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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, 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, 2002
OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___ to ___

Commission File Number 000-30093



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Websense, Inc.

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                  
|----------------------------------------------------------------------- |  | -------------------------------------------------
|Delaware
(State or other jurisdiction of incorporation or organization) |  | 51-0380839
(I.R.S.Employer Identification Number)

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



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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 outstanding of the registrants Common Stock, $.01 par
value, as of May 1, 2002 was 21,065,086.





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TABLE OF CONTENTS



|                               |                                                                                               |                                                        |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|Part I  Financial Information
|                               | Item 1. Consolidated Financial Statements (Unaudited)                                        
|                               |                                                                                               | Consolidated Balance Sheets                           
|                               |                                                                                               | Consolidated Statements of Operations                 
|                               |                                                                                               | Consolidated Statement of Stockholders Equity        
|                               |                                                                                               | Consolidated Statements of Cash Flows                 
|                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               |                                                                                               | Risks and Uncertainties                               
|                               | 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 and S-8                                             
|SIGNATURES                    



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Websense, Inc.
Form 10-Q
For the Three Months Ended March 31, 2002

TABLE OF CONTENTS

|                              |  |    |  |         |  |                                                                                       |  |                                                                                                    |    |      |    | 
|----------------------------- |  | -- |  | ------- |  | ------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |    |  |         |  |                                                                                       |  |                                                                                                    |    | Page
|                              |  |    |  |         |  |                                                                                       |  |                                                                                                    |    |     
|Part I. Financial Information
|                             
|                              |  |    |  | Item 1. |  | Consolidated Financial Statements (Unaudited)                                         |  |                                                                                                    |    |     
|                              |  |    |  |         |  |                                                                                       |  | Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001                             |    |      | 1  | 
|                              |  |    |  |         |  |                                                                                       |  | Consolidated Statements of Operations for the three months ended March 31, 2002
and 2001           |    |      | 2  | 
|                              |  |    |  |         |  |                                                                                       |  | Consolidated Statements of Stockholders Equity for the three months ended
March 31, 2002          |    |      | 3  | 
|                              |  |    |  |         |  |                                                                                       |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2002
and March 31, 2001 |    |      | 4  | 
|                              |  |    |  |         |  |                                                                                       |  | Notes to Consolidated Financial Statements                                                         |    |      | 5  | 
|                              |  |    |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                                    | 7  |     
|                              |  |    |  |         |  |                                                                                       |  | Risks and Uncertainties                                                                            |    |      | 13 | 
|                              |  |    |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                    | 25 |     
|                             
|Part II. Other Information   
|                             
|                              |  |    |  | Item 1. |  | Legal Proceedings                                                                     |  |                                                                                                    | 25 |     
|                              |  |    |  | Item 2. |  | Changes in Securities and Use of Proceeds                                             |  |                                                                                                    | 25 |     
|                              |  |    |  | Item 3. |  | Defaults upon Senior Securities                                                       |  |                                                                                                    | 26 |     
|                              |  |    |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                    | 26 |     
|                              |  |    |  | Item 5. |  | Other Information                                                                     |  |                                                                                                    | 26 |     
|                              |  |    |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                    | 26 |     
|                             
|Signatures                    |  | 27 | 

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Part I  Financial Information




Item 1. Consolidated Financial Statements (Unaudited)




Websense, Inc.
Consolidated Balance Sheets
(In thousands)

|                                       |                                                             |                            |        |         |             |  |              |         |         |  | 
|-------------------------------------- | ----------------------------------------------------------- | -------------------------- | ------ | ------- | ----------- |  | ------------ | ------- | ------- |  | 
|                                       |                                                             |                            |        |         | March 31,   |  | December 31,
|                                       |                                                             |                            |        |         | 2002        |  | 2001        
|                                       |                                                             |                            |        |         |             |  |             
|                                       |                                                             |                            |        |         | (Unaudited) |  |              |         |        
|Assets                                 |                                                             |                            |        |         |             |  |              |        
|Current assets:                        |                                                             |                            |        |         |             |  |              |        
|                                       | Cash and cash equivalents                                   |                            | $      | 36,000  |             |  | $            | 23,715  |        
|                                       | Investments in marketable securities                        |                            |        | 74,620  |             |  |              | 79,393  |        
|                                       | Accounts receivable, net of allowance for doubtful accounts |                            |        | 10,862  |             |  |              | 12,001  |        
|                                       | Accounts receivable from a related party                    |                            |        | 664     |             |  |              | 525     |        
|                                       | Other current assets                                        |                            |        | 1,363   |             |  |              | 1,084   |        
|                                       |                                                             |                            |        |         |             |  |              |        
|                                       |                                                             | Total current assets       |        |         | 123,509     |  |              |         | 116,718 | 
|                                       | Property and equipment, net                                 |                            |        | 2,572   |             |  |              | 2,710   |        
|                                       | Deposits and other assets                                   |                            |        | 329     |             |  |              | 384     |        
|                                       |                                                             |                            |        |         |             |  |              |        
|                                       | Total assets                                                |                            | $      | 126,410 |             |  | $            | 119,812 |        
|                                       |                                                             |                            |        |         |             |  |              |        
|Liabilities and stockholders equity   |                                                             |                            |        |         |             |  |              |        
|Current liabilities:                   |                                                             |                            |        |         |             |  |              |        
|                                       | Accounts payable                                            |                            | $      | 389     |             |  | $            | 640     |        
|                                       | Accrued payroll and related benefits                        |                            |        | 2,709   |             |  |              | 2,750   |        
|                                       | Other accrued expenses                                      |                            |        | 3,027   |             |  |              | 2,264   |        
|                                       | Current portion of deferred revenue                         |                            |        | 33,980  |             |  |              | 31,218  |        
|                                       |                                                             |                            |        |         |             |  |              |        
|                                       |                                                             | Total current liabilities  |        |         | 40,105      |  |              |         | 36,872  | 
|Deferred revenue, less current portion |                                                             |                            | 12,292 |         |             |  | 12,260       |        
|Stockholders equity:                  |                                                             |                            |        |         |             |  |              |        
|                                       | Common stock                                                |                            |        | 209     |             |  |              | 206     |        
|                                       | Additional paid-in capital                                  |                            |        | 89,492  |             |  |              | 88,639  |        
|                                       | Deferred compensation                                       |                            |        | (371    | )           |  |              | (531    | )      
|                                       | Accumulated deficit                                         |                            |        | (15,038 | )           |  |              | (17,694 | )      
|                                       | Accumulated other comprehensive income                      |                            |        | (279    | )           |  |              | 60      |        
|                                       |                                                             |                            |        |         |             |  |              |        
|                                       |                                                             | Total stockholders equity |        |         | 74,013      |  |              |         | 70,680  | 
|                                       |                                                             |                            |        |         |             |  |              |        
|                                       | Total liabilities and stockholders equity                  |                            | $      | 126,410 |             |  | $            | 119,812 |        
|                                       |                                                             |                            |        |         |             |  |              |        

See accompanying notes.

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

|                                      |                                     |                                          |                          |        |                    |        |           |        |       |       | 
|------------------------------------- | ----------------------------------- | ---------------------------------------- | ------------------------ | ------ | ------------------ | ------ | --------- | ------ | ----- | ----- | 
|                                      |                                     |                                          |                          |        | Three Months Ended
|                                      |                                     |                                          |                          |        |                   
|                                      |                                     |                                          |                          |        | March 31,          |        | March 31,
|                                      |                                     |                                          |                          |        | 2002               |        | 2001     
|                                      |                                     |                                          |                          |        |                    |        |          
|Revenues                              |                                     | $                                        | 13,035                   |        |                    | $      | 6,861     |       
|Cost of revenues                      |                                     |                                          | 933                      |        |                    |        | 817       |       
|                                      |                                     |                                          |                          |        |                    |        |           |       
|Gross margin                          |                                     |                                          | 12,102                   |        |                    |        | 6,044     |       
|                                      |                                     |                                          |                          |        |                    |        |           |       
|Operating expenses:                   |                                     |                                          |                          |        |                    |        |           |       
|                                      |                                     | Selling and marketing                    |                          |        | 5,939              |        |           |        | 4,276 |      
|                                      |                                     | Research and development                 |                          |        | 2,307              |        |           |        | 1,812 |      
|                                      |                                     | General and administrative               |                          |        | 1,667              |        |           |        | 1,203 |      
|                                      |                                     | Amortization of stock-based compensation |                          |        | 160                |        |           |        | 200   |      
|                                      |                                     |                                          |                          |        |                    |        |           |       
|                                      |                                     |                                          | Total operating expenses |        |                    | 10,073 |           |        |       | 7,491 | 
|                                      |                                     |                                          |                          |        |                    |        |           |       
|Income (loss) from operations         |                                     |                                          | 2,029                    |        |                    |        | (1,447    | )     
|Interest income, net                  |                                     |                                          | 713                      |        |                    |        | 1,060     |       
|                                      |                                     |                                          |                          |        |                    |        |           |       
|Net income (loss) before income taxes |                                     |                                          | 2,742                    |        |                    |        | (387      | )     
|Provision for income taxes            |                                     |                                          | 86                       |        |                    |        |          |       
|                                      |                                     |                                          |                          |        |                    |        |           |       
|Net income (loss)                     |                                     | $                                        | 2,656                    |        |                    | $      | (387      | )     
|                                      |                                     |                                          |                          |        |                    |        |           |       
|Net income (loss) per share:          |                                     |                                          |                          |        |                    |        |           |       
|                                      | Basic net income (loss) per share   |                                          | $                        | 0.13   |                    |        | $         | (0.02  | )    
|                                      |                                     |                                          |                          |        |                    |        |           |       
|                                      | Diluted net income (loss) per share |                                          | $                        | 0.11   |                    |        | $         | (0.02  | )    
|                                      |                                     |                                          |                          |        |                    |        |           |       
|                                      | Weighted average shares  basic     |                                          |                          | 20,777 |                    |        |           | 19,774 |      
|                                      |                                     |                                          |                          |        |                    |        |           |       
|                                      | Weighted average shares  diluted   |                                          |                          | 23,396 |                    |        |           | 19,774 |      
|                                      |                                     |                                          |                          |        |                    |        |           |       

See accompanying notes.

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Websense, Inc.
Consolidated Statement of Stockholders Equity
(Unaudited and in thousands)

|                             |                                                   |                                                                |        |              |   |            |     |                 |   |              |        |               |   |               |      |        |   |       |         |       |       |   |      |             |      |   |        |     |       |  
|---------------------------- | ------------------------------------------------- | -------------------------------------------------------------- | ------ | ------------ | - | ---------- | --- | --------------- | - | ------------ | ------ | ------------- | - | ------------- | ---- | ------ | - | ----- | ------- | ----- | ----- | - | ---- | ----------- | ---- | - | ------ | --- | ----- | -
|                             |                                                   |                                                                |        |              |   |            |     |                 |   |              |        |               |   |               |      |        |   |       |         |       |       |   |      | Accumulated |      |   |        |    
|                             |                                                   |                                                                |        | Common stock |   |            |     |                 |   |              |        |               |   |               |      |        |   | other |         | Total
|                             |                                                   |                                                                |        |              |   | Additional |     | Deferred        |   | Accumulated  |        | comprehensive |   | stockholders'
|                             |                                                   |                                                                |        | Shares       |   | Amount     |     | paid-in capital |   | compensation |        | deficit       |   | income        |      | equity
|                             |                                                   |                                                                |        |              |   |            |     |                 |   |              |        |               |   |               |      |       
|Balance at December 31, 2001 |                                                   |                                                                | 20,596 |              |   | $          | 206 |                 |   | $            | 88,639 |               |   | $             | (531 | )      |   | $     | (17,694 | )     |       | $ | 60   |             |      | $ | 70,680 |    
|                             | Issuance of common stock upon exercise of options |                                                                |        | 323          |   |            |     | 3               |   |              |        | 853           |   |               |      |       |   |       |         |      |       |   |      |            |      |   |        | 856 |      
|                             | Amortization of deferred compensation             |                                                                |        |             |   |            |     |                |   |              |        |              |   |               |      | 160    |   |       |         |      |       |   |      |            |      |   |        | 160 |      
|                             | Comprehensive income:                             |                                                                |        |              |   |            |     |                 |   |              |        |               |   |               |      |        |   |       |         |       |       |   |      |             |      |   |        |     |      
|                             |                                                   | Net income                                                     |        |              |  |            |     |                 |  |              |        |               |  |               |      |        |  |       |         |       | 2,656 |   |      |             |     |   |        |     | 2,656 |  
|                             |                                                   | Net change in unrealized loss on securities available for sale |        |              |  |            |     |                 |  |              |        |               |  |               |      |        |  |       |         |       |      |   |      |             | (339 | ) |        |     | (339  | )
|                             |                                                   |                                                                |        |              |   |            |     |                 |   |              |        |               |   |               |      |        |   |       |         |       |       |   |      |             |      |   |        |    
|                             |                                                   | Comprehensive net income                                       |        |              |   |            |     |                 |   |              |        |               |   |               |      |        |   |       |         |       |       |   |      |             |      |   |        |     | 2,317 |  
|                             |                                                   |                                                                |        |              |   |            |     |                 |   |              |        |               |   |               |      |        |   |       |         |       |       |   |      |             |      |   |        |    
|Balance at March 31, 2002    |                                                   |                                                                | 20,919 |              |   | $          | 209 |                 |   | $            | 89,492 |               |   | $             | (371 | )      |   | $     | (15,038 | )     |       | $ | (279 | )           |      | $ | 74,013 |    
|                             |                                                   |                                                                |        |              |   |            |     |                 |   |              |        |               |   |               |      |        |   |       |         |       |       |   |      |             |      |   |        |    

See accompanying notes.

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Websense, Inc.
Consolidated Statements of Cash Flows
(In thousands)

|                                                                                         |                                       |   |                    |       |           |   |         |       |  
|---------------------------------------------------------------------------------------- | ------------------------------------- | - | ------------------ | ----- | --------- | - | ------- | ----- | -
|                                                                                         |                                       |   | Three Months Ended
|                                                                                         |                                       |   |                   
|                                                                                         |                                       |   | March 31,          |       | March 31,
|                                                                                         |                                       |   | 2002               |       | 2001     
|                                                                                         |                                       |   |                    |       |          
|Operating activities:                                                                    |                                       |   |                    |       |           |   |         |      
|Net income (loss)                                                                        |                                       | $ | 2,656              |       |           | $ | (387    | )    
|Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                       |   |                    |       |           |   |         |      
|                                                                                         | Depreciation                          |   |                    | 467   |           |   |         | 323   |  
|                                                                                         | Amortization of deferred compensation |   |                    | 160   |           |   |         | 200   |  
|                                                                                         | Deferred revenue                      |   |                    | 2,794 |           |   |         | 3,413 |  
|Changes in operating assets and liabilities:                                             |                                       |   |                    |       |           |   |         |      
|                                                                                         | Accounts receivable                   |   |                    | 1,000 |           |   |         | (578  | )
|                                                                                         | Deposits and other assets             |   |                    | (224  | )         |   |         | (703  | )
|                                                                                         | Accounts payable                      |   |                    | (251  | )         |   |         | (330  | )
|                                                                                         | Accrued payroll and related benefits  |   |                    | (41   | )         |   |         | 140   |  
|                                                                                         | Other accrued expenses                |   |                    | 763   |           |   |         | 383   |  
|                                                                                         |                                       |   |                    |       |           |   |         |      
|Net cash provided by operating activities                                                |                                       |   | 7,324              |       |           |   | 2,461   |      
|                                                                                         |                                       |   |                    |       |           |   |         |      
|Investing activities:                                                                    |                                       |   |                    |       |           |   |         |      
|Purchase of property and equipment                                                       |                                       |   | (329               | )     |           |   | (258    | )    
|Purchases of marketable securities                                                       |                                       |   | (21,573            | )     |           |   | (12,154 | )    
|Maturities of marketable securities                                                      |                                       |   | 26,007             |       |           |   | 1,336   |      
|                                                                                         |                                       |   |                    |       |           |   |         |      
|Net cash provided by (used in) investing activities                                      |                                       |   | 4,105              |       |           |   | (11,076 | )    
|                                                                                         |                                       |   |                    |       |           |   |         |      
|Financing activities:                                                                    |                                       |   |                    |       |           |   |         |      
|Proceeds from exercise of stock options                                                  |                                       |   | 856                |       |           |   | 176     |      
|                                                                                         |                                       |   |                    |       |           |   |         |      
|Net cash provided by financing activities                                                |                                       |   | 856                |       |           |   | 176     |      
|                                                                                         |                                       |   |                    |       |           |   |         |      
|Increase (decrease) in cash and cash equivalents                                         |                                       |   | 12,285             |       |           |   | (8,439  | )    
|Cash and cash equivalents at beginning of period                                         |                                       |   | 23,715             |       |           |   | 13,106  |      
|                                                                                         |                                       |   |                    |       |           |   |         |      
|Cash and cash equivalents at end of period                                               |                                       | $ | 36,000             |       |           | $ | 4,667   |      
|                                                                                         |                                       |   |                    |       |           |   |         |      

See accompanying notes.

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WEBSENSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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, 2001,
included in Websense, Inc.s Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Operating results for the three months
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for any other interim period or for the year ending December 31, 2002.
The balance sheet at December 31, 2001 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 Income (Loss) Per Share

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

Dilutive securities include options and warrants as if converted. In the three months ended March 31, 2002,
the difference between the weighted average shares used in determining basic
net income (loss) per share versus diluted net income (loss) per share related
to dilutive stock options and warrants totaled 2,619,000. Potentially dilutive
securities totaling 741,000 and 2,697,000 for the three months ended March 31,
2002 and 2001, respectively, were excluded from diluted earnings per share
because of their anti-dilutive effect.

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3. Amortization of Stock-based Compensation

For the three-month periods ended March 31, 2002 and 2001, the Company
recorded amortization of stock-based compensation of $160,000 and $200,000. The
allocation of the expense by operating expense category is as follows (in
thousands):

|                               |  |                    |     |           |  |   |     | 
|------------------------------ |  | ------------------ | --- | --------- |  | - | --- | 
|                               |  | Three months ended
|                               |  |                   
|                               |  | March 31,          |     | March 31,
|                               |  | 2002               |     | 2001     
|                               |  |                    |     |          
|Selling and marketing          |  | $                  | 41  |           |  | $ | 14  | 
|Research and development       |  |                    | 25  |           |  |   | 28  | 
|General and administrative     |  |                    | 94  |           |  |   | 158 | 
|                               |  |                    |     |           |  |   |     | 
|Total stock-based compensation |  | $                  | 160 |           |  | $ | 200 | 
|                               |  |                    |     |           |  |   |     | 

4. Reclassifications

Certain reclassifications have been made for consistent presentation.

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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion and analysis should be read in conjunction with
the financial statements and related notes contained elsewhere in this report.
See Risks and Uncertainties regarding certain factors known to us that could
cause reported financial information not to be necessarily indicative of future
results.

Forward Looking Statements

From time to time we have made and may continue to make forward looking
statements within the meaning of the federal securities laws. This report on
Form 10-Q may contain forward-looking statements. These statements, which
represent our expectations or beliefs concerning various future events, may
contain words such as expects, anticipates, intends, plans, believes,
estimates, or other words indicating future results. Such statements include
but are not limited to statements concerning the following:



| |  |  | anticipated trends in revenue;                             
| | - |  | -----------------------------------------------------------
|
| |  |  | growth opportunities in domestic and international markets;
|
| |  |  | expected trends in operating expenses;                     
|
| |  |  | anticipated cash and capital requirements; and             
|
| |  |  | intentions regarding investment of excess cash.            

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 of this report.

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 the 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 April 2002. We currently derive nearly all
of our revenues from subscriptions to this solution and expect this trend to
continue in the future.

We also derive a very small portion of revenues from professional services
for the implementation of our products. We recognize revenues for these
professional services upon their completion or delivery. These revenues have
declined significantly over the past three years due to our shift in business
strategy. We expect these revenues to constitute an insignificant percentage of
our total revenues in future periods.

During the three months ended March 31, 2002, we derived 35% of revenues
from international sales compared to 34% for the three months ended March 31,
2001. We believe international markets represent a significant growth
opportunity and are continuing to expand our international operations,
particularly in selected countries in the European and Asia/Pacific markets.

7



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We currently sell Websense Enterprise through both indirect and direct
channels; however, sales through indirect channels currently account for more
than 75% of our revenue and our strategy is to continue to rely on indirect
sales channels for a significant majority of our sales. Domestically, we sell
solutions through more than 880 Value Added Resellers, or VARs, and through our
direct sales force. Internationally, we distribute Websense Enterprise through
more than 145 distributors and resellers in more than 80 countries who resell
our solution through VARs and their resellers.

As described above, we recognize revenues from subscriptions to Websense
Enterprise on a monthly straight-line basis over the term of the subscription.
However, we recognize operating expenses as they are incurred. These expenses
include commissions relating to the sale of new subscriptions, which are based
on the total amount of the subscription contract and are fully expensed in the
current period. 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.

Critical Accounting Policies

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Revenue Recognition.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. We promptly invoice customers for the full amount
of their subscriptions at the time a subscription is activated.
Payment is due for the full term of the subscription generally within 30 days of the
invoice. We recognize revenue on a monthly 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 would negatively impact our revenue.

Allowance for Doubtful Accounts.We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

Deferred Tax Assets.We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event we were to determine that we would be able to realize our deferred tax
assets in the future in excess of their net recorded amounts, an adjustment to
the deferred tax assets would increase our income or additional
paid-in capital in the period such
determination was made. Should we determine that we would not be
able to realize all or part of our net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged against income in the
period such determination was made. As of December 31, 2001, we had $14.3
million in gross deferred tax assets, which were fully offset by a valuation
allowance.

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Results of Operations

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

|                                      |                                          |                          |     |                    |    |           |     |    |     |  
|------------------------------------- | ---------------------------------------- | ------------------------ | --- | ------------------ | -- | --------- | --- | -- | --- | -
|                                      |                                          |                          |     | Three Months Ended
|                                      |                                          |                          |     |                   
|                                      |                                          |                          |     | March 31,          |    | March 31,
|                                      |                                          |                          |     | 2002               |    | 2001     
|                                      |                                          |                          |     |                    |    |          
|Revenues                              |                                          |                          | 100 | %                  |    |           | 100 | % 
|Cost of revenues                      |                                          |                          | 7   | %                  |    |           | 12  | % 
|                                      |                                          |                          |     |                    |    |           |     |   
|Gross margin                          |                                          |                          | 93  | %                  |    |           | 88  | % 
|Operating expenses:                   |                                          |                          |     |                    |    |           |     |   
|                                      | Selling and marketing                    |                          |     | 45                 | %  |           |     | 62 | %  
|                                      | Research and development                 |                          |     | 18                 | %  |           |     | 26 | %  
|                                      | General and administrative               |                          |     | 13                 | %  |           |     | 18 | %  
|                                      | Amortization of stock-based compensation |                          |     | 1                  | %  |           |     | 3  | %  
|                                      |                                          |                          |     |                    |    |           |     |   
|                                      |                                          | Total operating expenses |     |                    | 77 | %         |     |    | 109 | %
|                                      |                                          |                          |     |                    |    |           |     |   
|Income (loss) from operations         |                                          |                          | 16  | %                  |    |           | (21 | %)
|Interest income, net                  |                                          |                          | 5   | %                  |    |           | 15  | % 
|                                      |                                          |                          |     |                    |    |           |     |   
|Net income (loss) before income taxes |                                          |                          | 21  | %                  |    |           | (6  | %)
|Provision for income taxes            |                                          |                          | 1   | %                  |    |           | 0   | % 
|                                      |                                          |                          |     |                    |    |           |     |   
|Net income (loss)                     |                                          |                          | 20  | %                  |    |           | (6  | %)
|                                      |                                          |                          |     |                    |    |           |     |   

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Revenues

Revenues increased from $6.9 million in the first quarter of 2001 to $13.0
million in the first quarter of 2002. This increase was primarily a result of
the addition of new customers. Approximately 60% of subscription revenue
recognized in the first quarter of 2002 was derived from sales to first-time
customers, who initially purchased one-, two-, or three-year subscriptions to
Websense Enterprise in 2002 or prior years. The remaining 40% of subscription
revenues was generated from renewal business with existing customers.

Cost of Revenues

Cost of revenues consists of the costs of Web site review, technical
support and infrastructure costs associated with maintaining our database. Cost
of revenues increased from $817,000 in the first quarter of 2001 to $933,000 in
the first quarter of 2002. The increase of $116,000 was primarily due to the
costs associated with additional personnel in our technical support group. We
expect cost of revenues to increase in the future as we support the growth and
maintenance of our database as well as the technical support needs of our
customers. As a percentage of revenues, cost of revenues decreased from 12% in
the first quarter of 2001 to 7% in the first quarter of 2002. This decrease was
primarily due to benefits derived from the automation of database search and
support processes. We expect that cost of revenues, as a percentage of
revenues, will remain below 10% of revenues for the foreseeable future.

Gross Margin

Gross margin increased from $6.0 million in the first quarter of 2001 to
$12.1 million in the first quarter of 2002. The increase was primarily due to
increased revenues. As a percentage of revenues, gross margin increased from
88% in the first quarter of 2001 to 93% in the first quarter of 2002. This
increase was primarily due to benefits derived from the automation of database
search and support processes. We expect that gross margin, as a percentage of
revenues, will remain in excess of 90% of revenues for the foreseeable future.

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Operating Expenses

Selling and marketing. Selling and marketing expenses consist primarily of
salaries, commissions and benefits related to personnel engaged in selling,
marketing and customer support functions, along with costs related to public
relations, advertising, promotions and travel. Selling and marketing expenses
increased from $4.3 million in the first quarter of 2001 to $5.9 million in the
first quarter of 2002. The increase in selling and marketing expenses of $1.6
million was primarily due to increased headcount costs of approximately
$790,000, increased commission expenses resulting from increased sales of
pre-paid subscriptions (also referred to as billings) of approximately
$180,000, as well as increased advertising and promotional activities in North
America and Europe. We expect selling and marketing expenses to increase in the
future as more personnel are added to support our globally expanding selling
and marketing efforts.

Research and development. Research and development expenses consist primarily
of salaries and benefits for software developers, contract programmers,
facilities costs and equipment depreciation. Research and development expenses
increased from $1.8 million in the first quarter of 2001 to $2.3 million in the
first quarter of 2002. The increase of $500,000 in research and development
expenses was primarily a result of personnel added since the first quarter of
2001 to support our expanded list of technology partners as well as the growing
feature set of Websense Enterprise. We expect research and development expenses
to increase in the future as more personnel are added to support additional
technology partners and to grow the feature set of Websense Enterprise.

General and administrative. General and administrative expenses consist
primarily of salaries, benefits and related expenses for our executive,
finance, human resources and administrative personnel, third party professional
service fees and allocated facilities and depreciation expenses. General and
administrative expenses increased from $1.2 million in the first quarter of
2001 to $1.7 million in the first quarter of 2002. The $500,000 increase in
general and administrative expenses is primarily due to state sales tax
expenses and foreign income tax consulting expenses. We expect general and
administrative expenses to increase in future periods, reflecting growth in
operations and increased expenses associated with being a public company.

Amortization of stock-based compensation. Amortization of stock-based
compensation decreased from $200,000 in the first quarter of 2001 to $160,000
in the first quarter of 2002. The decrease in the amortization expense is
primarily due to the accelerated method of amortization used that resulted in
higher expense in the first quarter of 2001 as compared to the first quarter of
2002. We expect amortization of stock-based compensation to decrease in future
periods as a result of using the accelerated method of amortization.

Interest Income, Net

Net interest income decreased from $1.1 million in the first quarter of
2001 to $713,000 in the first quarter of 2002. The decrease is due to lower
interest rates earned by our cash, cash equivalents and marketable securities
despite increased balances as of March 31, 2002 as compared to March 31, 2001.
We expect net interest income during 2002 to remain relatively consistent with
the results obtained during the first quarter of 2002.

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Provision for Income Taxes

In the first quarter of 2001, there was no provision for income taxes. Our
provision for income taxes in the first quarter of 2002 relates to our
wholly-owned subsidiaries in the United Kingdom and Japan as well as domestic
state income taxes in a few states. Beyond these domestic state income taxes,
we did not provide for any other income taxes related to our operations in the
United States due to the utilization of our deferred tax assets that we
recorded in prior periods. We expect our effective U.S. tax rate to be less
than both the federal and state statutory rates in 2002 due to the continued
utilization of our deferred tax assets; however, we expect our provision for
income taxes to increase in 2002 as compared to 2001. Subsequent to 2002, we
expect the provision for income taxes to continue to increase, reflecting
continued growth in our business, both domestically and internationally, and
the utilization of our deferred tax assets.

Liquidity and Capital Resources

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

As of March 31, 2002, we had cash and cash equivalents of $36.0 million
and investments in marketable securities of $74.6 million and an accumulated
deficit of $15.0 million.

Net cash provided by operating activities was $7.3 million in the first
quarter of 2002 and $2.5 million in the first quarter of 2001. In the first
quarter of 2002, cash provided by operating activities was primarily due to net
income from operations, an increase in our subscriptions (which are initially
recorded as deferred revenue) and interest earnings on our invested cash. In
the first quarter of 2001, cash provided by operating activities was primarily
due to an increase in our subscriptions (which are initially recorded as
deferred revenue) and interest earnings on our invested cash. Our operating
cash flow and revenue are significantly influenced by subscription renewals,
and a decrease in subscription renewals would negatively impact our operating
cash flow and revenue.

Net cash provided by investing activities was $4.1 million in the first
quarter of 2002 compared to net cash used in investing activities of $11.1
million in the first quarter of 2001. The relative increase in cash provided by
investing activities in the first quarter of 2002 is primarily due to
maturities of marketable securities.

Net cash provided by financing activities was $856,000 in the first
quarter of 2002 compared to $176,000 in the first quarter of 2001. Cash
provided by financing activities in the first quarter of 2002 and the first
quarter of 2001 was due to proceeds received from the exercise of stock
options.

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, 2002, 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 $693,000
expiring during the three remaining quarters of 2002 and $139,000 expiring in
2003.

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We believe that our cash and cash equivalents balances, investments in
marketable securities and funds available under our existing credit facilities
will be sufficient to satisfy our cash requirements for at least the next 12
months. We intend to continue to invest our cash in excess of current operating
requirements in interest bearing, investment-grade securities. If existing cash
is insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities or to obtain a larger credit facility. The
sale of additional equity or convertible debt securities would result in
additional dilution to our stockholders. 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.

Our future success 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 durations 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 be successful in selling renewal subscriptions.

Our future success also depends on our ability to sell further subscriptions to
existing customers in order to obtain additional seats within their respective
organizations. 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 and
costly sales efforts targeting senior management and other management personnel
associated with our customers Internet infrastructure.

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 to Websense
Enterprise and we expect this trend will continue for the foreseeable future.
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 existing and 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 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.

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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 35% of our total revenues in both the first quarter of 2002 and
in 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:



| |  | dependence on foreign distributors and their sales channels;                                                             
|- |  | -------------------------------------------------------------------------------------------------------------------------
| 
| |  | the ability of our Websense Enterprise products to properly categorize and filter Web sites containing foreign languages;
| 
| |  | laws and business practices favoring foreign competitors;                                                                
| 
| |  | compliance with multiple, conflicting and changing governmental laws and regulations, including tax laws and regulations;
| 
| |  | foreign currency fluctuations;                                                                                           
| 
| |  | longer accounts receivable payment cycles and other collection difficulties; and                                         
| 
| |  | regional economic and political conditions.                                                                              

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.

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. 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.

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We have a history of losses and, because we expect our operating expenses to
increase in the future, we may not be able to maintain profitability.

In 2001, we achieved profitability for the first time since 1996. Prior to the
third quarter of 2001, we had experienced net losses in each of our previous 21
fiscal quarters, and as of March 31, 2002, we had an accumulated deficit of
$15.0 million. We may be unable to maintain profitability unless our revenues
continue to increase at a greater rate than our operating expenses. We
currently expect our operating expenses to increase substantially, as we, among
other things:



| |  | expand our domestic and international selling and marketing activities;                                                  
|- |  | -------------------------------------------------------------------------------------------------------------------------
| 
| |  | expand our Websense product offerings;                                                                                   
| 
| |  | increase our research and development efforts to upgrade our existing products and develop new products and technologies;
| 
| |  | develop and expand our proprietary database and systems;                                                                 
| 
| |  | upgrade our operational and financial systems, procedures and controls; and                                              
| 
| |  | hire additional personnel, including sales and marketing personnel, engineers and other technical staff.                 

We will need to significantly increase our revenues to maintain profitability.
If we fail to increase revenues from subscription fees for Websense Enterprise,
we may experience losses in future quarters. If we continue to grow, we also
may fail to accurately estimate and assess the associated increase in our
operating expenses. 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 face increasing competition that could
prevent us from increasing revenue or maintaining profitability. In
addition, we may face competition from better-established companies that have
significantly greater resources.

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



| |  | companies offering network filtering products, such as SurfControl plc,
Secure Computing, Symantec Corporation, N2H2 Incorporated, Elron
Software, Inc. and 8e6 Technologies; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | companies offering network reporting products, such as the WebTrends
business acquired by NetIQ in 2001 and Wavecrest Computing.                                                 

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. We also face potential competition from our own indirect sales
channels, who may decide to develop or sell competing products. Many of our
potential competitors enjoy substantial competitive advantages,
such as:



| |  | greater name recognition and larger marketing budgets and resources;        
|- |  | ----------------------------------------------------------------------------
| 
| |  | established marketing relationships and access to larger customer bases; and
| 
| |  | substantially greater financial, technical and other resources.             

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.

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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 monthly over the terms of
their subscription agreements which generally have durations 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.

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
technology, 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 a significant majority of our products indirectly. We intend
to continue to rely on our indirect sales channels for a significant majority
of revenue. We depend on our indirect sales channels, including value-added
resellers, distributors, and providers of managed Internet services, to offer
Websense Enterprise to a larger customer base than can be reached through a
direct sales effort. 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.

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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 more than 75% of our revenues in the
first quarter of 2002 and for more than 80% of our revenues in 2001. We
anticipate that sales from our various indirect sales channels, including
value-added resellers, distributors, providers of managed Internet services and
others, will continue to account for a significant majority 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. Some of our indirect sales channels also market and sell products
that compete with Websense Enterprise or may decide to do so in the future. We
may not be able to prevent these parties from devoting greater resources to
support our competitors products and/or eliminating their efforts to sell
Websense Enterprise.

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.

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
April 2002. 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 four
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.

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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 maintain profitability.

During 2001, the United States and other international markets in which we
offer our products experienced a significant economic downturn. In addition,
the United States and other countries suffered significant acts of hostility
and terror. Such acts may increase or prolong such negative economic
conditions. The economic downturn may impact our ability to sustain
profitability by:



| |  | negatively affecting growth in demand for our products and services;                      
|- |  | ------------------------------------------------------------------------------------------
| 
| |  | causing some of our customers to be unable to pay for subscriptions they have ordered; and
| 
| |  | decreasing the renewal rate of subscriptions by our existing customers.                   

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 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 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 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 primarily 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:



| |  | concentration of marketing expenses for activities such as trade shows
and advertising campaigns;                
|- |  | -----------------------------------------------------------------------------------------------------------------
| 
| |  | concentration of general and administrative expenses, such as
recruiting expenses and professional services fees;
| 
| |  | concentration of research and development costs; and                                                             
| 
| |  | concentration of expenses associated with commissions paid on sales of
subscriptions to Websense Enterprise.     

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 has been and likely will continue to be
highly volatile and could be subject to wide fluctuations in response to a
number of factors that are beyond our control, including:



| |  | announcements of technological innovations or new products or services by our competitors;
|- |  | ------------------------------------------------------------------------------------------
| 
| |  | demand for Websense Enterprise, including fluctuations in subscription renewals;          
| 
| |  | fluctuations in revenues from our indirect sales channels;                                
| 
| |  | changes in the pricing policies of our competitors; and                                   
| 
| |  | changes in government regulations.                                                        

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



| |  | announcements of technological innovations or new products or services by us;                      
|- |  | ---------------------------------------------------------------------------------------------------
| 
| |  | changes in our pricing policies;                                                                   
| 
| |  | quarterly variations in our operating expenses; and                                                
| 
| |  | our technological capabilities to accommodate the future growth in our operations or our customers.

Further, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market price of the stock of
many Internet-related companies, and that often have been unrelated or
disproportionate to the operating performance of these companies. A number of
publicly traded Internet-related companies have current market prices below
their initial public offering prices. Market fluctuations such as these may
seriously harm the market price of our common stock. In the past, securities
class action suits have been filed following periods of market volatility in
the price of a companys securities. If such an action were 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 large numbers of shares of our common stock 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.

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

The success of Websense Enterprise depends on the breadth and accuracy of our
database. Although our database currently catalogs more than 3.4 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 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.

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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 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.

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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. In such an event we may be
unable to recruit personnel to replace these individuals in a timely manner, or
at all, on acceptable terms.

Our growth could strain our 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 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.

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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:



| |  | difficulties in integrating operations, technologies, services and personnel;       
|- |  | ------------------------------------------------------------------------------------
| 
| |  | diversion of financial and management resources from existing operations;           
| 
| |  | risk of entering new markets;                                                       
| 
| |  | potential loss of key employees; and                                                
| 
| |  | inability to generate sufficient revenues to offset acquisition or investment costs.

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.

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.

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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risk exposures are related to our cash, cash equivalents and
investments. We invest our excess cash in highly liquid 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.

We are exposed to changes in interest rates
primarily from our available-for-sale investments. Under our current policies, we do not use
interest rate derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point adverse move in interest rates along
the entire interest rate yield curve would not materially affect the fair value
of our interest sensitive financial instruments at March 31, 2002. Declines in
interest rates over time will, however, reduce our interest income.

In addition, we have a $1.5 million loan and security agreement with a
financial institution. Interest on this credit facility is 5% at March 31,
2002. At March 31, 2002, 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.




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

(a)  Not applicable.

(b)  Not applicable.

(c)  Not applicable.

(d)  On March 28, 2000, we completed our initial public offering for the sale of
4,000,000 shares of common stock at a price to the public of $18 per share,
which resulted in net proceeds of $65.7 million after payment of the
underwriters commissions and deductions of offering expenses. The
registration statement (No. 333-95619) relating to our initial public offering
was declared effective on March 28, 2000. Subsequent to our initial public
offering, a portion of the offering proceeds were used to repay the $1.4
million balance of our fixed term loan agreements with financial institutions.
The remaining proceeds have conformed with our intended use outlined in the
prospectus related to such offering. We currently have approximately $64.3
million remaining from our IPO proceeds.

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Item 3. Defaults upon Senior Securities

None.




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

None




Item 5. Other Information

None




Item 6. Exhibits and Reports on Form 8-K and S-8



|(a) |  | Exhibits                                                                                    
|--- |  | --------------------------------------------------------------------------------------------
|   
|    |  | None                                                                                        
|   
|(b) |  | Reports on Form 8-K                                                                         
|   
|    |  | No reports on Form 8-K were filed by the Registrant during the quarter
ended March 31, 2002.

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SIGNATURES

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

|                   |                                                                                         |                         
|------------------ | --------------------------------------------------------------------------------------- | ------------------------
|                   | WEBSENSE, INC                                                                          
|                  
|Date: May 14, 2002 | By:                                                                                     | /s/   JOHN B. CARRINGTON
|                   |                                                                                        
|                   | John B. Carrington
   Chairman of the Board, President, and Chief Executive 
   Officer

|                   |                                             |                       
|------------------ | ------------------------------------------- | ----------------------
|Date: May 14, 2002 | By:                                         | /s/   DOUGLAS C. WRIDE
|                   |                                            
|                   | Douglas C. Wride
   Chief Financial Officer

27