**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

 

******(Mark One)**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2005**

 

**OR**

 

**o****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**

 

**Websense, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                   | ** ** | **51-0380839**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

 

**10240 Sorrento Valley Road**

**San Diego, California 92121**

**858-320-8000**

(Address of principal executive offices, zip code and telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act): Yes ý  No o

 

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of April 29, 2005 was 23,899,648.

 

 

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**Websense, Inc.**

**Form 10-Q**

**For thePeriod Ended March 31, 2005**

 

**TABLE OF CONTENTS**

 
| Part I. Financial  Information |     |
|--------------------------------|----------|
|                           |     |   | Page |
|                           | Item  1. | Consolidated  Financial Statements (Unaudited) |   |
|                           |     | Consolidated Balance Sheets  as of March 31, 2005 and December 31, 2004 | 2 |
|                           |     | Consolidated  Statements of Income for the three months ended March 31, 2005 and 2004 | 2 |
|                           |     | Consolidated  Statement of Stockholders’ Equity for the three months ended March 31, 2005 | 3 |
|                           |     | Consolidated  Statements of Cash Flows for the three months ended March 31, 2005 and 2004 | 4 |
|                           |     | Notes  to Consolidated Financial Statements | 5 |
|                           | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10 |
|                           | Item  3. | Quantitative  and Qualitative Disclosures About Market Risk | 16 |
|                           | Item 4.  | Controls and Procedures | 17 |
|                           |     |   |   |
| Part II. Other Information     |     |
|                           |     |   |   |
|                           | Item 1.  | Legal Proceedings | 18 |
|                           | Item  2. | Unregistered  Sales of Equity Securities and Use of Proceeds. | 18 |
|                           | Item 3.  | Defaults upon  Senior Securities | 18 |
|                           | Item  4. | Submission  of Matters to a Vote of Security Holders. | 18 |
|                           | Item 5.  | Other Information | 18 |
|                           | Item 6.  | Exhibits | 19 |
|                           |     |   |   |
| Signatures                     | 20       |

 

1

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**Part I — Financial Information**

 

**Item 1. Consolidated Financial Statements (Unaudited)**

 

**Websense, Inc.**

**Consolidated Balance Sheets**

**(Unaudited and in thousands)**

 
| ** **                                                  | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | ** **          | ** ** | **(See Note 1)**       | ** ** |
| **Assets**                                                  |       |                |       |                   |       |
| Current assets:                                             |       |                |       |                   |       |
| Cash and cash equivalents                                   |       | $                   | 45,025     |                   | $          | 38,878 |   |
| Marketable securities                                       |       | 222,527             |       | 204,910                |       |
| Accounts receivable, net of allowance for doubtful accounts |       | 32,399              |       | 44,309                 |       |
| Income taxes receivable                                     |       | 3,717               |       | 3,201                  |       |
| Current portion of deferred income taxes                    |       | 8,530               |       | 8,530                  |       |
| Other current assets                                        |       | 3,165               |       | 1,525                  |       |
| Total current assets                                        |       | 315,363             |       | 301,353                |       |
|                                                        |       |                |       |                   |       |
| Property and equipment, net                                 |       | 4,174               |       | 3,955                  |       |
| Deferred income taxes, less current portion                 |       | 9,523               |       | 9,523                  |       |
| Deposits and other assets                                   |       | 461                 |       | 462                    |       |
| Total assets                                                |       | $                   | 329,521    |                   | $          | 315,293 |   |
|                                                        |       |                |       |                   |       |
| **Liabilities and stockholders’ equity**               |       |                |       |                   |       |
| Current liabilities:                                        |       |                |       |                   |       |
| Accounts payable                                            |       | $                   | 1,747      |                   | $          | 1,100 |   |
| Accrued payroll and related benefits                        |       | 6,528               |       | 7,163                  |       |
| Other accrued expenses                                      |       | 5,605               |       | 5,011                  |       |
| Income taxes payable                                        |       | 1,667               |       | 1,758                  |       |
| Current portion of deferred revenue                         |       | 91,919              |       | 90,686                 |       |
| Total current liabilities                                   |       | 107,466             |       | 105,718                |       |
|                                                        |       |                |       |                   |       |
| Deferred revenue, less current portion                      |       | 41,689              |       | 41,631                 |       |
|                                                        |       |                |       |                   |       |
| Stockholders’ equity:                                  |       |                |       |                   |       |
| Common stock                                                |       | 239                 |       | 235                    |       |
| Additional paid-in capital                                  |       | 161,674             |       | 150,447                |       |
| Treasury stock                                              |       | (7,078              | )          | —                 |       |
| Retained earnings                                           |       | 26,293              |       | 17,681                 |       |
| Accumulated other comprehensive loss                        |       | (762                | )          | (419                   | )          |
| Total stockholders’ equity                             |       | 180,366             |       | 167,944                |       |
| Total liabilities and stockholders’ equity             |       | $                   | 329,521    |                   | $          | 315,293 |   |

 

See accompanying notes.

 

2

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**Websense, Inc.**

**ConsolidatedStatements of Income**

**(Unauditedand in thousands, except per share amounts)**

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **March 31,  2005**    | ** ** | **March 31,  2004** | ** ** |
|                                   |       |                   |       |   |   |
| Revenue                                |       | $                      | 34,182     |   | $ | 24,611 |   |
|                                   |       |                   |       |   |   |
| Cost of revenue                        |       | 2,500                  |       | 1,691 |   |
|                                   |       |                   |       |   |   |
| Gross margin                           |       | 31,682                 |       | 22,920 |   |
|                                   |       |                   |       |   |   |
| Operating expenses:                    |       |                   |       |   |   |
| Selling and marketing                  |       | 12,328                 |       | 9,416 |   |
| Research and development               |       | 4,024                  |       | 3,567 |   |
| General and administrative             |       | 2,871                  |       | 2,219 |   |
| Total operating expenses               |       | 19,223                 |       | 15,202 |   |
|                                   |       |                   |       |   |   |
| Income from operations                 |       | 12,459                 |       | 7,718 |   |
|                                   |       |                   |       |   |   |
| Other income, net                      |       | 954                    |       | 413 |   |
|                                   |       |                   |       |   |   |
| Income before income taxes             |       | 13,413                 |       | 8,131 |   |
|                                   |       |                   |       |   |   |
| Provision for income taxes             |       | 4,801                  |       | 3,004 |   |
|                                   |       |                   |       |   |   |
| Net income                             |       | $                      | 8,612      |   | $ | 5,127 |   |
|                                   |       |                   |       |   |   |
| Net income per share:                  |       |                   |       |   |   |
|                                   |       |                   |       |   |   |
| Basic net income per share             |       | $                      | 0.36       |   | $ | 0.23 |   |
| Diluted net income per share           |       | $                      | 0.35       |   | $ | 0.22 |   |
| Weighted average shares — basic   |       | 23,672                 |       | 22,677 |   |
| Weighted average shares — diluted |       | 24,741                 |       | 23,676 |   |

 

See accompanying notes.

 

3

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**Websense, Inc.**

**Consolidated Statement of Stockholders’ Equity**

**(Unaudited and in thousands)**

 
| ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional********paid-in capital** | ** ** | **Treasury  stock** | ** ** | **Retained********earnings** | ** ** | **Accumulated  other  comprehensive********loss** | ** ** | **Total  stockholders’********equity** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------------------------------|------------|---------------------|------------|------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                           | ** ** | ** ** |
| **Common stock**                                                                                     |
| **Shares**                                                                                           | ** ** | **Amount** |
| Balance at December 31, 2004                                                                         |       | 23,526     |       | $          | 235        |                                  | $          | 150,447             |       | $                            | —     |                                              | $          | 17,681                                      |       | $ | (419 | ) | $ | 167,944 |   |
|                                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
| Issuance of common stock upon exercise of options                                                    |       | 357        |       | 4          |       | 6,145                                 |       | —              |       | —                       |       | —                                            |       | 6,149                                       |       |
|                                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
| Purchase of treasury stock                                                                           |       | (125       | )          | —     |       | —                                |       | (7,078              | )          | —                       |       | —                                            |       | (7,078                                      | )          |
|                                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
| Tax benefit of stock options                                                                         |       | —     |       | —     |       | 5,082                                 |       | —              |       | —                       |       | —                                            |       | 5,082                                       |       |
|                                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
| Comprehensive income:                                                                                |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
|                                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
| Net income                                                                                           |       | —     |       | —     |       | —                                |       | —              |       | 8,612                        |       | —                                            |       | 8,612                                       |       |
|                                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
| Net change in unrealized gain (loss) on fair market valuation of  marketable securities              |       | —     |       | —     |       | —                                |       | —              |       | —                       |       | (325                                              | )          | (325                                        | )          |
|                                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
| Net change in unrealized gain (loss) on fair market valuation of  foreign currency forward contracts |       | —     |       | —     |       | —                                |       | —              |       | —                       |       | (18                                               | )          | (18                                         | )          |
|                                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
| Comprehensive income                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       | 8,269                                       |       |
|                                                                                                 |       |       |       |       |       |                                  |       |                |       |                         |       |                                              |       |                                        |       |
| Balance at March 31, 2005                                                                            |       | 23,758     |       | $          | 239        |                                  | $          | 161,674             |       | $                            | (7,078     | )                                                 | $          | 26,293                                      |       | $ | (762 | ) | $ | 180,366 |   |

 

See accompanying notes.

 

4

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**Websense, Inc.**

**Consolidated Statements of Cash Flows**

**(Unaudited and in thousands)**

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **March 31,  2005**    | ** ** | **March 31,  2004** | ** ** |
| **Operating activities:**                                                              |       |                   |       |   |   |
| Net income                                                                             |       | $                      | 8,612      |   | $ | 5,127 |   |
|                                                                                   |       |                   |       |   |   |
| Adjustments to reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation                                                                           |       | 603                    |       | 511 |   |
| Deferred revenue                                                                       |       | 1,291                  |       | 1,840 |   |
| Unrealized loss on foreign exchange contracts                                          |       | (18                    | )          | (200 | ) |
| Tax benefit from exercise of stock options                                             |       | 5,082                  |       | 3,241 |   |
| Changes in operating assets and liabilities:                                           |       |                   |       |   |   |
| Accounts receivable                                                                    |       | 11,910                 |       | 6,520 |   |
| Income taxes receivable                                                                |       | (516                   | )          | (800 | ) |
| Other current assets                                                                   |       | (1,640                 | )          | (1,192 | ) |
| Deposits and other assets                                                              |       | 1                      |       | (12 | ) |
| Accounts payable                                                                       |       | 647                    |       | 428 |   |
| Accrued payroll and related benefits                                                   |       | (635                   | )          | (240 | ) |
| Other accrued expenses                                                                 |       | 594                    |       | 955 |   |
| Income taxes payable                                                                   |       | (91                    | )          | (483 | ) |
| Net cash provided by operating activities                                              |       | 25,840                 |       | 15,695 |   |
|                                                                                   |       |                   |       |   |   |
| **Investing activities:**                                                              |       |                   |       |   |   |
| Purchases of property and equipment                                                    |       | (822                   | )          | (857 | ) |
| Purchases of marketable securities                                                     |       | (59,119                | )          | (87,534 | ) |
| Maturities of marketable securities                                                    |       | 35,330                 |       | 64,097 |   |
| Sales of marketable securities                                                         |       | 5,847                  |       | 1,193 |   |
| Net cash used in investing activities                                                  |       | (18,764                | )          | (23,101 | ) |
|                                                                                   |       |                   |       |   |   |
| **Financing activities:**                                                              |       |                   |       |   |   |
| Proceeds from exercise of stock options                                                |       | 6,149                  |       | 5,477 |   |
| Purchases of treasury stock                                                            |       | (7,078                 | )          | (2,956 | ) |
| Net cash provided by (used in) financing activities                                    |       | (929                   | )          | 2,521 |   |
|                                                                                   |       |                   |       |   |   |
| Increase (decrease) in cash and cash equivalents                                       |       | 6,147                  |       | (4,885 | ) |
|                                                                                   |       |                   |       |   |   |
| Cash and cash equivalents at beginning of period                                       |       | 38,878                 |       | 35,324 |   |
|                                                                                   |       |                   |       |   |   |
| Cash and cash equivalents at end of period                                             |       | $                      | 45,025     |   | $ | 30,439 |   |

 

See accompanying notes.

 

5

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**Websense, Inc.**

** **

**Notes To Consolidated FinancialStatements (Unaudited)**

 

 

1.  *Basis of Presentation*

 

The accompanying unaudited consolidated financialstatements have been prepared in conformity with accounting principles generallyaccepted in the United States for interim financial statements and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,certain information or footnote disclosures normally included in completefinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted pursuantto the rules and regulations of the Securities and Exchange Commission. In theopinion of management, the statements include all adjustments necessary, whichare of a normal and recurring nature, for the fair presentation of ourfinancial position and of the results for the interim periods presented.

 

These financial statements should be read inconjunction with the audited consolidated financial statements and notesthereto for the year ended December 31, 2004, included in Websense, Inc.’sAnnual Report on Form 10-K filed with the Securities and ExchangeCommission.  Operating results for thethree months ended March 31, 2005 are not necessarily indicative of the resultsthat may be expected for any other interim period or for the year endingDecember 31, 2005.  The balance sheet atDecember 31, 2004 has been derived from the audited financial statements atthat date but does not include all of the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.

 

2.  *Net Income Per Share*

 

Websense computes net income per share in accordancewith Statement of Financial Accounting Standards (SFAS) No. 128, Earnings PerShare (EPS). Under the provisions of SFAS No. 128, basic net income per shareis computed by dividing the net income for the period by the weighted averagenumber of common shares outstanding during the period. Diluted net income pershare is computed by dividing the net income for the period by the weightedaverage number of common and common equivalent shares outstanding during theperiod. Common equivalent shares for all periods presented consist of dilutivestock options.

 

Dilutive securities include stock options, warrants,preferred stock on an as if converted to common stock basis and restrictedstock subject to vesting. During the quarters ended March 31, 2005 and 2004,the difference between the weighted average shares used in determining basicEPS versus diluted EPS related to dilutive stock options totaled 1,069,000 and 999,000,respectively. Potentially dilutive securities totaling 38,000 and 219,000 forthe quarters ended March 31, 2005 and 2004, respectively, were excluded fromhistorical basic and diluted earnings per share because of their anti-dilutiveeffect as a result of stock options which have exercise prices greater than theaverage market price of the common shares.

 

6

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The following is a reconciliation of the numeratorand denominator used in calculating basic EPS to the numerator and denominatorused in calculating diluted EPS for all periods presented:

 
| ** **                      | ** ** | ** **                                   | ** ** | ** **                | ** ** | ** **            | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Net Income  (Numerator)**                  | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
| ** **                      | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **For the Three Months Ended:** | ** ** | ** **                                   | ** ** | ** **                | ** ** | ** **            | ** ** |
| **March 31, 2005:**             | ** ** | ** **                                   | ** ** | ** **                | ** ** | ** **            | ** ** |
| Basic EPS                       |       | $                                            | 8,612      |                      | 23,672     |                  | $          | 0.36 |   |
| Effect of options               |       | —                                       |       | 1,069                     |       | (0.01                 | )          |
| Diluted EPS                     |       | $                                            | 8,612      |                      | 24,741     |                  | $          | 0.35 |   |
| ** **                      | ** ** | ** **                                   | ** ** | ** **                | ** ** | ** **            | ** ** |
| **March 31, 2004:**             | ** ** | ** **                                   | ** ** | ** **                | ** ** | ** **            | ** ** |
| Basic EPS                       |       | $                                            | 5,127      |                      | 22,677     |                  | $          | 0.23 |   |
| Effect of options               |       | —                                       |       | 999                       |       | (0.01                 | )          |
| Diluted EPS                     |       | $                                            | 5,127      |                      | 23,676     |                  | $          | 0.22 |   |

 

 

3. *ComprehensiveIncome*

 

The components of comprehensive income, as requiredto be reported by SFAS No. 130, Reporting Comprehensive Income, were as follows(in thousands):

 
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                           | ** ** | **March 31,  2005**    | ** ** | **March 31,  2004** | ** ** |
| Net income                                                                                           |       | $                      | 8,612      |   | $ | 5,127 |   |
| Net change in unrealized gain (loss) on fair market valuation of  marketable securities              |       | (325                   | )          | 3 |   |
| Net change in unrealized gain (loss) on fair market valuation of  foreign currency forward contracts |       | (18                    | )          | (200 | ) |
| Comprehensive income                                                                                 |       | $                      | 8,269      |   | $ | 4,930 |   |

 

Accumulated other comprehensive loss totaled ($762,000)and ($182,000) at March 31, 2005 and March 31, 2004, respectively.

 

4.* **Stock-Based Compensation*

 

Pro forma information regarding net income isrequired by SFAS No. 123, Accounting for Stock-Based Compensation, as amendedby SFAS No. 148, Accounting for Stock-Based Compensation — Transition andDisclosure, and has been determined as if the Company has accounted for itsemployee stock options and employee stock purchase plan under the fair valuemethod of SFAS No. 123, as amended by SFAS No. 148. The pro forma effects ofstock-based compensation on net income and net income per share have beenestimated at the date of grant using the Black-Scholes option pricing modelbased on the following weighted average assumptions since the Company’s initialpublic offering in March of 2000: risk free interest rates of 1.04% to 6.0%,dividend yields of 0%, expected volatility of 44% to 132%, and a life of 5years for employee stock options and 6 months to 2 years for the employee stockpurchase plan.

 

7

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The Company’s pro forma information is as follows(in thousands, except per share amounts):

 

| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **March 31,  2005**    | ** ** | **March 31,  2004** | ** ** |
| Net income as reported                             |       | $8,612                 |       | $5,127 |   |
| Compensation expense under FAS 123, net of tax (1) |       | $(2,388                | )          | $(2,377 | ) |
| Pro forma net income                               |       | $6,224                 |       | $2,750 |   |
|                                               |       |                   |       |   |   |
| Basic net income per share as reported             |       | $0.36                  |       | $0.23 |   |
| Pro forma basic net income per share               |       | $0.26                  |       | $0.12 |   |
|                                               |       |                   |       |   |   |
| Diluted net income per share as reported           |       | $0.35                  |       | $0.22 |   |
| Pro forma diluted net income per share             |       | $0.25                  |       | $0.12 |   |

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(1)      The Company had an effective tax rate of 36% and 37% in thethree months ended March 31, 2005 and 2004, respectively

 

For purposes of pro forma disclosures, theestimated fair value is amortized to expense over the options vesting period.  The effect of applying SFAS No. 123, asamended by SFAS No. 148, for purposes of providing pro forma disclosures maynot be representative of the effects on the Company’s operating results infuture years.

 

5.*Foreign Currency Cash Flow Hedges*

 

SFAS No. 133, Accounting for Derivative Instrumentsand Hedging Activities, as amended, established accounting and reportingstandards requiring recognition of all derivatives as assets or liabilities inthe consolidated balance sheets and measurement of those instruments at fairvalue. Gains and losses resulting from changes in the fair values of thosederivative instruments will be recorded to earnings or other comprehensiveincome depending on the use of the derivative instrument and whether itqualifies for hedge accounting.  TheCompany uses derivatives to manage foreign currency risk and not forspeculative or trading purposes.  TheCompany’s objective is to reduce the risk to earnings and cash flows associatedwith changes in foreign currency exchange rates.

 

During 2005, the Company continues to utilize foreign currency forward contracts. All such contracts entered into were designated as cash flow hedges and were considered effective as of March 31, 2005, as defined by SFAS 133, as amended.  None of the contracts were terminated prior to settlement. Net realized losses related to these contracts settled during the periods presented are included in other income, net in the accompanying consolidated income statements and amounted to $7,000 and $29,000 in the three months ended March 31, 2005 and 2004, respectively. As of March 31, 2005, the Company had committed to six foreign currency forward contracts to purchase Euro and British Pounds for $1.7 million. The fair value of these contracts was $1.7 million at March 31, 2005 and all of the foreign exchange contracts will be settled before June 30, 2005. Realized gains or losses related to the settlements, if any, will be recorded in other income, net at the time of settlement.

 

8

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6. *TaxMatters*

 

                Fromtime to time, the Company is audited by various state, federal andinternational authorities relating to tax matters.  The Company fully cooperates with all audits,but defends its positions vigorously. The Company’s audits are in various stages of completion; however, nooutcome for a particular audit can be determined with certainty prior to theconclusion of the audit and appeals process. Adjustments, if any, are appropriately recorded in the Company’sfinancial statements in the period determined.

 

7. *New AccountingPronouncements*

 

In December 2004, the FASB issued SFASNo. 123 (revised 2004), Share-Based Payment (SFAS 123R), which willbe effective in the Company’s first quarter of fiscal 2006.   As permitted by SFAS 123, the Companycurrently accounts for share-based payments to employees using APB 25’sintrinsic value method and, as such, generally recognizes no compensation costfor employee stock option grants or the discounts the Company provides underits employee stock purchase plans. Accordingly, the adoption of SFAS 123R’s fair value method willsignificantly increase the Company’s recognized employee compensation expense,thereby reducing net income and earnings per share.  The impact of adoption of SFAS 123R cannot bepredicted at this time because it will depend on levels of share-based paymentsgranted in the future.  However, had theCompany adopted SFAS 123R in prior periods, the impact of that standard wouldhave approximated the impact of SFAS 123 as described in Note 4 above, “Stock-BasedCompensation”.  SFAS 123R also requiresthe benefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow asrequired under current guidance.  Thisrequirement will reduce the Company’s net operating cash flows and increase netfinancing cash flows in periods after adoption. The Company cannot estimate what those amounts will be in the future,however, the amount of operating cash flows recognized in the first quarters of2005 and 2004 for such tax deductions were $5.1 million and $3.2 million,respectively.

 

 

8. *Reclassifications*

 

Certain reclassificationshave been made for consistent presentation.

 

9

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**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**Thefollowing discussion and analysis should be read in conjunction with thefinancial statements and related notes contained elsewhere in this report. See “Risksand Uncertainties” regarding certain factors known to us that could causereported financial information not to be necessarily indicative of futureresults.**

** **

**Forward Looking Statements**

** **

**Thisreport on Form 10-Q may contain “forward-looking statements” within the meaningof the federal securities laws made pursuant to the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995. These statements, whichrepresent our expectations or beliefs concerning various future events, maycontain words such as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,”“believes,” “estimates,” or other words indicating future results. Suchstatements may include but are not limited to statements concerning thefollowing:**

 

 

•                  anticipatedtrends in revenue;

•                  growthopportunities in domestic and international markets;

•                  customeracceptance and satisfaction with our products;

•                  expectedtrends in operating and other expenses;

•                  anticipatedcash and intentions regarding usage of cash;

•                  changesin effective tax rates; and

•                  anticipatedproduct enhancements or releases.

 

 

**Theseforward-looking statements are subject to risks and uncertainties that couldcause actual results to differ materially from those anticipated as of the dateof this report. We assume no obligation to update any forward-lookingstatements to reflect events or circumstances arising after the date of thisreport.**

 

**Overview**

 

**     **Weprovide employee internet management (EIM) software products that enableorganizations to analyze, report and manage how their employees use computingresources, including internet access, instant messaging (IM), peer-to-peer filesharing, network bandwidth and desktop applications.  Our primary product offering is the WebsenseEnterprise® software application, our central policy engine and managementconsole.  Websense Enterprise givesorganizations the ability to enhance security, improve employee productivity,conserve network bandwidth and mitigate potential legal liability byidentifying potential risks and rapidly configuring and implementing policiesto manage their employees’ internet access and use of software applications. In1996, we released our first software product, Websense Internet ScreeningSystem, and since that time, we have focused our business on developing andselling EIM solutions. Websense Enterprise now serves as a platform for relatedWebsense add-on modules, such as  thePremium Groupsä, Real Time Security UpdatesTM,Bandwidth OptimizerTM, Instant Messaging (IM) Attachment ManagerTM, and ClientPolicy ManagerTM. We have also created suites of some of our products to addressspecific customer needs, such as the Websense Web Security SuiteTM and WebsenseWeb Security Suite — Lockdown EditionTM.  Wecurrently derive all of our revenue from subscriptions to the WebsenseEnterprise solution (including add-on modules), and expect this trend tocontinue in the future as more offerings are added to the Websense Enterpriseplatform.

 

**          Duringthe three months ended March 31, 2005, we derived 32% of revenue frominternational sales compared with 30% for the three months ended March 31,2004, with the United Kingdom comprising approximately 9% of our total revenuein both periods. We believe international markets continue to**

** **

**10**

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** **

**represent a significant growthopportunity and we are continuing to expand our international operations,particularly in selected countries in the European, Asia/Pacific and LatinAmerican markets.**

** **

**We sellWebsense Enterprise through both indirect and direct channels. Sales throughindirect channels currently account for more than 80% of our revenue, and ourstrategy is to continue to rely on indirect sales channels for a significantmajority of our sales.**

** **

**        **As described elsewhere in this report, we recognize revenue fromsubscriptions to Websense Enterprise, including add-on modules, on a monthlystraight-line basis over the term of the subscription. We recognize theoperating expenses related to these sales as they are incurred. These operatingexpenses include sales commissions, which are based on the total amount of thesubscription contract and are fully expensed in the period the product isdelivered. Operating expenses have continued to increase as compared with priorperiods due to expanded selling and marketing efforts, continued productresearch and development and investments in administrative infrastructure tosupport subscription sales that we will recognize as revenue in subsequentperiods.

 

**Critical Accounting Policies**

** **

**        **We believe the following critical accounting policies affect our moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements.

** **

***         RevenueRecognition.***When a purchase decision is madefor Websense Enterprise, customers enter into a subscription agreement, whichis generally 12, 24 or 36 months in duration and for a fixed number of users.Other services such as upgrades/enhancements and standard post-contracttechnical support services are sold together with Websense Enterprise andprovided throughout the subscription term. We recognize revenue on a monthlystraight-line basis, commencing with the month the subscription begins, overthe term of the subscription agreement provided collectibility is reasonablyassured. Upon entering into a subscription arrangement for a fixed ordeterminable fee, we electronically deliver access codes to users and thenpromptly invoice customers for the full amount of their subscriptions. Paymentis due for the full term of the subscription, generally within 30 days of theinvoice. We record amounts billed to customers in excess of recognizablerevenue as deferred revenue on our balance sheet. Upon expiration of thesubscription, customers who wish to re-subscribe typically must do so at thencurrent rates to continue using Websense Enterprise. Our revenue issignificantly influenced by new and renewal subscriptions, and a decrease in subscriptionamounts could negatively impact our future revenue.

** **

***        ****Allowance for Doubtful Accounts.*We maintain an allowance for doubtful accounts for estimated lossesresulting from the inability or unwillingness of our customers to pay theirinvoice(s). If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required.

*Deferred Tax Assets.* Asrequired by Statement of Financial Accounting Standards No. 109, we recognizetax assets on the balance sheet if it is “more likely than not” that they willbe realized on future tax returns.  AtDecember 31, 2004, we had deferred tax assets of $18.1 million.  We believe that it is more likely than notthat our deferred tax assets will be realized. Factors considered by usincluded: our earnings history, projected earnings based on current operations,and projected future taxable income in excess of stock option deductions.However, should we determine that we would not be able to realize all or partof our deferred tax assets in thefuture, an adjustment to the deferred tax assets would becharged against income in the period such determination was made.

# ***Tax Contingency Reserve***.Significant judgment is required in determining our consolidated income taxprovision and evaluating our U.S. and foreign tax positions. It is our policyto maintain tax contingency reserves for tax audit issues that are likely tooccur and can reasonably be estimated. We review the reserves as circumstanceswarrant and adjust the reserves as events occur that affect our potentialliability for additional taxes, such as lapsing of applicable statutes oflimitations, conclusion of tax audits, additional exposure based on currentcalculations, identification of new issues or rendering of court decisionsaffecting a particular tax issue. Tax reserve contingencies and changes to thereserves are evaluated and recorded in our tax provision in the period in whichthe above noted events occur.

 

11

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**Results of Operations**

 

***Three months ended March 31, 2005 compared with the three months ended March31, 2004***

 

The following tablesummarizes our operating results as a percentage of total revenue for each ofthe periods shown.

 

| ** **                 | ** ** | **Three Months  Ended** | ** ** |
|----------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **March 31, 2005**      | ** ** | **March 31, 2004** | ** ** |
| ** **                 | ** ** | **(Unaudited)**         | ** ** |
|                       |       |                    |       |   |   |
| Revenue                    |       | 100                     | %          | 100 | % |
|                       |       |                    |       |   |   |
| Cost of revenue            |       | 7                       |       | 7 |   |
|                       |       |                    |       |   |   |
| Gross margin               |       | 93                      |       | 93 |   |
|                       |       |                    |       |   |   |
| Operating expenses:        |       |                    |       |   |   |
| Selling and marketing      |       | 36                      |       | 38 |   |
| Research and development   |       | 12                      |       | 15 |   |
| General and administrative |       | 9                       |       | 9 |   |
| Total operating expenses   |       | 57                      |       | 62 |   |
|                       |       |                    |       |   |   |
| Income from operations     |       | 36                      |       | 31 |   |
|                       |       |                    |       |   |   |
| Other income, net          |       | 3                       |       | 2 |   |
|                       |       |                    |       |   |   |
| Income before income taxes |       | 39                      |       | 33 |   |
|                       |       |                    |       |   |   |
| Provision for income taxes |       | 14                      |       | 12 |   |
|                       |       |                    |       |   |   |
| Net income                 |       | 25                      | %          | 21 | % |

# ** **

# **Revenue**

# ** **

# **Revenue increased to $34.2 million inthe first quarter of 2005 from $24.6 million in the first quarter of 2004. Theincrease was primarily a result of the addition of new, renewed and upgradedsubscriptions from our customers. Approximately 65% of subscription revenuerecognized in the first quarter of 2005 was derived from renewal business. Weexpect total revenue growth amounts in 2005 to exceed total revenue growth in2004, although the percentage revenue growth rate may be lower in 2005 than in2004 as a result of the increasing overall revenue base.**

# ** **

# **Cost of Revenue**

# ** **

# **Cost of revenue consists of the costsof content review, technical support and infrastructure costs associated with maintainingour databases. Cost of revenue increased to $2.5 million in the first quarterof 2005 from $1.7 million in the first quarter of 2004. The increase wasprimarily due to the costs associated with additional personnel in ourtechnical support and database groups. We expect cost of revenue to**

 

12

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# **increasein the future as we support the growth and maintenance of our databases as wellas the technical support needs of our customers. As a percentage of revenue,cost of revenue remained unchanged at 7% during the first quarters of 2005 and 2004.We expect that cost of revenue, as a percentage of revenue, will remain below10% of revenue for the foreseeable future.**

# ** **

# **Gross Margin**

# ** **

# **Gross margin increased to $31.7million in the first quarter of 2005 from $22.9 million in the first quarter of2004. The increase was due to increased revenue. As a percentage of revenue,gross margin remained unchanged at 93% in the first quarters of 2005 and 2004.**We expect that grossmargin, as a percentage of revenue, will remain in excess of 90% of revenue forthe foreseeable future.

# ** **

# **Operating Expenses**

# ** **

# ***Selling andmarketing***. Selling and marketing expensesconsist primarily of salaries, commissions and benefits related to personnelengaged in selling, marketing and customer support functions, along with costsrelated to public relations, advertising, promotions and travel as well asallocated facilities costs and equipment depreciation. Selling and marketingexpenses increased to $12.3 million in the first quarter of 2005 from $9.4million in the first quarter of 2004. The increase in selling and marketingexpenses of $2.9 million was primarily due to increased personnel costs andrelated travel and allocated costs as well as higher commission and co-opmarketing expenses related to higher sales levels. We expect selling andmarketing expenses to increase in absolute dollars in the future as morepersonnel are added to support our expanding selling and marketing effortsworldwide and as increased sales result in higher overall sales commissionexpenses.

# ** **

*Research and development.*****Research anddevelopment expenses consist primarily of salaries and benefits for softwaredevelopers, contract programmers, and allocated facilities costs and equipment depreciation.Research and development expenses increased to $4.0 million in the first quarterof 2005 from $3.6 million in the first quarter of 2004. The increase of $400,000in research and development expenses was primarily a result of increased allocatedcosts and personnel needed to support our expanding list of technologypartners, the enhancements of Websense Enterprise and additional products. Weexpect research and development expenses to increase in absolute dollars infuture periods as a result of our continued enhancements of Websense Enterpriseand additional products.

 

*         General andadministrative*. General and administrative expenses consistprimarily of salaries, benefits and related expenses for our executive,finance, human resources and administrative personnel, third party professionalservice fees, allocated facilities costs and equipment depreciation. Generaland administrative expenses increased to $2.9 million in the first quarter of 2005from $2.2 million in the first quarter of 2004. The $700,000 increase ingeneral and administrative expenses was primarily a result of an increase inprofessional accounting fees driven by compliance with the Sarbanes-Oxley Actof 2002 and allocated costs and additional personnel needed to support ourgrowing operations. We expect general and administrative expenses to increasein absolute dollars in future periods, reflecting growth in operations,increasing expenses associated with being a public company and expansion of ourinternational operations.  We may alsoincur increased general and administrative expense in connection with ourannounced search for a successor to our current chairman and chief executiveofficer, John Carrington, in his role as our chief executive officer.

 

13

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# **Other Income, Net**

# ** **

# **Net other income increased to $954,000in the first quarter of 2005 from $413,000 in the first quarter of 2004. The increaseis due primarily to higher interest rates realized by our increased balances ofcash, cash equivalents and marketable securities as of March 31, 2005 comparedwith March 31, 2004. The majority of our total cash and cash equivalents andmarketable securities are tax-exempt. We expect that the majority of our cashand cash equivalents and marketable securities will continue to be held intax-exempt investments during the foreseeable future.**

# ** **

# **Provision for IncomeTaxes**

 

# **In the firstquarter of 2005, United States and foreign income tax expense was $4.8 millionas compared to $3.0 million for the first quarter of 2004. The annual effectiveincome tax rate for the first quarter 2005 was 36% compared to 37% for thefirst quarter of 2004. The effective tax rate for the first quarter 2005 waslower than the first quarter 2004 effective tax rate primarily due to anincrease in foreign earnings taxed at less than the United States federalincome tax rate, an increase in tax exempt interest income and a decrease inour overall state tax rate. We expect an effective tax rate of approximately36% for 2005. Subsequent to 2005, our effective tax rate may**change due to potential changes in themix of income within various domestic and international tax jurisdictions alongwith potential changes in tax rules and legislation.

 

**Liquidity and Capital Resources**

 

Asof March 31, 2005, we had cash and cash equivalents of $45.0 million,investments in marketable securities of $222.5 million and retained earnings of$26.3 million.

 

**Net cashprovided by operating activities was $25.8 million in the first three months of2005 compared with $15.7 million in the first three months of 2004. The $10.1million increase in cash provided by operating activities in the first three monthsof 2005 was primarily due to an increase in our net income and a decrease inour accounts receivable balance. Our operating cash flow and revenue aresignificantly influenced by subscription renewals and a decrease insubscription renewals would negatively impact our operating cash flow andrevenue.**

 

Netcash used in investing activities was $18.8 million in the first three monthsof 2005 compared with net cash used in investing activities of $23.1 million inthe first three months of 2004. The $4.3 million decrease in cash used byinvesting activities in the first three months of 2005 was primarily due to fewerpurchases of marketable securities to offset maturities and sales of marketablesecurities.

 

Netcash used by financing activities was $929,000 in the first three months of 2005compared with net cash provided by financing activities of $2.5 million in thefirst three months of 2004. The $3.4 million decrease in net cash provided byfinancing activities in the first three months of 2005 was primarily due to theuse of $7.1 million to repurchase 125,000 shares of our common stock offset by anincrease in the proceeds received from the exercise of stock options.

 

Wehave operating lease and software license commitments of approximately $1.6million during the remainder of 2005, $2.2 million in 2006, $2.0 million in 2007and $0.3 million in 2008. A significant majority of our operating leasecommitments are related to our corporate headquarters lease, which was mostrecently amended in July 2004 to add additional space for our corporateheadquarters and to extend the lease through 2008. The lease provides forescalating rent payments from 2004 to 2008. The rent expense related to ourcorporate headquarters lease is recorded monthly on a straight-line basis inaccordance with generally accepted accounting principles.

 

14

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Future minimum annual payments under non-cancelableoperating leases and software licenses at March 31, 2005 are as follows (inthousands):

 
| ** ** | ** ** | **Operating  Leases** | ** ** | **Software  Licenses** | ** ** | **Total** | ** ** |
|------------|------------|-----------------------|------------|------------------------|------------|-----------|------------|
| 2005       |       | $                     | 1,378      |                   | $          | 236       |       | $ | 1,614 |   |
| 2006       |       | 1,889                 |       | 314                    |       | 2,203     |       |
| 2007       |       | 1,937                 |       | 79                     |       | 2,016     |       |
| 2008       |       | 325                   |       | —                 |       | 325       |       |
|       |       | $                     | 5,529      |                   | $          | 629       |       | $ | 6,158 |   |

 

As of March 31, 2005 and 2004, wedid not have any relationships with unconsolidated entities or financialpartners, such as entities often referred to as structured finance or specialpurpose entities, which would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. As such, we are not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

 

OnApril 3, 2003, we announced that our Board of Directors authorized a stockrepurchase program of up to 2 million shares of our common stock. The repurchaseswill be made from time to time on the open market at prevailing market pricesor in privately negotiated transactions. Depending on market conditions andother factors, purchases under this program may be commenced or suspended atany time, or from time to time, without prior notice. As of March 31, 2005, wehad repurchased 1,131,000 shares of our common stock under this program, for anaggregate of $37.7 million at an average price of $33.37 per share.

 

Asof December 31, 2004, we retired all 1,006,000 shares of our common stock thathad been repurchased prior to that date. In accordance with APB 6, Status of Accounting Research Bulletins, thetreasury stock retirement was effected by reducing the following on ourConsolidated Balance Sheets:  treasurystock by $30.7 million, common stock by $0.1 million, additional paid-incapital by $6.4 million and retained earnings by $24.2 million.  There was no effect to our overall equityposition as a result of the retirement.

 

We believe that our cash and cash equivalents balances and investments in marketable securities will be sufficient to satisfy our cash requirements for the foreseeable future. We intend to continue to invest our cash in excess of current operating requirements in interest-bearing, investment-grade securities.

 

15

 

**Risks and Uncertainties**

 

**Risks anduncertainties that could impact our business, consolidated financial position,results of operations and cash flows and cause future results to differ fromour expectations include the following: customer acceptance of our services,products and fee structures; the success of our brand development efforts; thevolatile and competitive nature of the internet industry; changes in domesticand international market conditions and the entry into and development ofinternational markets for our products; risks relating to intellectual propertyownership; and the risks and uncertainties identified in our Annual Report onForm 10-K for the fiscal year ended December 31, 2004 and other filings withthe Securities and Exchange Commission.**

** **

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

** **

**Our market risk exposures are related to our cash, cashequivalents and investments. We invest our excess cash in highly liquidshort-term investments, municipal securities, commercial paper and corporatebonds. These investments are not held for trading or other speculativepurposes. Changes in interest rates affect the investment income we earn on ourinvestments and therefore impact our cash flows and results of operations.**

** **

**We are exposed to changes in interest rates primarily fromour short-term available-for-sale investments. Under our current policies, wedo not use interest rate derivative instruments to manage exposure to interestrate changes. A hypothetical 100 basis point adverse move in interest ratesalong the entire interest rate yield curve would not materially affect the fairvalue of our interest sensitive financial instruments at March 31, 2005.Changes in interest rates over time will, however, affect our interest income.**

** **

For the quarter ended March 31, 2005, all of our billings, includingthose billed by our operations in Ireland, were denominated in our functionalcurrency, which is the U.S. dollar. Working funds necessary to facilitate theshort-term operations of our subsidiaries are kept in the local currencies inwhich they do business. Beginning in the second quarter of 2005, we beganbilling certain international customers in Euros, however we do not expectthese billings to represent more than 10% of our total billings during 2005.

 

We utilize foreign currency forward contracts to hedge foreign currencymarket exposures of underlying assets and liabilities. Our objective is to reducethe risk to earnings and cash flows associated with changes in foreign currencyexchange rates. We do not use foreign currency forward contracts forspeculative or trading purposes. As of March 31, 2005, we had committed tosix foreign currency forward contracts to purchase Euro and British Pounds for$1.7 million. Our Euro commitment represents 450,000 Euros at a weightedaverage forward rate of 1.3146. Our British Pound commitment represents 600,000British Pounds at a weighted average forward rate of 1.9031. The fair value ofthese foreign currency forward contracts was $1.7 million at March 31, 2005.All of the foreign currency forward contracts will be settled before June 30,2005.

** **

**16**

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** **

**Item 4. Controls andProcedures**

 

**Disclosure Controls and Procedures**

** **

**         We maintain disclosure controls andprocedures (as defined in Rules 13a — 15(e) and 15d — 15(e) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) designed to ensure thatwe are able to collect the information we are required to disclose in thereports we file under the Exchange Act, and to record, process, summarize andreport this information within the time periods specified in the rules of theSecurities and Exchange Commission.**Our Chief Executive and Chief Financial Officersevaluated our disclosure controls and procedures as of the end of the periodcovered by this report. Based on their evaluation, our Chief Executive andChief Financial Officers have concluded that these controls and procedures areeffective.

** **

There have been no significantchanges in our internal control over financial reporting or in other factorsthat could significantly affect our internal control over financial reporting,including any corrective actions with regard to significant deficiencies andmaterial weaknesses, during the period covered by this report.

 

17

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**Part II - Other Information**

** **

**Item 1. Legal Proceedings**

** **

None.

** **

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds**

** **

**(a) Not applicable.**

** **

**(b) Not applicable.**

** **

**(c)  Issuer Purchasesof Equity Securities**

** **
| **Month**                               | ** ** | **Number of  shares purchased  during month(1)** | ** ** | **Average price  paid per  share** | ** ** | **Cumulative  number of shares  purchased as part  of publicly  announced plan(2)** | ** ** | **Maximum number  of shares that may  yet be purchased  under the plan** |
|-----------------------------------------|------------|--------------------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|
| **January 1st  through 31st  of 2005**  | ** ** | **—**                                       | ** ** | **—**                         | ** ** | **1,006,000**                                                                       | ** ** | **994,000**                                                              |
| **February 1st  through 28th  of 2005** | ** ** | **75,000**                                       | ** ** | **$56.46**                         | ** ** | **1,081,000**                                                                       | ** ** | **919,000**                                                              |
| **March 1st  through 31st  of 2005**    | ** ** | **50,000**                                       | ** ** | **$56.85**                         | ** ** | **1,131,000**                                                                       | ** ** | **869,000**                                                              |
| **Total**                               | ** ** | **125,000**                                      | ** ** | **$56.62**                         | ** ** | **1,131,000**                                                                       | ** ** | **869,000**                                                              |

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**(1)**          The purchases were made in open-markettransactions.

** **

**(2)**          On April 3, 2003, we announced that ourBoard of Directors authorized a stock repurchase program of up to 2 millionshares of our common stock.

** **

**Item3. Defaults upon Senior Securities**

** **

**None.**

** **

**Item4. Submission of Matters to a Vote of Security Holders**

** **

**None.**

** **

**Item 5. Other Information**

** **

**None.**

** **

**18**

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** **

** **

** **

** **

**Item 6. Exhibits**

** **

**Exhibits**

** **

**3.1(1)**          Amendedand Restated Certificate of Incorporation

**3.2(1)**          RestatedBylaws

**4.1(1)**          SpecimenStock Certificate of Websense, Inc

**31.1**                  Certificationof Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) or15d-14(a).

**31.2**                  Certificationof Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) or15d-14(a).

**32.1**                  Certificationof Principal Executive Officer pursuant to Exchange Act Rules 13a-14(b) or15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code(18 U.S.C. 1350).

**32.2**                  Certificationof Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) or15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code(18 U.S.C. 1350).

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**(1)**             Previouslyfiled as an exhibit to our Registration Statement on Form S-1, as amended,(File No 333-95619) and incorporated herein by reference.

** **

**19**

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** **

##### **SIGNATURES**

 

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

 

**WEBSENSE, INC.**

** **
| Date:  May 9, 2005 | By:   | /s/  JOHN B. CARRINGTON         |     |
|--------------------|-----------------|---------------------------------|----------|
|               |            | John  B. Carrington             |     |
| * *           | * *        | *Chairman of the Board and*     | * * |
| * *           | * *        | * Chief Executive Officer* | * * |
|               |            |                            |     |
| Date:  May 9, 2005 | By:   | /s/  DOUGLAS C. WRIDE           |     |
|               |            | Douglas  C. Wride               |     |
| * *           | * *        | *Chief Financial Officer*       | * * |

 

20

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**EXHIBIT INDEX**

** **
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                       |
| **3.1(1)**          | ** ** | **Amended  and Restated Certificate of Incorporation**                                                                                                                                           |
| **3.2(1)**          | ** ** | **Restated  Bylaws**                                                                                                                                                                             |
| **4.1(1)**          | ** ** | **Specimen  Stock Certificate of Websense, Inc**                                                                                                                                                 |
| **31.1**            | ** ** | **Certification  of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) or  15d-14(a).**                                                                                        |
| **31.2**            | ** ** | **Certification  of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) or  15d-14(a).**                                                                                        |
| **32.1**            | ** ** | **Certification  of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(b) or  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States  Code (18 U.S.C. 1350).** |
| **32.2**            | ** ** | **Certification  of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) or  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States  Code (18 U.S.C. 1350).** |

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**(1)     Previously filed as an exhibit to our Registration Statement onForm S-1, as amended, (File No 333-95619) and incorporated herein by reference.**

** **

**21**

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