue
multiple remedies without regard to other remedies elected or that all remedies
are cumulative.

                  (x)      The effect of O.C.G.A. ss. 13-1-11 on provisions
relating to attorneys fees.

                  (xi)     The possible unenforceability of provisions that
determinations by a party or a party's designee are conclusive.

                  (xii)    The possible unenforceability of provisions
permitting modifications of an agreement only in writing.

                  (xiii)   The possible unenforceability of provisions that the
provisions of an agreement are severable.

                  (xiv)    The effect of laws requiring mitigation of damages.

                  (xv)     The possible unenforceability of provisions
permitting the exercise, under certain circumstances, of rights without notice
or without providing opportunity to cure failures to perform.
<PAGE>   124
MORRIS, MANNING & MARTIN
A LIMITED LIABILITY PARTNERSHIP


September 30, 1999
Page 6

         This opinion is provided to you solely in connection with the
Transaction and may not be relied upon for use by any other person or used for
any other purpose without our prior written consent.

                                    Most sincerely,

                                    MORRIS, MANNING & MARTIN, L.L.P.
                                    /s/ Charles R. Beaudrot, Jr.
                                    ----------------------------
                                    Charles R. Beaudrot, Jr.
CRB/mjw
Enclosure




<PAGE>   125






                                    EXHIBIT K

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.


                             INSTRUMENT OF ACCESSION

         The undersigned, Advanced Integrated Recorders, Inc., as a condition
precedent to becoming the owner or holder of record of Four Hundred and Sixty
Seven Thousand and Two Hundred and Eighty Nine (467,289) shares of the Common
Stock, par value $.01 per share, of Witness Systems, Inc., a Delaware
corporation (the "Company"), hereby agrees to become a Holder party to and bound
by that certain Amended and Restated Stockholders' Agreement, dated as of August
2, 1999 by and among the Company and other stockholders of the Company. This
Instrument of Accession shall take effect and shall become an integral part of
the said Stockholders' Agreement immediately upon execution and delivery to the
Company of this Instrument.

         IN WITNESS WHEREOF, this INSTRUMENT OF ACCESSION has been duly executed
by or on behalf of the undersigned, as a sealed instrument under the laws of the
State of Delaware, as of the date below written.


                                    ADVANCED INTEGRATED
                                    RECORDERS, INC.



                                    By:
                                       ----------------------------------------


                                       Name:  R. Nim Evatt
                                            -----------------------------------
                                       Title:  President & CEO
                                             ----------------------------------
                                    Date:  September 30, 1999
                                         --------------------------------------



                                    Accepted:

                                    WITNESS SYSTEMS, INC.


                                    By:
                                       ----------------------------------------


                                       Name:  Jon W. Ezrine
                                            -----------------------------------
                                       Title:  Chief Financial Officer
                                             ----------------------------------
                                    Date:  September 30, 1999
                                         --------------------------------------

                                      -37-

<PAGE>   126


                                    EXHIBIT L

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.

                         PURCHASER'S OPINION OF COUNSEL



                                      -38-

<PAGE>   127


                                    EXHIBIT M

                      To the Asset Purchase Agreement among
                  Witness Systems, Inc. and Advanced Integrated
                       Recorders, Inc. and Formation, Inc.


                         ASSIGNED SOFTWARE SPECIFICATION



         Seller's AIR2000 Manual Release 4.x provided to Purchaser prior to the
Closing Date is incorporated into this Agreement by this reference and shall be
deemed the Assigned Software Specification.




                                      -39-

<PAGE>   1
                                                                  EXHIBIT 10.15


THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.


                             WITNESS SYSTEMS, INC.

                           WARRANT TO PURCHASE STOCK

WARRANT TO PURCHASE 65,000         ISSUE DATE:                  JUNE 24 1999
SHARES OF THE COMMON STOCK         EXPIRATION DATE:             JUNE 24, 2004
OF WITNESS SYSTEMS, INC.           INITIAL EXERCISE PRICE:      $4.65 PER SHARE


                  THIS WARRANT CERTIFIES THAT, for the agreed upon value of
$1.00 and for other good and valuable consideration, GREYROCK CAPITAL, A
DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION ("Holder") is entitled to
purchase the number of fully paid and non-assessable shares of the class of
securities (the "Shares") of WITNESS SYSTEMS, INC. (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the
provisions and upon the terms and conditions set forth in this Warrant.

                              ARTICLE 1. EXERCISE

         1.1      METHOD OF EXERCISE. Holder may exercise this Warrant by
delivering a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check, bank draft or wire transfer of immediately
available funds for the aggregate Warrant Price for the Shares being purchased.

         1.2      CONVERSION RIGHT. In lieu of exercising this Warrant as
specified in Section 1.1, Holder may from time to time convert this Warrant, in
whole or in part, into a number of Shares determined by dividing (a) the
aggregate fair market value of the Shares or other securities otherwise
issuable upon exercise of this Warrant minus the aggregate Warrant Price of
such Shares by (b) the fair market value of one Share. The fair market value of
the Shares shall be determined pursuant to Section 1.4.

         1.3      [RESERVED]

         1.4      FAIR MARKET VALUE. If the Shares are traded in a public
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the Company's stock into which the Shares are
convertible) reported for the business day immediately before Holder delivers
its Notice of Exercise to the Company. If the Shares are not traded in a public
market, the Board of Directors of the Company shall determine fair market value
in its
<PAGE>   2

reasonable good faith judgment. The foregoing notwithstanding, if Holder
advises the Board of Directors in writing that Holder disagrees with such
determination, then the Company and Holder shall promptly agree upon a
reputable investment banking firm to undertake such valuation. If the valuation
of such investment banking firm is greater than that determined by the Board of
Directors, then all fees and expenses of such investment banking firm shall be
paid by the Company. In all other circumstances, such fees and expenses shall
be paid by Holder.

         1.5      DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after
Holder exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.

         1.6      REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant,
a new warrant of like tenor.

         1.7      REPURCHASE ON SALE, MERGER OR CONSOLIDATION OF THE COMPANY.

                  1.7.1    "ACQUISITION." For the purpose of this Warrant,
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.

                  1.7.2    ASSUMPTION OF WARRANT. If upon the closing of any
Acquisition the successor entity assumes the obligations of this Warrant, then
this Warrant shall be exercisable, for the same securities, cash, and property
as would be payable for the Shares issuable upon exercise of the unexercised
portion of this Warrant as if such Shares were outstanding on the record date
for the Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly.

                  1.7.3    NONASSUMPTION. If upon the closing of any
Acquisition the successor entity does not assume the obligations of this
Warrant and Holder has not otherwise exercised this Warrant in full, then the
unexercised portion of this Warrant shall be deemed to have been automatically
converted pursuant to Section 1.2 and thereafter Holder shall participate in
the Acquisition on the same terms as other holders of the same class of
securities of the Company.

                  1.7.4    PURCHASE RIGHT. Notwithstanding the foregoing, at
the election of Holder, the Company shall purchase the unexercised portion of
this Warrant for cash upon the closing of any Acquisition for an amount equal
to (a) the fair market value of any consideration that would have been received
by Holder in consideration of the Shares had Holder exercised the unexercised
portion of this Warrant immediately before the record date for determining the
shareholders entitled to participate in the proceeds of the Acquisition, less
(b) the aggregate Warrant Price of the Shares, but in no event less than zero.



                                     - 2 -
<PAGE>   3

                     ARTICLE 2. ADJUSTMENTS TO THE SHARES.


         2.1      STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays
a dividend on its common stock (or the Shares if the Shares are securities
other than common stock) payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
or, if the Shares are securities other than common stock, subdivides the Shares
in a transaction that increases the amount of common stock into which the
Shares are convertible, then upon exercise of this Warrant, for each Share
acquired, Holder shall receive, without cost to Holder, the total number and
kind of securities to which Holder would have been entitled had Holder owned
the Shares of record as of the date the dividend or subdivision occurred.

         2.2      RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series
as the Shares to common stock pursuant to the terms of the Company's Articles
of Incorporation upon the closing of a registered public offering of the
Company's common stock. The Company or its successor shall promptly issue to
Holder a new Warrant for such new securities or other property. The new Warrant
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article 2 including,
without limitation, adjustments to the Warrant Price and to the number of
securities or property issuable upon exercise of the new Warrant. The
provisions of this Section 2.2 shall similarly apply to successive
reclassifications, exchanges, substitutions, or other events.

         2.3      ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares
are combined or consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be proportionately increased.

         2.4      ADJUSTMENTS FOR DILUTING ISSUANCES. The Warrant Price and the
number of Shares issuable upon exercise of this Warrant or, if the Shares are
Preferred Stock, the number of shares of common stock issuable upon conversion
of the Shares, shall be subject to adjustment, from time to time in the manner
set forth on Exhibit A attached hereto in the event of Diluting Issuances (as
defined on Exhibit A).

         2.5      NO IMPAIRMENT. The Company shall not, by amendment of its
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions
of this Article 2 and in taking all such action as may be reasonably necessary
or appropriate to protect Holder's rights under this Article against
impairment. If the Company takes any action affecting the Shares or its common
stock other than as described above that intentionally and adversely



                                     - 3 -
<PAGE>   4

affects Holder's rights under this Warrant, the Warrant Price shall be adjusted
downward and the number of Shares issuable upon exercise of this Warrant shall
be adjusted upward in such a manner that the aggregate Warrant Price of this
Warrant is unchanged.

         2.6      FRACTIONAL SHARES. No fractional Shares shall be issuable
upon exercise or conversion of the Warrant and the number of Shares to be
issued shall be rounded down to the nearest whole Share. If a fractional share
interest arises upon any exercise or conversion of the Warrant, the Company
shall eliminate such fractional share interest by paying to Holder an amount
computed by multiplying the fractional interest by the fair market value of a
full Share.

         2.7      CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the
Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial
Officer setting forth such adjustment and the facts upon which such adjustment
is based. The Company shall, upon written request, furnish Holder a certificate
setting forth the Warrant Price in effect upon the date thereof and the series
of adjustments leading to such Warrant Price.

                         ARTICLE 3. REPRESENTATIONS AND
                           COVENANTS OF THE COMPANY.

         3.1      REPRESENTATIONS AND WARRANTIES. The Company hereby represents
and warrants to the Holder as follows:

                  (a)    The initial Warrant Price referenced on the first page
of this Warrant is not greater than the fair market value of the Shares, as
determined pursuant to Section 1.4 of this Warrant, as of the date of this
Warrant.

                  (b)    All Shares which may be issued upon the exercise of
the purchase right represented by this Warrant, and all securities, if any
issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws.

         3.2      NOTICE OF CERTAIN EVENTS. If the Company proposes at any time
(a) to declare any dividend or distribution upon its common stock, whether in
cash, property, stock, or other securities and whether or not a regular cash
dividend; (b) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights; (c) to effect any reclassification or recapitalization of common
stock; (d) to merge or consolidate with or into any other corporation, or sell,
lease, license, or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; or (e) offer holders of registration rights the
opportunity to participate in an underwritten public offering of the Company's
securities for cash, then, in connection with each such event, the Company
shall give Holder (1) at least 20 days' prior written notice of the date on
which a record will be taken for such dividend, distribution, or subscription
rights (and specifying the date on which the holders of common stock will be
entitled thereto) or for determining rights to vote, if any, in respect of the
matters referred to in (c) and (d) above; (2) in the case of the matters
referred to in (c) and (d) above at least 20 days prior written notice of the
date when the same will take place (and



                                     - 4 -
<PAGE>   5

specifying the date on which the holders of common stock will be entitled to
exchange their common stock for securities or other property deliverable upon
the occurrence of such event); and (3) in the case of the matter referred to in
(e) above, the same notice as is given to the holders of such registration
rights.

         3.3      INFORMATION RIGHTS. So long as the Holder holds this Warrant
and/or any of the Shares, the Company shall deliver to the Holder (a) promptly
after mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing, (c)
within forty-five (45) days after the end of each of the first three quarters
of each fiscal year, the Company's quarterly, unaudited financial statements,
and (d) within thirty (30) days after the end of each month, the Company's
monthly, unaudited financial statements.

         3.4      REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The
Company agrees that the Shares or, if the Shares are convertible into common
stock of the Company, such common stock, shall be subject to the registration
rights set forth on Exhibit B, if attached.

                           ARTICLE 4. MISCELLANEOUS.

         4.1      TERM; NOTICE OF EXPIRATION. This Warrant is exercisable, in
whole or in part, at any time and from time to time on or before the Expiration
Date set forth above. The Company shall give Holder written notice of Holder's
right to exercise this Warrant in the form attached as Appendix 2 not more than
90 days and not less than 30 days before the Expiration Date. If the notice is
not so given, the Expiration Date shall automatically be extended until 30 days
after the date the Company delivers the notice to Holder.

         4.2      LEGENDS. This Warrant and the Shares (and the securities
issuable, directly or indirectly, upon conversion of the Shares, if any) shall
be imprinted with a legend in substantially the following form:

                  THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE
144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

         4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the
Shares issuable upon exercise of this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, if
reasonably requested by the Company). The Company shall not require Holder to
provide an opinion of counsel if the transfer is to an affiliate of Holder or
if there is no material question as to the availability of current information
as referenced in Rule 144(c), Holder represents that it has complied with Rule
144(d) and (e) in



                                     - 5 -
<PAGE>   6

reasonable detail, the selling broker represents that it has complied with Rule
144(f), and the Company is provided with a copy of Holder's notice of proposed
sale.

         4.4      TRANSFER PROCEDURE. Subject to the provisions of Section 4.3
with the prior written consent of the Company in the case of transfer to any
non-affiliated person or entity (such consent not to be unreasonably withheld),
Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant (or the securities issuable, directly or indirectly,
upon conversion of the Shares, if any) by giving the Company notice of the
portion of the Warrant being transferred setting forth the name, address and
taxpayer identification number of the transferee and surrendering this Warrant
to the Company for reissuance to the transferee(s) (and Holder if applicable).
Unless the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.

         4.5      NOTICES. All notices and other communications from the
Company to the Holder, or vice versa, shall be deemed delivered and effective
when given personally or mailed by first-class registered or certified mail,
postage prepaid, at such address as may have been furnished to the Company or
the Holder, as the case may be, in writing by the Company or such holder from
time to time.

         4.6      WAIVER. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or
termination is sought.

         4.7      ATTORNEYS' FEES. In the event of any dispute between the
parties concerning the terms and provisions of this Warrant, the party
prevailing in such dispute shall be entitled to collect from the other party
all costs incurred in such dispute, including reasonable attorneys' fees.

         4.8      GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of California, without
giving effect to its principles regarding conflicts of law.

                  IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed and delivered as of the Issue Date hereof.

                                          WITNESS SYSTEMS, INC.



                                          By: /s/ David B. Gould
                                              ---------------------------------
                                              President



                                          By: /s/ Jon W. Ezrine
                                              ---------------------------------
                                              Secretary



                                     - 6 -
<PAGE>   7

                                   APPENDIX 1

                               NOTICE OF EXERCISE


                  1.     The undersigned hereby elects to purchase __________
shares of the Common Stock of Witness Systems, Inc. pursuant to the terms of
the attached Warrant, and tenders herewith payment of the purchase price of
such shares in full.

                  2.     The undersigned hereby elects to convert the attached
Warrant into Shares in the manner specified in the Warrant. This conversion is
exercised with respect to ______________________ of the Shares covered by the
Warrant.

                    [Strike paragraph that does not apply.]

                  3.     Please issue a certificate or certificates representing
said shares in the name of the undersigned or in such other name as is
specified below:


                        --------------------------------
                                     (NAME)

                        --------------------------------

                        --------------------------------
                                   (ADDRESS)


                  4.     The undersigned represents it is acquiring the shares
solely for its own account and not as a nominee for any other party and not
with a view toward the resale or distribution thereof except in compliance with
applicable securities laws.



                                        ---------------------------------------
                                        (Signature)



                                        ---------------------------------------

                                        (Date)



                                       1.
<PAGE>   8

                                  APPENDIX 2

                     NOTICE THAT WARRANT IS ABOUT TO EXPIRE


                            _________________, ____




(Name of Holder)
(Address of Holder)

Attn: Chief Financial Officer

Dear __________:

         This is to advise you that the Warrant issued to you described below
will expire on June 24, 2004.

             Issuer:                           Witness Systems, Inc.

             Issue Date:                       June 24, 1999

             Class of Security Issuable:       Common Stock

             Exercise Price per Share:

             Number of Shares Issuable:

             Procedure for Exercise:

         Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.

             WITNESS SYSTEMS, INC.



             By:
                 ---------------------------------------------------
             its
                 ---------------------------------------------------



                                      1.
<PAGE>   9

                                   EXHIBIT A

                            ANTI-DILUTION PROVISIONS


                  In the event of the issuance (a "Diluting Issuance") by the
Company, after the Issue Date of the Warrant, of securities at a price per
share less than the Warrant Price, or, if the Shares are common stock, less
than the then conversion price of the Company's Series B Convertible Preferred
Stock, then the number of shares of common stock issuable upon conversion of
the Shares, or if the Shares are common stock, the number of Shares issuable
upon exercise of the Warrant, shall be adjusted as a result of Diluting
Issuances in accordance with the Anti-Dilution Agreement of even date herewith
between Holder and Company.

                  Under no circumstances shall the aggregate Warrant Price
payable by the Holder upon exercise of the Warrant increase as a result of any
adjustment arising from a Diluting Issuance.



                                      1.
<PAGE>   10

                                   EXHIBIT B

                              REGISTRATION RIGHTS


                  The Shares (if common stock), or the common stock issuable
upon conversion of the Shares, shall be deemed "registrable securities" or
otherwise entitled to "piggy back" registration rights in accordance with the
terms of the following agreement (the "Agreement") between the Company and its
investor(s):

         Registration Rights Agreement dated March 18, 1997, as amended
- -------------------------------------------------------------------------------
                [Identify Agreement by date, title and parties.
                  If no Agreement exists,indicate by "none."]

                  The Company agrees that no amendments will be made to the
Agreement which would have an adverse impact on Holder's registration rights
thereunder without the consent of Holder. By acceptance of the Warrant to which
this Exhibit B is attached, Holder shall be deemed to be a party to the
Agreement.

                  If no Agreement exists, then the Company and the Holder shall
enter into Holder's standard form of Registration Rights Agreement as in effect
on the Issue Date of the Warrant.



                                      1.

<PAGE>   1
                                                                  EXHIBIT 10.16



THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.

                           WARRANT TO PURCHASE STOCK

Corporation: Witness Systems, Inc., a Delaware corporation
Number of Shares: 20,000
Class of Stock: Series B Preferred
Initial Exercise Price: $4.65 per share
Issue Date: April 22, 1999
Expiration Date: April 22, 2004


         THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and
for other good and valuable consideration, SILICON VALLEY BANK ("HOLDER") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "SHARES") of the corporation (the "COMPANY") at the
initial exercise price per Share (the "WARRANT PRICE") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the
provisions and upon the terms and conditions set forth in this Warrant.

ARTICLE 1.   EXERCISE.

                  1.1    METHOD OF EXERCISE. Holder may exercise this Warrant
at any time on or prior to the Expiration Date by delivering a duly executed
Notice of Exercise in substantially the form attached as Appendix 1 to the
principal office of the Company. Unless Holder is exercising the conversion
right set forth in Section 1.2, Holder shall also deliver to the Company a
check for the aggregate Warrant Price for the Shares being purchased.

                  1.2    CONVERSION RIGHT. In lieu of exercising this Warrant
as specified in Section 1.1, Holder may from time to time convert this Warrant,
in whole or in part, into a number of Shares determined by dividing (a) the
aggregate fair market value of the Shares or other securities otherwise
issuable upon exercise of this Warrant minus the aggregate Warrant Price of
such Shares by (b) the fair market value of one Share. The fair market value of
the Shares shall be determined pursuant to Section 1.4.

                  1.3    Intentionally Omitted

                  1.4    FAIR MARKET VALUE. If the Shares are traded in a
public market, the fair market value of the Shares shall be the closing price
of the Shares (or the closing price of the Company's stock into which the
Shares are convertible) reported for the business day immediately before Holder
delivers its Notice of Exercise to the Company. If the Shares are not traded in
a public market, the Board of Directors of the Company shall determine fair
market value in its reasonable good faith judgment. The foregoing
notwithstanding, if Holder advises the Board of Directors in writing that
Holder disagrees with such determination, then the Company and Holder shall
promptly agree upon a reputable investment banking firm to undertake such
valuation. If the valuation of such investment banking firm is greater than
that
<PAGE>   2

determined by the Board of Directors, then all fees and expenses of such
investment banking firm shall be paid by the Company. In all other
circumstances, such fees and expenses shall be paid by Holder.

                 1.5     DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly
after Holder exercises or converts this Warrant, the Company shall deliver to
Holder certificates for the Shares acquired and, if this Warrant has not been
fully exercised or converted and has not expired, a new Warrant representing
the Shares not so acquired.

                 1.6     REPLACEMENT OF WARRANTS. On receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of loss, theft or destruction, on
delivery of an indemnity agreement reasonably satisfactory in form and amount
to the Company or, in the case of mutilation, on surrender and cancellation of
this Warrant, the Company at its expense shall execute and deliver, in lieu of
this Warrant, a new warrant of like tenor.

                 1.7     REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE
COMPANY.

                         1.7.1.    "ACQUISITION". For the purpose of this
Warrant, "ACQUISITION" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.

                         1.7.2.    ASSUMPTION OF WARRANT. Upon the closing of
any Acquisition the successor entity shall assume the obligations of this
Warrant, and this Warrant shall be exercisable for the same securities, cash,
and property as would be payable for the Shares issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were outstanding on the
record date for the Acquisition and subsequent closing. The Warrant Price shall
be adjusted accordingly.

                         1.7.3.    PURCHASE RIGHT. Notwithstanding the
foregoing, at the election of Holder, the Company shall purchase the
unexercised portion of this Warrant for cash upon the closing of any
Acquisition for an amount equal to (a) the fair market value of any
consideration that would have been received by Holder in consideration of the
Shares had Holder exercised the unexercised portion of this Warrant immediately
before the record date for determining the shareholders entitled to participate
in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the
Shares, but in no event less than zero.

ARTICLE 2.   ADJUSTMENTS TO THE SHARES.

                  2.1    STOCK DIVIDENDS, SPLITS, ETC. If the Company declares
or pays a dividend on its common stock (or the Shares if the Shares are
securities other than common stock) payable in common stock, or other
securities, subdivides the outstanding common stock into a greater amount of
common stock, or, if the Shares are securities other than common stock,
subdivides the Shares in a transaction that increases the amount of common
stock into which the Shares are convertible, then upon exercise of this
Warrant, for each Share acquired, Holder shall receive, without cost to Holder,
the total number and kind of securities to which Holder would have been
entitled had Holder owned the Shares of record as of the date the dividend or
subdivision occurred.

                  2.2    RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities



                                     - 2 -
<PAGE>   3

issuable upon exercise or conversion of this Warrant, Holder shall be entitled
to receive, upon exercise or conversion of this Warrant, the number and kind of
securities and property that Holder would have received for the Shares if this
Warrant had been exercised immediately before such reclassification, exchange,
substitution, or other event. Such an event shall include any automatic
conversion of the outstanding or issuable securities of the Company of the same
class or series as the Shares to common stock pursuant to the terms of the
Company's Articles of Incorporation upon the closing of a registered public
offering of the Company's common stock. The Company or its successor shall
promptly issue to Holder a new Warrant for such new securities or other
property. The new Warrant shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Article 2 including, without limitation, adjustments to the Warrant Price and
to the number of securities or property issuable upon exercise of the new
Warrant. The provisions of this Section 2.2 shall similarly apply to successive
reclassifications, exchanges, substitutions, or other events.

                 2.3     ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding
Shares are combined or consolidated, by reclassification or otherwise, into a
lesser number of shares, the Warrant Price shall be proportionately increased.

                 2.4     ADJUSTMENTS FOR DILUTING ISSUANCES. The Warrant Price
and the number of Shares issuable upon exercise of this Warrant or, if the
Shares are Preferred Stock, the number of shares of common stock issuable upon
conversion of the Shares, shall be subject to adjustment, from time to time in
the manner set forth on Exhibit A in the event of Diluting Issuances (as
defined on Exhibit A).

                 2.5     NO IMPAIRMENT. The Company shall not, by amendment of
its Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions
of this Article 2 and in taking all such action as may be necessary or
appropriate to protect Holder's rights under this Article against impairment.
If the Company takes any action affecting the Shares or its common stock other
than as described above that adversely affects Holder's rights under this
Warrant, the Warrant Price shall be adjusted downward and the number of Shares
issuable upon exercise of this Warrant shall be adjusted upward in such a
manner that the aggregate Warrant Price of this Warrant is unchanged.

                 2.6     FRACTIONAL SHARES. No fractional Shares shall be
issuable upon exercise or conversion of the Warrant and the number of Shares to
be issued shall be rounded down to the nearest whole Share. If a fractional
share interest arises upon any exercise or conversion of the Warrant, the
Company shall eliminate such fractional share interest by paying Holder amount
computed by multiplying the fractional interest by the fair market value of a
full Share.

                 2.7     CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of
the Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial
Officer setting forth such adjustment and the facts upon which such adjustment
is based. The Company shall, upon written request, furnish Holder a certificate
setting forth the Warrant Price in effect upon the date thereof and the series
of adjustments leading to such Warrant Price.



                                     - 3 -
<PAGE>   4

ARTICLE 3.   REPRESENTATIONS AND COVENANTS OF THE COMPANY.

                  3.1    REPRESENTATIONS AND WARRANTIES. The Company hereby
represents and warrants to the Holder as follows:

                         (a)       The initial Warrant Price referenced on the
first page of this Warrant is not greater than (i) the price per share at which
the Shares were last issued in an arms-length transaction in which at least
$500,000 of the Shares were sold and (ii) the fair market value of the Shares
as of the date of this Warrant.

                         (b)       All Shares which may be issued upon the
exercise of the purchase right represented by this Warrant, and all securities,
if any, issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws.

                 3.2     NOTICE OF CERTAIN EVENTS. If the Company proposes at
any time (a) to declare any dividend or distribution upon its common stock,
whether in cash, property, stock, or other securities and whether or not a
regular cash dividend; (b) to offer for subscription pro rata to the holders of
any class or series of its stock any additional shares of stock of any class or
series or other rights; (c) to effect any reclassification or recapitalization
of common stock; (d) to merge or consolidate with or into any other
corporation, or sell, lease, license, or convey all or substantially all of its
assets, or to liquidate, dissolve or wind up; or (e) offer holders of
registration rights the opportunity to participate in an underwritten public
offering of the company's securities for cash, then, in connection with each
such event, the Company shall give Holder (1) at least 20 days prior written
notice of the date on which a record will be taken for such dividend,
distribution, or subscription rights (and specifying the date on which the
holders of common stock will be entitled thereto) or for determining rights to
vote, if any, in respect of the matters referred to in (c) and (d) above; (2)
in the case of the matters referred to in (c) and (d) above at least 20 days
prior written notice of the date when the same will take place (and specifying
the date on which the holders of common stock will be entitled to exchange
their common stock for securities or other property deliverable upon the
occurrence of such event); and (3) in the case of the matter referred to in (e)
above, the same notice as is given to the holders of such registration rights.

                 3.3     INFORMATION RIGHTS. So long as the Holder holds this
Warrant and/or any of the Shares, the Company shall deliver to the Holder (a)
promptly after mailing, copies of all notices or other written communications
to the shareholders of the Company, (b) within ninety (90) days after the end
of each fiscal year of the Company, the annual audited financial statements of
the Company certified by independent public accountants of recognized standing
and (c) such other financial statements required under and in accordance with
any loan documents between Holder and the Company (or if there are no such
requirements [or if the subject loan(s) no longer are outstanding]), then
within forty-five (45) days after the end of each of the first three quarters
of each fiscal year, the Company's quarterly, unaudited financial statements.

                 3.4     REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED.
The Company agrees that the Shares or, if the Shares are convertible into
common stock of the Company, such common stock, shall be subject to the
registration rights set forth on Exhibit B, if attached.



                                     - 4 -
<PAGE>   5

ARTICLE 4.   MISCELLANEOUS.

                 4.1     TERM; NOTICE OF EXPIRATION. This Warrant is
exercisable, in whole or in part, at any time and from time to time on or
before the Expiration Date set forth above. The Company shall give Holder
written notice of Holder's right to exercise this Warrant in the form attached
as Appendix 2 not more than 90 days and not less than 30 days before the
Expiration Date. If the notice is not so given, the Expiration Date shall
automatically be extended until 30 days after the date the Company delivers the
notice to Holder.

                 4.2     LEGENDS. This Warrant and the Shares (and the
securities issuable, directly or indirectly, upon conversion of the Shares, if
any) shall be imprinted with a legend in substantially the following form:

             THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
             ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
             OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
             THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION
             OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
             COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

                 4.3     COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This
Warrant and the Shares issuable upon exercise this Warrant (and the securities
issuable, directly or indirectly, upon conversion of the Shares, if any) may
not be transferred or assigned in whole or in part without compliance with
applicable federal and state securities laws by the transferor and the
transferee (including, without limitation, the delivery of investment
representation letters and legal opinions reasonably satisfactory to the
Company, as reasonably requested by the Company). The Company shall not require
Holder to provide an opinion of counsel if the transfer is to an affiliate of
Holder or if there is no material question as to the availability of current
information as referenced in Rule 144(c), Holder represents that it has
complied with Rule 144(d) and (e) in reasonable detail, the selling broker
represents that it has complied with Rule 144(f), and the Company is provided
with a copy of Holder s notice of proposed sale.

                 4.4     TRANSFER PROCEDURE. Subject to the provisions of
Section 4.3 Holder may transfer all or part of this Warrant or the Shares
issuable upon exercise of this Warrant (or the securities issuable, directly or
indirectly, upon conversion of the Shares, if any) at any time to Silicon
Valley Bancshares or The Silicon Valley Bank Foundation , or, to any other
transferree by giving the Company notice of the portion of the Warrant being
transferred setting forth the name, address and taxpayer identification number
of the transferee and surrendering this Warrant to the Company for reissuance
to the transferee(s) (and Holder if applicable). Unless the Company is filing
financial information with the SEC pursuant to the Securities Exchange Act of
1934, the Company shall have the right to refuse to transfer any portion of
this Warrant to any person who directly competes with the Company.

                 4.5     NOTICES. All notices and other communications from the
Company to the Holder, or vice versa, shall be deemed delivered and effective
when given personally or mailed by first-class registered or certified mail,
postage prepaid, at such address as may have been furnished to the Company or
the Holder, as the case may be, in writing by the Company or such holder from
time to time.

                 4.6     WAIVER. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought.



                                     - 5 -
<PAGE>   6

                 4.7     ATTORNEYS FEES. In the event of any dispute between
the parties concerning the terms and provisions of this Warrant, the party
prevailing in such dispute shall be entitled to collect from the other party
all costs incurred in such dispute, including reasonable attorneys' fees.

                 4.8     GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of Georgia, without giving
effect to its principles regarding conflicts of law.

                              "COMPANY"

                              WITNESS SYSTEMS, INC.



                              By: /s/ David B. Gould
                                  ---------------------------------------------
                                    David B. Gould, President and Chief
                                    Executive Officer



                              By: /s/ Jon W. Ezrine
                                  ---------------------------------------------
                                    Jon W. Ezrine, Chief Financial Officer and
                                    Secretary



                                     - 6 -
<PAGE>   7


                                   APPENDIX 1

                               NOTICE OF EXERCISE


         1.    The undersigned hereby elects to purchase ________ shares of the
Series ______ Preferred Stock of Witness Systems, Inc. pursuant to the terms of
the attached Warrant, and tenders herewith payment of the purchase price of
such shares in full.

         2.    The undersigned hereby elects to convert the attached Warrant
into Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _____________________ of the Shares
covered by the Warrant.

         [Strike paragraph that does not apply.]

         3.    Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name as is specified
below:


                         -----------------------------------------------
                                    (Name)


                         -------------------------------------


                         -------------------------------------
                                    (Address)

         4.    The undersigned represents it is acquiring the shares solely for
its own account and not as a nominee for any other party and not with a view
toward the resale or distribution thereof except in compliance with applicable
securities laws.



                                             ----------------------------------
                                                 (Signature)


- ---------------------------
         (Date)
<PAGE>   8

                                   APPENDIX 2

                     NOTICE THAT WARRANT IS ABOUT TO EXPIRE

                              _______________, ____



(Name of Holder)

(Address of Holder)

Attn: Chief Financial Officer

Dear ____________:

         This is to advise you that the Warrant issued to you described below
will expire on _________________________, 20 ___.

         Issuer:

         Issue Date:

         Class of Security Issuable:

         Exercise Price per Share:

         Number of Shares Issuable:

         Procedure for Exercise:

         Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.



                                -----------------------------------------------
                                (Name of Issuer)



                                By:
                                   --------------------------------------------
                                   Its:
                                       ----------------------------------------
<PAGE>   9

                                   EXHIBIT A

                            ANTI-DILUTION PROVISIONS


         In the event of the issuance (a "DILUTING ISSUANCE") by the Company,
after the Issue Date of the Warrant, of securities at a price per share less
than the Warrant Price, then the number of shares of common stock issuable upon
conversion of the Shares shall be adjusted in accordance with those provisions
(the "PROVISIONS") of the Company's Articles (Certificate) of Incorporation
which apply to Diluting Issuances.

         The Company agrees that the Provisions, as in effect on the Issue
Date, shall be deemed to remain in full force and effect during the term of the
Warrant, unless amended, modified or waived in accordance with Section 4.A.7 of
the Company's Certificate of Incorporation.

         Under no circumstances shall the aggregate Warrant Price payable by
the Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
<PAGE>   10

                                   EXHIBIT B

                              REGISTRATION RIGHTS


         The Shares (if common stock), or the common stock issuable upon
conversion of the Shares, shall be deemed "registrable securities" or otherwise
entitled to "piggy back" registration rights in accordance with the terms of
the following agreement (the "AGREEMENT") between the Company and its
investor(s):

                  Registration Rights Agreement dated March 18, 1997 by and
                  among the Company, Battery Investment Partners IV, LLC, John
                  Abraham and Battery Ventures IV, L.P., as amended by that
                  certain Amendment No. 1 to the Registration Rights Agreement,
                  dated September 29, 1998.

         The Company agrees that no amendments will be made to the Agreement
which would have an adverse impact on Holder's registration rights thereunder
without the consent of Holder, other than amendments effected in accordance
with the terms of the Agreement that affect the registration rights thereunder
equally as to all parties possessing such registration rights. By acceptance of
the Warrant to which this Exhibit B is attached, Holder shall be deemed to be a
party to the Agreement, unless Holder otherwise elects not to become or to
cease being a party thereto.

                                          WITNESS SYSTEMS, INC.



                                          By: /s/ Jon W. Ezrine
                                              ---------------------------------
                                              Name:  Jon W. Ezrine
                                              Title: CFO

<PAGE>   1
                                                                    EXHIBIT 23.1

                         INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Witness Systems, Inc.:

         The audits referred to in our report dated November 18, 1999 included
the related financial statement schedule as of September 30, 1999, and for each
of the years in the three-year period ended December 31, 1998 and for the nine-
month period ended September 30, 1999, included in the registration statement.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such 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.

         We consent to the use of our reports included herein and to the
reference to our firm under the headings "Selected Consolidated Financial Data"
and "Experts" in the registration statement.

                                             /s/ KPMG LLP

Atlanta, Georgia
December 29, 1999

<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               SEP-30-1999
<EXCHANGE-RATE>                                      1
<CASH>                                              52
<SECURITIES>                                         0
<RECEIVABLES>                                    6,706
<ALLOWANCES>                                       438
<INVENTORY>                                          0
<CURRENT-ASSETS>                                   700
<PP&E>                                           3,715
<DEPRECIATION>                                   1,977
<TOTAL-ASSETS>                                   8,919
<CURRENT-LIABILITIES>                            9,268
<BONDS>                                              0
                           22,113
                                          0
<COMMON>                                           103
<OTHER-SE>                                    (24,775)
<TOTAL-LIABILITY-AND-EQUITY>                     8,919
<SALES>                                         14,936
<TOTAL-REVENUES>                                14,936
<CGS>                                            2,900
<TOTAL-COSTS>                                    2,900
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 351
<INCOME-PRETAX>                                (6,560)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            (6,560)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (6,560)
<EPS-BASIC>                                     (1.18)
<EPS-DILUTED>                                   (1.18)


</TABLE>

<PAGE>   1
                                                                    EXHIBIT 99.1



     The undersigned hereby consents to the use of the following market
projections and related assumptions, and to the reference to its name in the
Registration Statement on Form S-1, including any amendments thereto (each a
"Registration Statement") of Witness Systems, Inc., and the prospectus included
therein, including, without limitation, any references under the headings
"Prospectus Summary" and "Business." The undersigned also grants its permission
to include a copy of this consent as a part of any Registration Statement.

JUPITER COMMUNICATIONS ESTIMATES THAT 90% OF ALL ONLINE CUSTOMERS STILL PREFER
HUMAN INTERACTION.


December 22, 1999
                                                Jupiter Communications

                                                By:  Michelle Hyseb
                                                     ---------------------

                                                Its: Associate Manager, PR
                                                     ---------------------

Nancy Treaster
VP Marketing
Witness Systems Inc
770-754-1906

<PAGE>   1
                                                                    EXHIBIT 99.2




         The undersigned hereby consents to the use of its market projections
(see below) and related assumptions, and to the reference to its name in the
Registration Statement on Form S-1, including any amendments thereto (each a
"Registration Statement") of Witness Systems, Inc., and the prospectus included
therein, including, without limitation, any references under the headings
"Prospectus Summary" and "Business." The undersigned also grants its permission
to include a copy of this consent as a part of any Registration Statement.

December 22, 1999


                                                      Meta Group, Inc.



                                                      By: /s/ Bernard F. Denoyer
                                                         -----------------------
                                                      Its: CFO
                                                          ----------------------

"According to META Group, an information technology research and advisory
services firm, industry leading enterprises are responding to the steadily
increasing competitive pressures and are focusing on CRM as their most valuable
post-year 2000 technology investment."

<PAGE>   1
                                                                    EXHIBIT 99.3

     The undersigned hereby consents to the use of its market projections (see
below) and related assumptions, and to the reference to its name in the
Registration Statement on Form S-1, including any amendments thereto (each a
"Registration Statement") of Witness Systems, Inc., and the prospectus included
therein, including, without limitation, any references under the headings
"Prospectus Summary" and "Business." The undersigned also grants its permission
to include a copy of this consent as a part of any Registration Statement.


December 22, 1999
                                                ------------------------------


                                                By: /s/ GREGG S. BLUNDALL
                                                   ---------------------------
                                                   GREGG S. BLUNDALL

                                                Its: The PELORUS Group 12/22/99
                                                    ---------------------------


"PELORUS Group estimates that by the end of 2003, the number of installed call
center systems will exceed 117,000, with the number of agents reaching
approximately 5.3 million."

"PELORUS Group estimates that at the end of 1998, there were approximately
70,000 installed call center systems with 3.3 million call center agent
positions in the United States. It further estimates that by the end of 2003,
the number of installed call center systems will increase to more than 117,000,
with the number of agents reaching approximately 5.3 million."

<PAGE>   1
                                                                    EXHIBIT 99.4


     The undersigned hereby consents to the use of its market projections (see
below) and related assumptions, and to the reference to its name in the
Registration Statement on Form S-1, including any amendments thereto (each a
"Registration Statement") of Witness Systems, Inc., and the prospectus included
therein, including, without limitation, any references under the headings
"Prospectus Summary" and "Business." The undersigned also grants its permission
to include a copy of this consent as a part of any Registration Statement.


December 22, 1999                       /s/  Elizabeth Anne Brady       12/28/99
                                        ----------------------------------------
                                             Yankee Group

                                        By:  Elizabeth Anne Brady
                                           -------------------------------------

                                        Its: Internet Market Strategies Practice
                                            ------------------------------------


"The Yankee Group estimates that the average cost to acquire a single customer
by Amazon.com, eBay and Preview Travel has risen approximately 45% from the
second quarter of 1998 to the second quarter of 1999. It is imperative that
companies retain these costly new customers to capitalize on their investment.
As a result, we believe that companies who deliver excellent service to their
customers will develop longer-term, more profitable customer relationships."




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