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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number 000-29335

Witness Systems, Inc.

Registrant’s telephone number, including area code 770-754-1900

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

      At March 15, 2002, the registrant had 22,591,803 shares of common stock, par value $.01 per share, outstanding, and the aggregate market value of the outstanding shares of voting stock held by non-affiliates of the registrant on such date was approximately $218 million based on the closing price of $13.28 per share of such common stock on such date.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive proxy statement for its annual meeting of stockholders, scheduled for May 29, 2002, are incorporated by reference in Part III of this report.

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PART I

Item 1.     Business

      This annual report on Form 10-K contains forward-looking statements that are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this report. Investors should carefully review the information contained in this report under the caption “Factors That May Affect Our Future Results and Market Price of Our Stock” beginning on page 26.

Overview

      We provide customer interaction recording, performance analysis and electronic learning management software that enable companies to enhance their customer interactions across multiple communications media. Our enterprise collaboration architecture allows contact center management to share information gathered in the contact center with departments that touch the customer, as well as executives, providing them with a proactive management tool for optimizing their customer relationship management (“CRM”), improving communication among departments, fine-tuning workflow, processes and quality of service from within the contact center and throughout the enterprise. As a result, we believe our customers are able to generate additional revenue opportunities, improve profitability, enhance customer retention, reduce employee turnover and improve their overall customer service.

      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, e-mail and the Internet, identify performance gaps and then apply targeted electronic learning for continuous performance improvement. The eQuality software records a customer sales/service representative’s (“CSRs”) voice interactions 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, 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 e-commerce, eQuality enables companies to also capture, evaluate and analyze e-mail, Web and guided browser sessions. In addition, eQuality allows companies to selectively record and analyze customer interactions on any of these mediums based on business criteria which they define, such as key customers, important marketing campaigns, new product introductions and selected CSR criteria.

      During the fourth quarter of 2001, the company added a new solution to the eQuality suite — eQuality Discover. This new software enables companies to capture and graphically view Web-based customer experiences. By gaining insight and context as to why a visitor to their Web site abandoned the site or placed a call to the contact center, companies can deploy eQuality Discover to help identify clear steps for improving online customer service.

      We currently provide software to an extensive base of large companies with multiple contact centers, including American Airlines, AT&T, Bank of America, Capital One, Compaq, Continental Airlines, EDS,

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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 e-commerce 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 channels of communication is, therefore, becoming both a strategic and tactical business requirement.

      In response to these trends, companies adopted CRM initiatives to increase the longevity and profitability of their customer relationships, and developed software applications to automate and evaluate key sales, marketing and customer service processes and improve the effectiveness of their customer interactions. CRM remains one of the highest spending priorities near-term, according to AMR Research.

      Historically, the focus of CRM applications has been on improving the companies’ internal sales, marketing and customer service processes. Competitive pressures resulting from the emergence of the Internet and e-commerce have required companies to shift the focus of their CRM initiatives from improving their internal operations to meeting the needs of their customers. Companies are 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 CSRs, 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. 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 CSRs are required to perform. As a result, traditional single-function CSRs 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.

      CSRs 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 CSR. Survey results from the Yankee Group indicate that companies still consider the deployment of

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      A number of applications have emerged to attempt to address the need to better manage these interactions. However, we believe that most solutions currently available do not adequately address the importance of optimizing customer interactions through recording at the point of contact, evaluation of the customer contact, analysis of CSR performance, and applying organizational learning through an integrated electronic learning management software solution. For example, current solutions require companies to record every call center telephone call and 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. Further, without an integrated electronic learning solution, these existing programs cannot effectively train and develop the CSRs who serve a company’s 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.

The eQuality Solution

      We provide customer interaction recording, performance analysis and electronic learning management software that enable companies to optimize their customer relationships across multiple communications media. As a result, we believe our customers are able to generate additional revenue opportunities, improve profitability, reduce employee turnover, enhance customer retention and improve overall customer satisfaction. We believe our software and services provide the following key business benefits:

	•	Increases revenue opportunities. The eQuality 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 CSRs 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 the eQuality 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.
	•	Reduces employee turnover. Because the eQuality 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 Giga Information Group, the contact center average turnover rate ranges from 20% to 30% annually, and the costs to recruit, interview, and train new CSRs are often as high as $10,000 per agent, depending on the level of skills required.
	•	Enhances customer retention. Using the eQuality 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 e-commerce and services will increase the importance customers place on high- quality and consistent customer service. 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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      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. The 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 occurred. This enables companies to not only evaluate the behavior of their CSRs, 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. The eQuality software captures customer interactions from a variety of communications media, including telephone, Web 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 the eQuality 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, new product introductions and selected CSRs. Further, companies can define critical business events to trigger the capture of the interaction, such as customer problems that 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.
	•	Enables information gathered in the contact center to be shared across the enterprise. eQuality’s enterprise collaboration recording architecture enables contact center management to share interactions from the contact center with departments that touch the customer, as well as executives, by notifying them when a business-critical customer event occurs. The result is a proactive management tool for optimizing customer relationships and improving communications among departments, as well as fine-tuning workflow, processes and quality of service from within the contact center and throughout the enterprise.
	•	Provides performance analysis and feedback. The eQuality Evaluation software facilitates the review, evaluation and scoring of CSRs, providing an immediate performance summary. Using the eQuality Analysis software, a user can combine important data derived from eQuality Evaluation with data derived from many other business applications, such as CRM 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.
	•	Enables an integrated, closed-loop environment for applying organizational learning. eQuality Now™ delivers ongoing training tailored to CSR competencies, which helps companies build customer loyalty though a more highly-skilled and motivated workforce. Underscoring the importance of staff development, recent research from the Yankee Group indicated that 62% of contact center managers ranked agent training as their number one budget priority. Companies are turning to electronic learning in response to the urgency of delivering and reinforcing training to improve CSRs’ skills, as well as to provide a means to support their career paths. Studies conducted by Corporate University Xchange indicate that 40% of corporate training will take place electronically by 2003. Our eQuality Now product addresses this market trend by focusing on electronic learning opportunities in the contact center, such as new product and service introductions; up-selling and cross-selling techniques; and tips

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		for managing customer communications through newer communications channels, such as e-mail and collaborative Web chat.
	•	Integrates with third-party software and hardware. The eQuality software is designed to integrate with a variety of third-party software, such as CRM applications, from providers such as Amdocs (which bought Clarify), Avaya, Cisco, Concerto, eGain, Genesys (a division of Alcatel), Kana, Nortel, Peoplesoft, Peregrine, Siebel Systems and Synchrony. In addition, the eQuality 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. The eQuality software operates on the Windows NT platform and is compatible with standard voice cards and databases. Also, the software can capture and record computer screen activity from CSR 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 the software is scalable, it can support the needs of a small single site as well as large multi-site installations. For example, the eQuality software is currently being used at a customer installation with approximately 7,000 CSRs. In addition, it can be expanded to accommodate an increasing number of CSRs. The eQuality software’s high volume recording architecture interfaces on either the network or agent side of the PBX/ACD switch and enables companies to record zero to 100% of any type of contact that comes into their center based on “business rules” that they define.
	•	Enables rapid deployment. Because of the software’s features, extensive third-party integration, open architecture and implementation process, we can typically implement our software at a customer’s initial site within 30 to 60 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. Since the detailed project planning occurs during installation at the first site, we can typically 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, rapid deployment is important in that it allows those customers to quickly implement and begin realizing the benefits of the eQuality software.

Strategy

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

	•	Extend the breadth and depth of 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 e-commerce, 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 new and existing 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, by using our direct sales force and emphasizing 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.

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	•	Expand international presence. We currently maintain direct sales forces in Australia, Brazil, Canada, Germany, Japan, Mexico, the Netherlands, Singapore and the United Kingdom. We plan to expand our direct and indirect sales channels in these regions, with particular attention to areas that are actively adopting CRM solutions.
	•	Expand the 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 CRM, 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 products to their customers. Currently, we have business alliances with the following application and Internet infrastructure providers: Amdocs (which bought Clarify), Avaya, Cisco, Concerto, eGain, Genesys (a division of Alcatel), Kana, Nortel, Peoplesoft, Peregrine, Siebel Systems and Synchrony.

Products

      The eQuality software initiates recording of customer interactions based on criteria selected by companies and facilitates retrieval and analysis of the recorded information, as well as targeted electronic learning events based on skill gaps identified using the evaluation software. With eQuality’s enterprise collaboration recording architecture, organizations can create advanced business rules for random, selective or 100% recording of the specific types of telephone, e-mail and Web customer interactions that drive their businesses. Additionally, contact center management is able to share these interactions with departments that touch the customer, as well as executives, by notifying them when a business-critical customer event occurs. The result is a proactive management tool for optimizing customer relationships and improving communications among departments, as well as fine-tuning workflow, processes and quality of service from within the contact center and throughout the enterprise.

      The foundation of the 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. 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 interactions can then be selectively retrieved, combined with information from a company’s other business systems, such as CRM and enterprise resource planning software, analyzed and presented in a number of summary or detailed formats. The eQuality 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. By recording customer interactions, evaluating CSR performance, and then using eQuality Now to prioritize training, companies have an integrated, closed-loop solution for applying organizational learning. The result is an effective environment for continuous performance improvement that helps companies ensure their customers receive consistent service across all touch-points.

      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. The eQuality 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.

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	•	Target products. Interactions that relate to targeted products can be identified and recorded to allow businesses to evaluate product design, installation and service issues. Examples include selected calls related to new product introductions, key revenue-producing products and particularly profitable products.
	•	Selected CSR considerations. 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, CSRs that are not achieving desired performance levels, and CSRs working with a new medium, such as e-mail or Web chat.

      By recording only critical customer interactions based on business rules, companies have fewer interactions to store and therefore significantly lower storage requirements. Further, the software’s 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, the eQuality software is designed to integrate or be compatible with a company’s existing telephony and computer network hardware and software. The software is designed to run on a server that employs the Windows NT operating system. In addition, it 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, and thin client operating systems, such as Citrix application server software.

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

      eQuality Balance™. eQuality Balance records a CSR’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 designed to support CSRs and enhance the quality of the services being delivered to customers.

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

      eQuality Evaluation™. The eQuality Evaluation application facilitates the review, evaluation and scoring of CSRs, providing an immediate summary of a CSR’s performance. Using eQuality Evaluation, CSR supervisors can build custom evaluation forms that 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.

      eQuality Analysis™. The eQuality Analysis application 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 Evaluation with data derived from information obtained from a company’s other business systems, such as CRM and enterprise resource planning software and integrated telephony applications. Combining multiple sources of data from within the company into a common analysis and reporting system allows for a more thorough evaluation of CSR and

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      eQuality Now™. The eQuality Now application delivers ongoing training tailored to CSR competencies, which helps companies build customer loyalty through a more highly skilled and motivated workforce. The electronic learning management software integrates with leading on-line learning products focused on CSR soft and hard skills. By recording customer interactions, evaluating CSR performance, and then using eQuality Now to prioritize training, contact centers have an integrated, closed-loop solution for applying organizational learning. The result is an effective environment for continuous performance improvement that helps companies ensure their customers receive consistent service across all touch points.

      eQuality Connect™. The eQuality Connect application serves as the foundation to integrate eQuality with Web-enabled contact center and eCRM applications, including e-mail response management, collaborative Web chat and customer information systems. As the underlying integration component of the eQuality suite, eQuality Connect is an open, scalable software solution that leverages strategic events and data gathered from external solutions to initiate recordings. Companies can implement eQuality Connect as the integration layer within their eQuality multimedia recording and analysis software, or as a standalone solution that integrates eQuality with other applications, such as internally developed customer information systems.

      eQuality Discover™. The eQuality Discover application enables companies to record and graphically view actual customer experiences on their Web sites so they can identify clear steps for improving online customer service. With these captured samples, companies will have the insight they need to determine how consumers interact with their Web sites, which in turn helps them increase the profitability of on-line relationships while at the same time reducing customer service costs. Using eQuality Discover, companies can determine why a visitor placed a call to the contact center or abandoned their Web site. When brought together with recorded customer contacts from other tough points, captured self-service interactions can help companies achieve a single view of customers and the way they are serviced across many channels.

      Historically and at present, eQuality Balance was and is licensed together with the eQuality Evaluation software. Through December 31, 2001, we derived most of our license revenue from the sale of these two products. During 2001, approximately 15% of our orders included more than one module of the eQuality application suite, including eQuality Now, Analysis, Response, Interactive, and Connect.

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 the software’s applications.

      Prior to implementation we offer end-user training both on-site at the customers location, and at a centralized training facility at our corporate headquarters. Training includes coach training and system administration. These engagements are usually completed in four to five days.

      An initial implementation engagement is typically completed within 30 to 60 days from the date the software agreement is signed by a new customer, and involves the planning, configuration, testing and installation of our software. Generally, the actual software installation takes 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. The professional services team also works closely with the internal research and development organization to help enhance software solutions. Experience gained by the professional services group through ongoing software installation is regularly conveyed to the development staff. Our research and development organization then capitalizes on this experience to design enhancements to the software. The services staff also maintains a technical support hotline.

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      In addition to installation and training services, we began offering customers business consulting services during the second half of 2001 to help our customers identify and link key business drivers with CSR skills and behaviors, providing a blueprint for implementing a successful performance management strategy. These workshops are typically completed in four to five business days.

Customers

      Our customers include large and small companies with a varying number of contact center sites. Our customers come from the banking and finance, general business, insurance, outsourcing, technology, travel and hospitality and utility industries. As of December 31, 2001, we had licensed our software to over 327 customers at over 885 sites. To date, customer installations have ranged from as small as one contact center having 25 CSRs, to customers with 32 contact centers having an aggregate of approximately 16,000 CSRs. No customer accounted for 10% or more of our revenue in 2001, 2000 and 1999.

Sales and Marketing

      We sell our software primarily through a combination of a direct sales force and resellers. As of December 31, 2001, we had 17 sales offices in the United States and offices in Australia, Canada, Japan, Mexico, and the United Kingdom. Our sales and marketing organization consisted of 116 employees worldwide.

      To date, substantially all of our revenue has been generated through our direct sales force, which consisted of 88 sales people in 23 locations as of December 31, 2001. The direct sales force consists of account executives, solutions consultants, and regional sales directors. In addition to qualified leads generated internally, the 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.

      We develop strategic marketing alliances with leading companies in our industry to expand the coverage and support of our direct sales force. These relationships may include joint marketing campaigns and selling strategies. Separate from the direct sales force, our business development personnel are responsible for the initiation, negotiation and completion of these partnerships. We currently have such relationships with Siebel Systems, Clarify, Cisco, Genesys, eShare, Kana, eGain, Accenture, Quintus, Peoplesoft, Servicesoft, Remedy, Pivotol and Synchrony.

      In addition to the direct sales force, we have agreements with a variety of CRM and contact center companies under which they can 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 the 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 the 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 the software’s solutions to expand the number of CSRs at existing sites and to license additional contact centers, with a minimal incremental sales effort on our behalf.

      We use a variety of marketing programs to build brand name awareness, 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. To support sales efforts, the marketing organization also produces marketing materials that include brochures, data sheets and other technical descriptions, presentations and demonstrations.

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      The market for business software has experienced seasonal fluctuations in demand. The first and third quarters of the year have been typically characterized by slightly longer sales cycles related to holiday and vacation schedules.

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 incorporates new technological developments and emerging industry standards.

      Research and development expenditures for the years ended December 31, 2001, 2000, and 1999 were $13.6 million, $10.4 million, and $5.8 million, respectively. We intend to continue to increase our investment in research and development in the future. As of December 31, 2001, we had 85 employees engaged in research and development activities.

Competition

      Our software and services compete in the emerging market for products that record and analyze customer interactions and provide electronic learning applications. This market is intensely competitive and experiences rapid changes in technology. We believe that we compete effectively and that we enjoy a competitive advantage based upon (1) the functionality and quality of our products, (2) the ease of use and ability of our products to operate with a variety of hardware and software products, (3) our ability as a single vendor to offer a full suite of applications, (4) our ability to implement our products quickly, (5) the responsiveness of our customer support, and (6) our competitive pricing. However, many 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 us. 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, take better 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 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 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 that our competitors will not offer or develop products and services that are superior to ours, or that achieve a 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 phone conversations made by or to the user, including emergency services, such as 911, and verification and liability users, such as trading floors and stockbrokers;
	•	electronic learning vendors that have historically provided a point solution that delivers training to customer service representatives;
	•	reporting vendors that have historically provided a point solution focused on providing contact center performance reports to management;
	•	systems integrators and consulting firms which design and develop custom systems and perform custom integration; and

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	•	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 CRM products, computer telephony companies and computer hardware, software and networking companies.

      In addition, we have developed, and intend to continue to develop, relationships with companies that resell our software, companies that integrate the 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 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.

      Our success will depend on our ability to compete effectively based on these factors. Further, 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 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 the software. These agreements generally warrant that the software will materially comply with written documentation. We assert that we own the software we distribute and have not violated the intellectual property rights of others. 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. The patent also relates to the data capture technique that records only particular changed regions

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

      We are aware of certain uses, U.S. trademark registrations, and U.S. trademark applications for the trademark “equality” and its variations that predate our use of, and U.S. trademark application for, our trademarks eQuality and Bringing eQuality to eBusiness. It is possible that the U.S. Patent and Trademark Office will deny the U.S. trademark applications. In addition, it is possible that the owner of legal rights resulting from one or more of these prior uses, U.S. trademark registrations, or U.S. trademark applications will bring legal action to prevent us from registering and/or using the trademarks eQuality and Bringing eQuality to eBusiness, and may also seek compensation for damages resulting from our use of these trademarks. As a result, we cannot assure that our efforts to use and register these trademarks will ultimately be successful, or that this use will not result in liability for trademark infringement, trademark dilution, and/or unfair competition.

      Based on the limited information available to us regarding these prior uses, U.S. trademark registrations, and U.S. trademark applications for the trademark eQuality and its variations, we believe that our trademarks eQuality and Bringing eQuality to eBusiness are available for use and U.S. trademark registration in connection with the services stated in our registration applications, or as the descriptions of those services may be amended during the course of examination in the U.S. Patent and Trademark Office.

      Copyrights. We have six copyright registrations covering our eQuality software.

Employees

      As of December 31, 2001, we had 327 full-time employees. Of these employees, 85 were engaged in research and development, 116 were engaged in sales and marketing, 71 were engaged in professional services and 55 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.

      Our principal administrative, marketing, product development and support facilities are located in Roswell, Georgia, a suburb of Atlanta, which we moved to in December 2000 and we lease approximately 96,400 square feet that expires in 2007. In addition, we lease a total of 17 sales and marketing offices in the United States, and offices in Australia, Brazil, Canada, Germany, Japan, Mexico, the Netherlands and the United Kingdom. We believe our facilities are adequate for our current and expected near-term requirements.

      From time to time we may be involved in legal proceedings and/or litigation arising in the ordinary course of our business. As of the date hereof, we are not party to any litigation or other legal proceedings that we believe could have a material adverse effect on our business, operating results or financial condition.

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

      No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2001.

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PART II

Item 5.     Market for Our Common Equity and Related Stockholder Matters.

Common Stock

      Our common stock trades on the Nasdaq Stock Market under the symbol “WITS”. Public trading of the common stock commenced on February 10, 2000. Prior to that, there was no public market for the common stock. The following table sets forth, for the periods indicated, the high and low sale price per share of the common stock on the Nasdaq Stock Market in each of the last eight quarters.

      The closing sale price of our common stock as reported by the Nasdaq Stock Market on March 15, 2002 was $13.28.

      Dividend Policy. We have not paid any cash dividends on our common stock to date. Our Board of Directors determines whether or not we will pay dividends. The Board of Directors considers a number of factors in deciding whether or not to pay dividends, including our earnings, our capital requirements and our financial condition. Today, the Board of Directors intends to retain all earnings, if any, for use in our business operations and, accordingly, does not expect to declare or pay any dividends in the foreseeable future.

      Rule 10b5-1 — Trading Plans. In November 2001, our Board of Directors approved an amendment to our insider trading policy to permit our officers, directors and other insiders to enter into trading plans or arrangements to sell shares of our common stock complying with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. In December 2001, subject to the adoption of the amendment to our trading guidelines, certain officers adopted “trading plans” under Rule 10b5-1. The trading plans provide for sales, subject to price restrictions, daily limits and other contingencies, of shares of our common stock. It is possible that other officers, directors and insiders may establish trading plans or arrangements complying with Rule 10b5-1.

      Holders. As of March 15, 2002, we had approximately 306 holders of record of our common stock. We believe that we have more than 2,800 beneficial owners.

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Item 6.     Selected Financial Data

      The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.