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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|/x/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2000

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the Transition Period from  to

Commission File Number 000-30093

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Websense, Inc.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)

51-0380839(I.R.S. Employer
Identification Number)


10240 Sorrento Valley Road
San Diego, California 92121
858-320-8000(Address of principal executive offices, zip code and telephone number)

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Securities registered pursuant to Section 12(b) of the Act:None

Securities
registered pursuant to Section 12(g) of the Act:Common Stock $0.01 par value(Title of class)

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

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

The
aggregate market value of the voting stock held by non-affiliates of the registrant, as of February 28, 2001 was approximately $280 million (based on the
closing price for shares of the registrant's Common Stock as reported by the Nasdaq National Market for that date). Shares of Common Stock held by each officer, director and holder of 5% or more of
the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. Exclusion of shares held by any person should not be construed to indicate that such person posseses the
power, direct or indirect, to direct or cause the direction of management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.

The
number of shares outstanding of the registrant's Common Stock, $.001 par value, as of February 28, 2001 was 19,821,162.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 30, 2001
are incorporated by reference into Part III.

Certain
exhibits filed with the Registrant's prior registration statements and forms 10-Q are incorporated herein by reference into Part IV of this Report.

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Websense, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2000

TABLE OF CONTENTS

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|Part I   |  |                                                                                       |  |     
|Item 1.  |  | Business                                                                              |  | 1   
|Item 2.  |  | Properties                                                                            |  | 12  
|Item 3.  |  | Legal Proceedings                                                                     |  | 12  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 12  
|Part II  |  |                                                                                       |  |     
|Item 5.  |  | Market for the Registrant's Common Stock and Related Stockholder Matters              |  | 13  
|Item 6.  |  | Selected Financial Data                                                               |  | 14  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 31  
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 31  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |  | 31  
|Part III |  |                                                                                       |  |     
|Item 10  |  | Directors and Executive Officers of the Registrant                                    |  | 31  
|Item 11  |  | Executive Compensation                                                                |  | 32  
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 32  
|Item 13  |  | Certain Relationships and Related Transactions                                        |  | 32  
|Part IV  |  |                                                                                       |  |     
|Item 14  |  | Exhibits, Financial Statements, Schedules and Reports on Form 8-K                     |  | 32  
|         |  | Signatures                                                                            |  | 34  
|         |  | Financial Statements                                                                  |  | F-1 

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PART I

Forward Looking Statements

From time to time we have made and may continue to make "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of
1995. This report on Form 10-K may contain forward looking statements. These statements, which represent our expectations or beliefs concerning various future events, include but
are not limited to statements concerning the following:



Actual
results may differ materially from results anticipated in such forward looking statements. We assume no obligation to update any forward looking statements to reflect events or
circumstances arising after the date hereof.

Readers
are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business,
including without limitation the disclosures made under the caption "Risks and Uncertainties" included herein and other reports and filings made with the Securities and Exchange Commission.

Item 1. Business

Overview

We provide employee Internet management products that enable businesses to monitor, report and manage how their employees use the Internet. Our primary
product, Websense Enterprise, gives businesses the ability to rapidly implement and configure Internet access policies in support of their efforts to improve employee productivity, conserve network
bandwidth and mitigate potential legal liability. Our flexible and easy-to-use software applications operate in conjunction with our proprietary database, which is available
for daily incremental downloads. This database is organized into 67 categories and encompasses more than 1.6 million Web sites representing approximately 335 million Web pages. Our
database is updated with approximately 3,000 newly categorized Web sites each business day using a proprietary process of automated site content assessment and classification with manual verification.
Websense Enterprise is easy to deploy and use, and has minimal impact on an organization's information technology department. Our products can grow with our customers as they expand and support a
broad range of network platforms, including proxy servers, cache appliances, firewalls and other network appliances and software.

INDUSTRY BACKGROUND

The Internet has emerged as a critical business tool and an important communications and commerce platform for enterprises worldwide. As part of their overall
business strategies, many organizations are using the Internet to enable business applications that are accessed over their corporate networks. Companies utilize the Internet to optimize their
extended supply chains, automate their sales forces, track shipments and communicate with employees, customers, partners and suppliers. Due to the efficiencies, cost-savings and
competitive advantages that can be gained by leveraging the Internet, many businesses are spending aggressively to build out their computer networks and information technology infrastructure.
According to Cahners In-Stat Group, corporate spending on basic Internet infrastructure is expected to reach $220 billion by 2004. In order to accommodate a

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significant number of simultaneous users and the increasing volume of data transfer associated with enterprise Internet use, many organizations are making substantial investments in high bandwidth
connections such as dedicated T-1 lines, enabling high speed Internet access.

The
Internet has also become a highly popular consumer medium for entertainment, information and commerce. Dataquest has projected that the number of corporate Internet users
worldwide will grow from 137 million in 2000 to 260 million in 2003. This rapid adoption of the Internet has been accompanied by the remarkable growth in the number of consumer oriented
content and commerce Web sites and by an ever-expanding assortment of Web-based consumer services. Internet users today have the ability to communicate through
e-mail, retrieve news and information from numerous Internet sources, make online purchases of goods and services ranging from books to airline tickets to groceries, and otherwise access a
broad range of non-business-related content and commerce Web sites. As the rapid evolution of Web content and technology continues, the amount of data, types of data and size of files
traveling across the Internet have also grown. Consumers now access and download large, complex files such as streaming audio and video, MP3 music files, multi-player games and a variety of other
content rich media, all of which consume large amounts of network bandwidth. Similarly, online banner advertising and marketing campaigns targeting consumer Internet users continue to evolve,
consuming more bandwidth, particularly as Web-based advertising increasingly incorporates multimedia and streaming technologies.

Internet
access at work is fast, convenient and essentially free to employees. In general, employees enjoy unsupervised and unrestricted Internet access from their desktop computers.
As a result, employees tend to use their employers' Internet connections for recreational "surfing" or personal matters during business hours. Non-business use of company Internet access
by employees can result in lost employee productivity, increased network bandwidth consumption and potential legal liability. These factors in turn contribute to higher costs for companies that use
the Internet.

Recent
research and news reports regularly document the hidden costs of open Internet access in the workplace. We believe that a substantial amount of employee Internet activity in
the workplace is non-business-related, and that a significant portion of non-business-related e-commerce is conducted through an Internet connection at work. This
non-business use of the Internet can consume large portions of expensive network bandwidth. According to a Saratoga Institute study that we commissioned, more than 60% of mid-
to large-sized companies surveyed had disciplined employees for Internet misuse, and more than 30% of those companies had terminated employees for inappropriate Internet activity. For example, in
July 2000, Dow Chemical fired 50 employees and suspended another 200 for inappropriate use of the Internet in the workplace. In addition, a company may be exposed to legal liability if online
content accessed at the workplace is deemed to have created a hostile work environment for other employees.

Businesses
are increasingly recognizing the problem of personal Internet use in the workplace, and traditionally have attempted to manage or modify employee behavior through written
policies. These
policies are easily ignored and difficult to enforce. In order to monitor compliance with policy, managers may require their information technology professionals to review the log files generated by
company servers of Web pages visited. This method of employee Internet management is generally cumbersome and time consuming, and often does not provide the company with useful information regarding
the actual content or category of Web sites visited. Because this method does not proactively curtail undesirable Internet activity, employers are forced to discipline employee violations after the
fact. As a result, some managers have lost a significant level of control over both their employees' productivity and the use of their information technology infrastructures.

To
address the problems associated with improper Internet use in the workplace, many businesses have sought products that enable them to proactively manage their employees' Internet
access. Early Internet filtering software for the enterprise was largely derived from products that were originally

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developed to help parents prevent their children from accessing adult content at home, and used keyword matching to block content. These, and other more recent products, lack the ability to meet the
needs of growing organizations, cannot operate on multiple network platforms, do not provide the flexibility required by management and can be labor-intensive to deploy, consuming valuable information
technology resources. In addition, these applications generally do not operate in conjunction with a comprehensive database that is consistently refreshed. Moreover, many of these products' databases
have typically focused on only a few categories such as sex, violence and inappropriate language, and do not have sufficiently broad coverage to address the wider range of
non-business-related content accessible through the Internet.

Workplace
management of non-business-related Internet access is an increasingly important priority because of its impact on employee productivity, network bandwidth
consumption and potential legal liability. Given the necessity of corporate Internet access and consumers' continuing adoption of the Web as a mass entertainment, information and commerce medium, we
believe there is a significant opportunity for an employee Internet management product that effectively addresses the needs of businesses.

OUR EMPLOYEE INTERNET MANAGEMENT PRODUCTS

We provide employee Internet management products that enable businesses to monitor, report and manage how their employees use the Internet. Our primary product
is Websense Enterprise, a software and database package that gives business managers the ability to implement customized Internet access policies for different users and groups within the business,
and supports an organization's efforts to improve employee productivity, conserve network bandwidth and mitigate potential legal liability. The software component of Websense Enterprise allows
managers the flexibility to select the types of
Internet content they wish to allow, block or defer access to based on the database categories we have defined. Our software enforces these managerial selections by comparing Web site requests with
the Web site addresses we have categorized in our database. Websense Enterprise is sold on a subscription basis. The principal benefits of our products include:

Increased Employee Productivity.Websense Enterprise gives businesses the ability to more effectively monitor, report
and manage employee Internet access, thereby reducing non-productive Internet use. Our software enables organizations to identify the pattern and scope of Internet use and to manage access
to non-business related content or particular categories of Internet content chosen by an organization. In addition, our software allows managers to permit or deny Internet access based on
the employee, type of user, time of day and type of content being accessed. Websense Enterprise may also be configured to defer access until after work hours, limiting workplace distractions but
allowing appropriate use of the organization's high-speed Internet connection.

Reduced Bandwidth Consumption.We believe Websense Enterprise allows organizations to reduce bandwidth consumption by
managing personal Internet use and access to Web sites, in particular those which may contain bandwidth-intensive content, such as streaming audio and video, MP3 music files, multi-player games and
other rich media. Reducing the bandwidth consumed by non-business-related Internet traffic allows an organization to use its network more efficiently and effectively in performing
important business tasks, and to avoid costs arising from the need to buy additional telecommunications services and networking equipment.

Reduced Exposure to Potential Legal Liabilities.Websense Enterprise supports organizations' efforts to reduce exposure
to legal liability resulting from the improper use of the Internet in the workplace. By implementing our products in conjunction with an overall corporate Internet usage policy, organizations can
proactively curtail access to objectionable Internet content such as adult entertainment, illegal activities and racism.

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In addition to the benefits above, our products provide these key features:

Access to the Most Comprehensive Database.We provide access to a proprietary database of over 1.6 million Web
sites, representing approximately 335 million unique Web pages. Our database is cataloged into 67 different categories to enable organizations to determine the types of Internet content that
are appropriate for their workplace culture. We add approximately 3,000 newly categorized Web sites each business day to our database and make these updates available to our customers for daily
incremental downloads.

Ability to Customize Employee Internet Access.Websense Enterprise allows organizations to configure specific Internet
access policies for various groups, user types or individuals. Through our easy-to-use browser interface, we enable managers to implement Internet access policy with limited
impact on information technology resources and personnel. Organizations may choose Internet access options which include blocking Web sites completely or partially, setting time periods for access,
allowing access but generating an exception report, or deferring access until after work hours.

Ability to Scale and Operate on a Variety of Network Platforms.Our software is designed to have minimal impact on
network performance. Websense Enterprise is available on a broad range of network platforms, and can support up to 50,000 users on a single server. Our software works with popular proxy servers,
firewalls and cache engines offered by Internet infrastructure providers such as Cisco, CacheFlow, Check Point, Inktomi, Microsoft Corp. and others.

STRATEGY

Our objective is to maintain and strengthen our position in the market for employee Internet management products. Key components of our strategy include:

Expand our Customer Base.Our products have been deployed in more than 12,000 organizations worldwide. We believe our
large installed base of customers provides our products with market credibility, and we intend to leverage this credibility to further our market penetration. We currently have over 130 international
distributors and resellers covering more than 70 countries. To address this growing opportunity, we will continue to increase the number of international resellers and expand our database coverage
beyond the English, French, German, Japanese and Spanish Web sites currently categorized. We believe that given the higher costs of Internet access in many foreign markets, the need to manage employee
Internet use will be cost-driven.

Aggressively Leverage Indirect Sales Channels.We currently have 680 value-added resellers that focus on the U.S.
market and over 130 international distributors and resellers primarily in Europe and Asia Pacific. Our indirect sales channels accounted for approximately 80% of our subscription revenue in 2000. We
intend to increase our resources focused on developing these channels and, as a result, expect that the percentage of our total sales derived from our indirect channels will increase in the future. In
addition, we plan to improve the productivity of our existing value-added resellers through lead development, marketing support, sales assistance and training. We intend to aggressively leverage and
expand our indirect sales channels in both the domestic and international markets through recruiting programs and an ongoing sharing of subscription renewal fees.

Increase Sales to Existing Customers.Many of our customers are large businesses that have thousands of
Internet-enabled employees. In most cases, these customers initially deploy the Websense Enterprise application in one or two internal departments and pay subscription fees based only on the number of
Internet users in those departments. We believe that there is a large opportunity to sell our existing customers subscriptions for additional Internet users within their organizations. We intend to
aggressively pursue renewals of existing subscription agreements and enterprise-wide deployment of Websense Enterprise within our existing customer base.

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Expand the Websense Product Offering.We intend to continuously develop and update our software and database in order
to keep current with the evolution of Internet content and technology. We plan to offer our customers enhanced reporting and management applications for Websense Enterprise as an incremental revenue
opportunity. We also believe that our filtering and categorization of Internet content will enable us to sell subscriptions to subsets of our database on an incremental per-user basis. We
also intend to provide additional software features, which address worker productivity and enterprise bandwidth consumption.

Work Closely with Leading Internet Infrastructure Providers.We intend to continue to work closely with Internet
infrastructure providers such as Cisco, CacheFlow, Check Point and Inktomi. We have modified our software to integrate with each of these companies' products, and we intend to continue to work with
these companies to migrate our software applications deeper into the network infrastructure, from proxy servers, firewalls and cache engines, to network routers. In addition, we plan to continue to
sponsor co-marketing programs with these companies to associate our product with their established brands and enhance our market position.

Develop and Maintain Leading Processes and Technologies.We intend to continue developing proprietary processes and
technologies that, we believe, give us a distinct competitive advantage. In the development and maintenance of our databases, we utilize a process of automated content assessment and classification
with manual verification, which allows us to quickly, and accurately grow the size of our database. We believe based on our internal market research efforts that our competitors do not currently use
software programs that assist in the development of their databases. We further believe that a larger and more accurate database will increase the market for our products because it provides our
customers with a large number of categorized Web sites to use in developing and implementing their Internet management policies. In addition, we intend to continue to develop software and technology
that will facilitate the integration of our products with the systems of our customers and Internet infrastructure providers in order to enable us to offer our products to a broader customer base than
our competitors.

PRODUCTS AND SERVICES

We develop and market a software and database application for managing employee access to the Internet. Our products consist of customizable software that
reference our proprietary database. Our database of Web page addresses is organized into 67 categories, which are regularly updated and available for incremental daily downloads. In addition to our
current offerings, we plan to introduce and market new products and services that will provide enterprises with additional flexibility in managing employee Internet access.

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Websense Enterprise.Websense Enterprise is the foundation of our software offerings. Websense Enterprise integrates
with an organization's network server, proxy server or firewall and is designed to work in networks of virtually any size and configuration without compromising security. The table below describes the
platforms for which we currently offer our Websense Enterprise product.

Proxy Servers

Firewalls

Cache Engines

Appliances/OtherMicrosoft Proxy Server

Check Point FireWall-1

CacheFlow Appliance

Content Technologies MIMEsweeperNetscape Proxy Server

Cisco Secure PIX Firewall

Cisco Cache Engine/Content EngineWebsense Proxy Server

GTA GNAT Box

Inktomi Traffic ServerInternet Dynamics Conclave
NetScreen
Netopia
Novell FireWALL
SLM SecurIT Firewall


We
sell Websense Enterprise as a subscription based on the number of Internet users to be managed. Additional users, additional features and enhanced technical support are priced
separately.

Content Management.Websense Enterprise enables employers to proactively manage employee Internet access based on the
content of the requested Web site. Our software application gives managers the ability to customize, implement and modify Internet access policies for various groups, user types and individuals. An
easy-to-use graphical interface enables business managers to define the categories of Web sites to which access will be managed during particular time periods of the day. The
filtering software examines each Internet access request, determines the category of the requested Web site and applies the policies that have been defined by the company. There are several possible
results for each request:



The Websense Database.We offer an extensive and regularly updated database of Web sites. Our database currently catalogs more than
1.6 million Web sites representing approximately 335 million Web page addresses cataloged into 67 categories. We add approximately 3,000 newly categorized Web

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sites per business day to our database and make these updates available for incremental daily downloads.

The
breadth and specificity of Web site categories we have defined provide the enterprise flexibility in selecting which types of material should be allowed, blocked, deferred or
reported. We define the categories, based on input we have received from our customers, to identify the types of materials that we believe employers would deem to be unacceptable, inappropriate or
undesirable in a work environment. Categories in our database include the following:

Abortion Advocacy

Government

Racism/HatePro-life sites

Military

ReligionPro-choice sites

Political groups

Non-traditional religionsActivist/Advocacy Groups

Health

Traditional religionsAdult Material

Illegal/Questionable

ShoppingAdult content

Information Technology

Internet auctionNudity

Hacking

Real EstateSex

Proxy avoidance systems

Society and LifestyleSex Education

Search engines and portals

Alcohol & tobaccoLingerie and Swimsuit

Web hosting

Gay & lesbian issuesBusiness and Economy

URL translation sites

Personals & datingFinancial data & services

Internet Communications

Restaurants & diningDrugs (as characterized by U.S. law)

Web chat

HobbiesAbused medications

Web-based email

Special EventsPrescribed medications

Job Search

SportsSupplements/Unregulated compounds

Militancy/Extremist

TastelessEducation

News & Media

TravelEducational Institutions

Alternative JournalsCultural Institutions

Premium Group IEntertainment

AdvertisementsMP3

Freeware/Software DownloadGambling

Instant MessagingGames

Online Brokerage & TradingPay-to-Surf.


Reporter.Websense Reporter is a software application that is offered with Websense Enterprise. This application
assists managers in analyzing Internet use within their organizations. Websense Reporter generates a wide variety of tabular and graphical reports on an organization's Internet usage. It analyzes
information from Internet monitoring logs and builds visual charts in a variety of formats for easy distribution to and interpretation by managers. Websense Reporter enables managers to identify
useful information, including summaries of categories of Web sites visited, requests to all destinations and details regarding individual destination requests.

Professional Services.Our professional services group provides technical support, training and consulting services.
This group provides pre-sales and technical support for Websense Enterprise, sells services and resells third-party computers and firewall software.

CUSTOMERS

We currently have subscription agreements covering approximately 7.5 million Internet-enabled employees. Our customers range from Fortune 500 companies
to government and educational organizations. No customer accounted for more than 10% of our total revenues in 2000, 1999 or 1998.

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SALES, MARKETING AND DISTRIBUTION

Sales.We sell our products and services through both indirect and direct channels. For 2000, indirect channel sales
comprised approximately 80% of subscription revenues, while direct sales to end-users accounted for the remainder of our revenues. Our indirect channels include:



Our
sales efforts are coordinated worldwide through our sales team of approximately 30 individuals. The typical end-users buying directly from us are large organizations.

In
2000 we generated approximately 31% of our subscription revenue and 28% of our total revenue from customers outside of North America. We expect international markets to provide
increased opportunities for our products in the future. Our current international efforts are focused on expanding our indirect sales channels in Europe and Africa, strengthening the Asia/Pacific
channels and establishing a further presence in Latin America.

Marketing.Our marketing strategy is to generate qualified sales leads, build our brand and raise corporate awareness
of Websense as a provider of employee Internet management products. Our marketing efforts are targeted toward operational executives and decision makers within businesses, including information
technology professionals, chief executives, upper level management and human resource personnel. We actively manage our public relations, communicating directly with technology
professionals and the media, in an effort to promote greater awareness of the growing problem caused by employee misuse of the Internet at work. Our additional marketing initiatives include:



CUSTOMER SERVICE, TRAINING AND SUPPORT

We believe that superior customer support is critical to retaining and expanding our customer base. Our technical support group provides dependable and timely
resolution of customer technical inquiries and is available to customers by telephone, e-mail and over the Web. Our training services group delivers education, training and
pre-sales support to our customers. We also offer online training to our customers and resellers to provide them with the knowledge and skills to successfully deploy, use and maintain our
products. Our customer service team is responsible for handling general customer

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inquiries, answering questions about the ordering process, investigating the status of orders and payments, as well as processing customer orders. In addition, our customer service team uses our
e-mail system to proactively update customers on a variety of topics, including release dates of new products and updates to existing products.

RESEARCH AND DEVELOPMENT

We have invested significant time and resources in creating a structured process for undertaking product and database development projects. The research and
development department is divided into several groups, which include database production, software development, quality assurance and documentation. Individuals are grouped along product lines and
work as part of cross-disciplined teams designed to provide a framework for defining and addressing the activities required to bring product concepts and development projects to market successfully.

TECHNOLOGY

Software Architecture.Websense Enterprise is a server-based system designed to function without compromising security
in networks of virtually any size and configuration. Websense Enterprise is composed of an integrated system of monitoring, reporting and management applications. It is designed to accommodate network
growth without impairing performance or requiring major overhauls and can scale to support networks of up to 50,000 users on a single server. Websense Enterprise integrates with major firewalls, proxy
servers and caching engines. We have designed our products to run on multiple network platforms and in multiple locations.

Database Content Analysis and Updating.We use a process of automated content assessment and classification with manual
verification to gather and classify new Web sites for our database. Our automated search technology uses Java-based tools and proprietary pattern recognition systems to automatically
search the Internet to identify and catalog Web sites into one of our 67 database categories.

COMPETITION

The market for Internet-filtering software and related services is immature, fragmented, highly competitive, quickly evolving and subject to rapid
technological change. We expect that competition will intensify. Increased competition may result in reduced market acceptance of our products, price reductions and reduced gross margins, any of which
could seriously harm our business. Competitors
vary in size and in the scope and breadth of the products and services they offer. Our current principal competitors include:



We
also face current and potential competition from vendors of Internet servers, operating systems and networking hardware, many of which now, or may in the future, develop and/or
bundle employee Internet management products with their offerings. We also compete against and expect increased competition from traditional network management software developers and Web management
service providers. Many of our current and potential competitors have longer operating histories and significantly greater financial, technical, marketing or other resources than we do. They may have
significantly greater name recognition, established marketing relationships and access to a larger

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installed base of customers. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the
functionality of their products to address customer needs. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share.

We
believe that the principal competitive factors in the market for our products include:



INTELLECTUAL PROPERTY RIGHTS

Our intellectual property rights are important to our business. We rely on a combination of trademark, copyright and trade secret laws in the United States and
other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and Websense brand. We have registered our Websense trademark in the United
States, Japan and the European Union. Effective trademark protection may not be available in every country where our products are available.

We
currently have two patent applications pending in the United States and two pending international patent applications that seek to protect our proprietary database and filtering
technologies. We do not have any issued patents and our pending patent applications may not result in issued patents.

Our
policy is to enter into confidentiality and invention assignment agreements with all employees and consultants, and nondisclosure agreements with all other parties to whom we
disclose confidential information. These protections, however, may not be adequate to protect our intellectual property rights.

EMPLOYEES

As of December 31, 2000, we had 179 employees. None of our employees is represented by a labor union, and we have never experienced a work stoppage. We
believe that our relations with our employees are good.

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EXECUTIVE OFFICERS

Our executive officers and their ages as of December 31, 2000 are as follows:

|Name               |  | Age |  | Position(s)                                                 
|------------------ |  | --- |  | ------------------------------------------------------------
|John B. Carrington |  | 56  |  | Chairman of the Board, President and Chief Executive Officer
|Harold M. Kester   |  | 54  |  | Chief Technology Officer                                    
|Douglas C. Wride   |  | 47  |  | Chief Financial Officer                                     
|J. Cleve Adams     |  | 45  |  | Vice President of Sales                                     
|Karen V. Goodrum   |  | 43  |  | Vice President of Finance and Administration                
|Geoff Haggart      |  | 45  |  | Vice President of Europe, Middle East and Africa Sales      
|Ronald B. Hegli    |  | 40  |  | Vice President of Engineering                               
|Andrew Meyer       |  | 42  |  | Vice President of Marketing                                 

John
B. Carrington has served as our President and Chief Executive Officer since May 1999 and has served as our Chairman since June 1999. Prior to joining Websense,
Mr. Carrington was Chairman, President and Chief Executive Officer of Artios, Inc., a provider of hardware and software design solutions to companies in the packaging industry, from
August 1996 until it was acquired by BARCO n.a. in December 1998. From September 1991 to October 1995, Mr. Carrington was President and Chief Executive
Officer of Digitalk, Inc., a software development tools company, which has since merged to form ParcPlace-Digitalk, Inc. Mr. Carrington currently serves on the boards of directors
for Interact Corp, a sales automation and e-commerce provider, and Digital Lava, Inc., a provider of video publishing and management tools. He received his B.S. in Business
Administration from the University of Texas.

Harold
M. Kester has served as our Chief Technology Officer since June 1999. Prior to joining us, from August 1993 to June 1999, Mr. Kester served as Vice
President of Encyclopedia Britannica, a provider of
general reference materials on a multitude of subjects, and General Manager and Chief Scientist of its La Jolla Research Laboratory. Prior to his employment with Encyclopedia Britannica,
Mr. Kester founded The Del Mar Group, a provider of information retrieval software products. Mr. Kester received his B.A. in Mathematics from California State University, Long Beach.

Douglas
C. Wride has served as our Chief Financial Officer since June 1999. From March 1997 to December 1998, Mr. Wride served as Chief Financial Officer
of Artios, Inc. Mr. Wride also served as Chief Operating Officer of Artios from July 1997 to December 1998. From April 1996 to March 1997, Mr. Wride
served as Chief Operating Officer and Chief Financial Officer of NetCount, LLC, a provider of Internet measurement and research services. From February 1992 to January 1996,
Mr. Wride was Chief Financial Officer at Digitalk, Inc. Mr. Wride has also held senior-level positions with SSD Management, Inc., a developer of network communications
software for wide area networks and Accountants Overload Group, an accounting, finance, bookkeeping and data processing job placement company, and spent 11 years in the entrepreneurial
technology group at Price Waterhouse & Co. Mr. Wride is a C.P.A and received his B.S. in Business/Accounting from the University of Southern California.

J.
Cleve Adams has served as our Vice President of Sales since September 1997. From January 1996 to August 1997, Mr. Adams served as Executive Vice
President of Sequel Technology, Inc., an Internet applications company. From June 1994 to October 1995, Mr. Adams served as Vice President of Sales for Acusoft, a
client-server start-up. Mr. Adams has also held sales positions with Novell and Texas Instruments. He received his B.S. in Education from the University of LaVerne.

11

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Karen V. Goodrum has served as our Vice President of Finance and Administration since August 2000. From January 1997 to February 2000, Ms. Goodrum served
as Chief Financial Officer for COMPS.Com, Inc., a provider of commercial real estate information services. Ms. Goodrum previously served as Vice President of Finance and Administration
for COMPS.Com, Inc. from September 1993 to January 1997. Ms. Goodrum received her B.A. in Education from the University of Maryland, College Park, and her M.B.A. from San
Diego State University.

Geoff
Haggart has served as our Vice President of Europe, Middle East and Africa Sales since February 2000. From February 1997 to February 2000,
Mr. Haggart served as Vice President of European/International Operations for Continuus Software, a manufacturer and distributor of software change management solutions. Mr. Haggart
previously served as Managing DirectorUK for Continuus Software from September 1995 to February 1997. Mr. Haggart has also held management and technical positions for
a number of companies in Europe and the Middle East, including Legent, Cincom Systems and Bahrain Petroleum Company.

Ronald
B. Hegli has served as our Vice President of Engineering since March 1999. Prior to joining us, from August 1998 to March 1999, Mr. Hegli served as
Director of Product Development for Nuera Communications, an Internet protocol telephony vendor. From March 1994 to April 1998, Mr. Hegli served as Vice President of Engineering
with TriTeal Corp., a graphical user interface software developer. TriTeal Corp. filed a bankruptcy petition in April 1999. Mr. Hegli received his B.S. in Nuclear Engineering from Oregon
State University and an M.S. in Mechanical Engineering from the University of California, Berkeley.

Andrew
Meyer has served as our Vice President of Marketing since August 1999. From November 1997 to August 1999, Mr. Meyer served as Vice President of
Marketing for Epicor Software (formerly Platinum Software), a provider of enterprise resource planning software. From September 1993 to November 1997, Mr. Meyer was Director of
Marketing for Scientific-Atlanta, a cable television and telecommunications manufacturer. Mr. Meyer received his bachelor's degree in Mechanical Engineering from Georgia Tech and an M.B.A. from
the University of New Orleans.

Item 2. Properties

Our corporate headquarters and principal offices are located in San Diego, California, where we lease approximately 51,000 square feet. This lease expires in
August 2002, with an option to extend the lease for an additional three years. We believe that our current space is adequate for our current and identified future needs. We lease space for our Europe
headquarters in an executive suite arrangement on an annual basis.

Item 3. Legal Proceedings

We are not a party to any material legal proceedings.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2000.

12

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PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

Our Common Stock is traded on the Nasdaq National Market under the symbol "WBSN." The Common Stock was initially offered to the public on March 28, 2000
at $18.00 per share. The following table sets forth the range of high and low closing prices on the Nasdaq National Market of our Common Stock for the periods indicated, as reported by Nasdaq. Such
quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

Year Ended December 31, 2000

High

LowFirst Quarter (subsequent to March 28)

$
48.06

$
39.63Second Quarter


41.25


15.38Third Quarter


29.00


12.75Fourth Quarter


23.38


10.38


To
date, the we have neither declared nor paid any dividends on the Common Stock. We currently intend to retain all future earnings, if any, for use in the operation and development
of our business and, therefore, do not expect to declare or pay any cash dividends on the Common Stock in the foreseeable future. As of February 28, 2001, there were 111 holders of record of
the Common Stock.

Use of Proceeds

On March 31, 2000 we closed the sale of 4,000,000 shares of our Common Stock, $0.01 par value, in our initial public offering (the "Offering"). The
shares of Common Stock sold in the Offering were registered under the 1933 Act on a Registration Statement on Form S-1 (Reg. No. 333-95619) that was declared
effective by the SEC on March 27, 2000. After deducting the underwriting discounts and commissions and various Offering expenses, we received net proceeds from the Offering of approximately
$65.7 million. A portion of the proceeds from the Offering was used to repay the $1.5 million balance of our fixed term loan agreements with a financial institution. We currently have
approximately $64.2 million in proceeds remaining from the Offering. We intend to use these proceeds for general corporate purposes, including working capital. We may also use a portion of the
net proceeds for acquisitions of businesses, products and technologies, or the establishment of new business opportunities that are complementary to our current and future business.

13

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Item 6. Selected Financial Data

You should read the following selected financial data in conjunction with our financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this annual report. We derived the statement of operations data for the years ended December 31, 2000, 1999 and 1998 and the balance sheet data as of
December 31, 2000 and 1999 from our financial statements audited by Ernst & Young LLP, which appear elsewhere in this report. We derived the statement of operations data for the year
ended December 31, 1997 and the balance sheet data as of December 31, 1998 and 1997 from our financial statements audited by Ernst & Young LLP, which are not included in this
annual report. We derived the statement of operations data for the year ended December 31, 1996 and the balance sheet data as of December 31, 1996 from our unaudited financial
statements, which are not included in this annual report. Our historical results are not necessarily indicative of operating results to be expected in the future.

|                              |                                          | Years Ended December 31, |       
|----------------------------- | ---------------------------------------- | ------------------------ | ------
|
|
|Statement of Operations Data: |                                          |                          |       
|Revenues:                     |                                          |                          |       
|                              | Subscriptions                            |                          | $     
|                              | Other products and services              |                          |       
|                              |                                          |                          |       
|                              |                                          | Total revenues           |       
|Cost of revenues:             |                                          |                          |       
|                              | Subscriptions                            |                          |       
|                              | Other products and services              |                          |       
|                              |                                          |                          |       
|                              |                                          | Total cost of revenues   |       
|                              |                                          |                          |       
|Gross margin                  |                                          |                          | 14,734
|Operating expenses:           |                                          |                          |       
|                              | Selling and marketing                    |                          |       
|                              | Research and development                 |                          |       
|                              | General and administrative               |                          |       
|                              | Amortization of stock-based compensation |                          |       
|                              |                                          |                          |       
|                              |                                          | Total operating expenses |       
|                              |                                          |                          |       
|Income (loss) from operations |                                          |                          | (9,708
|Interest income (expense)     |                                          |                          | 3,761 
|                              |                                          |                          |       
|Net income (loss)             |                                          | $                        | (5,947
|                              |                                          |                          |       
|Net income (loss) per share:  |                                          |                          |       
|Basic and diluted             |                                          | $                        | (0.35 
|                              |                                          |                          |       
|Weighted average shares       |                                          |                          | 16,882
|                              |                                          |                          |       

|                                     |  | As of December 31,
|------------------------------------ |  | ------------------
|
|Balance Sheet Data:                  |  |                   
|Cash and cash equivalents            |  | $                 
|Investments in marketable securities |  |                   
|Working capital (deficit)            |  |                   
|Total assets                         |  |                   
|Deferred revenue                     |  |                   
|Debt                                 |  |                   
|Total stockholders' equity (deficit) |  |                   

14

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report. See
"Factors Affecting our Operating Results" regarding certain factors known to us that could cause reported financial information not to be necessarily indicative of future results.

Overview

We provide employee Internet management, or EIM, solutions that enable businesses to monitor, report and manage how their employees use the Internet. Our
Websense Enterprise solution supports an organization's efforts to improve employee productivity, conserve network bandwidth and mitigate potential legal liability. We were founded in 1994 as
NetPartners Internet Solutions, a reseller of computer network security solutions and related services. In 1996, we released our first software product, Websense Internet Screening System. Since that
time, we have refocused our business on developing and selling employee Internet management solutions, and no longer focus on software resale and service business.

In
1999, we changed our name to Websense, Inc. and completed our change in business strategy. In the same year, we expanded our senior management team, raised approximately
$9.8 million in a private round of financing and further strengthened indirect sales channels and business relationships. In December 1999, we released version 4.0 a redesigned version
of Websense Enterprise; our most recent version was released in October 2000. We currently derive a substantial majority of our revenues from subscriptions to this solution and expect this
trend to continue in the future. When a purchase decision is made, customers enter into a subscription agreement, which is generally 12, 24 or 36 months in duration and for a fixed number of
users. Upon entering into the subscription agreement, we promptly invoice customers for their subscriptions. Generally, payment is due for the full term of the subscription within 30 days of
the invoice. We recognize revenue on a straight-line basis over the term of the subscription agreement. We record amounts billed to customers in excess of recognizable revenue as deferred
revenue on our balance sheet. Upon expiration of the subscription, customers who wish to resubscribe must do so at our then current rates to continue using Websense Enterprise. Our revenue is
significantly influenced by subscription renewals, and a decrease in subscription renewals could negatively impact our revenue.

We
also derive revenues from professional services for the implementation of our products and from resale of hardware and software. We recognize revenues for these services and
products upon their completion or delivery. These revenues declined significantly in 2000 due to the shift in business strategy. We expect these revenues to continue to decline as a percent of total
revenues for the foreseeable future.

In
2000, we derived 28% of revenues from international sales compared to 21% in 1999. We are continuing to expand our international operations, particularly in selected countries in
the European and Asia Pacific markets, because we believe international markets represent a significant growth opportunity.

We
currently sell Websense Enterprise through indirect (approximately 80% of subscription revenue) and direct (approximately 20% of subscription revenue) channels; however, our
strategy is to increasingly rely on indirect sales channels. Domestically, we sell solutions through more than 680 Value Added Resellers, or VARs, and through our direct sales force. Internationally,
we distribute Websense Enterprise through more than 130 distributors and resellers in over 70 countries who resell our solution through VARs and their resellers. In addition, we leverage the sales and
marketing capabilities of the original equipment manufacturers, or OEMs, and other key providers of complementary hardware and software products.

15

---

Because we derive revenues from subscription fees, we do not recognize the entire amount of subscription fees received in the month the subscription agreements are executed. However,
we recognize operating expenses as they are incurred. Operating expenses have continued to increase as compared to prior periods due to expanded selling and marketing efforts and investments in
administrative infrastructure to support subscription sales that we will recognize as revenue in subsequent periods.

Results of Operations

The following table summarizes our operating results as a percentage of total revenues for each of the periods shown.

Years ended December 31,2000

1999

1998Revenues:Subscriptions

96
%
83
%
36
%Other products and services

4

17

64Total revenues

100

100

100Cost of revenues:Subscriptions

12

13

11Other products and services

4

14

53Total cost of revenues

16

27

64Gross margin

84

73

36Operating expenses:Selling and marketing

73

73

66Research and development

36

45

26General and administrative

20

44

25Amortization of stock-based compensation

11

21

Total operating expenses

140

183

117Loss from operations

(56
)
(110
)
(81
)Interest income, net

22

3

0Net loss

(34
)%
(107
)%
(81
)%


Years ended December 31, 2000 and 1999

Revenues

Subscriptions.Subscription revenue increased from $7.1 million in 1999 to $16.7 million in 2000. This
increase of $9.6 million was primarily a result of the addition of new customers (approximately $6.2 million) during 2000 as well as renewals by existing customers (approximately
$3.4 million). Subscription revenue accounted for 96% of total revenues in 2000 compared to 83% in 1999. The increase as a percentage of sales is due to our focus on selling Websense
Enterprise.

Other products and services.Other products and services revenue, which include revenues from professional services and
from the resale of computers and firewall software, decreased from $1.5 million in 1999 to $761,000 in 2000. Other products and services revenue accounted for 4% of revenues in 2000 compared to
17% in 1999. The decrease as a percentage of sales in 2000 is consistent with the strategy that has transformed Websense from a network security service organization and

16

---

reseller of third party security software to a provider of subscription-based employee Internet management products.

Cost of Revenues

Cost of subscriptions.Cost of subscriptions consists of the costs of Web site review, technical support and
infrastructure costs associated with maintaining our database. Cost of subscriptions increased from $1.1 million in 1999 to $2.0 million in 2000. This increase was primarily due to
additional technical support personnel and the development of automation tools by our database group, as well as increased allocated facilities and human resource costs in 2000. Cost of subscriptions
as a percentage of subscription revenue decreased to 12% in 2000 from 15% in 1999. This decrease in costs of subscription revenue as a percentage of subscription revenue was due to increased revenue
and the relative fixed nature of these costs.

Cost of other products and services.Cost of other products and services consists primarily of the cost of resale
software and related hardware. Cost of other products and services decreased from $1.2 million in 1999 to $718,000 in 2000. The costs have decreased as a result of the shift in focus away from
reselling hardware and software. Cost of other products and services as a percentage of other products and services revenue increased to 94% in 2000 compared to 79% in 1999 primarily due to lower
volume discounts on the firewall software and hardware that we resold.

Gross Margin

Gross margin increased from $6.4 million in 1999 to $14.7 million in 2000. The increase was due to a higher percentage mix of subscription
revenues, which generate a higher margin as compared to other products and services.

Operating Expenses

Selling and marketing.Selling and marketing expenses consist primarily of salaries, commissions and benefits related
to personnel engaged in selling, marketing and customer support functions, along with costs related to public relations, advertising, promotions and travel. Selling and marketing expenses increased
from $6.3 million in 1999 to $12.7 million in 2000. The $6.4 million increase in selling and marketing expenses in 2000 was primarily due to increased headcount costs of
$2.6 million, increases in advertising and promotional costs of $1.3 million, increased travel costs of $328,000 and increased allocations of information technology, facilities and human
resource costs of $2.2 million. We expect our selling and marketing expenses to increase as we add personnel to expand our selling and marketing efforts.

Research and development.Research and development expenses consist primarily of salaries and benefits for software
developers, contract programmers, facilities costs and equipment depreciation. Research and development expenses increased from $3.9 million in 1999 to $6.3 million in 2000. The increase
of $2.4 million in research and development expenses was primarily a result of increased headcount of $1.0 million and increased allocations of information technology, facilities and
human resource costs of $1.4 million.

General and administrative.General and administrative expenses consist primarily of salaries, benefits and related
expenses for our executive, finance, human resources and administrative personnel, third party professional service fees and allocated facilities and depreciation expenses. General and administrative
expenses decreased from $3.8 million in 1999 to $3.5 million in 2000. The $300,000 decrease in general and administrative expenses in 2000 is primarily due to the expanded allocation of
information technology, facilities and human resource costs to other departments of $600,000 and to non-recurring charges in the first quarter of 1999 which consisted of an additional
allowance for

17

---

doubtful accounts of $100,000 partially offset by increased costs related to being a public company of $400,000. We expect general and administrative expenses to increase in the future, reflecting
growth in operations and increased expenses associated with being a public company

Amortization of stock-based compensation.Amortization of stock-based compensation increased from $1.8 million
in 1999 to $1.9 million in 2000. There was no amortization of stock-based compensation in periods prior to 1999. The increase in the amortization expense in 2000 is primarily due to the large
number of option grants that occurred after March 1999 for which deferred compensation was recorded as well as deferred compensation recorded for options issued in the first quarter of
2000.

Interest Income, Net

Net interest income increased from $225,000 in 1999 to $3.8 million in 2000. This increase reflects an increase in interest income generated from higher
average cash balances and investments in marketable securities in 2000, which included the proceeds from our initial public offering completed in March 2000.

Years ended December 31, 1998 and 1999

Revenues

Subscriptions.Subscription revenue increased from $2.5 million in 1998 to $7.1 million in 1999. This
increase of $4.6 million was primarily a result of a focus on the sale of our Websense Enterprise products in 1999, which resulted in the addition of new customers (accounting for approximately
$3.4 million of the increase) as well as renewals by existing customers (accounting for approximately $1.2 million of the increase). Subscription revenue accounted for 83% of total
revenues in 1999 as compared to 36% in 1998.

Other products and services.Other products and services revenue decreased from $4.4 million in 1998 to
$1.5 million in 1999. Other products and services revenue accounted for 17% of total revenues in 1999 as compared to 64% in 1998. The decrease as a percentage of sales in 1999 is consistent
with the strategy that has transformed Websense from a network security service organization and reseller of third party security software to a provider of subscription-based employee Internet
management products.

Cost of Revenues

Cost of subscriptions.Cost of subscriptions increased from $736,000 in 1998 to $1.1 million in 1999. Cost of
subscriptions as a percentage of subscription revenue was 15% in 1999 and 29% in 1998. This
decrease in cost of subscriptions as a percentage of subscription revenue was due to increased revenue and the relatively fixed nature of these costs.

Cost of other products and services.Cost of other products and services decreased from $3.7 million in 1998 to
$1.2 million in 1999. The costs decreased as a result of the shift in focus away from reselling hardware and software. Cost of other products and services as a percentage of other products and
services revenue was 79% in 1999 and 84% in 1998. This percentage decrease was due primarily to decreased sales of low-margin hardware products.

Gross Margin

Gross margin increased from $2.5 million in 1998 to $6.4 million in 1999. The increase was due to a higher percentage mix of subscription
revenues, which generate a higher margin as compared to other products and services.

18

---



Operating Expenses

Selling and marketing.Selling and marketing expenses increased from $4.6 million in 1998 to $6.3 million
in 1999. The increase in selling and marketing expenses of $1.7 million in 1999 was primarily due to increases in headcount of $1.3 million and promotional expenses of $748,000, and was
partially offset by a decrease in advertising expenses of $483,000.

Research and development.Research and development expenses increased from $1.8 million in 1998 to
$3.9 million in 1999. The increase in research and development expenses was primarily a result of increased development efforts and enhancements to Websense Enterprise.

General and administrative.General and administrative expenses increased from $1.7 million in 1998 to
$3.8 million in 1999. The increase in general and administrative expenses in 1999 was primarily due to significant investments in increased headcount of $1.0 million, facilities of
$268,000 and information technology of $327,000 to support an expansion in the scope of our business

Amortization of stock-based compensation.There was no amortization of stock-based compensation in periods prior to
1999.

Interest Income, Net

Net interest income.Net interest income increased from $33,000 in 1998 to $225,000 in 1999. The increase in 1999
resulted primarily from the investment of proceeds from our Series B convertible preferred stock financing in 1999.

Liquidity and Capital Resources

From our inception through March 2000, we financed our operations primarily through the sale of preferred equity securities. In total, we raised
approximately $15.5 million, net of fees and expenses, through the sale of preferred equity securities. In March 2000, we closed our initial public offering with proceeds, net of
underwriting fees and offering expenses, of approximately $65.7 million. In the past, we have also utilized available financing for the purchase of capital equipment.

As
of December 31, 2000, we had cash and cash equivalents of $13.1 million and investments in marketable securities of $68.2 million and an accumulated deficit of
$20.8 million.

Net
cash provided by operating activities was $7.7 million in 2000 compared to net cash used in operating activities of $422,000 in 1999 and $3.2 million in 1998. The
increase in cash provided by operating activities in 2000 is primarily due to interest earnings on our cash invested and an increase in our subscriptions (which are initially recorded as deferred
revenue). In 1999 and 1998, cash used in operations was primarily the result of our net losses and increases in accounts receivable, partially offset by increases in deferred revenue.

Net
cash used in investing activities was $70.3 million in 2000 compared to $1.7 million in 1999 and $802,000 in 1998. The relative increase in cash used in investing
activities in 2000 is primarily due to purchases of marketable securities using proceeds of our initial public offering in March 2000. In 1999 and 1998, cash used in investing activities
consisted primarily of capital expenditures, related to our investments in computer equipment and facilities, which were required to support our business expansion.

Net
cash provided by financing activities was $64.9 million in 2000 compared to $11.1 million in 1999 and $5.6 million in 1998. The increase in cash provided by
financing activities in 2000 was primarily due to net proceeds of $65.7 million from the completion in March 2000 of our initial public offering, reduced by $1.5 million of
repayments of our outstanding equipment financing notes payable in the second quarter of 2000. In 1999, cash provided by financing activities consisted primarily of $9.8 million received from
the sale of Series B Convertible Preferred Stock and $1.3 million in

19

---

proceeds from borrowings. In 1998, cash provided by financing activities consisted primarily of $5.7 million received from the sale of Series A Convertible Preferred Stock, reduced by
repayments of notes payable.

In
June 2000 we entered into a loan and security agreement with a bank for a credit facility of $1.5 million. At December 31, 2000 we had $1.0 million
available for drawing under this facility and $500,000 set aside for existing or future letters of credit. We have operating lease commitments of $1.6 million expiring at various dates through
August 2003.

We
believe that our cash and cash equivalents balances, investments in marketable securities and funds available under our existing credit facilities will be sufficient to satisfy our
cash requirements for at least the next 12 months. We intend to continue to invest our cash in excess of current operating requirements in interest bearing, investment-grade securities. If
existing cash is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain a larger credit facility. The sale of additional equity or
convertible debt securities would result in additional dilution to our shareholders. Additional debt would result in increased expenses and could result in covenants that would restrict our
operations. We have not made arrangements to obtain additional financing and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all.

Summarized Quarterly Data (Unaudited)

The following tables present unaudited quarterly financial information, for the eight quarters ended December 31, 2000. We believe this information
reflects all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of such information in accordance with generally accepted accounting
principles. The results for any quarter are not necessarily indicative of results for any future period. (In thousands, except per share data):

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter2000Net revenue

$
3,125

$
3,794

$
4,743

$
5,779Gross margin


2,506


3,130


4,063


5,035Loss from operations


(2,913
)

(2,801
)

(1,946
)

(2,048
)Net loss


(2,809
)

(1,583
)

(789
)

(766
)Basic and diluted loss per share(1)


(0.32
)

(0.08
)

(0.04
)

(0.04
)1999Net revenue

$
1,667

$
1,934

$
2,330

$
2,716Gross margin


1,144


1,407


1,763


2,059Loss from operations


(1,526
)

(2,313
)

(2,505
)

(3,135
)Net loss


(1,510
)

(2,395
)

(2,331
)

(3,018
)Basic and diluted loss per share(1)


(0.22
)

(0.33
)

(0.29
)

(0.36
)


---

20

---

FACTORS AFFECTING OUR OPERATING RESULTS

You should carefully consider the following information in addition to the other information in this report before you decide to purchase our common stock. The
risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our company. If any of these or other risks actually occur, the trading
price of our common stock could decline and you may lose all or part of your investment.

We have a history of losses and, because we expect our operating expenses to increase in the future, we may never achieve or maintain profitability.

We have experienced net losses in each of the last 19 fiscal quarters, and as of December 31, 2000, we had an accumulated deficit of
$20.8 million. We incurred net losses of $5.9 million, $9.3 million and $5.6 million for the years ended December 31, 2000, 1999 and 1998 respectively. We may
continue to incur significant net losses in the future and may be unable to achieve or maintain profitability unless our revenues increase at a greater rate than our operating expenses. We currently
expect our operating expenses to increase substantially, as we, among other things:



We
will need to significantly increase our revenues to achieve and maintain profitability. If we fail to increase revenues from subscription fees for Websense Enterprise, we will
continue to experience losses indefinitely. We also may fail to accurately estimate and assess our increased operating expenses as we grow. If our operating expenses exceed our expectations, our
financial performance will be adversely affected, which could cause the price of our common stock to decline.

We are an early-stage company with an unproven business model, which makes it difficult to evaluate our current business and future prospects.

We have only a limited operating history upon which to base an evaluation of our current business and future prospects. We began offering our employee Internet
management software in September 1996, but only since May 1998, when we released our first version of Websense Enterprise as a significant enhancement to our original product, have we
directed a majority of our focus on this market. We introduced the most recent version of Websense Enterprise in October 2000. As a result, the revenue and income potential of our business and
our market are unproven. In addition, we have very limited historical data with respect to subscription renewals because we sell subscriptions that range from one to three years in length and have
only been selling Websense Enterprise for less than three and one-half years. Further, because of our limited operating history and because the market for employee Internet management
products is relatively new and rapidly evolving, we have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant
business trends, which could harm our business. Before investing, you should consider an investment in our stock in light of the risks, uncertainties and difficulties frequently encountered by
early-stage companies in new and rapidly evolving markets such as ours. We may not be able to successfully address any or all of these risks. Failure to adequately do so could cause our business,
results of operations and financial condition to suffer.

21

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Because we expect to derive substantially all of our future revenue from subscription fees for Websense Enterprise, any failure of this product to satisfy customer demands or
to achieve more widespread market acceptance will seriously harm our business.

Substantially all of our revenues come from subscriptions for Websense Enterprise, and we expect this trend will continue for the foreseeable future.
Subscription revenues accounted for approximately 96% of our total revenues for the year ended December 31, 2000, 83% of our total revenues for the year ended December 31, 1999 and
approximately 36% for the year ended December 31, 1998. As a result, if for any reason revenues from Websense Enterprise decline or do not grow as rapidly as we anticipate, our operating
results and our business will be significantly impaired. If Websense Enterprise fails to meet the needs of our target customers, or if it does not compare favorably in price and performance to
competing products, our growth will be limited. We cannot assure you that Websense Enterprise will achieve continued market acceptance. Our future financial performance also will depend, in part, on
our ability to diversify our offerings by successfully developing, introducing and gaining customer acceptance of new products and enhanced versions of Websense Enterprise. We cannot assure you,
however, that we will be successful in achieving market acceptance of any new products that we develop or of enhanced versions of Websense Enterprise. Any failure or delay in diversifying our existing
offerings could harm our business, results of operations and financial condition.

The market for employee Internet management products is emerging, and if we are not successful in promoting awareness of the need for Websense Enterprise and of our Websense
brand, our growth may be limited.

Based on our experience with potential customers, we believe that many corporations are unaware of the existence or scope of problems caused by employee misuse
of the Internet. In addition, there may be a time-limited opportunity to achieve and maintain a significant share of the market for employee Internet management products due in part to the
emerging nature of this market and the substantial resources available to our existing and potential competitors. We spent approximately $3.5 million of our marketing communications resources
in 2000 to promote awareness of the problems caused by employee misuse of Internet access in the workplace, but we cannot assure you that we will be successful in this effort. If employers do not
recognize or acknowledge these problems, then the market for Websense Enterprise may develop more slowly than we expect, which could adversely affect our
operating results. Developing and maintaining awareness of our Websense brand is critical to achieving widespread acceptance of our existing and future employee Internet management products.
Furthermore, we believe that the importance of brand recognition will increase as competition in our market develops. Successful promotion of our Websense brand will depend largely on the
effectiveness of our marketing efforts and on our ability to develop reliable and useful products at competitive prices. If we fail to successfully promote our Websense brand, or if our expenses to
promote and maintain our Websense brand are greater than anticipated, our results of operations and financial condition could suffer.

Our future growth depends on our existing customers renewing and purchasing additional subscriptions to Websense Enterprise.

Our future success depends on achieving substantial revenue from customer renewals for subscriptions to Websense Enterprise. Subscriptions for Websense
Enterprise typically have a duration of 12, 24 or 36 months. Our customers have no obligation to renew their subscriptions upon expiration. We cannot assure you that we will generate
significant revenue from renewals. In order to maintain our revenues we must continue to sell renewal subscriptions.

Our
future success also depends on our ability to sell subscriptions to existing customers for additional employees within their respective organizations. We believe that
approximately 17% of our customers' employees are covered by Websense Enterprise. As a result, to increase our revenues we

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must sell our existing customers additional subscriptions for Websense Enterprise to get greater coverage of their workforces. This may require increasingly sophisticated sales efforts targeting
senior management and other management personnel associated with our customers' Internet infrastructure.

Because we recognize revenue from subscriptions for Websense Enterprise ratably over the term of the subscription, downturns in sales may not be immediately reflected in our
revenues.

We expect that a substantial majority of our future revenues will come from subscriptions to Websense Enterprise. Upon execution of a subscription agreement,
we invoice our customers for the full term of the subscription agreement. We then recognize revenue from customers over the terms of their subscription agreements which generally have a duration of
12, 24 or 36 months. As a result, a majority of revenues we recognize in each quarter is deferred revenue from subscription agreements entered into and paid for during previous quarters.
Because of this deferred revenue, the revenues we report in
any quarter or series of quarters may mask significant downturns in sales and the market acceptance of Websense Enterprise.

We may not be able to develop acceptable new products or enhancements to our existing products at a rate required by our rapidly changing market.

Our future success depends on our ability to develop new products or enhancements to our existing products that keep pace with rapid technological developments
and that address the changing needs of our customers. Although Websense Enterprise is designed to operate with a variety of network hardware and software platforms, we will need to continuously modify
and enhance Websense Enterprise to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We may not be successful in either developing such
products or timely introducing them to the market. In addition, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or
technologies, could increase our research and development expenses. The failure of our products to operate effectively with the existing and future network platforms and technologies will limit or
reduce the market for our products, result in customer dissatisfaction and seriously harm our business, results of operations and financial condition.

We must develop and expand our indirect sales channels to increase revenue and improve our operating results.

We currently sell our products both indirectly and directly; however, we intend to rely increasingly on our indirect sales channels. We depend on our indirect
sales channels, including value-added resellers, distributors, original equipment manufacturers and Internet service providers, to offer Websense Enterprise to a larger customer base than we can reach
through our direct sales efforts. We will need to expand our existing relationships and enter into new relationships to increase our current and future market share and revenue. We cannot assure you
that we will be able to maintain and expand our existing relationships or enter into new relationships, or that any new relationships will be available on commercially reasonable terms. If we are
unable to maintain and expand our existing relationships or enter into new relationships, we would lose customer introductions and co-marketing benefits and our operating results could
suffer.

Our reliance on indirect sales channels could result in reduced revenue growth because we have little control over our value-added resellers, distributors and original
equipment manufacturers.

Our indirect sales channels accounted for approximately 80% of our subscription revenues in 2000 and 71% in 1999. We anticipate that sales from our various
indirect sales channels, including value-added resellers, distributors, original equipment manufacturers, Internet service providers and others, will account for an increasing percentage of our total
revenues in future periods. None of these parties is obligated to continue selling our products or to make any purchases from us. Our ability to generate

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increased revenue depends significantly upon the ability and willingness of our indirect sales channels to market and sell our products to organizations worldwide. If they are unsuccessful in their
efforts, our operating results will suffer. We cannot control the level of effort these parties expend or the extent to which any of them will be successful in marketing and selling our products. Many
of our indirect sales channels also market and sell products that compete with Websense Enterprise. We may not be able to prevent these parties from devoting greater resources to support our
competitors' products.

We face increasing competition from better established companies that may have significantly greater resources, which could prevent us from increasing revenue or achieving
profitability.

The market for our products is intensely competitive and is likely to become even more so in the future. Increased competition could result in pricing
pressures, reduced sales, reduced margins or the failure of Websense Enterprise to achieve or maintain more widespread market acceptance, any of which would have a material adverse effect on our
business, results of operations and financial condition. Our current principal competitors include:



We
also face current and potential competition from vendors of Internet servers, operating systems and networking hardware, many of which now, or may in the future, develop and/or
bundle employee Internet management products with their products. We also compete against, and expect increased competition from, traditional network management software developers and Web management
service providers. Many of our current and potential competitors enjoy substantial competitive advantages, such as:



As
a result, they may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. For all of the
foregoing reasons, we may not be able to compete successfully against our current and future competitors.

Other vendors may develop products similar to ours for incorporation into their hardware or software, and thereby reduce demand for Websense Enterprise.

In the future, vendors of Internet-related hardware and software may enhance their products or develop separate products that include functions that are
currently provided by Websense Enterprise. If employee Internet management functions become standard features of Internet-related hardware or software, the demand for Websense Enterprise will
decrease. Furthermore, even if Websense Enterprise provides greater functionality and is more effective than the products offered by vendors of Internet-related hardware or software, potential
customers might accept this limited functionality in lieu of purchasing our Websense Enterprise.

Sales to customers outside the United States have accounted for a significant portion of our revenue, and we expect this trend to continue, which exposes us to risks inherent
in international sales.

We market and sell our products outside the United States through value-added resellers, distributors and other resellers. International sales represented
approximately 28% of our total revenues in 2000 and 21% in 1999. As a key component of our business strategy, we intend to expand

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our international sales. In addition to the risks associated with our domestic sales, our international sales are subject to the following risks:



Such
factors could have a material adverse effect on our future international sales. Any reduction in international sales, or our failure to further develop our international
distribution channels, could have
a material adverse effect on our business, results of operations and financial condition. Our international revenue is currently denominated in U.S. dollars. As a result, fluctuations in the value of
the U.S. dollar and foreign currencies may make Websense Enterprise more expensive for international customers, which could harm our business. We do not currently engage in currency hedging activities
to limit the risk of exchange rate fluctuation.

Negative economic conditions in the United States and in the other countries and geographic areas in which we offer our products may negatively impact our ability to achieve
and maintain profitability.

We have seen a rapid and increasingly severe economic downturn in the United States and in the other international markets in which we offer our products in
the first quarter of 2001. This downturn may impact our ability to reach profitability by:



In
addition, the economic downturn may force companies to prioritize expenditures and we cannot be sure that subscriptions to our products will be seen as necessary expenditures in a
slowing economy. There can be no certainty as to the degree or severity of the duration of this downturn. We also cannot predict the extent and timing, of the impact of the economic downturn in the
United States and in other countries and geographic regions in which we conduct our business.

We may need to raise additional funds in the future, which funds may not be available on acceptable terms or at all.

We expect that our operating expenses will increase substantially over at least the next 12 months. In addition, we may experience a material decrease
in liquidity due to unforeseen capital requirements or other events and uncertainties. As a result, we may need to raise additional funds, and such funds may not be available on favorable terms, if at
all. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our software applications or database, execute on our business plan,
take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. This may seriously harm our business, results of operations and financial condition.

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We may seek to raise additional funds, and additional funding may be dilutive to stockholders or impose operational restrictions.

An additional equity financing may be dilutive to our stockholders and debt financing, if available, may involve restrictive covenants, which may limit our
operating flexibility. If additional funds are raised through the issuance of equity securities, the percentage of ownership of our stockholders will be reduced. These stockholders may experience
additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.

Our common stock may not develop an active, liquid trading market.

We completed our initial public offering in March 2000. Prior to this offering, there was no public market for our common stock. We cannot predict
whether an active trading market in our common stock will develop or how liquid that market may become.

Our quarterly operating results may fluctuate significantly, and these fluctuations may cause our stock price to fall.

Our quarterly operating results have varied significantly in the past, and will likely vary in the future as the result of fluctuations in our operating
expenses. We expect that our operating expenses will increase substantially in the future as we expand our selling and marketing activities, increase our research and development efforts and hire
additional personnel. In addition, our operating expenses historically have fluctuated, and may continue to fluctuate in the future, as the result of the factors described below and elsewhere in this
annual report:



As
a result, it is possible that in some future periods, our results of operations may be below the expectations of current or potential investors. If this occurs, the price of our
common stock may decline.

The market price of our common stock is likely to be highly volatile and subject to wide fluctuations.

The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are
beyond our control, including:



In
addition, the market price of our common stock could be subject to wide fluctuations in response to:



26

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Further,
the stock market has experienced significant price and volume fluctuations that have particularly affected the market price of the stock of many Internet-related companies,
and that often have been unrelated or disproportionate to the operating performance of these companies. A number of publicly traded Internet-related companies have current market prices below their
initial public offering prices. Market fluctuations such as these may seriously harm the market price of our common stock. In the past, securities class action suits have been filed following periods
of market volatility in the price of a company's securities. If such an action was instituted, we would incur substantial costs and a diversion of management attention and resources, which would
seriously harm our business, results of operations and financial condition.

Future sales of our common stock may cause our stock price to decline.

The market price of our common stock could decline as a result of sales by our existing stockholders of a large number of shares of our common stock in the
market or the perception that such sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Our database categories and our process for classifying Web sites within those categories are subjective, and we may not be able to categorize Web sites in accordance with our
customers' expectations.

We may not succeed in accurately categorizing Internet content to meet our customers' expectations. We rely upon a combination of automated filtering
technology and human review to categorize Web sites in our proprietary database. Our customers may not agree with our determinations that particular Web sites should be included or not included in
specific categories of our database. In addition, it is possible that our filtering processes may place objectionable material in categories that are generally unrestricted by our users' Internet
access policies, which could result in employees having access to such material in the workplace. Any miscategorization could result in customer dissatisfaction and harm our reputation. Furthermore,
we select our categories based on Web site content we believe employers want to manage. We may not now, or in the future, succeed in properly identifying the categories of Web site content that
employers want to manage. Any failure to effectively categorize and filter Web sites according to our customers' expectations will impair the growth of our business and our efforts to increase brand
acceptance.

Our database may fail to keep pace with the rapid growth and technological change of the Internet.

The success of Websense Enterprise depends on the breadth and accuracy of our database. Although our database currently catalogs more than 1.6 million
Web sites, it contains only a fraction of the material available on the Internet. In addition, the total number of Web sites is growing rapidly, and we expect this rapid growth rate to continue in the
future. We cannot assure you that our database and database technologies will be able to keep pace with the growth in the number of Web sites, especially the growing number of Web sites containing
foreign languages. Further, the ongoing evolution of the Internet will require us to continually improve the functionality, features and reliability of our database. Because Websense Enterprise can
only manage access to Web sites included in our database, if our database does not contain a meaningful portion of relevant Web sites, the effectiveness of Websense Enterprise will be significantly
diminished. Any failure of our database to keep pace with the rapid growth and technological change of the Internet will impair the market acceptance of Websense Enterprise, which in turn will harm
our business, results of operations and financial condition.

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Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and establish our Websense brand.

Intellectual property is critical to our success, and we rely upon trademark, copyright and trade secret laws in the United States and other jurisdictions as
well as confidentiality procedures and contractual
provisions to protect our proprietary technology and our Websense brand. Any of our trademarks may be challenged by others or invalidated through administrative process or litigation. We currently
have no issued patents and may be unable to obtain patent protection in the future. In addition, any issued patents may not provide us with any competitive advantages, or may be challenged by third
parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade
secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual property rights as United
States laws, and mechanisms for enforcement of intellectual property rights may be inadequate. As a result, we cannot assure you that our means of protecting our proprietary technology and brands will
be adequate. Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. Any such infringement or misappropriation
could have a material adverse effect on our business, results of operations and financial condition.

We may be sued by third parties for alleged infringement of their proprietary rights.

The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation
based on allegations of patent infringement or other violations of intellectual property rights. As the number of entrants into our market increases, the possibility of an intellectual property claim
against us grows. Our technologies and products may not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be
time-consuming and expensive to litigate or settle, and could divert management attention from executing our business plan.

Our systems may be vulnerable to security risks or service disruptions that could harm our business.

Our servers are vulnerable to physical or electronic break-ins and service disruptions, which could lead to interruptions, delays, loss of data or
the inability to process customer requests. Such events could be very expensive to remedy, could damage our reputation and could discourage existing and potential customers from using our products. We
may experience break-ins in the future. Any such events could substantially harm our business, results of operations and financial condition.

Because
our products are complex and are deployed in a wide variety of complex network environments, they may have errors or defects that users identify after deployment, which could
harm our reputation and our business.

Products
as complex as ours frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found errors in
versions of Websense Enterprise, and we may find such errors in the future. The occurrence of errors could adversely affect sales of our products, divert the attention of engineering personnel from
our product development efforts and cause significant customer relations problems.

Evolving regulation of the Internet may affect us adversely.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. Such regulation is likely in the
areas of user privacy, pricing, content and quality of products and services. Taxation of Internet use or other charges imposed by government agencies or by private organizations for accessing the
Internet may also be imposed. Laws and regulations applying to the solicitation, collection or processing of personal or consumer information could affect our activities. Furthermore, any regulation
imposing fees for Internet use could result in a

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decline in the use of the Internet and the viability of Internet commerce, which could have a material adverse effect on our business, results of operations and financial condition.

The success of our business depends on the continued growth and acceptance of the Internet as a business tool.

Expansion in the sales of Websense Enterprise depends on the continued acceptance of the Internet as a communications and commerce platform for enterprises.
The Internet may not prove to be a viable commercial medium due to inadequate development of the necessary infrastructure, such as a reliable network backbone, or timely development of complementary
products, such as high-speed modems. Additionally, the Internet could lose its viability as a business tool due to delays in the development or adoption of new standards and protocols to
handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility, and quality-of-service. If the Internet does not
continue to become a widespread communications medium and commercial platform, the demand for Websense Enterprise could be significantly reduced, which could have a material adverse effect on our
business, results of operations and financial condition.

Our products create risks of potential negative publicity and legal liability.

Because customers rely on Websense Enterprise to provide employee Internet management, any significant defects or errors in our products may result in negative
publicity or legal claims. Negative publicity or legal claims could seriously harm our business, results of operations and financial condition. In addition, Websense Enterprise's capability to report
Internet data retrieval requests and the workstations from which they originated may result in negative publicity or legal claims based on potential privacy violations.

We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner.

Our success depends largely upon the continued services of our executive officers and other key management and development personnel. In particular, we rely on
John B. Carrington, our President, Chief Executive Officer and Chairman. We are also substantially dependent on the continued service of our existing engineering personnel because of the complexity of
our products and technologies. We do not have employment agreements with a majority of our executive officers, key management or development personnel and, therefore, they could terminate their
employment with us at any time without penalty. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees could seriously harm our
business, results of operations and financial condition. We cannot assure you that in such an event we would be able to recruit personnel to replace these individuals in a timely manner, or at all, on
acceptable terms.

Our recent growth has strained our existing personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth,
we may not be able to successfully implement our business plan.

We are currently experiencing a period of rapid growth in our operations, which has placed, and will continue to place, a significant strain on our management,
administrative, operational and financial infrastructure. Our future success will depend in part upon the ability of our senior management to manage growth effectively. This will require us to hire
and train additional personnel to manage our expanding operations. In addition, we will be required to continue to improve our operational, financial and management controls and our reporting systems
and procedures. If we fail to successfully manage our growth, we will be unable to execute our business plan.

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Because competition for our target employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our planned growth.

To execute our growth plan, we must attract and retain highly qualified personnel. We need to hire additional personnel in virtually all operational areas,
including selling and marketing, research and development, operations and technical support, customer service and administration. Competition for these personnel is intense, especially for engineers
with high levels of experience in designing and developing software and Internet-related products. We may not be successful in attracting and retaining qualified personnel. We have from time to time
in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with
which we compete for experienced personnel have greater resources than we have. If we fail to attract new personnel or retain and motivate our current personnel, our business and future growth
prospects could be severely harmed.

If we acquire any companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our
operating results. We may acquire or make investments in complementary companies, services and technologies in the future. We have not made any acquisitions or investments to date, and therefore our
ability as an organization to make acquisitions or investments is unproven.

Acquisitions and investments involve numerous risks, including:



In
addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted which could affect the market price of our stock. As
a result, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed.

Our executive officers, directors and principal stockholders own a large percentage of our voting stock and could delay or prevent a change in our corporate control or other
matters requiring stockholder approval, even if favored by our other stockholders.

As of December 31, 2000 our executive officers, directors and principal stockholders, and their respective affiliates, beneficially owned approximately 70% of
our outstanding common stock. These stockholders, if acting together, would be able to control substantially all matters requiring approval by
our stockholders, including the election of all directors and approval of significant corporate transactions.

It may be difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.

Some provisions of our certificate of incorporation and bylaws, as well as some provisions of Delaware law, may discourage, delay or prevent third parties from
acquiring us, even if doing so would be beneficial to our stockholders. For example, our certificate of incorporation provides for a classified board, with each board member serving a staggered
three-year term. It also provides that stockholders may not fill board vacancies, call stockholder meetings or act by written consent. Our bylaws further provide that advance written
notice is required prior to stockholder proposals. Each of these provisions makes it more difficult for stockholders to obtain control of our board or initiate actions that are opposed by the then
current board. Additionally, we have authorized preferred stock that is

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undesignated, making it possible for the board to issue preferred stock with voting or other rights and preferences that could impede the success of any attempted change of control. Delaware law also
could make it more difficult for a third party to acquire us. Section 203 of the Delaware General Corporation Law may have an anti-takeover effect with respect to transactions not
approved in advance by our board, including discouraging attempts that might result in a premium over the market price of the shares of common stock held by our stockholders

We do not intend to pay dividends.

Since we terminated our election to be treated as an "S" corporation in January 1998, we have not declared or paid any cash dividends on our common
stock. We currently intend to retain any future cash flows from operations to fund growth and, therefore, do not expect to pay any dividends in the foreseeable future.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Our market risk exposures are related to our cash, cash equivalents and investments. We invest our excess cash in highly liquid short-term
investments, commercial paper, corporate bonds, and mortgage-backed securities. These investments are not held for trading or other speculative purposes. Changes in
interest rates affect the investment income we earn on our investments and, therefore impact our cash flows and results of operations.

In
addition, we have a $1.5 million loan and security agreement with a financial institution. Interest on this credit facility was 9.75% at December 31, 2000. At
December 31, 2000 we had no advances outstanding under this credit facility. If we were to draw advances under this facility, changes in interest rates would affect the interest expense we
would pay and could, therefore, impact our cash flows and results of operations.

Item 8.  Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements on page F-1 below for a list of the financial statements being filed herein.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

PART III

Item 10.  Directors and Executive Officers of the Registrant

(a) Identification
of Directors. Information concerning our directors is incorporated by reference from the section captioned "Proposal 1: Election of Directors"contained in our definitive Proxy Statement with
respect to our Annual Meeting of Stockholders to be
filed with the Commission no later than 120 days after the end of the fiscal year ended December 31, 2000.

(b) Identification
of Executive Officers. Information concerning our executive officers is set forth under the section captioned"Executive
Officers"in Part I of this report.

(c) Compliance
with Section 16(a) of the Exchange Act. Information concerning compliance with Section 16(a) of the Exchange Act is incorporated by
reference from the section captioned"Section 16(a) Beneficial Ownership Reporting Compliance"contained in our Proxy Statement.

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Item 11.  Executive Compensation

The information required by item 11 of Form 10-K is incorporated by reference from the information contained in the section captioned "Executive Compensation and Other
Information"in our Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

The information required by item 12 is incorporated by reference from the information contained in the section captioned "Ownership of Securities"in our
Proxy Statement.

Item 13.  Certain Relationships and Related Transactions

The information required by item 13 is incorporated by reference from the information contained in the section captioned"Certain
Relationships and Related Transactions"in our Proxy Statement.

PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K



Page
NumberReport of Ernst & Young LLP, Independent Auditors

F-2Consolidated Balance Sheets at December 31, 2000 and 1999

F-3Consolidated Statements of Operations for 2000, 1999 and 1998

F-4Consolidated Statements of Stockholders' Equity for 2000, 1999 and 1998

F-5Consolidated Statements of Cash Flows for 2000, 1999 and 1998

F-6Notes to Consolidated Financial Statements

F-7Schedule II Valuation and Qualifying Accounts

II-1


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(3) See
Exhibits below for all Exhibits being filed or incorporated by reference herein.

|Exhibits |     |                                                                                                                                        
|-------- | --- | ---------------------------------------------------------------------------------------------------------------------------------------
|3.1      | (1) | Amended and Restated Certificate of Incorporation                                                                                      
|3.2      | (1) | Restated Bylaws                                                                                                                        
|4.1      | (1) | Specimen Stock Certificate of Websense, Inc.                                                                                           
|10.1     | (1) | Amended and Restated Registration Rights Agreement dated June 9, 1999                                                                  
|10.2     | (1) | Form of Subscription Agreement regarding Series B Preferred Stock                                                                      
|10.3     | (1) | Warrant to Purchase Common Stock between Websense, Inc. and Alps System Integration Co., Ltd., dated April 15, 1999                    
|10.4     | (1) | Form of Warrant to Purchase Common Stock between Websense, Inc. and entities listed on Schedule A attached thereto, dated July 30, 1999
|10.5     | (1) | Employment Agreement by and between Websense, Inc. and John B. Carrington, dated May 10, 1999                                          
|10.6     | (1) | Employment Agreement by and between Websense, Inc. and Douglas C. Wride, dated June 11, 1999                                           
|10.7     | (1) | Lease Agreement between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated June 21, 1999, as amended                             
|10.8     | (1) | 1998 Equity Incentive Plan                                                                                                             
|10.9     | (1) | Standard Terms and Conditions Relating to Incentive Stock Option Under the 1998 Equity Incentive Plan                                  
|10.10    | (1) | 2000 Stock Incentive Plan                                                                                                              
|10.11    | (1) | 2000 Stock Incentive Plan, Notice of Grant of Stock Option                                                                             
|10.12    | (1) | 2000 Stock Incentive Plan, Form of Incentive Stock Option Agreement                                                                    
|10.13    | (1) | 2000 Employee Stock Purchase Plan                                                                                                      
|10.14    | (1) | Form of Indemnification Agreement between Websense, Inc. and its directors                                                             
|10.15    | (1) | Form of Indemnification Agreement between Websense, Inc. and its officers                                                              
|10.16    |     | Lease Agreement between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated February 12, 2000                                     
|10.17    |     | First Amendment to Lease Agreement between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated June 2, 2000                       
|23.1     |     | Consent of Ernst & Young LLP, Independent Auditors                                                                                     
|24.1     |     | Power of Attorney (included on signature page)                                                                                         

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(b) Reports
on Form 8-K filed in the fourth quarter of 2000.

We
did not file any reports on Form 8-K during the quarter ended December 31, 2000.

SUPPLEMENTAL INFORMATION

No Annual Report to stockholders or proxy materials have been sent to stockholders as of the date of this report. The Annual Report to stockholders and proxy
material will be furnished to our stockholders subsequent to the filing of this report and we will furnish such material to the SEC at that time.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

| |  | WEBSENSE, INC.
| |  | --------------
| |  | By:           

POWER
OF ATTORNEY

KNOW
ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints John B. Carrington and Douglas C Wride, and each or any one of them, his
true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any
of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

|Signature                               |  | Title                                                                |  | Date          
|--------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
|                                        |  |                                                                      |  |               
|/s/JOHN B. CARRINGTONJohn B. Carrington |  | Chairman of the Board, President and Chief Executive Officer         |  | March 29, 2001
|/s/DOUGLAS C. WRIDEDouglas C. Wride     |  | Chief Financial Officer (principal financial and accounting officer) |  | March 29, 2001
|/s/ROBERT J. LOARIERobert J. Loarie     |  | Director                                                             |  | March 29, 2001
|/s/BRUCE T. COLEMANBruce T. Coleman     |  | Director                                                             |  | March 29, 2001
|/s/JOHN C. STISKAJohn C. Stiska         |  | Director                                                             |  | March 29, 2001
|/s/DONALD B. MILDERDonald B. Milder     |  | Director                                                             |  | March 29, 2001
|/s/GARY E. SUTTONGary E. Sutton         |  | Director                                                             |  | March 29, 2001

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WEBSENSE, INC.    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Index to Consolidated Financial Statements                                                           |  | F-1 
|Report of Ernst & Young LLP Independent Auditors                                                     |  | F-2 
|Consolidated Balance Sheets as of December 31, 2000 and 1999                                         |  | F-3 
|Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998           |  | F-4 
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 |  | F-5 
|Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998           |  | F-6 
|Notes to Consolidated Financial Statements                                                           |  | F-7 

F-1

---

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Websense, Inc.

We
have audited the accompanying consolidated balance sheets of Websense, Inc. as of December 31, 2000 and 1999 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Websense, Inc. at
December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

| |  | ERNST & YOUNG LLP
| |  | -----------------

San
Diego, California
January 19, 2001

F-2

---

WEBSENSE INC

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

|                                           |                                                                                                                                                                                | December 31,               |       
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------
|
|Assets                                     |                                                                                                                                                                                |                            |       
|Current assets:                            |                                                                                                                                                                                |                            |       
|                                           | Cash and cash equivalents                                                                                                                                                      |                            | $     
|                                           | Investments in marketable securities                                                                                                                                           |                            |       
|                                           | Accounts receivable, net of allowance for doubtful accounts of $125 and $253 at December 31, 2000 and 1999                                                                     |                            |       
|                                           | Accounts receivable from a related party                                                                                                                                       |                            |       
|                                           | Other current assets                                                                                                                                                           |                            |       
|                                           |                                                                                                                                                                                |                            |       
|                                           |                                                                                                                                                                                | Total current assets       |       
|Property and equipment, net                |                                                                                                                                                                                |                            | 2,793 
|Deposits and other assets                  |                                                                                                                                                                                |                            | 188   
|                                           |                                                                                                                                                                                |                            |       
|Total assets                               |                                                                                                                                                                                | $                          | 92,454
|                                           |                                                                                                                                                                                |                            |       
|Liabilities and stockholders' equity       |                                                                                                                                                                                |                            |       
|Current liabilities:                       |                                                                                                                                                                                |                            |       
|                                           | Accounts payable                                                                                                                                                               |                            | $     
|                                           | Accrued payroll and related benefits                                                                                                                                           |                            |       
|                                           | Other accrued expenses                                                                                                                                                         |                            |       
|                                           | Current portion of deferred revenue                                                                                                                                            |                            |       
|                                           | Long-term debt, current portion                                                                                                                                                |                            |       
|                                           |                                                                                                                                                                                |                            |       
|                                           |                                                                                                                                                                                | Total current liabilities  |       
|Long-term debt, less current portion       |                                                                                                                                                                                |                            |      
|Deferred revenue, less current portion     |                                                                                                                                                                                |                            | 7,936 
|Stockholders' equity:                      |                                                                                                                                                                                |                            |       
|                                           | Preferred stock-$0.01 par value, 5,000 shares authorized, zero issued and outstanding at December 31, 2000 and 1999                                                            |                            |       
|                                           | Convertible preferred stock-$0.01 par value, zero and 7,037 shares issued and outstanding at December 31, 2000 and 1999                                                        |                            |       
|                                           | Common stock$0.01 par value; 100,000 and 92,962 shares authorized at December 31, 2000 and 1999, 19,705 and 8,358 shares issued and outstanding at December 31, 2000 and 1999 |                            |       
|                                           | Additional paid-in capital                                                                                                                                                     |                            |       
|                                           | Deferred compensation                                                                                                                                                          |                            |       
|                                           | Accumulated deficit                                                                                                                                                            |                            |       
|                                           | Accumulated other comprehensive income                                                                                                                                         |                            |       
|                                           |                                                                                                                                                                                |                            |       
|                                           |                                                                                                                                                                                | Total stockholders' equity |       
|                                           |                                                                                                                                                                                |                            |       
|Total liabilities and stockholders' equity |                                                                                                                                                                                | $                          | 92,454
|                                           |                                                                                                                                                                                |                            |       

See
accompanying notes.

F-3

---

WEBSENSE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

|                     |                                                                                                                                                                                  | Years ended December 31, |       
|-------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------
|
|Revenues:            |                                                                                                                                                                                  |                          |       
|                     | Subscriptions                                                                                                                                                                    |                          | $     
|                     | Other products and services                                                                                                                                                      |                          |       
|                     |                                                                                                                                                                                  |                          |       
|                     |                                                                                                                                                                                  | Total revenues           |       
|Cost of revenues:    |                                                                                                                                                                                  |                          |       
|                     | Subscriptions                                                                                                                                                                    |                          |       
|                     | Other products and services                                                                                                                                                      |                          |       
|                     |                                                                                                                                                                                  |                          |       
|                     |                                                                                                                                                                                  | Total cost of revenues   |       
|                     |                                                                                                                                                                                  |                          |       
|Gross margin         |                                                                                                                                                                                  |                          | 14,734
|Operating expenses:  |                                                                                                                                                                                  |                          |       
|                     | Selling and marketing (exclusive of $589 and $230 for the years ended December 31, 2000 and 1999 respectively reported below as amortization of stock-based compensation)        |                          |       
|                     | Research and development (exclusive of $359 and $256 for the years ended December 31, 2000 and 1999 respectively reported below as amortization of stock-based compensation)     |                          |       
|                     | General and administrative (exclusive of $990 and $1,336 for the years ended December 31, 2000 and 1999 respectively reported below as amortization of stock-based compensation) |                          |       
|                     | Amortization of stock-based compensation                                                                                                                                         |                          |       
|                     |                                                                                                                                                                                  |                          |       
|                     |                                                                                                                                                                                  | Total operating expenses |       
|                     |                                                                                                                                                                                  |                          |       
|Loss from operations |                                                                                                                                                                                  |                          | (9,708
|Interest income, net |                                                                                                                                                                                  |                          | 3,761 
|                     |                                                                                                                                                                                  |                          |       
|Net loss             |                                                                                                                                                                                  | $                        | (5,947
|                     |                                                                                                                                                                                  |                          |       
|Net loss per share:  |                                                                                                                                                                                  |                          |       
|                     | Basic and diluted net loss per share                                                                                                                                             |                          | $     
|                     |                                                                                                                                                                                  |                          |       
|                     | Weighted average shares- basic and diluted                                                                                                                                       |                          |       
|                     |                                                                                                                                                                                  |                          |       

See
accompanying notes.

F-4

---



WEBSENSE, INC.    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY    (in thousands)

|                                                                                                                  |  | Convertible
preferred stock |   |   |     |   |        |  |   |     |  |   |        |   |   |        |  
|----------------------------------------------------------------------------------------------------------------- |  | --------------------------- | - | - | --- | - | ------ |  | - | --- |  | - | ------ | - | - | ------ | -
|
|
|
|Balance at December 31, 1997                                                                                      |  |                            |   | $ |    |   | 7,000  |  | $ | 70  |  | $ | 139    |   | $ |       |  
|Transfer of accumulated deficit to additional paid-in capital upon conversion from S corporation to C corporation |  |                            |   |   |    |   |       |  |   |    |  |   | (1,549 | ) |   |       |  
|Preferred stock issued for cash, net of offering costs of $269                                                    |  | 3,704                       |   |   | 37  |   |       |  |   |    |  |   | 5,695  |   |   |       |  
|Net loss and comprehensive loss                                                                                   |  |                            |   |   |    |   |       |  |   |    |  |   |       |   |   |       |  
|                                                                                                                  |  |                             |   |   |     |   |        |  |   |     |  |   |        |   |   |        |  
|Balance at December 31, 1998                                                                                      |  | 3,704                       |   |   | 37  |   | 7,000  |  |   | 70  |  |   | 4,285  |   |   |       |  
|Preferred stock issued for cash, net of offering costs of $185                                                    |  | 3,333                       |   |   | 33  |   |       |  |   |    |  |   | 9,782  |   |   |       |  
|Issuance of common stock upon exercise of options                                                                 |  |                            |   |   |    |   | 1,090  |  |   | 11  |  |   | 349    |   |   |       |  
|Issuance of common stock upon exercise of warrant                                                                 |  |                            |   |   |    |   | 250    |  |   | 3   |  |   |       |   |   |       |  
|Issuance of warrant in connection with the termination of an exclusive distributor agreement                      |  |                            |   |   |    |   |       |  |   |    |  |   | 37     |   |   |       |  
|Issuance of common stock for services                                                                             |  |                             |   |   |     |   | 17     |  |   |    |  |   | 28     |   |   |        |  
|Issuance of common stock options for services                                                                     |  |                            |   |   |    |   |       |  |   |    |  |   | 48     |   |   |       |  
|Deferred compensation                                                                                             |  |                            |   |   |    |   |       |  |   |    |  |   | 4,407  |   |   | (4,407 | )
|Amortization of deferred compensation                                                                             |  |                            |   |   |    |   |       |  |   |    |  |   |       |   |   | 1,822  |  
|Net loss and comprehensive loss                                                                                   |  |                            |   |   |    |   |       |  |   |    |  |   |       |   |   |       |  
|                                                                                                                  |  |                             |   |   |     |   |        |  |   |     |  |   |        |   |   |        |  
|Balance at December 31, 1999                                                                                      |  | 7,037                       |   |   | 70  |   | 8,357  |  |   | 84  |  |   | 18,936 |   |   | (2,585 | )
|Issuance of common stock, net of offering costs of $6,281                                                         |  |                            |   |   |    |   | 4,000  |  |   | 40  |  |   | 65,680 |   |   |       |  
|Conversion of preferred stock to common stock                                                                     |  | (7,037                      | ) |   | (70 | ) | 7,037  |  |   | 70  |  |   |       |   |   |       |  
|Issuance of common stock upon exercise of options                                                                 |  |                            |   |   |    |   | 219    |  |   | 2   |  |   | 101    |   |   |       |  
|Issuance of common stock upon exercise of warrant                                                                 |  |                            |   |   |    |   | 55     |  |   | 1   |  |   | 15     |   |   |       |  
|Issuance of common stock for stock purchase plan                                                                  |  |                            |   |   |    |   | 37     |  |   |    |  |   | 567    |   |   |       |  
|Deferred compensation (net of forfeitures)                                                                        |  |                            |   |   |    |   |       |  |   |    |  |   | 812    |   |   | (812   | )
|Amortization of deferred compensation                                                                             |  |                            |   |   |    |   |       |  |   |    |  |   |       |   |   | 1,938  |  
|Comprehensive income (loss):                                                                                      |  |                             |   |   |     |   |        |  |   |     |  |   |        |   |   |        |  
|Net loss                                                                                                          |  |                            |   |   |    |   |       |  |   |    |  |   |       |   |   |       |  
|Unrealized gain on securities available for sale                                                                  |  |                            |   |   |    |   |       |  |   |    |  |   |       |   |   |       |  
|                                                                                                                  |  |                             |   |   |     |   |        |  |   |     |  |   |        |   |   |        |  
|Comprehensive loss                                                                                                |  |                             |   |   |     |   |        |  |   |     |  |   |        |   |   |        |  
|                                                                                                                  |  |                             |   |   |     |   |        |  |   |     |  |   |        |   |   |        |  
|Balance at December 31, 2000                                                                                      |  |                            |   | $ |    |   | 19,705 |  | $ | 197 |  | $ | 86,111 |   | $ | (1,459 | )
|                                                                                                                  |  |                             |   |   |     |   |        |  |   |     |  |   |        |   |   |        |  

See
accompanying notes.

F-5

---

WEBSENSE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

|                                                                                          |                                                            | Years ended December 31, |        
|----------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------ | -------
|
|Operating activities:                                                                     |                                                            |                          |        
|Net loss                                                                                  |                                                            | $                        | (5,947 
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                            |                          |        
|                                                                                          | Depreciation                                               |                          |        
|                                                                                          | Amortization of deferred compensation                      |                          |        
|                                                                                          | Issuance of common stock options and warrants for services |                          |        
|                                                                                          | Deferred revenue                                           |                          |        
|Changes in operating assets and liabilities:                                              |                                                            |                          |        
|                                                                                          | Accounts receivable                                        |                          |        
|                                                                                          | Deposits and other assets                                  |                          |        
|                                                                                          | Accounts payable                                           |                          |        
|                                                                                          | Accrued payroll and related benefits                       |                          |        
|                                                                                          | Other accrued expenses                                     |                          |        
|                                                                                          |                                                            |                          |        
|Net cash provided by (used in) operating activities                                       |                                                            |                          | 7,715  
|                                                                                          |                                                            |                          |        
|Investing activities:                                                                     |                                                            |                          |        
|Purchase of property and equipment                                                        |                                                            |                          | (2,126 
|Purchases of marketable securities                                                        |                                                            |                          | (70,213
|Maturities of marketable securities                                                       |                                                            |                          | 2,085  
|                                                                                          |                                                            |                          |        
|Net cash used in investing activities                                                     |                                                            |                          | (70,254
|                                                                                          |                                                            |                          |        
|Financing activities:                                                                     |                                                            |                          |        
|Repayments on notes payable                                                               |                                                            |                          | (1,497 
|Proceeds from issuance of note payable                                                    |                                                            |                          |       
|Proceeds from issuance of convertible preferred stock                                     |                                                            |                          |       
|Proceeds from exercise of stock options and warrants                                      |                                                            |                          | 120    
|Proceeds from issuance of common stock for stock purchase plan                            |                                                            |                          | 567    
|Proceeds from issuance of common stock                                                    |                                                            |                          | 65,720 
|                                                                                          |                                                            |                          |        
|Net cash provided by financing activities                                                 |                                                            |                          | 64,910 
|                                                                                          |                                                            |                          |        
|Increase in cash and cash equivalents                                                     |                                                            |                          | 2,371  
|Cash and cash equivalents at beginning of year                                            |                                                            |                          | 10,735 
|                                                                                          |                                                            |                          |        
|Cash and cash equivalents at end of year                                                  |                                                            | $                        | 13,106 
|                                                                                          |                                                            |                          |        
|Supplemental disclosures of cash flow information:                                        |                                                            |                          |        
|Interest paid                                                                             |                                                            | $                        | 48     
|                                                                                          |                                                            |                          |        
|Income taxes paid                                                                         |                                                            | $                        | 1      
|                                                                                          |                                                            |                          |        

See
accompanying notes.

F-6

---

WEBSENSE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2000

1.  Summary of Significant Accounting Policies

Description of Business

Websense, Inc. ("Websense" or the "Company") was founded in 1994. The Company provides employee Internet management products that enable businesses to
monitor, report and manage how their employees use the Internet. The Company's Websense Enterprise solution supports an organization's efforts to improve employee productivity, conserve network
bandwidth and mitigate potential legal liability.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary in the United Kingdom. Significant intercompany
accounts and transactions have been eliminated in consolidation. Activities performed by the subsidiary are a direct and integral extension of the Company's primary business.

Revenue Recognition

The Company has adopted American Institute of Certified Public Accountants Statement of Position No. 97-2, Software Revenue Recognition (SOP
97-2) as amended by SOP 98-9. These statements provide guidance for recognizing revenue related to sales by software vendors.

The
Company sells Websense Enterprise on a subscription basis. A subscription agreement is generally 12, 24 or 36 months in duration and for a fixed number of users. Upon
entering into the subscription agreement, the Company invoices customers. Generally, payment is due for the full term of the subscription within 30 days of invoicing. The Company recognizes
revenue on a straight-line basis over the term of the subscription agreement. The Company records amounts billed to customers in excess of recognizable revenue as deferred revenue in the
accompanying balance sheets.

The
Company also derives revenue from professional services and from resale of software and hardware. The Company recognizes revenue for these services and products upon their
completion or delivery.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company generally
invests its excess cash in debt instruments of the U.S. Treasury, government agencies and corporations with strong credit ratings. Such investments are made in accordance with the Company's investment
policy, which establishes guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are

F-7

---

periodically reviewed and modified if necessary to take advantage of trends in yields and interest rates. The Company has not experienced any losses on its cash and cash equivalents.

Marketable Securities

Marketable securities at December 31, 2000 consist of high-grade commercial paper, government securities, corporate bonds and certificates
of deposit. The Company currently classifies all investment securities as available for sale. Securities available for sale are reported at fair value, adjusted for other than temporary declines in
value. Unrealized holding gains and losses on securities available for sale are reported as a net amount in a separate component of stockholders' equity until realized. Realized gains and losses are
recorded based on the specific identification method.

Disclosures About Fair Value of Financial Instruments

The fair values of investment securities have been determined using values supplied by independent pricing services and are disclosed together with carrying
amounts in Note 2. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and debt approximates their fair values.

Concentration of Credit Risk

The Company sells its products to customers primarily in the United States, Canada, Europe and Asia. The Company maintains a reserve for potential credit
losses and historically such losses have been within management's estimates.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of three years.

Computer Software Costs

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, when significant the Company capitalizes costs incurred in the development of specific computer software products after establishment of technological feasibility and
marketability. There have been no such costs capitalized to date as the costs incurred during the period between technological feasibility to general release have not been significant.

Statement
of Position 98-1 "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) requires companies to capitalize
qualifying computer software costs, which are incurred during the application development stage and amortize them over the software's estimated
useful life. The Company adopted SOP 98-1 effective January 1, 1999 with no material effect on the financial statements.

F-8

---

Advertising Expenses

Advertising costs are expensed as incurred. Total advertising costs for the years ended December 31, 2000, 1999 and 1998 were $1.3 million,
$1.0 million and $1.5 million, respectively.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, requires the
use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the Company's employee stock options, is not less than the
fair value for the underlying stock on the date of grant, no compensation expense is recognized. At the time stock options were granted, the Company believed that the exercise price was at a price not
less than the fair value of the underlying common stock. In conjunction with the Company's initial public offering the Company reviewed its exercise prices and arrived at the deemed fair value for
each option grant during 1999. With respect to the 3,220,500 options granted during 1999 and through March 27, 2000, the Company has recorded deferred compensation of $5.4 million for
the difference between the exercise price per share and the deemed fair value per share at the grant date. The approximate weighted-average exercise price per share and the approximate
weighted-average deemed fair value per share for the options was $1.64 and $3.31,
respectively. Deferred stock compensation is recognized and amortized on an accelerated basis in accordance with Financial Accounting Standards Board Interpretation No. 28 over the vesting
period of the related options, generally four years.

Deferred
compensation for options and warrants granted to non-employees has been determined at the grant date in accordance with SFAS No. 123 and EITF
No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services, and has been recorded at the
fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Such deferred compensation is recognized over the period the related
services are rendered.

Comprehensive Income

The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which requires that all components of comprehensive income, including net income,
be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and
circumstances from non-owner sources. Net income (loss) and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and losses on investments,
shall be reported, net of their related tax effect, to arrive at comprehensive income (loss). Comprehensive loss for the years ended December 31, 1999 and 1998 did not differ from reported net
loss. Comprehensive loss for the year ended December 31, 2000 was ($5,922,000). The difference from reported net loss is unrealized gains on marketable securities of $25,000.

F-9

---

Net Loss Per Share

Websense computes net loss per share in accordance with SFAS No. 128, Earnings Per Share. Under the provisions of SFAS No. 128, basic net income
(loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period.

Dilutive
securities include options, warrants and preferred stock as if converted and restricted stock subject to vesting. Potentially dilutive securities totaling 3,247,000,
4,908,000 and 3,392,000 for the years ended December 31, 2000, 1999 and 1998, respectively, were excluded from historical basic and diluted earnings per share because of their
anti-dilutive effect.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and hedging activities. The Statement will require the recognition of all derivatives on the Company's balance sheet at fair
value. The Financial Accounting Standards Board has subsequently delayed implementation of the standard for the financial years beginning after June 15, 2000. The Company expects to adopt the
new Statement effective January 1, 2001. The impact on the Company's financial statements is not expected to be material.

In
March 2000, the FASB issued FASB Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion
No. 25". The Interpretation requires
that stock options that have been modified to effectively reduce the exercise price generally be accounted for as variable. The Company adopted the Interpretation prospectively as of July 1,
2000. The adoption of the Interpretation has not had a significant impact on the Company's financial statements.

2.  Marketable Securities

Investments in marketable securities consisted of the following at December 31, 2000 (in thousands):

Amortized
Cost

Unrealized
Gains

Unrealized
(Losses)

Estimated Fair
ValueCommercial paper

$
36,358

$


$
(14
)
$
36,344Government securities


17,493


11





17,504Corporate bonds


13,244


28





13,272Certificates of deposit


1,033








1,033$
68,128

$
39

$
(14
)
$
68,153


F-10

---

The
amortized cost and estimated fair value of the securities at December 31, 2000, by contractual maturity, are shown below (in thousands).

Amortized Cost

Fair ValueDue within 1 year

$
61,490

$
61,509Due between 1 and 2 years


6,637


6,644$
68,127

$
68,153


3.  Property and Equipment

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

December 31,Estimated Useful Lives2000

1999(in thousands)Computer hardware and software

3 years

$
3,725

$
2,147Office furniture and equipment

3 years

$
1,175

$
781Vehicles and other equipment

3 years

$
215

$
60$
5,115

$
2,988Accumulated depreciation



$
(2,322
)
$
(1,041
)$
2,793

$
1,947


4.  Debt

In June 1998, the Company entered into a loan and security agreement with Silicon Valley Bank for a $1,000,000 line of credit. In May of 1999 this line
was modified to provide only for fixed asset loans. Loans outstanding under this line were $553,000 on December 31, 1999. In October of 1999, the Company modified the May 1999 agreement
to provide an additional $1 million for fixed assets, loans outstanding under this additional line were $925,000 on December 31, 1999. In April 2000 the Company repaid the
outstanding amounts due under each of these lines of credit.

In
June 2000, the Company established an amended and restated loan and security agreement which provides a line of credit of $1,500,000 for working capital advances
("borrowings") and stand-by letters of credit. Advances bear interest at the bank's floating prime rate plus .25% (9.75% at December 31, 2000) The Company had no advances under the
line at December 31, 2000 and open letters of credit totaled $435,000.

Any
borrowings under the agreements with Silicon Valley Bank are collateralized by substantially all of the Company's assets, and are subject to financial and restrictive covenants.
The Company was in compliance with the financial and restrictive covenants at December 31, 2000.

F-11

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5.  Geographic Information

The following illustrates revenues attributed to customers located in the Company's country of domicile (the United States) and those attributed to foreign
customers (in thousands):

Years Ended December 31,2000

1999

1998United States

$
12,490

$
6,833

$
6,399Europe


3,007


1,156


276Asia\Pacific


1,617


494


200Latin America


327


164


44$
17,441

$
8,647

$
6,919


6.  Deferred Revenue

The Company will recognize revenues related to contracts in existence as of December 31, 2000 as follows (in thousands):

2001

$
16,5512002


5,5372003


1,9362004


3302005


133$
24,487


7.  Lease Commitments

The Company leases its facilities and certain equipment under non-cancellable operating leases, which expire at various dates through
August 2003. The facilities leases contain renewal options and are subject to cost increases.

Future
minimum annual lease payments under non-cancellable operating leases at December 31, 2000 are as follows (in thousands):

2001

$
8452002


6332003


111$
1,589


Rent
expense totaled $882,000, $690,000 and $516,000 for the years ended December 31, 2000, 1999 and 1998, respectively.

F-12

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8.  Stockholders' Equity

Convertible Preferred Stock

All previously issued preferred stock automatically converted into common stock concurrent with the closing of the Company's initial public offering of common
stock on March 27, 2000. The Company issued 7,037,036 shares of common stock upon conversion of Series A and Series B convertible preferred stock.

Warrants

The Company issued a warrant to purchase 250,000 shares of common stock at $0.01 per share in conjunction with bridge note financing consummated in
March 1998. The warrant was exercised in June 1999.

In
connection with the termination of an exclusive distributor agreement, the Company issued a warrant to a distributor to purchase up to 50,000 shares of common stock for $.05 per
share in March 1999. The Company recorded expense of $38,000 related to this issuance based on the estimated fair value of the warrant. The warrants were exercised in February 2000. This
distributor accounted for $1,046,000, $418,000 and $171,000 of the Company's revenues for the years ended December 31, 2000, 1999 and 1998, respectively.

In
connection with the Series B convertible preferred stock offering, the Company issued warrants to purchase 62,500 shares of common stock for $3.00 per share to financial
consultants. The warrants are exercisable in whole or in part at any time and from time to time until their expiration in June 2004. In April 2000 a warrant to purchase 4,688 shares of
common stock was exercised. The Company has reserved 57,812 shares of common stock for issuance upon exercise of the remaining warrants.

Stock Option Plan

In May 1998, the Board of Directors elected to replace the 1997 Stock Option/Stock Issuance Plan with the 1998 Stock Option/Stock Issuance Plan (the
"1998 Stock Plan") under which 4,600,000 shares of the Company's common stock are authorized for future issuance, and reserved for purchase upon
exercise of options granted. The 1998 Stock Plan provides for the grant of incentive and non-statutory options and issuances of common stock to employees, directors and consultants.

In
February 2000 the Board of Directors replaced the 1998 Stock Plan with the 2000 Stock Incentive Plan (the "2000 Plan") under which 4,500,000 shares of the Company's common
stock are authorized for future issuance, and reserved for purchase upon exercise of options granted. In addition, the 2000 Plan provides for automatic annual increases in the number of shares
reserved for issuance thereunder (beginning in 2001) equal to the lesser of (i) 4% of the Company's outstanding shares on the last business day in December of the calendar year immediately
preceding or (ii) 1,500,000 shares.

The
2000 Plan provides for the grant of options to the Company's directors, officers, employees and consultants. The 2000 Plan provides for the grant of incentive and nonstatutory
stock options and rights to purchase stock to employees, directors or consultants of the Company. The 2000 Plan provides that incentive stock options will be granted only to employees and are subject
to certain limitations as to fair value during a calendar year.

F-13

---

The exercise price of incentive stock options must equal at least the fair value on the date of grant and the exercise price of non-statutory stock options and the
issuance price of common stock under the stock issuance program may be no less than 85% of the fair value on the date of grant or issuance. The options are exercisable for a period of up to ten years
after the date of grant and generally vest 25% one year from date of grant and ratably each month thereafter for a period of 36 months. Unvested common shares obtained through early exercise of
options are subject to repurchase by the Company at the original issue price. To date only nonstatutory options have been granted under the 2000 Plan.

The
following table summarizes stock option activity under the 1998 and 2000 Stock Plans and related information through December 31, 2000:

Number of
Shares

Weighted
Average
Exercise PriceBalance at December 31, 1997

839,334

$
0.20Granted

976,435

$
0.20Cancelled

(124,334
)
$
0.20Balance at December 31, 1998

1,691,435

$
0.20Granted

3,060,500

$
0.91Exercised

(1,090,455
)
$
0.33Cancelled

(499,929
)
$
0.25Balance at December 31, 1999

3,161,551

$
0.83Granted

641,000

$
14.57Exercised

(220,269
)
$
0.47Cancelled

(174,097
)
$
1.99Balance at December 31, 2000

3,408,185

$
3.38


As
of December 31, 2000, 1999 and 1998 there were options to purchase 1,183,206, 331,326 and 561,473 shares exercisable at weighted average exercise prices of $.84, $.20 and
$.20 per share, respectively.

F-14

---

The following table summarizes all options outstanding and exercisable by price range as of December 31, 2000:

Options OutstandingWeighted Average
Remaining
Contractual Life
in Years



Options ExercisableRange of
Exercise Prices

Number of Shares

Weighted
Average
Exercise
Price

Number of
Shares

Weighted
Average
Exercise
Price$
.20-$.50

1,866,855

7.9

$
0.60

916,470

$
0.42$
0.75

425,917

8.4

$
0.75

106,426

$
0.75$
1.50-$3.00

440,913

8.7

$
2.22

121,790

$
2.23$
6.00-$7.00

109,000

9.0

$
6.55

13,520

$
0.76$
8.50-$34.25

565,500

9.4

$
15.44

25,000

$
0.383,408,185



$
3.38

1,183,206


The
Company repurchased 11,666 shares exercised under the 1998 Stock Plan through December 31, 1999 and recognized $1,750 of related expense for the difference between the fair
value and the price paid on the date repurchased.

Pro
forma information regarding net loss is required by SFAS 123 and has been determined as if the Company has accounted for its employee stock options and stock purchase plan
under the fair value method of SFAS 123. The fair value of each option grant prior to the Company's initial public offering in March 2000 was estimated on the date of grant using the
minimum value method with the following weighted-average assumptions; risk-free interest rate of 6%, dividend yield of 0% and a weighted average expected life of 5 years. The fair
value of each option grant subsequent to the Company's initial public offering in March 2000 was estimated on the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk free interest rate of 6%; dividend yield of 0%; volatility factor of 50%; and weighted-average expected life for the option of 5 years. For purposes of pro
forma disclosures, the estimated fair value of the options are amortized to expense over the
vesting period. The Company's adjusted pro forma information is as follows (in thousands, except per share amounts):

Years Ended December 31,2000

1999

1998Pro forma net loss

$
(6,263
)
$
(9,467
)
$
(5,634
)Pro forma basic and diluted net loss per share

$
(0.37
)
$
(1.28
)
$
(0.80
)


The
weighted average fair value of options granted during 2000, 1999 and 1998 were $8.85, $1.20 and $.04 per share, respectively.

The
pro forma effect on net loss for 2000, 1999 and 1998 is not likely to be representative of the pro forma effect on reported net income or loss in future years because these
amounts reflect less than four years of vesting.

F-15

---

Employee Stock Purchase Plan

In February 2000, the Company adopted the 2000 Employee Stock Purchase Plan. A total of 250,000 shares of common stock have been reserved for issuance
under the purchase plan. In addition, the purchase plan provides for automatic annual increases in the number of shares reserved for issuance thereunder (beginning in 2001) equal to the lesser of
(i) 1% of the Company's outstanding shares on the last business day in December of the calendar year immediately preceding or (ii) 375,000 shares. The purchase plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. Under the purchase plan, the Board of Directors may authorize participation by
eligible employees, including officers, in periodic offerings following commencement of the purchase plan. The initial offering under the purchase plan commenced on March 28, 2000 and
terminates on April 30, 2002.

Unless
otherwise determined by the Board, employees are eligible to participate in the purchase plan provided they are employed for at least 20 hours per week and are
customarily employed for at least five months per calendar year. Employees who participate in an offering may have up to 15% of their earnings withheld pursuant to the purchase plan. The amount
withheld is then used to purchase shares of common stock on specified dates. The price of common stock purchased pursuant to the plan will be equal to 85% of the lower of the fair market value of the
common stock at the commencement date of each offering period or the relevant purchase date. Employees may end their participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment.

Shares Reserved for Future Issuance

The following shares of common stock are reserved for future issuance as of December 31, 2000:

Stock options:Granted and outstanding

3,408,185Reserved for future grants

935,6204,343,805Warrants

57,8124,401,617


9.  Income Taxes

At December 31, 2000, the Company has federal and California net operating loss carryforwards of approximately $5,915,000 and $3,296,000, respectively.
The federal and California net operating loss
carryforwards will begin to expire in 2018 and 2003, respectively, unless previously utilized. At December 31, 2000, the Company had federal and California research and development credit
carryforwards of approximately $863,000 and $519,000, respectively, which will begin to expire in 2018 unless previously utilized.

F-16

---

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company's net operating loss and credit carryforwards may be limited as a result of a cumulative
change in ownership of more than 50% within a three year testing period.

The
components of the Company's deferred tax assets as of December 31, 2000 and 1999 are shown below. A valuation allowance has been recognized to offset the deferred tax
assets, as realization of such assets is uncertain.

December 31,2000

1999(in thousands)Deferred tax assets:Net operating loss carryforwards

$
2,260

$
1,976Research tax credit carryforwards


1,201


543Capitalized research and development


432


576Deferred revenue


5,075


2,786Deferred compensation





352Other


465


272Total deferred tax assets


9,433


6,505Valuation allowance for deferred tax assets


(9,433
)

(6,505
)Net deferred tax assets

$


$



10.  Employee Retirement Plan

Effective May 1, 1997, the Company established a 401(k) defined contribution retirement plan (the "401(k) Plan") covering substantially all employees.
The 401(k) Plan provides for voluntary employee contributions from 1% to 20% of annual compensation, as defined, and does not currently provide for matching contributions from the Company.

F-17

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SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

WEBSENSE, INC.
(in thousands)

|A                                                     |                                 | B |     | C |     | D |   | E
|----------------------------------------------------- | ------------------------------- | - | --- | - | --- | - | - | -
|
|
|YEAR ENDED DECEMBER 31, 1998                          |                                 |   |     |   |     |   |   |  
|Reserves and allowances deducted from asset accounts: |                                 |   |     |   |     |   |   |  
|                                                      | Allowance for doubtful accounts |   | 25  |   | 72  |   |  |  
|YEAR ENDED DECEMBER 31, 1999                          |                                 |   |     |   |     |   |   |  
|Reserves and allowances deducted from asset accounts: |                                 |   |     |   |     |   |   |  
|                                                      | Allowance for doubtful accounts |   | 27  |   | 236 |   |  |  
|YEAR ENDED DECEMBER 31, 2000                          |                                 |   |     |   |     |   |   |  
|Reserves and allowances deducted from asset accounts: |                                 |   |     |   |     |   |   |  
|                                                      | Allowance for doubtful accounts |   | 253 |   | 128 |   |  |  

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II-1

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EXHIBIT INDEX

|3.1   | (1) | Amended and Restated Certificate of Incorporation                                                                                      
|----- | --- | ---------------------------------------------------------------------------------------------------------------------------------------
|3.2   | (1) | Restated Bylaws                                                                                                                        
|4.1   | (1) | Specimen Stock Certificate of Websense, Inc.                                                                                           
|10.1  | (1) | Amended and Restated Registration Rights Agreement dated June 9, 1999                                                                  
|10.2  | (1) | Form of Subscription Agreement regarding Series B Preferred Stock                                                                      
|10.3  | (1) | Warrant to Purchase Common Stock between Websense, Inc. and Alps System Integration Co., Ltd., dated April 15, 1999                    
|10.4  | (1) | Form of Warrant to Purchase Common Stock between Websense, Inc. and entities listed on Schedule A attached thereto, dated July 30, 1999
|10.5  | (1) | Employment Agreement by and between Websense, Inc. and John B. Carrington, dated May 10, 1999                                          
|10.6  | (1) | Employment Agreement by and between Websense, Inc. and Douglas C. Wride, dated June 11, 1999                                           
|10.7  | (1) | Lease Agreement between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated June 21, 1999, as amended                             
|10.8  | (1) | 1998 Equity Incentive Plan                                                                                                             
|10.9  | (1) | Standard Terms and Conditions Relating to Incentive Stock Option Under the 1998 Equity Incentive Plan                                  
|10.10 | (1) | 2000 Stock Incentive Plan                                                                                                              
|10.11 | (1) | 2000 Stock Incentive Plan, Notice of Grant of Stock Option                                                                             
|10.12 | (1) | 2000 Stock Incentive Plan, Form of Incentive Stock Option Agreement                                                                    
|10.13 | (1) | 2000 Employee Stock Purchase Plan                                                                                                      
|10.14 | (1) | Form of Indemnification Agreement between Websense, Inc. and its directors                                                             
|10.15 | (1) | Form of Indemnification Agreement between Websense, Inc. and its officers                                                              
|10.16 |     | Lease Agreement between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated February 12, 2000                                     
|10.17 |     | First Amendment to Lease Agreement between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated June 2, 2000                       
|23.1  |     | Consent of Ernst & Young LLP, Independent Auditors                                                                                     
|24.1  |     | Power of Attorney (included on signature page)                                                                                         

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