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

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FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2001.

|/ / | 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 No.)10240 Sorrento Valley Road
San Diego, CA 92121
(858) 320-8000(Address, including zip code and telephone number, of principal executive offices)


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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 / /

The
number of shares of the Registrant's common stock, $0.01 par value, outstanding as of May 2, 2001 was 19,878,283.

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Websense, Inc.  Table of Contents

|                              |         |                                                                                          |                                                                                       | Page
|----------------------------- | ------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----
|Part I. Financial Information |         |                                                                                         
|                              | Item 1. |                                                                                          | Financial Statements (unaudited)                                                      |     
|                              |         | Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000                   |                                                                                       | 3   
|                              |         | Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 |                                                                                       | 4   
|                              |         | Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2001 |                                                                                       | 5   
|                              |         | Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 |                                                                                       | 6   
|                              |         | Notes to Consolidated Financial Statements                                               |                                                                                       | 7   
|                              | Item 2. |                                                                                          | Management's Discussion and Analysis of Financial Condition and Results of Operations |     
|                              |         | Risks and Uncertainties                                                                  |                                                                                       | 14  
|                              | Item 3. |                                                                                          | Quantitative and Qualitative Disclosures About Market Risk                            |     
|Part II. Other Information    |         |                                                                                         
|                              | Item 1. |                                                                                          | Legal Proceedings                                                                     |     
|                              | Item 2. |                                                                                          | Changes in Securities and Use of Proceeds                                             |     
|                              | Item 3. |                                                                                          | Defaults upon Senior Securities                                                       |     
|                              | Item 4. |                                                                                          | Submission of Matters to a Vote of Security Holders                                   |     
|                              | Item 5. |                                                                                          | Other Information                                                                     |     
|                              | Item 6. |                                                                                          | Exhibits and Reports on Form 8-K                                                      |     
|Signatures                    |         | 27                                                                                      

2

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Part IFinancial InformationItem 1. Financial Statements (unaudited)

Websense, Inc.  Consolidated Balance Sheets  (in thousands)

|                                                        |                                                             | March 31,
2001             |        | December 31,
2000 |       
|------------------------------------------------------- | ----------------------------------------------------------- | -------------------------- | ------ | ----------------- | ------
|
|Assets                                                  |                                                             |                            |        |                   |       
|Current assets:                                         |                                                             |                            |        |                   |       
|                                                        | Cash and cash equivalents                                   |                            | $      | 4,667             |       
|                                                        | Investments in marketable securities                        |                            |        | 79,038            |       
|                                                        | Accounts receivable, net of allowance for doubtful accounts |                            |        | 7,042             |       
|                                                        | Accounts receivable from a related party                    |                            |        | 1,134             |       
|                                                        | Other current assets                                        |                            |        | 1,328             |       
|                                                        |                                                             |                            |        |                   |       
|                                                        |                                                             | Total current assets       |        |                   | 93,209
|Property and equipment, net of accumulated depreciation |                                                             |                            | 2,728  |                   |       
|Deposits and other assets                               |                                                             |                            | 179    |                   |       
|                                                        |                                                             |                            |        |                   |       
|Total assets                                            |                                                             | $                          | 96,116 |                   | $     
|                                                        |                                                             |                            |        |                   |       
|Liabilities and stockholders' equity                    |                                                             |                            |        |                   |       
|Current liabilities:                                    |                                                             |                            |        |                   |       
|                                                        | Accounts payable                                            |                            | $      | 485               |       
|                                                        | Accrued payroll and related benefits                        |                            |        | 1,904             |       
|                                                        | Other accrued expenses                                      |                            |        | 1,707             |       
|                                                        | Deferred revenue, current portion                           |                            |        | 19,452            |       
|                                                        |                                                             |                            |        |                   |       
|                                                        |                                                             | Total current liabilities  |        |                   | 23,548
|Deferred revenue, less current portion                  |                                                             |                            | 8,448  |                   |       
|Stockholders' equity:                                   |                                                             |                            |        |                   |       
|                                                        | Common stock                                                |                            |        | 198               |       
|                                                        | Additional paid-in capital                                  |                            |        | 86,130            |       
|                                                        | Deferred compensation                                       |                            |        | (1,103            | )     
|                                                        | Accumulated deficit                                         |                            |        | (21,197           | )     
|                                                        | Accumulated other comprehensive income                      |                            |        | 92                |       
|                                                        |                                                             |                            |        |                   |       
|                                                        |                                                             | Total stockholders' equity |        |                   | 64,120
|                                                        |                                                             |                            |        |                   |       
|Total liabilities and stockholders' equity              |                                                             | $                          | 96,116 |                   | $     
|                                                        |                                                             |                            |        |                   |       

See accompanying notes.

3

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Websense, Inc.  Consolidated Statements of Operations  (unaudited and in thousands, except per share amounts)

|                                     |                                          | Three Months Ended March 31, |       
|------------------------------------ | ---------------------------------------- | ---------------------------- | ------
|
|Revenues:                            |                                          |                              |       
|                                     | Subscriptions                            |                              | $     
|                                     | Other products and services              |                              |       
|                                     |                                          |                              |       
|                                     |                                          | Total revenues               |       
|                                     |                                          |                              |       
|Cost of revenues:                    |                                          |                              |       
|                                     | Subscriptions                            |                              |       
|                                     | Other products and services              |                              |       
|                                     |                                          |                              |       
|                                     |                                          | Total cost of revenues       |       
|                                     |                                          |                              |       
|Gross margin                         |                                          |                              | 6,044 
|                                     |                                          |                              |       
|Operating expenses:                  |                                          |                              |       
|                                     | Selling and marketing                    |                              |       
|                                     | Research and development                 |                              |       
|                                     | General and administrative               |                              |       
|                                     | Amortization of stock-based compensation |                              |       
|                                     |                                          |                              |       
|                                     |                                          | Total operating expenses     |       
|                                     |                                          |                              |       
|Loss from operations                 |                                          |                              | (1,447
|Interest income, net                 |                                          |                              | 1,060 
|                                     |                                          |                              |       
|Net loss                             |                                          | $                            | (387  
|                                     |                                          |                              |       
|Basic and diluted net loss per share |                                          | $                            | (0.02 
|                                     |                                          |                              |       
|Basic and diluted common shares      |                                          |                              | 19,774
|                                     |                                          |                              |       

See accompanying notes.

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Websense, Inc.  Consolidated Statement of Stockholders' Equity  (unaudited and in thousands)

|                                                  |  | Common Stock |  |   |     |  |   |        |   | Accumulated
other
comprehensive
income |        |   |  
|------------------------------------------------- |  | ------------ |  | - | --- |  | - | ------ | - | -------------------------------------- | ------ | - | -
|
|
|Balance at December 31, 2000                      |  | 19,705       |  | $ | 197 |  | $ | 86,111 |   | $                                      | (1,459 | ) | $
|Issuance of common stock upon exercise of options |  | 137          |  |   | 1   |  |   | 175    |   |                                        |       |   |  
|Deferred compensation (net of forfeitures)        |  |             |  |   |    |  |   | (156   | ) |                                        | 156    |   |  
|Amortization of deferred compensation             |  |             |  |   |    |  |   |       |   |                                        | 200    |   |  
|Net loss                                          |  |             |  |   |    |  |   |       |   |                                        |       |   |  
|Unrealized gain on securities available for sale  |  |             |  |   |    |  |   |       |   |                                        |       |   |  
|                                                  |  |              |  |   |     |  |   |        |   |                                        |        |   |  
|Comprehensive net loss                            |  |             |  |   |    |  |   |       |   |                                        |       |   |  
|                                                  |  |              |  |   |     |  |   |        |   |                                        |        |   |  
|Balance at March 31, 2001                         |  | 19,842       |  | $ | 198 |  | $ | 86,130 |   | $                                      | (1,103 | ) | $
|                                                  |  |              |  |   |     |  |   |        |   |                                        |        |   |  

See accompanying notes.

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Websense, Inc.  Consolidated Statements of Cash Flows  (unaudited and in thousands)

|                                                                                |                                       | Three Months
Ended March 31, |        
|------------------------------------------------------------------------------- | ------------------------------------- | ---------------------------- | -------
|
|Operating activities:                                                           |                                       |                              |        
|Net loss                                                                        |                                       | $                            | (387   
|Adjustments to reconcile net loss to net cash provided by operating activities: |                                       |                              |        
|                                                                                | Depreciation                          |                              |        
|                                                                                | Deferred revenue                      |                              |        
|                                                                                | Amortization of deferred compensation |                              |        
|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 operating activities                                       |                                       |                              | 2,461  
|                                                                                |                                       |                              |        
|Investing activities:                                                           |                                       |                              |        
|Purchase of equipment                                                           |                                       |                              | (258   
|Purchase of marketable securities                                               |                                       |                              | (12,154
|Maturities of marketable securities                                             |                                       |                              | 1,336  
|Deposits and other assets                                                       |                                       |                              |       
|                                                                                |                                       |                              |        
|Net cash used in investing activities                                           |                                       |                              | (11,076
|                                                                                |                                       |                              |        
|Financing activities:                                                           |                                       |                              |        
|Repayments of notes payable                                                     |                                       |                              |       
|Proceeds from issuance of common stock                                          |                                       |                              |       
|Proceeds from exercise of stock options and warrant                             |                                       |                              | 176    
|                                                                                |                                       |                              |        
|Net cash provided by financing activities                                       |                                       |                              | 176    
|                                                                                |                                       |                              |        
|Increase (decrease) in cash and cash equivalents                                |                                       |                              | (8,439 
|Cash and cash equivalents at beginning of period                                |                                       |                              | 13,106 
|                                                                                |                                       |                              |        
|Cash and cash equivalents at end of period                                      |                                       | $                            | 4,667  
|                                                                                |                                       |                              |        
|Supplemental disclosures of cash flow information:                              |                                       |                              |        
|Interest paid                                                                   |                                       | $                            |       
|                                                                                |                                       |                              |        
|Increase in deferred compensation                                               |                                       | $                            |       
|                                                                                |                                       |                              |        

See accompanying notes.

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WEBSENSE, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United
States for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information or
footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary, which are of a normal and recurring
nature, for the fair presentation of our financial position and of the results for the interim periods presented.

These
financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2000, included in
Websense, Inc.'s Annual Report on Form 10-K reported to the Securities and Exchange Commission. Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2001. The balance sheet at December 31, 2000 has been derived
from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete
financial statements.

2. Net Loss Per Share

We compute 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 per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Diluted earnings
per share are required to be calculated to include the potentially dilutive effect of the conversion of outstanding stock options. Because we have a net loss for the periods presented the
inclusion of outstanding stock options would be anti-dilutive and therefore the weighted average shares used to calculate both basic and diluted loss per share are the same.

3. Amortization of Stock-based Compensation

For the three months ended March 31, 2001 and 2000, we recorded amortization of stock-based compensation of $200,000 and $633,000, respectively. The
allocation of the expense by operating expense category is as follows (in thousands):

Three Months Ended
March 31,2001

2000Selling and marketing

$
14

$
186Research and development


28


119General and administrative


158


328Total stock-based compensation

$
200

$
633


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5. Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative instruments on the Company's balance sheet at fair value. The FASB subsequently delayed implementation of the standard
for the financial years beginning after June 15, 2000. We adopted SFAS 133 effective January 1, 2001. As we do not engage in any hedging or derivative activities the adoption of
SFAS 133 did not have a material impact on our financial position or results of operations.

[Remainder
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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-Q 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", "Factors Affecting Our Operating Results" or "Risk Factors" and included herein and other reports and
filings made with the Securities and Exchange Commission.

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 January 2001. 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 monthly 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 a small portion of our revenues from professional services for the implementation of our products and from resale of hardware and software. We recognize revenues for
these services

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and products upon their completion or delivery. We expect these revenues to continue to decline as a percent of total revenues for the foreseeable future.

In
the first three months of 2001, we derived 34% of revenues from international sales compared to 29% in the first three months of 2000. 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 solutions through indirect (85% of revenue) and direct (15% of revenue) channels; our strategy is to increasingly rely on indirect sales channels. Domestically, we
sell solutions through more than 700 Value Added Resellers, or VARs, and through our direct sales force. Internationally, we distribute Websense Enterprise through more than 100 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.

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.

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Results of Operations

Three months ended March 31, 2001 compared to the three months ended March 31, 2000

The following table sets forth, as a percentage of total revenues, certain income data for the period indicated.

|                     |                                          | Three Months Ended
March 31, |   
|-------------------- | ---------------------------------------- | ---------------------------- | --
|
|Revenues:            |                                          |                              |   
|                     | Subscriptions                            |                              | 98
|                     | Other products and services              |                              | 2 
|                     |                                          |                              |   
|                     |                                          | Total revenues               |   
|                     |                                          |                              |   
|Cost of revenues:    |                                          |                              |   
|                     | Subscriptions                            |                              | 10
|                     | Other products and services              |                              | 2 
|                     |                                          |                              |   
|                     |                                          | Total cost of revenues       |   
|                     |                                          |                              |   
|Gross margin         |                                          | 88                           | % 
|                     |                                          |                              |   
|Operating expenses:  |                                          |                              |   
|                     | Selling and marketing                    |                              | 62
|                     | Research and development                 |                              | 26
|                     | General and administrative               |                              | 18
|                     | Amortization of stock-based compensation |                              | 3 
|                     |                                          |                              |   
|                     |                                          | Total operating expenses     |   
|Loss from operations |                                          | (21                          | )%
|Interest income, net |                                          | 15                           | % 
|                     |                                          |                              |   
|Net loss             |                                          | (6                           | )%
|                     |                                          |                              |   

Revenues

Subscriptions.Subscription revenue increased $3.7 million, or 126%, to $6.7 million in the first quarter
of 2001 from $3.0 million in the first quarter of 2000. Subscription revenue accounted for 98% of total revenues in the first quarter of 2001 compared to 95% in the first quarter of 2000. This
increase was primarily a result of the addition of new customers during the quarter as well as renewals by existing customers.

Other products and services.Other products and services revenue decreased $12,000, or 7%, to $150,000 in the first
quarter of 2001 from $162,000 in the first quarter of 2000. Other products and services revenue accounted for 2% of revenues in the first quarter of 2001 compared to 5% in the first quarter of 2000.
We expect this decline as a percentage of revenues to continue as we focus on selling our Websense Enterprise product.

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 $233,000 or 49% to $705,000 in the first quarter of 2001, from $472,000 in the first quarter of 2000.
This increase was primarily due to additional personnel added to our database and technical support groups. Costs of subscriptions, as a percentage of total revenue was 10% in the first quarter of

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2001 as compared to 15% in the first quarter of 2000. Cost of subscriptions are relatively fixed in nature and do not increase directly in proportion with increases in subscription revenue.

Cost of other products and services.Costs of other products and services consist primarily of the cost of resale
software and related hardware. Cost of other products and services decreased $35,000 or 24%, to $112,000 in the first quarter of 2001, from $147,000 in the first quarter of 2000. Cost of other
products
and services as a percentage of total revenue decreased to 2% in the first quarter of 2001 compared to 5% in the first quarter of 2000. This decrease is a result of a continuing focus on sales of
subscriptions to Websense Enterprise.

Gross Margin

Gross margin was $6.0 million, or 88% of revenues, for the first quarter 2001 compared to $2.5 million, or 80% of revenues, in first quarter
2000. Gross margin increased $3.5 million, or 141%, due to the continuing growth of subscription revenue, which generates higher margins 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
$1.8 million, or 73%, to $4.3 million in the first quarter of 2001, from $2.5 million in the first quarter 2000. The increase was primarily due to the addition of personnel
domestically including an Executive Vice President of Worldwide Sales, our continuing expansion into Europe and increased advertising and promotional activities. We expect selling and marketing
expenses to increase as more personnel are added to support our expanding selling and marketing efforts, while decreasing as a percentage of revenues.

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 $235,000, or 15%, to $1.8 million in first quarter 2001 from
$1.6 million in first quarter 2000. The increase in research and development expenses was primarily a result of increased personnel and development efforts and enhancements to Websense
Enterprise.

General and administrative.General and administrative expenses consist primarily of salaries, benefits and related
expenses for executive and administrative personnel, third party professional service fees and allocated facilities and depreciation expenses. General and administrative expenses increased $466,000,
or 63%, to $1.2 million in first quarter of 2001 from $737,000 in first quarter 2000. The increase was primarily due to personnel additions and increased professional service fees, insurance
and other costs associated with being a public company. We expect general and administrative expenses to increase in the future, reflecting continued growth in operations.

Amortization of stock-based compensation.We recognized $200,000 of stock-based compensation expense in first quarter
2001 net of forfeitures, compared to $633,000 in first quarter 2000, a decrease of $433,000, or 68%. The decrease in the amortization expense is due to forfeitures of $111,000 as well as the
accelerated method of amortization used.

Interest Income, Net

Net interest income increased $956,000, or 919%, to $1.1 million from $104,000 in the first quarter of 2000. The increase is primarily due to interest
earned from the investment of our IPO proceeds.

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Net Loss

Net loss decreased $2.4 million, or 86%, to $387,000 (or $0.02 loss per share) from $2.8 million (or $0.32 loss per share) in first quarter 2000.
This decrease was due to a combination of an increase in gross margin of $3.5 million, or 141%, and an increase in interest income of $956,000, offset by an increase in operating expenses of
$2.1 million, or 38%.

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Liquidity and Capital Resources

From our inception through March 2000, we financed our operations primarily through profits and 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 March 31, 2001, we had cash and cash equivalents of $4.7 million and investments in marketable securities of $79.0 million and an accumulated deficit of
$21.2 million.

Net
cash provided by operating activities was $2.5 million in first quarter 2001 compared to $820,000 in the first quarter 2000. The relative increase in cash provided by
operating activities is primarily due to interest earnings on our invested cash and an increase in our subscriptions (which are initially recorded as deferred revenue).

Net
cash used in investing activities was $11.1 million in first quarter 2001 compared to $525,000 in the first quarter 2000. The relative increase in cash used in investing
activities is primarily due to purchases of marketable securities.

Net
cash provided by financing activities was $176,000 in first quarter 2001 compared to $65.7 million in first quarter 2000. This decrease is due to the proceeds we received
upon completion in March 2000 of our initial public offering.

In
June 2000 we entered into a loan and security agreement with a bank for a credit facility of $1.5 million. At March 31, 2001 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 $1.5 million expiring in 2002 and $111,000
expiring in 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, high grade commercial paper,
corporate bonds and government
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.

Risks and Uncertainties

You should carefully consider the following information in addition to 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 and our industry. If any of these or other risks actually occurs
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 20 fiscal quarters, and as of March 31, 2001, we had an accumulated deficit of $21.2 million.
We incurred net losses of $5.9 million and $9.3 million for the years ended December 31, 2000 and 1999, 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

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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 January 2001. 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 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.

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 98% of our total revenues in first quarter of 2001. 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. Websense Enterprise may not 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

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Websense Enterprise. We may not 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 have committed approximately $1.4 million of our marketing communications
resources in 2001 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 may be unable to 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 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 the revenue we report in each quarter is deferred revenue from subscription agreements entered into and paid for during previous quarters.
Because of this model, the revenues we report in any quarter or series of quarters may mask significant downturns in sales and the market acceptance of Websense Enterprise.

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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 may be unable to
maintain and expand our existing relationships or enter into new relationships on commercially reasonable terms or at all. 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 85% of our revenues in the first quarter of 2001. 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 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

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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 34% of our total revenues in the first quarter of 2001. As a key component of our business strategy, we intend to expand our international sales. In addition to the risks associated with
our domestic sales, our international sales are subject to the following risks:



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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.

In the first quarter of 2001 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. This downturn may impact our ability to reach profitability by:



In
addition, the economic downturn may force companies to prioritize expenditures, and these companies may decide that subscriptions to our products are unnecessary 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.

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 existing 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.

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Our common stock may not develop or maintain 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 be maintained 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
quarterly report:



As
a result, it is possible that in some future periods, our results of operations may not meet 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:



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

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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 approximately
2.2 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. Our database and database technologies may not 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.

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

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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 our means of protecting our proprietary technology and brands may not 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 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

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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.

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

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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.

Our executive officers, directors and principal stockholders, and their respective affiliates, beneficially own 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
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.

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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 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risk exposures are related to our cash, cash equivalents and investments in marketable securities. 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 is 9.75% at March 31, 2001. At
March 31, 2001 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.

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Part IIOther Information

Item 1. Legal Proceedings

We
are currently not a party to any litigation that could have a material adverse effect on our results of operations, financial position or business.

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

None.

The
Company filed a Report on Form 8-K on March 8, 2001 concerning the resignation of a director who had been serving as a member of the Board of Directors and the Audit
Committee and the appointment of a director to fill the resulting vacancies.

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SIGNATURES

In
accordance with the requirements of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                   |  | WEBSENSE, INC.
|------------------ |  | --------------
|Date: May 11, 2001 |  | By:           
|                   |  | By:           

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