8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): April 14, 2005

NetScout Systems, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

(State or Other Jurisdiction of Incorporation)

0000-26251	04-2837575
(Commission File Number)	(IRS Employer Identification No.)
310 Littleton Road, Westford, Massachusetts	01886
(Address of Principal Executive Offices)	(Zip Code)

(978) 614-4000

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name or Former Address, If Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

NetScout Systems, Inc. (“NetScout”) filed a Current Report on Form 8-K on April 20, 2005, to report its acquisition of Quantiva, Inc. (“Quantiva”). The purpose of this amendment is to provide the financial statements and information required by Item 9.01 of Form 8-K.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements of Business Acquired

The following audited financial statements of Quantiva are filed herewith as Exhibit 99.2:

I. Report of Independent Registered Public Accounting Firm

II. Balance Sheets as of December 31, 2004 and 2003

III. Statements of Operations for the Years Ended December 31, 2004 and 2003 and for the Cumulative Period from March 3, 2000 (Date of Inception) Through December 31, 2004

IV. Statements of Cash Flows for the Years Ended December 31, 2004 and 2003 and for the Cumulative Period from March 3, 2000 (Date of Inception) Through December 31, 2004

V. Statement of Stockholders’ Equity for the Period from March 3, 2000 (Date of Inception) Through December 31, 2004

VI. Notes to Financial Statements

(b) Pro Forma Financial Information

The following unaudited combined pro forma financial statements of NetScout are filed herewith as Exhibit 99.3:

I. Introduction to Unaudited Combined Pro Forma Financial Statements

II. Unaudited Combined Pro Forma Balance Sheet as of March 31, 2005

III. Unaudited Combined Pro Forma Statement of Operations for the Twelve Months Ended March 31, 2005

IV. Notes to Unaudited Combined Pro Forma Financial Statements

(c) Exhibits

2.1 Asset Purchase Agreement dated as of February 12, 2005, between NetScout and Quantiva (previously filed as Exhibit 2.1 to NetScout’s Current Report on Form 8-K, dated as of April 14, 2005, and filed with the Securities and Exchange Commission on April 20, 2005).

2

23.1	Consent of Amper, Politziner & Mattia, P.C.
99.1	Press release announcing the completion of the acquisition by NetScout of substantially all of the assets of Quantiva, dated April 14, 2005 (previously furnished as Exhibit 99.1 to NetScout’s Current Report on Form 8-K, dated as of April 14, 2005, and filed with the Securities and Exchange Commission on April 20, 2005).
99.2	Audited balance sheets of Quantiva as of December 31, 2004 and 2003 and the related statements of operations, and cash flows for the years ended December 31, 2004 and 2003, and the statements of operations, cash flows and stockholders’ equity for the cumulative period from March 3, 2000 (date of inception) through December 31, 2004 together with the report of Amper, Politziner & Mattia, P.C. with respect thereto.
99.3	Unaudited combined pro forma balance sheet of NetScout as of March 31, 2005 and unaudited combined statement of operations for the twelve months ended March 31, 2005.

3

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NETSCOUT SYSTEMS, INC.
By:	/s/ David P. Sommers
	David P. Sommers
	Chief Financial Officer and
	Senior Vice President, General Operations

Date: June 30, 2005

4

EXHIBIT INDEX

Exhibit Number	Description
2.1	Asset Purchase Agreement dated as of February 12, 2005, between NetScout and Quantiva (previously filed as Exhibit 2.1 to NetScout’s Current Report on Form 8-K, dated as of April 14, 2005, and filed with the Securities and Exchange Commission on April 20, 2005).
23.1	Consent of Amper, Politziner & Mattia, P.C.
99.1	Press release announcing the completion of the acquisition by NetScout of substantially all of the assets of Quantiva, dated April 14, 2005 (previously furnished as Exhibit 99.1 to NetScout’s Current Report on Form 8-K, dated as of April 14, 2005, and filed with the Securities and Exchange Commission on April 20, 2005).
99.2	Audited balance sheets of Quantiva as of December 31, 2004 and 2003 and the related statements of operations, and cash flows for the years ended December 31, 2004 and 2003, and the statements of operations, cash flows and stockholders’ equity for the cumulative period from March 3, 2000 (date of inception) through December 31, 2004 together with the report of Amper, Politziner & Mattia, P.C. with respect thereto.
99.3	Unaudited combined pro forma balance sheet of NetScout as of March 31, 2005 and unaudited combined statement of operations for the twelve months ended March 31, 2005.

5

EX-23.1

Exhibit 23.1

Consent of Amper, Politziner & Mattia, P.C.

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in Registration Statements (No. 333-112704, No. 333-73842, No. 333-41880, No. 333-95647, No. 333-90971 and No. 333-88131) on Form S-8 of NetScout Systems, Inc. of our report dated March 29, 2005 relating to the financial statements of Quantiva, Inc. (the “Company”), which appears in this Form 8-K/A of NetScout Systems, Inc.

Our report dated March 29, 2005, contains an explanatory paragraph that states that the accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses, negative cash flow from operations, and has negative working capital, which raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding this matter are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/    AMPER, POLITZINER & MATTIA P.C.

June 30, 2005

EX-99.2

Exhibit 99.2

QUANTIVA, INC.

(A Development Stage Company)

For the Years Ended December 31, 2004

and 2003, and for the Cumulative Period

from March 3, 2000 (Date of Inception)

Through December 31, 2004

	Page
Report of Independent Registered Public Accounting Firm	2-3
Balance Sheets	4
Statements of Operations	5
Statements of Cash Flows	6
Statements of Stockholders’ Equity	7-8
Notes to Financial Statements	9-27

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Quantiva, Inc.

(A Development Stage Company)

We have audited the accompanying balance sheets of Quantiva, Inc. (a development stage company) as of December 31, 2004 and 2003, and the related statements of operations and cash flows for the years then ended and the statements of operations, cash flows and stockholders’ equity for the cumulative period from March 3, 2000 (date of inception) through December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of Quantiva, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended and for the period from March 3, 2000 (date of inception) through December 31, 2004 in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses, negative cash flow from operations, and has negative working capital, which raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding this matter are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

-2-

The Company has entered into an asset purchase agreement with a publicly traded software company. The agreement calls for the sale of substantially all of the Company’s assets upon the closing date, which is expected to occur prior to April 30, 2005 (see Note 17).

/s/    AMPER, POLITZINER & MATTIA P.C.

March 29, 2005

-3-

Quantiva, Inc.

(A Development Stage Company)

Balance Sheets

As of December 31

	2004			2003
Assets
Current Assets
Cash	$	56,048		$	828,591
Accounts Receivable		12,959			4,500
Prepaid expenses and other current assets		11,676			12,993
Total Current Assets		80,683			846,084
Property and equipment, net of accumulated depreciation and amortization		74,719			267,241
Intangible assets, net of accumulated amortization		45,595			900
Deposits		9,315			41,065
Total assets	$	210,312		$	1,155,290
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable	$	103,600		$	56,917
Accrued Expenses		211,199			116,532
Deferred Revenue		22,831			5,156
Current portion of capital lease obligation		99,966			99,633
Notes Payable to Stockholders, net of unamortized discount of $74,770		—			2,425,240
Accrued Interest on Notes Payable to Stockholders		—			51,640
Total current liabilities		437,596			2,755,118
Capital lease obligations, net of current portion		—			108,876
Series A mandatorily redeemable convertible preferred stock, $.01 par value, 3,675,000 shares authorized, 0 and 3,659,878 shares issued and outstanding at December 31, 2004 and 2003 respectively (liquidation preference of $1,500,000 at 2003)		—			1,965,941
Series A-1 mandatorily redeemable convertible preferred stock, $.01 par value, 27,000,000 shares authorized, 0 and 24,725,131 shares issued and outstanding at December 31, 2004 and 2003 respectively (liquidation preference of $5,100,003 at 2003)		—			5,954,357
Series C mandatorily redeemable convertible participating preferred stock, $.01 par value, 1,039,176 shares authorized, 984,373 and 0 shares issued and outstanding at December 31, 2004 and 2003 respectively (liquidation preference of $5,927,689 at 2004)		512,008			—
Total liabilities		949,604			10,784,292
Commitments and Contingencies		—			—
Stockholders’ equity(deficit)
Series B convertible participating preferred stock, $.01 par value, 592,645 shares authorized, 592,645 and 0 shares issued and outstanding as of December 31, 2004 and 2003 respectively (liquidation preference of $321,171 at 2004)		2,676,666			—
Common Stock, $.01 par value, 2,130,000 shares authorized, 58,677 and 13,967 shares issued and outstanding at December 31, 2004 and 2003 respectively		586			140
Additional paid-in-capital		8,623,873			90,915
Note receivable from shareholder		(90,540	)		(85,705	)
Accumulated deficit during development stage		(11,949,877	)		(9,634,352	)
Total stockholders' equity(deficit)		(739,292	)		(9,629,002	)
Total liabilities and stockholders' equity(deficit)	$	210,312		$	1,155,290

The accompanying notes are an integral part of these financial statements

-4-

Quantiva, Inc.

(A Development Stage Company)

Statements of Operations

For the Years Ended December 31, 2004 and 2003, and Cumulative for the

Period from March 3, 2000(Date of Inception) Through December 31, 2004

	2004			2003			For the Period March 3, 2000(Date of Inception) Through December 31, 2004
Revenue	$	102,950		$	54,869		$	217,819
Cost of Revenue		226,302			573,311			799,613
Net Margin		(123,352	)		(518,442	)		(581,794	)
Costs and Expenses:
Sales and marketing		108,371			485,379			1,305,825
Research and development		703,902			910,427			5,691,222
General and administrative		533,473			563,070			2,729,433
Depreciation and amortization		199,592			219,203			620,180
Non-cash stock compensation		265			—			145,023
Total costs and expenses		1,545,603			2,178,079			10,491,683
Loss from operations		(1,668,955	)		(2,696,521	)		(11,073,477	)
Interest Expense-Preferred Stock and Notes Payable to Stockholders		(829,087	)		(552,338	)		(1,381,425	)
Other expense, net		(14,500	)		—			(9,266	)
Interest Expense		(22,899	)		(34,149	)		(183,083	)
Interest Income		6,822			11,826			72,429
Net loss before income taxes		(2,528,619	)		(3,271,182	)		(12,574,822	)
Income Tax Benefit		(213,094	)		(205,081	)		(624,945	)
Net loss	$	(2,315,525	)	$	(3,066,101	)	$	(11,949,877	)

The accompanying notes are an integral part of these financial statements

-5-

Quantiva, Inc.

(A Development Stage Company)

Statements of Cash Flows

For the Years Ended December 31, 2004 and 2003 and Cumulative for the

Period from March 3, 2000(Date of Inception) Through December 31, 2004

	2004			2003			For the Period March 3, 2000(Date of Inception) Through December 31, 2004
Cash Flows from development stage activities
Net loss	$	(2,315,525	)	$	(3,066,101	)	$	(11,949,877	)
Adjustments to reconcile net loss to net cash used in development stage activities
Depreciation and amortization		193,122			219,203			613,710
Amortization of debt issuance costs		6,470			—			6,470
Stock compensation expense		265			—			145,023
Interest expense (income), net		194,953			124,100			431,726
Accretion of interest expense on Preferred Stock		629,300			372,222			1,001,522
Changes in operating assets and liabilities
Accounts receivable		(8,459	)		(4,500	)		(12,959	)
Prepaid expenses and other current assets		1,316			3,985			(11,677	)
Deposits		31,750			21,750			(9,315	)
Accounts payable		46,683			(90,973	)		103,600
Accrued expenses		94,665			47,147			211,929
Deferred revenue		17,675			5,156			22,831
Net cash used in development stage activities		(1,107,785	)		(2,368,011	)		(9,447,017	)
Cash from investing activities
Purchase of intangible assets		—			—			(3,000	)
Purchase of property and equipment		—			—			(340,821	)
Net cash used in investing activities		—			—			(343,821	)
Cash flows from financing activities
Proceeds from sale of common stock		—			—			633,743
Proceeds from exercise of stock options		2,066			900			11,903
Proceeds from issuance of notes payable to stockholder		97,713			2,500,000			2,997,713
Proceeds from sale of preferred stock		395,772			—			6,476,003
Payment of issuance costs on preferred stock		(51,766	)		—			(51,766	)
Principal payments of capital lease obligations		(108,543	)		(90,118	)		(220,710	)
Net cash provided by financing activities		335,242			2,410,782			9,846,886
Net change in cash		(772,543	)		42,771			56,048
Cash at beginning of period		828,591			785,820			—
Cash at end of period	$	56,048		$	828,591		$	56,048
Non-cash financing activities
Conversion of notes payable to stockholders to Series B preferred stock, including accrued interest of $176,666	$	2,676,666		$	—		$	2,676,666
Accretion of Preferred Stock	$	—		$	372,222		$	1,365,822
Conversion of note payable into Series A-1 preferred stock	$	—		$	—		$	400,000
Conversion of Series A and A-1 mandatorily redeemable preferred stock to common stock	$	8,580,469		$	—		$	8,580,469
Conversion of notes payable into Series C preferred stock	$	97,713		$	—		$	97,713
Property and equipment acquired under capital leases	$	—		$	—		$	320,676
Cash paid for interest and income taxes
Interest paid on Notes Payable to Stockholders	$	—		$	51,440		$	51,440
Interest paid on debt obligations	$	22,898		$	34,103		$	66,738
Income Taxes Paid	$	3,278		$	1,600		$	11,606

The accompanying notes are an integral part of these financial statements

-6-

Quantiva, Inc.

(A Development Stage Company)

Statement of Stockholders’ Equity

For the period from March 3, 2000 (Date of Inception) Through December 31, 2004

	Series A Preferred Stock					Series A-1 Preferred Stock					Series C Preferred Stock			Mandatorily Redeemable Preferred Stock			Series A Preferred Stock
	Shares		Amount			Shares		Amount			Shares	Amount					Shares		Amount
Balance at March 3, 2000
Original stock issuance
Sale of series A Preferred stock, net of issuance costs of $60,000																	3,659,878		$	1,440,000
Accretion of preferred stock in redemption amount																				46,819
Issuance of warrants to conjunction with common stock
Net loss
Balance at December 31, 2000																	3,659,878			1,486,819
Exercise of Common Stock Options
Conversion of Notes Payable to Series A-1 Preferred
Sale of Series A-1 Preferred net of issuance costs of $51,336 of cash & 15,213 warrants valued at $275,250
Stock Based Compensation for Options issued to non-employees
Accretion of Preferred Stock to Redemption Amount																				159,707
Issuance of Warrants on Notes Payable
Net loss
Balance at December 31, 2001	—			—		—			—		—		—		—		3,659,878			1,646,526
Exercise of Common Stock Options and Restricted Stock															—
Accrued Interest on Notes Receivable from Shareholder															—
Issuance of Restricted Stock to Non-Employees															—
Sale of Series A-1 Preferred, net of issuance costs of $8,437 of cash and 1,839 warrants valued at $42,727															—
Accretion of Preferred Stock to redemption amounts															—					159,707
Issuance of warrants in conjunction with execution of debt obligations															—
Net loss															—
Balance at December 31, 2002	—			—		—			—				—		—		3,659,878			1,806,233
Accretion of Preferred Stock to redemption amount			$	79,854				$	292,369						372,223					79,854
Reclass of mandatorily redeemable preferred stock in liabilities	3,659,878			1,886,087		24,725,131			5,661,988						7,548,075		(3,659,878	)		(1,886,087	)
Exercise of Common Stock Options															—
Accrued Interest on Note Receivable from Shareholder															—
Issuance of Restricted Stock to Non-Employees															—
Issuance of warrants in conjunction with Notes Payable															—
Net loss															—
Balance at December 31, 2003	3,659,878			1,965,941		24,725,131			5,954,357		—		—		7,920,298		—			—
Exercise of Common Stock Options															—
Conversion of Note Payable to Stockholder and related accrued interest to Series B															—
Conversion of demand notes to Series C Preferred											194,912	$	97,713		97,713
Sale of Series C Preferred, net of issurance costs of $51,766 cash											789,461		395,772		395,772
Stock Based Compensation for Options issued to non-employees															—
Accrued Interest on Note Receivable from Shareholder															—
Issuance of Restricted Stock to Non-Employees															—
Accretion of Preferred Stock to redemption amount				99,762					511,015				18,523		629,300
Conversion of Series A and A-1 mandotarily redeemable preferred stock to common	(3,659,878	)		(2,065,703	)	(24,725,131	)		(6,465,372	)					(8,531,075	)
Net loss
Balance at December 31, 2004	—		$	—		—		$	—		984,373	$	512,008	$	512,008		—		$	—

-6-

	Series A-1 Preferred Stock					Series B Preferred Stock			Common Stock			Additional Paid-in- Capital			Note Receivable From Shareholder			Accumulated Default			Total Stockholders’ Equity (Default)
	Shares		Amount			Shares	Amount		Shares	Amount
Balance at March 3, 2000																					$	—
Original stock issuance									10,269	$	103	$	764,116									764,269
Sale of series A Preferred stock, net of issuance costs of $60,000																						1,440,000
Accretion of preferred stock in redemption amount													(46,819	)								—
Issuance of warrants to conjunction with common stock													18,450									18,450
Net loss																		$	(1,175,312	)		(1,175,312	)
Balance at December 31, 2000									10,269		103		735,797						(1,175,312	)		1,047,407
Exercise of Common Stock Options									49		0		8,937									8,937
Conversion of Notes Payable to Series A-1 Preferred	1,939,225		$	400,000																		400,000
Sale of Series A-1 Preferred net of issuance costs of $51,336 of cash & $5,213 warrants valued at $275,250	20,119,471			3,823,417									275,250									4,098,667
Stock Based Compensation for Options issued to non-employees													22,241									22,241
Accretion of Preferred Stock to Redemption Amount				67,000									(226,707	)								—
Issuance of Warrants on Notes Payable													72,785									72,785
Net loss																			(2,144,710	)		(2,144,710	)
Balance at December 31, 2001	22,058,696			4,290,417		—	$	—	10,318		103		888,303			—			(3,320,022	)		3,305,327
Exercise of Common Stock Options and Restricted Stock									3,049		31		79,557			(77,503	)					2,085
Accrued Interest on Notes Receivable from Shareholder																(3,626	)					(3,626	)
Issuance of Restricted Stock to Non-Employees									539		5		14,134									14,139
Sale of series A-1 Preferred, net of issuance costs of $8,437 of cash and 1,839 warrants valued at $42,727	2,666,435			498,836									42,727									541,563
Accretion of Preferred Stock to redemption amounts				580,367									(740,074	)								—
Issuance of warrants in conjunction with execution of debt obligations													25,064									25,064
Net loss																			(3,248,229	)		(3,248,229	)
Balance at December 31, 2002	24,725,131			5,369,620		—		—	13,906		139		309,711			(81,129	)		(6,568,251	)		836,323
Accretion of Preferred Stock to redemption amount				292,368									(372,222	)								—
Reclass of mandatorily redeemable Preferred stock in liabilities	(24,725,131	)		(5,661,988	)																	(7,548,075	)
Exercise of Common Stock Options									34		—		900									900
Accrued Interest on Note Receivable from Shareholder																(4,576	)					(4,576	)
Issuance of Restricted Stock to Non-Employees									27		—		720									720
Issuance of warrants in conjunction with Notes Payable													151,806									151,806
Net loss																			(3,066,101	)		(3,666,101	)
Balance at December 31, 2003	—			—		—		—	13,967		139		90,915			(85,705	)		(9,634,352	)		(9,629,003	)
Exercise of Common Stock Options									79		1		2,064									2,065
Conversion of Notes Payable to Stockholder and related accrued interest to Series B						592,645		2,676,666														2,676,666
Conversion of demand notes to Series C Preferred
Sale of Series C Preferred, net of issuance costs of $51,766 cash																						—
Stock Based Compensation for Options issued to non-employees													240									240
Accrued Interest on Note Receivable from Shareholder																(4,835	)					(4,835	)
Issuance of Restricted Stock to Non-Employees									500		5		20									25
Accretion of Preferred Stock to redemption amount																						—
Conversion of Series A and A-1 mandotarily redeemable preferred stock to common									44,131		441		8,530,634									8,531,075
Net loss																			(2,315,525	)		(2,315,525	)
Balance at December 31, 2004	—		$	—		592,645	$	2,676,666	58,677	$	586	$	8,623,873		$	(90,540	)	$	(11,949,877	)	$	(739,292	)

The accompanying notes are an integral part of these financial statements

8

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

1. Nature of Operations and Liquidity

Description of Business

Quantiva, Inc. (“Quantiva” or the “Company”) is a development stage software company that provides an automated diagnostic solution for performance management of applications and the supporting IT infrastructure. Quantiva’s advanced software continually and precisely analyzes business transactions, automatically detecting and diagnosing problems while dynamically adapting to changes on both sides of the firewall. Quantiva’s software is designed to reduce IT costs, improve the online customer experience, and quickly deliver value to the business.

Quantiva is a Delaware corporation, which commenced operations on March 3, 2000. The Company operates in one business segment.

Since its inception, the Company has devoted substantially all its efforts to raising capital, the research and development of products, recruiting personnel, and financial reporting and planning. Accordingly, the Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards No. 7.

Liquidity

The Company has incurred substantial net losses since its inception and, as of December 31, 2004, had an accumulated deficit during development stage of $11,949,877. Such losses and accumulated deficit during development stage resulted from the Company’s lack of revenue and significant costs incurred in the development of the Company’s products and services and in the preliminary establishment of the Company’s infrastructure. The Company expects to continue to incur significant operating expenses in order to execute its current business plan. The future viability of the Company is largely dependent on its ability to generate cash from operating activities or to raise additional capital to finance its operations or a sale of the Company (Note 17).

As discussed above, the Company has incurred recurring losses, has a net stockholders’ deficit and negative working capital which give rise to substantial doubt about its ability to continue as a going concern in the event that the asset purchase agreement (Note 17) is not consummated. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

2. Summary of Significant Accounting Policies

Risks, Concentrations and Uncertainties

The Company is subject to risks and uncertainties common to developmental-stage software companies, including rapid technological change, growth and commercial acceptance of e-commerce, new product development, new product introductions and other activities of competitors, dependence on key personnel, security and privacy issues, dependence on strategic relationships and limited operating history.

The Company invests its cash in deposits and money market funds with high credit quality financial institutions. These balances, as reflected in the financial institution’s records, are insured in the U.S. by the Federal Deposit Insurance Corporation for up to $100,000. The Company has not experienced any realized losses to date on its invested cash.

-9-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

Accounts Receivable

The Company’s extends credit terms to customers in the normal course of business, generally with 30 to 60 day payment terms. The Company monitors all payments, assesses collection issues as they arise and does not require collateral from its customers. Since inception, the Company has not experienced any significant non-performance issues by any of its customer and all amounts recorded are deemed collectible. As such, no allowance for doubtful accounts has been established.

Property and Equipment

Property and equipment are stated at historical cost. Depreciation is computed using the straight-line method over the following estimated asset lives:

Office equipment	3 years
Computers, peripherals and servers	3 years
Software	3 years
Furniture and fixtures	5 years

Leasehold improvements are amortized over the shorter of an asset’s estimated useful life or the remaining life of the lease. Maintenance and repairs are charged to expense when incurred, while betterments are capitalized. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is reflected in operations. Depreciation expense for the years ended December 31, 2004 and 2003, and cumulative for the period March 3, 2000 (date of inception) through December 31, 2004, was $192,522, $218,603, and $611,010, respectively.

Intangible Assets

Intangible assets are amortized over their estimated useful lives and consist of the following at the years ended December 31, 2004 and 2003 respectively:

	2004					2003
	Est. Useful Life	Gross Carrying Cost		Gross Accumulated Amortization		Carrying Cost		Accumulated Amortization
Domain name	5 Yrs	$	3,000	$	2,700	$	3,000	$	2,100
Debt acquisition costs	3 Yrs		51,766		6,471		—		—
Total		$	54,766	$	9,171	$	3,000	$	2,100

The Company purchased its domain name, www.quantiva.com, in 2000 from an independent third party for a fee of $3,000. It is being amortized on a straight-line basis over a five-year period. Total amortization expense for the years ended December 31, 2004 and 2003 was $600 and $600, respectively.

As a result of adopting Financial Accounting Standard 150, the company has recorded on its balance sheet Debt Acquisition Costs of $51,766 at December 31, 2004, net of amortization of $6,471, for the issuance costs associated with its Series C series of mandatorily-redeemable convertible preferred stock.

-10-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

Revenue Recognition

During 2004 and 2003, the Company earned $102,950 and $54,869 of revenue respectively for services provided to customers. In addition, the Company earned $60,000 of revenue for services provided to customers in 2000, that were unrelated to its principal product. Throughout 2004 and 2003, revenue consisted primarily of subscription based fees from customer agreements whereby revenue billed in advance is deferred and recognized ratably over the subscription period. In addition, product revenue from software licensing is generally recognized upon shipment, and revenue from software maintenance agreements is recognized ratably over the service period.

Research and Development

Pursuant to Statement of Financial Accounting Standards “SFAS” No. 2 “Accounting for Research and Development Costs”, the Company’s research and development costs are expensed as incurred.

Capitalization of Software Development Costs

Costs associated with the development of computer software are expensed prior to the establishment of technological feasibility (as defined by SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold Leased or Otherwise Marketed”). Costs incurred thereafter are capitalized until software products are available for market; however, costs are capitalized only to the extent that expected net realizable value is established. Since inception, no such software development costs have been capitalized since the capitalization period was deemed short and insignificant. Additionally, the Company could not support the recoverability based upon anticipated future revenues.

Advertising Expense

Marketing and Advertising costs are expensed as incurred; however, the Company has not incurred any advertising costs since inception.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based upon the differences arising from carrying amounts of the Company’s assets and liabilities for tax and financial reporting purposes using enacted tax rates in effect for the year in which the differences are expected to reverse and expected future tax benefit of tax net operating loss carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change in tax rates is enacted. A valuation allowance is established when it is determined that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Stock-Based Compensation

The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and has adopted SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended, through disclosure only. The Company accounts for equity instruments issued to non-employees using the fair value method in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 and the Emerging Issues Task Force (“EITF’) in Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services.”

-11-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

For the years ended December 31, 2004 and 2003 and for the period from March 3, 2000 (date of inception) to December 31, 2004, there was no compensation expense recorded in accordance with APB Opinion No. 25 since the option price of options issued since inception was equal to the intrinsic value of the common stock; however, SFAS No. 123 requires the Company to make pro forma disclosures of what the net loss would have been had the minimum value based method defined in SFAS No. 123 been applied to employee and director stock options. For all years since inception, the fair value for these options was estimated using the Black-Scholes option pricing model. The following weighted-average assumptions were utilized for the years ended December 31, 2004 and 2003:

	2004	2003
Volatility	0.00%	0.00%
Risk free interest rate	4.24%	4.27%
Dividend yield	0.00%	0.00%
Weighted average expected life of option	10 yrs.	10 yrs.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. Had compensation cost been determined based on the fair value of awards granted during the years ended December 31, 2004 and 2003, and cumulative from March 3, 2000 (date of inception) through December 31, 2004 consistent with the provisions of SFAS No. 123, the Company’s net loss would have been as follows:

	2004			2003			Since Inception
Net loss	$	(2,315,525	)	$	(3,066,101	)	$	(11,949,877	)
Pro-forma stock based compensation		(7,239	)		(8,318	)		(85,634	)
Pro-forma net loss	$	(2,322,764	)	$	(3,074,419	)	$	(12,035,511	)

Because the options vest over a period of time and additional option grants are expected to be made in future years, the above actual results may not be representative of the actual results for future years.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s most significant estimates relate to depreciable lives of fixed assets, deferred tax valuation allowances and contingencies, and the fair market value of stock for equity compensation. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The fair value of long-term liabilities was approximately equivalent to its carrying value due to the fact that the interest rates currently available to the Company for debt with similar terms are approximately equal to the interest rates for its existing debt.

-12-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

Recently Issued Accounting Standards

The Company periodically reviews recently issued accounting standards to determine applicability to the Company’s financial statements and overall operations. Throughout 2003 and 2004, the following recently issued accounting standards were deemed relevant to the Company’s current or future operations:

In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104(SAB 104), “Revenue Recognition”, SAB 104 supercedes SAB 101, “Revenue Recognition in Financial Statements”, to include guidance from the Emerging Issues Task Force EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. The adoption of SAB 104 did not have an effect on the Company’s statement of operations or financial position.

As of June 30, 2003, the Company adopted Financial Accounting Standard No. 150,” Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. In accordance with this standard, the Company has classified as liabilities on its balance sheet the Series A, Series A-l and Series C series of mandatorily-redeemable convertible preferred stock, of which the Series A and A-l were previously classified as quasi equity. The respective liabilities were recorded at their fair values, which did not require adjustments to their carrying amounts. Beginning June 30, 2003 and thereafter, dividends on mandatorily-redeemable preferred stock were expensed to interest expense on preferred stock, with a corresponding credit to the liabilities’ carrying amount and new issuance costs were subsequently amortized to debt issuance costs in the Company’s statement of operations. Prior to the adoption of Financial Accounting Standard No. 150, dividends and issuance costs were accreted through Stockholders’ Equity through a debit to Additional Paid in Capital and a corresponding credit to the respective preferred stock accounts.

During December 2004, the FASB issued SFAS No. 123R, “Share Based Payment”(SFAS 123R), which replaces SFAS No. 123, “Accounting for Stock Based Compensation “(SFAS 123) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS I23R requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense in the financial statements based upon their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro-forma disclosures previously permitted under SFAS 123 will no longer be an alternative to expense recognition. The Company will adopt SFAS 123R effective in the third quarter of 2005 and is currently evaluating the method of adoption.

Reclassification

Certain items in prior period financial statements have been reclassified to conform with current year presentation.

-13-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

3. Income Taxes

The income tax benefit for the years ended December 31, 2004 and 2003 and cumulative from March 3, 2000 (date of inception) to December 31, 2004 consisted of the following:

	2004			2003			Since Inception
Current	$	3,278		$	1,600		$	11,606
Deferred		—			—			—
Sale of NOLs		(216,372	)		(206,681	)		(636,551	)
Total	$	(213,094	)	$	(205,081	)	$	(624,945	)

Deferred tax assets (liabilities) as of December 31, 2004 and 2003 consist of the following:

	2004			2003
Net operating loss carryforwards	$	2,987,100		$	2,147,100
Fixed assets		(43,329	)		(72,420	)
Intangible assets-start up costs		546,272			714,378
Research and development credits		317,000			257,000
		3,807,043			3,046,058
Less: Valuation allowance		(3,807,043	)		(3,046,058	)
	$	—		$	—

As of December 31, 2004 the Company had approximately $8,412,000 and $317,000 of federal net operating loss carryforwards and tax credits, respectively, available to offset future income that expire at various dates through 2024.

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in limitation on the amount of net operating loss carryforwards that can be used in future years.

During the years ended December 31, 2004 and 2003, the Company received approval to sell a portion of its unused cumulative New Jersey Net Operating Loss (“NOL”) carryforwards under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the “Program”). The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOL carryforwards and defined research and development credits for cash. The Company entered into a contract to sell its 2003 and 2002 NOLs for $216,372 and $206,681 in December 2004 and December 2003, respectively. The Company has received a total of $636,551 in cash proceeds since inception through December 31, 2004 for participation in the program.

-14-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

4. Prepaid Expenses

The major components of prepaid expenses consisted of the following at December 31, 2004 and 2003 respectively:

	2004		2003
Business insurance	$	2,487	$	2,765
January employee benefit insurance premiums		6,689		7,131
Consulting services retainer		2,500		2,500
Other		—		597
Total	$	11,676	$	12,993

5. Property and Equipment

As of December 31, 2004 and 2003, property, plant and equipment consisted of the following:

	2004			2003
Computers, peripherals, servers and office equipment	$	606,568		$	607,739
Software		1,622			1,622
Furniture and fixtures		5,933			5,933
Leasehold improvements		—			56,359
		614,123			671,653
Less: Accumulated depreciation and amortization		(539,404	)		(404,412	)
Property, plant & equipment, net	$	74,719		$	267,241

Computers, peripherals, servers and office equipment includes amounts recorded under capital leases of $320,676 at December 31, 2004 and 2003. Related accumulated depreciation was $268,687 and $161,876, as of December 31, 2004 and 2003, respectively.

6. Accrued Expenses

The major components of accrued expenses consisted of the following at December 31, 2004 and 2003 respectively:

	2004		2003
Consulting and other operating expenses	$	30,622	$	20,840
Accrued vacation		46,760		50,692
Audit fees		70,000		35,000
Sales commissions		—		10,000
Property tax assessment		14,500		—
Rent - corporate headquarters		49,317		—
Total	$	211,199	$	116,532

-15-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

7. Mandatorily-Redeemable Convertible Preferred Stock

Series A and A-1 Mandatorily-Redeemable Convertible Preferred Stock

On September 8, 2000, the Company designated 3,659,878 shares of its previously authorized preferred stock as Series A Convertible Preferred Stock (“Series A”), $0.01 par value per share. During the period ended December 31, 2000, the Company issued 3,659,878 shares of Series A for proceeds of $1,500,000, or approximately $0.41 per share, before considering issuance costs of $60,000. On November 14, 2001 the Company increased the number of authorized shares of Series A to 3,675,000.

On November 14, 2001, the Company designated 27,000,000 shares of its previously authorized shares of preferred stock as Series A-1, Convertible Preferred Stock (“Series A-1”), $0.01 par value per share. On November 14, 2001, the Company issued 20,119,471 shares of Series A-1 for cash proceeds of $4,150,003, or approximately $0.21 per share, before considering issuance costs of $51,336, and issued warrants to purchase 15,213 shares of common stock, which were valued at $275,250 (Note 11). Concurrently, the Company also issued an additional 1,939,225 shares of the Series A-1 as a result of the conversion of $400,000 of notes payable to stockholders.

On February 8, 2002, the Company issued 2,666,435 shares of Series A-1 for cash proceeds of $550,000 or approximately $0.21 per share before considering issuance costs of $8,437, and issued warrants to purchase 1,839 shares of common stock, which were valued at $42,727.

In June 2003, the Company adopted Financial Accounting Standard No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (Note 2). Accordingly, the Series A and A-1 have been classified as liabilities in the balance sheet as of June 30, 2003.

On August 16, 2004, all shares of Series A and A-1 were converted into common stock of the Company. Holders of Series A received 1 share of common stock for every 367 shares of Series A. Holders of Series A-1 received one share of common stock for every 725 shares of Series A-1.

Voting

All holders of the Series A and Series A-1 were entitled to vote on all matters upon which holders of common stock have the right to vote and to receive notice of any shareholders’ meetings, with the number of votes equal to the number of full shares of common stock into which the Series A and A-1 were convertible.

Dividends

Holders of the Series A were entitled to receive non-cumulative dividends at a rate equal to 10% of the original purchase price ($0.41), as and if declared by the Company’s Board of Directors.

Holders of the Series A-1 were entitled to receive non-cumulative dividends at a rate equal to 10% of the original purchase price ($0.21), as and if declared by the Company’s Board of Directors.

-16-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

No Dividends have been declared by the Board of Directors.

Conversion

Shares of Series A and Series A-1 were convertible, at the option of the holder, into common stock on the basis of 1 share of common stock for every 367 shares of Series A and 1 share of common stock for every 725 shares of Series A-1, respectively, subject to adjustment based upon the issuance of additional common shares or other convertible securities, without payment of any additional consideration. The Series A and Series A-1 were automatically convertible into common stock upon the closing of a firmly underwritten public offering with a price of at least $304.50 per share and aggregate proceeds of at least $40,000,000, or upon a merger or similar transaction.

Liquidation

In the event of liquidation of the Company, holders of the outstanding Series A and Series A-1 were entitled to receive a liquidation preference of the original price per share, as adjusted for any stock dividends, combinations or splits with respect to such shares, and all accrued and unpaid dividends, paid in full before any payments were made on the common stock. If upon liquidation, the assets of the Company were insufficient to pay the liquidation preference amounts in full, then the entire net assets of the Company were to be distributed among the holders of the Series A and Series A-1 ratably in proportion to the full amounts to which they would otherwise have been entitled. A merger, consolidation or reorganization, or a sale, transfer, lease or conveyance of all or substantially all of the assets of the Company, would be treated as a liquidation for these purposes.

Redemption

The Company, at the election of more than two-thirds of the holders of the Series A and Series A-1, was required to redeem up to 33.3%, 66.7% and 100% of the then outstanding shares of preferred stock held by such holders on November 14, 2006, 2007 and 2008, respectively, at a redemption price equal to the original issue price per share (Series A - $0.41, Series A-1 - $0.21), plus an amount equal to ten percent per year of the original issue price per share plus all accrued but unpaid dividends for the Series A and Series A-1. Prior to the adoption of Financial Accounting Standard No. 150 in June 2003, the carrying values of the Series A and Series A-1 have been accreted to their redemption value by a charge to additional paid in capital; however, subsequent to the adoption of Financial Accounting Standard No. 150, the 10% per annum increase in redemption values were charged to interest expense on preferred stock in the company’s statement of operations. Total accretion of the Series A and Series A-1 to their redemption values prior to the change in accounting principle was $79,854 and $292,369, respectively, during the year ended December 31, 2003. Total interest expense on Series A was $99,762 and $79,854 for the years ended December 31, 2004 and 2003 respectively and total interest on Series A-1 was $325,960 and $260,911 during the years ended December 31, 2004 and 2003 respectively.

In addition, the Company issued warrants with a value of $317,977 in connection with the issuance of the Company’s Series A-1. Prior to the adoption of Financial Accounting Standard 150 in June 2003, the value of the warrants were accreted to the Series A-1 preferred stock with a corresponding charge to additional paid in capital; however, subsequent to the adoption of Financial Accounting Standard No. 150, the remaining unaccreted value was charged to interest expense on preferred stock in the Company’s Statement of Operations.

-17-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

Total interest expense related to these warrants during the years ended December 31, 2004 and 2003 was $185,055 and $31,458 respectively.

Series C Mandatorily-Redeemable Convertible Participating Preferred Stock

On August 16, 2004, the authorized number of preferred shares was reduced to 1,631,821 shares, of which 1,039,176 shares were designated Series C Convertible Participating Preferred Stock (“Series C”). The Company issued 976,276 shares of Series C to five investors on August 16, 2004, for approximately $.50 per share, a total of $489,426, before considering issuance costs of $51,766, of which $97,713 was paid by the surrender and cancellation of demand notes held by certain of the investors for loans made to the Company in July 2004. An additional 8,097 shares of Series C were issued to other investors for $4,059 in September and October 2004.

In June 2003, the Company adopted Financial Accounting Standard No, 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (Note 2). As such, the Series C mandatorily-redeemable preferred stock has been classified as a liability in the balance sheet as of December 31, 2004.

Voting

Holders of the Series C are entitled to vote on all matters upon which holders of common stock have the right to vote and to receive notice of any shareholders’ meetings, with the number of votes equal to the number of full shares of common stock into which the Series C is convertible. The holders of the Series C are entitled to elect three members of the Board of Directors. The holders of the Series C and Series B, voting as a single class, are entitled to elect the remaining directors.

Dividends

The holders of Series C are entitled to dividends if, as and when declared by the Company’s Board of Directors; however, no such dividends have been declared by the Board of Directors.

Conversion

Shares of Series C are convertible, at the option of the holder, into common stock on a 1:1 basis, subject to adjustment based upon the issuance of additional common shares or other convertible securities, without payment of any additional consideration. The Series C shares are automatically convertible into common stock upon the closing of a firmly underwritten public offering with a price of at least $1.51 per share and aggregate proceeds of at least $40,000,000.

Liquidation

In the event of liquidation of the Company, holders of the outstanding Series C are entitled to receive a liquidation preference of approximately $6.02 price per share, as adjusted for any stock dividends, combinations or splits with respect to such shares, and all declared and unpaid dividends, paid in full before any payments are made to holders of the Series B (Note 9) or common stock. Any liquidation proceeds remaining after payment of the Series C and Series B liquidation preferences shall be distributed ratably to the holders of the Series C, Series B and common stock in proportion to their ownership, A merger, consolidation or reorganization, or a sale, transfer, lease or conveyance of all or substantially all of the assets of the Company, would be treated as a liquidation for these purposes.

-18-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

Redemption

The Company, at the request of a majority of the holders of the Series C, is required to redeem up to 33.3%, 66.7% and 100% of the then outstanding shares of Series C held by such holders on August 16, 2007, 2008 and 2009, respectively, at a redemption price equal to the original issue price per share, plus an amount equal to ten percent per year of the original issue price per share plus all declared but unpaid dividends for the Series C. The carrying value of the Series C has been accreted to its redemption value by a charge to interest expense. Total accretion of the Series C to its redemption value was $18,523 during the year ended December 31, 2004.

8. Convertible Notes Payable to Shareholders

On March 24, 2003, the Company obtained loans from five Series A and Series A-1 investors in the amount of $ 1,250,000. The March promissory notes carried an interest rate of 8.0%, matured on August 31, 2003, were mandatorily convertible into the Company’s next round of preferred stock financing (or, in the event that another round was not completed by the maturity date, into common stock at the option of the note-holders), and were secured by the Company’s intellectual property. In connection with these loans, the Company issued warrants to purchase 4,591 shares of common stock at an exercise price of $40.85 per share (Note 11).

On September 25 and October 27, 2003, the Company obtained an additional $1,250,000 in loans from investors. Accrued interest of $51,440 on the March promissory notes was paid to the investors from the proceeds of the new loans. In exchange for the additional loans and the cancellation of the March promissory notes, the Company issued new promissory notes (the “2003 Notes”) in the aggregate principal amount of $2,500,000, secured by the Company’s intellectual property and with interest at 8.0% payable at the earlier of the conversion of the note or the stated maturity date of March 31, 2004.

In the event of an acquisition of the Company, the 2003 Notes were repayable in an amount equal to twice their face value plus accrued and unpaid interest, unless converted into Series A-1 at the option of the note-holders.

The 2003 Notes were convertible, at the option of the note-holders, into shares of Series A-1 at a price of approximately $.21 per share. If all of the 2003 Notes were converted, a total of 12,120,154 shares of Series A-1 would be issued, which were in turn convertible into 16,718 shares of common stock. In connection with the 2003 Notes, the March 2003 warrants for 4,591 shares were cancelled and the Company issued new warrants for 8,355 shares of common stock at an exercise price of $40.85 (Note 11).

On August 16, 2004, the 2003 Notes and accrued interest in the amount of $176,666 were converted into 592,645 shares of Series B convertible participating preferred stock (Note 9). Total interest expense on convertible notes payable to shareholders recorded in the Company’s statement of operations was $125,026 and $103,080 for the years ended December 31, 2004 and 2003 respectively.

-19-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

9. Stockholders’ Equity

Common Stock

On January 29, 2002, the Company effected a 1:2.5 reverse split of its common stock. At the same time, the Company also changed the par value of its common stock from $0.01 per share to $0.001 per share and the number of authorized shares of common stock to 110,345 shares.

On September 25, 2003, the Company amended its Certificate of Incorporation to increase the authorized number of common shares to 137,931.

On August 16, 2004, the Company effected a reverse split of its common stock, with every 290 shares of common stock being exchanged for one new share. The authorized number of common shares was increased to 2,130,000, and the par value of a share of common stock was changed from $.001 per share to $.01 per share.

The accompanying financial statements and notes have been restated for all periods to reflect the 2002 and 2004 reverse splits (with any fractional shares that otherwise would have resulted from such exchange rounded up and exchanged for one whole share of common stock).

Note Receivable from Stockholder

In March 2002, the Company received a promissory note, bearing interest at a rate of 5.5%, in the amount of $77,503 from its chief executive officer in payment of the exercise price for restricted stock. This note is carried on the balance sheet as a reduction of Stockholders’ Equity in the amount of $85,705 and $90,540 at December 31, 2003 and 2004, respectively. Interest income of $4,576 and $4,835 was recognized on this note in 2003 and 2004, respectively.

Series B Convertible Participating Preferred Stock

Of the 1,631,821 authorized shares of preferred stock as of August 16, 2004, 592,645 shares were designated Series B Convertible Participating Preferred Stock (“Series B”). The Company issued 592,645 shares of Series B to the holders of the 2003 Notes on August 16, 2004, in return for cancellation of the 2003 Notes and accrued interest, a total of $2,676,666 (Note 8).

Voting

Holders of the Series B are entitled to vote on all matters upon which holders of common stock have the right to vote and to receive notice of any shareholders’ meetings, with the number of votes equal to the number of full shares of common stock into which the Series B is convertible. The holders of the Series B and Series C, voting as a single class, are entitled to elect the remaining directors after election by the Series C of three members of the Board of Directors.

Dividends

The holders of Series B are not entitled to dividends.

-20-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

Conversion

Shares of Series B are convertible, at the option of the holder, into common stock on a 1:1 basis, subject to adjustment based upon the issuance of additional common shares or other convertible securities, without payment of any additional consideration. The Series B shares are automatically convertible into common stock upon the closing of a firmly underwritten public offering with a price of at least $1.51 per share and aggregate proceeds of at least $40,000,000.

Liquidation

In the event of liquidation of the Company, after payment of the Series C liquidation preference, the holders of the outstanding Series B are entitled to receive a liquidation preference of approximately $.54 price per share, as adjusted for any stock dividends, combinations or splits with respect to such shares, and all declared and unpaid dividends, before any payments are made to holders of the common stock. Any liquidation proceeds remaining after payment of the Series C and Series B liquidation preferences shall be distributed ratably to the holders of the Series C, Series B and common stock in proportion to their ownership. A merger, consolidation or reorganization, or a sale, transfer, lease or conveyance of all or substantially all of the assets of the Company, would be treated as a liquidation for these purposes.

Redemption

The Series B is not redeemable.

10. Stock Option Plan and Stock Based Compensation

The Company adopted the Quantiva 2000 Stock Option Plan (the “Plan”) effective April 18, 2000 and a total of 21,848 shares of common stock were authorized for issuance upon exercise of options under the plan. On August 16, 2004, the Stock Option Plan was amended in accordance with the closing of the Series C financing round, whereby the number of shares authorized for issuance was amended to 412,118. Stock options granted under the Plan may be either incentive stock options, nonqualified stock options or restricted stock. The purpose of the plan is to enable the Company to attract, retain and reward employees, directors, advisors and consultants. Incentive stock options may be granted at a price equal to or greater than 100% of the fair market value at the date of grant. If at the time the Company grants an incentive stock option, an optionee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair value at the date of grant. All options granted to employees are incentive stock options. All options granted to individuals other than employees are nonqualified stock options. Options become exercisable pursuant to individual vesting schedules, and the Company’s Board of Directors may issue fully and immediately vested shares of common stock or impose such vesting requirements as it deems appropriate. Options generally become exercisable at a rate of 25% upon the one-year anniversary of the option grant date and vest quarterly thereafter at a rate of 6.25% per quarter. All options expire ten years from the date of grant. Restricted stock may also be issued under the plan. Shares of restricted stock are subject to certain repurchase rights at the original exercise price paid per share, and the restrictions lapse over the same terms as the options were to vest.

-21-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

A summary of the stock option transactions under the Plan is presented below:

	Weighted Ave Number of Shares		Exercise Price Per Share
Granted during 2000	1,190		$	182.70
Outstanding as of December 31, 2000	1,190		$	182.70
Granted	145			182.70
Forfeited	(385	)		182.70
Exercised	(49	)		182.70
Outstanding as of December 31, 2001	901		$	181.25
Granted	15,341			26.10
Forfeited	(1,914	)		78.30
Exercised	(3,049	)		26.10
Outstanding as of December 31, 2002	11,279		$	34.80
Granted	2,415			26.10
Forfeited	(1,038	)		26.10
Exercised	(34	)		26.10
Outstanding as of December 31, 2003	12,622		$	29.36
Granted	387,607			.05
Forfeited	(2,430	)		26.10
Exercised	(79	)		26.10
Outstanding as of December 31, 2004	397,720		$	.82
Exercisable as of December 31, 2004	347,640		$	1.05

The fair value of options granted during 2004 and 2003 were equal to the intrinsic value of the common stock.

The following table summarizes information about stock options outstanding at December 31, 2004:

	Remaining Outstanding	Options Outstanding Weighted Average Contractual Life	Number Exercisable	Options Exercisable Weighted Average Exercise Price		Range of Exercise Price
	695	5.78	695	$	182.70	$	182.70
	9,417	7.21	8,453		26.10		26.10
	387,608	9.71	338,492		.05		.05
Total	397,720		347,640

-22-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

During the years ended December 31, 2004 and 2003 respectively, the Company issued both stock options and restricted stock to non-employees. As such, stock compensation expense in the amount of $264 and $720 was recorded in the company’s statement of operations with a corresponding credit to additional paid in capital during the years ended December 31, 2004 and 2003 respectively.

In addition, during 2002, the Company modified stock options granted to certain employees by reducing the exercise price from $181.25 to $26.10 per share. The Company re-measures these options at each period end until they are exercised, cancelled or expired.

11. Issuance of Warrants

During the period ended December 31, 2000, the Company issued warrants to purchase 103 shares of common stock at a price of $7.25 per share. These warrants are fully vested, exercisable at the option of the holders, in whole or in part, and expire in ten years. The fair value ascribed to the warrants of $18,450 has been recognized as a credit to additional paid-in capital and a charge to the statement of operations as additional legal fees. The fair value of warrants was estimated using the Black-Scholes pricing model with the following assumptions: volatility of 80%, weighted-average risk free interest rate of 6.0%, dividend yield of 0.0% and a weighted-average expected life of 10 years.

In conjunction with the issuance of convertible notes payable totaling $400,000 during the year ended December 31, 2001, the Company issued warrants to purchase a total of 414 shares of common stock at an exercise price of $7.25 per share. These warrants are fully vested, exercisable at the option of the holders, in whole or in part, and expire in five years. The fair value ascribed to the warrants of $72,785 has been recognized as a credit to additional paid-in capital and a reduction of the carrying value of the related convertible notes payable. During the year-ended December 31, 2001, the total value of $72,785 was amortized to interest expense over the period from the issuance of the warrants to the conversion of the related notes payable into Series A-1. The fair value of warrants was estimated using the Black-Scholes pricing model with the following assumptions: volatility of 80%, weighted-average risk free interest rate of 4.54%, dividend yield of 0.0% and a weighted-average expected life of 5 years.

Concurrent with the issuance of the Series A-1 during 2001 and 2002, the Company issued warrants to purchase 17,052 shares of common stock at an exercise price of $7.25 per share, subject to certain anti-dilution adjustments. These warrants were fully vested upon issuance, are exercisable at the option of the holder, in whole or in part, and expire in five years. The estimated fair value of the warrants amounted to $317,977, which was originally recorded as a discount against the carrying value of the Company’s Series A-1 and accreted to the value of the Series A-1 over the period from the issuance of the warrants to the first redemption date of the Series A-1. Upon adoption of Financial Accounting Standard No. 150 and the conversion of the Series A-1 to common stock in August 2004, the remaining unamortized discount was charged to interest expense. Interest expense recognized was $31,458 and $185,055 for the years ended December 31, 2003 and 2004, respectively. The fair value of warrants was estimated using the Black-Scholes pricing model with the following assumptions: volatility of 80%, weighted average risk free interest rate of 4.50%, dividend yield of 0.0% and a weighted average expected life of 5 years.

-23-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

In connection with the loans obtained on March 24, 2003, the Company issued warrants to purchase 4,591 shares of common stock at an exercise price of $40.85 per share, expiring on March 24, 2008. In conjunction with the September 25 and October 27, 2003, loans, these warrants were cancelled, and new warrants for 8,355 shares of common stock at an exercise price of $40.85 per share were issued to the lenders. These warrants expire on September 25, 2008. The estimated fair value of these warrants was $151,806, which was recorded as a discount against the carrying value of the 2003 Notes and amortized to interest expense over the term of the 2003 Notes. Interest expense recognized was $77,036 and $74,770 for the years ended December 31, 2003 and 2004, respectively. The fair value of warrants was estimated using the Black-Scholes pricing model with the following assumptions: volatility of 100%, weighted average risk free interest rate of 3.05%, dividend yield of 0.0% and a weighted average expected life of 5 years.

A summary of common stock warrant transactions since inception is presented below:

	Number of Shares		Weighted Ave. Exercise Price
Granted during 2000	103		$	7.25
Outstanding as of December 31, 2000	103		$	7.25
Granted	15,628			7.25
Outstanding as of December 31, 2001	15,731		$	7.25
Granted	1,838			7.25
Outstanding as of December 31, 2002	17,569		$	7.25
Granted	12,946			40.85
Cancelled	(4,591	)		40.85
Outstanding as of December 31, 2003	25,924		$	18.07
Granted	—			—
Outstanding as of December 31, 2004	25,924		$	18.07

In addition, the Company granted warrants to purchase 133,322 shares of Series A-1 stock at an exercise price of $.21 in 2002, which relate to a credit facility (see Note 12). These warrants were cancelled during 2004 and the Company issued the warrant holder warrants to purchase 54,800 shares of series C at a price of $0.50 per share.

12. Capital Lease Obligations

In July 2002 the Company entered into a credit facility with a financial institution under which the Company could borrow up to $500,000 to finance qualified equipment purchases. The facility could be drawn down through May 2003. In September and October 2002, the Company borrowed a total of $320,676, and there were no further draw-downs under the facility. These loans mature by October 2005, carry an interest rate of approximately 13.2% per annum, are repayable in 36 equal monthly installments of $10,111 and a final payment of $32,068, and are secured by a lien on the equipment financed (see Note 17).

-24-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

Future payment obligations in conjunction with this capital lease agreement are as follows:

	Principal		Interest		Total
2005	$	99,966	$	5,723	$	105,689

In connection with this facility, the Company granted a fully-vested ten-year warrant, expiring July 26, 2012, to purchase either (i) 133,322 shares of the Series A-1 stock at an exercise price of approximately $.21 per share, or (ii) if the next series of preferred stock was at a lower price, the number of shares of preferred stock of that series equal to $27,500 divided by the price per share of that series. The price of the Series C was lower than the price of Series A-1 when expressed on a common share equivalent basis. Accordingly, in August 2004, the warrant was amended to state that it is exercisable for 54,800 shares of Series C at an exercise price of approximately $.50 per share.

The fair value of the warrants was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: volatility of 100%; risk-free interest rate of 4.91%; dividend yield of 0.0% and expected life of 10 years. The company recognized the warrants’ fair value of $25,064 as interest expense in the statement of operations.

13. Lease Commitments

The Company leases its corporate headquarters facility.

Rental expense for all operating leases charged against earnings amounted to approximately $166,883 and $170,444 for the fiscal years ended December 31, 2004 and 2003 respectively.

On January 1, 2003, the company entered into a sub-lease agreement with a third party to sub-lease a portion of the Company’s corporate headquarters facility. The sub-lease agreement term extended from January 1, 2003 to June 30, 2003 and was cancelable by either party upon 30 days written notice. Rental Income received from the third party was recorded as a reduction in rent expense in the amount of $5,000 throughout 2003.

On March 11, 2003, the Company and its landlord agreed to amend its corporate headquarters facility lease agreement. In accordance with this amendment, the unused portion of the original security deposit paid in May 2000 in the amount of $53,000 was to be applied towards future lease payments and as such, monthly rental payments were reduced from $15,750 to $11,813 through November 2004. The security deposit, originally recorded as an asset, was reduced proportionately over the remainder of the lease term and therefore ratably charged to rent expense.

In 2004, the Company was in default of its corporate headquarters facility lease agreement due to non-payment of rents owed. As of December 31, 2004, the Company and its landlord were in discussions to reduce the amount of rents owed in accordance with this lease agreement. A final settlement was reached in 2005; however, as of December 31, 2004, $53,317 was accrued for unpaid rent, real estate taxes and estimated common area maintenance charges owed in accordance with this lease agreement through its termination (see Note 17).

-25-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

The Company exited these premises on November 2, 2004 upon termination of the lease agreement and subsequently entered into a short term lease agreement which commenced on November 2, 2004 to occupy another property for the remainder of 2004 and-early 2005, in which the rent payments were $4,500 monthly.

14. Employee Benefit Plan

The Company has a 401 (k) Plan that allows eligible employees to contribute up to 15% of their compensation, not to exceed the statutory limit. Employee contributions and earnings thereon vest immediately. Employer matching contributions are made at the discretion of the Company and vest over a 5-year period from the employee’s date of hire. The Company did not make any contributions under this plan for the years ended December 31, 2004 and 2003, nor since inception.

15. Related Party Transactions

Beginning in 2000, the Company has received marketing and strategic advisory services from a consultant who, since August 2001, has been a partner in an investor in the Company. Since commencement of these services, approximately $155,000 has been expensed as consulting fees payable to either the consultant or the investor ($53,000 in 2003 and $25,000 in 2004).

Pursuant to an award agreement dated April 18, 2000, the Company agreed to pay $300,000 to a founder and officer of the Company upon the closing of an Exit Transaction, defined as a merger, consolidation, or similar business combination, a sale of substantially all of the Company’s assets, or a qualified public offering. The award is subject to continuous employment through the closing of the Exit Transaction. This award is expected to be paid in 2005 upon consummation of the sale of the Company’s assets (Note 17).

In March 2002, the Company received an interest bearing promissory note in the amount of $77,503 from its chief executive officer in payment of the exercise price for restricted stock (Note 9).

16. Contingent Liabilities

In October 2004, the Company engaged the services of an investment banking firm to assist in identifying a buyer for the Company’s assets. The agreement between the Company and the investment banking firm calls for the payment of a transaction fee based upon the aggregate consideration received for the sale of the Company’s assets, if applicable. A total fee of approximately $500,000 is payable to the investment banking firm in conjunction with the sale of the Company’ assets. This fee will be partially offset by $35,000 in retainer fees paid and expensed during the year ended December 31, 2004.

-26-

Quantiva, Inc.

(A Development Stage Company)

Notes to Financial Statements

17. Subsequent Events

On February 9 and March 25, 2005, the Company received a total of $300,000 from three separate investors in the form of demand notes. The demand notes bear interest at a rate of 8%.

On February 12, 2005, the Company entered into an asset purchase agreement with a publicly traded software company. The agreement calls for the sale of substantially all of the Company’s assets upon the Closing date, which is expected to occur prior to April 30, 2005, for total consideration of $10.1 million. The assets to be transferred in accordance with this agreement include, but are not Limited to, the Company’s software, technology, trade names, equipment, accounts receivable and certain contractual agreements. The agreement may be terminated at any time prior to closing by written agreement of Buyer and the Company, or by either Buyer or the Company if the closing is not consummated before April 30, 2005.

On February 15, 2005, the company entered into a settlement agreement for unpaid rents owed under its corporate headquarters lease agreement. The Company and landlord agreed to settle all outstanding obligations owed in the amount of $53,317 under its lease agreement for a sum of $4,500(Note 13).

Upon the expiration of the short-term corporate headquarters facility lease on February 28, 2005, the company entered into a separate agreement for the lease of its corporate headquarters at another location which commenced on March 1, 2005. Commitments for minimum lease payments in accordance with this agreement throughout 2005 are $2,800 monthly for a duration of six months thereby resulting in a total minimum lease obligation in 2005 of $16,800.

On February 28, 2005, the promissory note from the Company’s chief executive officer was amended to eliminate the default in the event it is not repaid within six months of termination of his employment.

On March 29, 2005, the Company entered into a settlement and release agreement with the financial institution with whom the Company has outstanding capital lease obligations (Note 12). Per the terms of this agreement, the Company agreed to pay $265,000 by March 31, 2005 as full, and final settlement of all outstanding obligations, including the value of the warrant for 54,800 shares of Series C. The lease and warrant agreements were terminated, and the Company regained full title to the equipment which previously secured its obligations under the capital leases.

-27-

EX-99.3

Exhibit 99.3

Introduction to Unaudited Combined Pro Forma Financial Statements	1 – 2
Unaudited Combined Pro Forma Balance Sheet as of March 31, 2005	3
Unaudited Combined Pro Forma Statement of Operations for the Twelve Months Ended March 31, 2005	4
Notes to Unaudited Combined Pro Forma Financial Statements	5 – 8

NETSCOUT SYSTEMS, INC.

INTRODUCTION TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS

On April 14, 2005, NetScout Systems, Inc. (“NetScout”) completed the acquisition of Quantiva, Inc. (“Quantiva”) a provider of automated analytics solutions for application performance management. Under the terms of the Asset Purchase Agreement dated February 12, 2005 by and between NetScout and Quantiva, the purchase price totaled approximately $9.3 million and was paid in cash.

The unaudited combined pro forma balance sheet as of March 31, 2005, gives effect to the acquisition as if it had taken place on March 31, 2005. The unaudited combined pro forma statement of operations for the twelve months ended March 31, 2005, reflects the acquisition as if it had taken place on April 1, 2004.

The unaudited combined pro forma financial statements are based on estimates and assumptions and have been made solely for purposes of developing such pro forma information. The estimated pro forma adjustments arising from the acquisition are derived from the allocation of the purchase price payable under the terms of the Asset Purchase Agreement dated April 12, 2005 by and between NetScout Systems, Inc. (“NetScout”) and Quantiva, Inc. (“Quantiva”). The final determination of the fair value of the assets of Quantiva acquired in the acquisition and resulting goodwill may differ from that reflected in the unaudited pro forma combined statement of operations and balance sheet.

The unaudited combined pro forma financial information, and the accompanying notes, should be read in conjunction with the historical financial statements of NetScout as of and for the year ended March 31, 2005, including the notes thereto, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 6, 2005. The unaudited combined pro forma financial information, and the accompanying notes, should also be read in conjunction with the December 31, 2004 financial statements of Quantiva, including the notes thereto, included elsewhere in this filing.

1

NETSCOUT SYSTEMS, INC.

INTRODUCTION TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS

The unaudited combined pro forma financial statements have been prepared by the application of pro forma adjustments to NetScout and Quantiva’s historical financial statements, prepared in accordance with accounting principles generally accepted in the United States of America.

The unaudited combined pro forma financial information reflects an estimated aggregate purchase price to be paid for Quantiva of $9.4 million, including costs relating to the acquisition totaling approximately $100,000.

NetScout’s fiscal year end is March 31 and Quantiva’s fiscal year end is December 31. The unaudited combined pro forma balance sheet as of March 31, 2005 is presented as if the transaction had been completed on March 31, 2005 and, due to different fiscal periods, combines NetScout’s historical audited balance sheet as of March 31, 2005 and the historical audited balance sheet of Quantiva as of December 31, 2004. The unaudited pro forma combined statement of operations for the twelve months ended March 31, 2005, due to different fiscal periods, combines NetScout’s historical audited results for the twelve months ended March 31, 2005 and the historical audited results for Quantiva for the twelve months ended December 31, 2004. NetScout does not believe that the unaudited combined pro forma financial statements would be materially impacted by any adjustments required to conform NetScout’s and Quantiva’s fiscal year ends.

The acquisition will be accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, and the resulting goodwill and other intangible assets will be accounted for under SFAS No. 142, Goodwill and Other Intangible Assets. The total purchase price has been allocated to the tangible and intangible assets acquired based on NetScout’s estimates of fair values at the time of acquisition.

The unaudited combined pro forma financial statements are provided for informational purposes only and should not be considered indicative of actual balance sheet data or operating results that would have been achieved had the acquisition been consummated on the dates indicated and do not purport to indicate balance sheet data or results of operations as of any future date or for any future period.

The unaudited combined pro forma financial statements are derived from and should be read in conjunction with the applicable consolidated financial statements of each of NetScout and Quantiva and the related notes thereto.

2

NETSCOUT SYSTEMS, INC.

UNAUDITED COMBINED PRO FORMA BALANCE SHEET

AS OF MARCH 31, 2005

(U.S. dollars in thousands)

NetScout Systems, Inc.

Unaudited Combined Pro Forma Balance Sheet

March 31, 2005

(in thousands)

	NetScout March 31, 2005			(**) Quantiva December 31, 2004			Acquisition Adjustments				Pro Forma
Assets
Current assets:
Cash and cash equivalents	$	57,070		$	56		$	(9,437	)	A	$	47,766
								(56	)	C
								133		F
Marketable securities		26,793			—							26,793
Accounts receivable, net		11,886			13							11,899
Inventories		3,114			—							3,114
Refundable income taxes		1,399			—							1,399
Deferred income taxes		2,356			—							2,356
Prepaid and other current taxes		3,003			12			(133	)	F		2,882
Total current assets		105,621			81			(9,493	)			96,209
Fixed assets, net		6,011			75			(49	)	C		6,037
Goodwill, net		28,839			—			7,669		A		36,508
Capitalized software development costs, net		221			—							221
Deferred income taxes		7,586			—							7,586
Long-term marketable securities		—			—							—
Intangible assets, net		—			45			(45	)	C		1,565
		—			—			1,708		A
								(143	)	B
Other assets		9			9							18
Total assets	$	148,287		$	210		$	(353	)		$	148,144
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	2,520		$	103		$	(103	)	C	$	2,520
Accrued compensation		6,385			—							6,385
Accrued other		2,976			311			(311	)	C		2,976
Income taxes payable		—			—							—
Deferred revenue		17,680			23			(23	)	C		17,680
Total current liabilities		29,561			437			(437	)			29,561
Deferred revenue		1,277			—			—				1,277
Series C convertible preferred stock		—			512			(512	)	D		—
Total liabilities		30,838			949			(949	)			30,838
Stockholders’ equity (deficit)
Preferred stock		—			2,677			(2,677	)	D		—
Common stock		35			1			(1	)	D		35
Additional paid-in capital		112,286			8,624			(8,624	)	D		112,925
								639		E
Accumulated other comprehensive income		(130	)		—			—				(130	)
Note receivable from shareholder					(91	)		91		D		—
Treasury stock		(26,490	)		—			—				(26,490	)
Restricted stock grant - gross												—
Deferred compensation								(639	)	E		(639	)
Retained earnings (deficit)		31,748			(11,950	)		(143	)	B		31,605
								11,950		D
Total stockholders’ equity (deficit)		117,449			(739	)		596				117,306
Total Liabilities and Stockholders’ Equity (Deficit)	$	148,287		$	210		$	(353	)		$	148,144

See accompanying Notes to Unaudited Combined Pro Forma Financial Statements.

(**) Derived from Quantiva’s audited financial statements as of December 31, 2004

3

NETSCOUT SYSTEMS, INC.

UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED MARCH 31, 2005

(U.S. dollars in thousands)

NetScout Systems, Inc.

Unaudited Combined Pro Forma Statement of Operations

For the Twelve Months Ended March 31, 2005

(in thousands, except per share data)

US$ in thousands	Historical NetScout March 31, 2005		(**) Historical Quantiva December 31, 2004			Acquisition Adjustments				Pro Forma
Revenues:
Products	$	51,352	$	—		$				$	51,352
Services		32,124		103							32,227
License and royalty		1,738		—							1,738
Total revenues		85,214		103			—				85,317
Cost of revenue:
Product		16,251		—							16,251
Service		4,384		226							4,610
Gross profit:		64,579		(123	)		—				64,456
Operating expenses:
Research and development		16,789		704			230		H		17,846
							47		I
							61		N
							15		O
Sales and marketing		36,889		108							36,997
General and administrative		8,121		534			90		H		8,764
							5		I
							14		N
Depreciation & amortization		—		200			573		J		767
							(6	)	L
Non-cash stock compensation		—		—							—
Total operating expenses		61,799		1,546			1,029				64,374
Income (loss) from operations		2,780		(1,669	)		(1,029	)			82
Interest income and other expenses, net		1,039		(860	)		(164	)	G		844
							829		K
Income (loss) before income tax expense (benefit)		3,819		(2,529	)		(364	)			926
Income tax expense (benefit)		949		(213	)		(896	)	M		(160	)
Net income (loss)	$	2,870	$	(2,316	)	$	532			$	1,086
Pro forma net income per common share:
Basic	$	0.09								$	0.04
Diluted	$	0.09								$	0.03
Weighted average shares:
Basic		30,572									30,572
Diluted		31,521					127		P		31,648

See accompanying Notes to Unaudited Combined Pro Forma Financial Statements.

(**) Derived from Quantiva’s audited financial statements for the twelve months ended December 31, 2004

4

NETSCOUT SYSTEMS, INC.

NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS

In preparation of the unaudited combined pro forma financial statements, the following significant assumptions and adjustments have been made. Pro forma adjustments reflect only those adjustments which are factually determinable and do not include the impact of contingencies. Pro forma adjustments include the following:

(A) Adjustments to record the fair value of the assets of Quantiva acquired. The aggregate purchase price to be paid for Quantiva is estimated at $9.4 million, including transaction costs relating to the acquisition. The purchase price allocation is based on NetScout ‘s current estimates of respective fair values and indications from studies and valuations.

Below is a table of the estimated purchase price and the purchase price allocation for Quantiva.

Total estimated purchase price (U.S. dollars in thousands):
Cash	$	9,291
Estimated transaction costs		146
Total estimated purchase costs	$	9,437
Purchase price allocation (U.S. dollars in thousands):
Fair value of net tangible assets acquired
Net fixed assets of Quantiva	$	26
Accounts receivable		13
Prepaid expenses		12
Deposits		9
Total fair value of net tangible assets acquired		60
Identifiable intangible assets
Software		1,255
In-process R&D		143
Non-compete agreements		310
Total Identifiable intangible assets		1,708
Goodwill		7,669
Total estimated purchase price	$	9,437

5

NETSCOUT SYSTEMS, INC.

NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS

(B) Adjustment, which relates to the write off of acquired in-process research and development, totaling $143,000.

(C) Adjustment to eliminate Quantiva assets and liabilities not acquired in the acquisition.

(D) Adjustment to eliminate Quantiva’s convertible preferred stock and stockholder’s equity (deficit).

(E) Adjustment to record the issuance of 154,348 restricted stock units of NetScout having an estimated fair value of $639,000 to new employees, in connection with the acquisition. NetScout estimated the fair value of these restricted stock units using total issued shares of 154,348 with a per share value of $4.14, which represents NetScout’s market price on the date of grant. These restricted stock units vest over a two year period and do not have an exercise price.

(F) Adjustment to eliminate costs incurred prior to March 31, 2005 relating to the acquisition from prepaid expenses totaling approximately $133,000, as if the acquisition had been completed on March 31, 2005.

(G) Adjustment to interest income of approximately $164,000 for the year ended March 31, 2005, related to payment of $9.4 million paid in cash as the total purchase price for the acquisition, including costs relating to the acquisition, as if the acquisition had been completed on April 1, 2004. NetScout calculated the pro forma adjustment using a weighted average of the interest rates experienced by NetScout, which consist of variable interest rate vehicles. Had NetScout experienced a change in interest rates of 12.5% of this weighted average rate, the pro forma adjustment would have differed by approximately $20,500.

(H) Adjustment to record stock-based salary compensation expense of $319,500, related to the issued restricted stock units as if the acquisition had been completed on April 1, 2004. These restricted stock units vest over a period of 2 years.

(I) Adjustment to record additional salary expense totaling $52,000, related to increases for employees previously paid as employees of Quantiva as if the acquisition had been completed on April 1, 2004.

6

NETSCOUT SYSTEMS, INC.

NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS

(J) Adjustment to record amortization expense of approximately $573,000 for the identifiable intangible assets associated with the acquisition for the year ended March 31, 2005, as if the acquisition had been completed on April 1, 2004. NetScout ‘s assessment of the useful life of each acquired identifiable intangible asset is as follows:

	Years
Software	3
Non-Compete Agreements	2

The acquired identifiable intangible assets will be amortized using the straight-line method. NetScout recognizes the economic consumption method of amortization would have resulted in significantly material differences in the timing of amortization expense over the life of the Software, and the existence of uncertainty surrounding the projected cash flows related to the acquired software, with respect to the economic consumption method, and therefore, has chosen to elect the straight-line method. Had the economic consumption method been elected, amortization expense would have been approximately $300,000 less for the pro forma period.

(K) Adjustment to eliminate interest expense totaling approximately $829,000, related to Quantiva’s preferred stock and notes payable to stockholders. Had the combination been completed on April 1, 2004, preferred stock and notes payable would not have been assumed by NetScout, and therefore, no interest would have been paid for the pro forma period.

(L) Adjustment to eliminate amortization expense of approximately $6,500 for the year ended December 31, 2004, related to intangible assets of Quantiva existing prior to the acquisition.

(M) Adjustment to record income tax benefit totaling $896,000, based upon the pro forma income before income tax expense. Had the acquisition been completed on April 1, 2004, NetScout’s income before income tax expense would have been reduced by approximately $3 million in losses, including pro forma adjustments, which would have decreased NetScout’s taxable income. Based upon a pro forma income before income tax expense of approximately $927,000, NetScout calculated income tax expense of approximately $280,000, which was offset by income tax benefits of $440,000 resulting from the resolution of federal income tax audits for the years ended March 31, 2003, 2002, 2001 and 2000.

(N) Adjustment to record compensation expense totaling approximately $75,000 related to deferred payments to be paid to two individuals two years from the date of the closing. These deferred payments are in lieu of payments the individuals would have received as security holders of Quantiva. The total amount of deferred payments to be made approximates $150,000.

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NETSCOUT SYSTEMS, INC.

NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS

(O) Adjustment to record stock based compensation to non-employees totaling approximately $15,000. Two non-employee consultants were each awarded options to purchase 10,000 shares of common stock with an exercise price of $4.14 and a vesting period of four years. In calculating the pro forma compensation, the fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:

Dividend yield	None
Expected volatility	95%
Risk-free interest rate	3.99%
Expected life (years)	5

(P) Adjustment to include the dilutive effect of options awarded as a result of the acquisition totaling approximately 127,000 shares to the weighted average shares data. NetScout calculated the diluted shares outstanding using the total of 154,348 restricted stock units awarded, which do not have an exercise price, and total of 102,000 common stock options granted, which have an exercise price of $4.14. NetScout used an average market price of $6.21 for the purposes of calculating the diluted shares outstanding.

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