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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-K
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                                         to
 Commission File Number: 0-31613
 WEBSIDESTORY, INC.
  Delaware
    
    33-0072173(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)10182 Telesis Court, 6thFloor, San Diego, CA
    
    92121(Address of principal executive offices)
    
    (Zip Code)
 (858) 546-0040
  Title of Each Class
    
    Name of Each Exchange on Which RegisteredNone
    
    None
 Common Stock, par value $0.001 per
share
 o þ
 o þ
 Note
 þ o
 £
  o þ o
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE




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##### 



WEBSIDESTORY, INC.
 FORM 10-K  ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
  
 TABLE OF CONTENTS
 PagePART I.
    
    
    1Item 1 Business
    
    
    1Item 1A Risk Factors
    
    
    11Item 1B Unresolved Staff Comments
    
    
    26Item 2 Properties
    
    
    27Item 3 Legal Proceedings
    
    
    27Item 4 Submission of Matters to a Vote of Security Holders
    
    
    27PART II.
    
    
    28Item 5 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    28Item 6 Selected Financial Data
    
    
    29Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 8 Financial Statements and Supplementary Data
    
    
    44Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    44Item 9A Controls and Procedures
    
    
    44Item 9B Other Information
    
    
    47PART III
    
    
    48Item 10 Directors and Executive Officers of the Registrant
    
    
    48Item 11 Executive Compensation
    
    
    48Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    48Item 13 Certain Relationships and Related Transactions
    
    
    48Item 14 Principal Accounting Fees and Services
    
    
    48PART IV
    
    
    49Item 15 Exhibits and Financial Statement Schedules
    
    
    49SIGNATURES
    
    
    53EXHIBIT 4.4EXHIBIT 10.8EXHIBIT 10.12EXHIBIT 10.13EXHIBIT 10.17EXHIBIT 10.18EXHIBIT 10.21EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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PART I
 Forward-Looking Statements
   
 Item 1. Business.
 Overview
   1




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Recent Acquisitions
   Benefits of Our Services
  
    
    Provide Valuable Information to Improve Online and Offline Initiatives.Our analytic
reports help our customers understand how users navigate their websites. Our reporting
services allow businesses to compare the popularity and effectiveness of their content over
time and across sections of their websites. These reports can reveal which paths in a
website lead to the greatest number of sales and where bottlenecks occur and enable rapid
testing of the effects that changes in content and design have on browsing, shopping and
buying. In addition, our services allow our customers to develop offline marketing
strategies based on online analysis. We also correlate browsing and searching behavior with
purchasing to reveal shopping patterns and trends.
 2




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
    
    Empower Customers to Implement Informed Marketing Decisions.While our web analytics
service provides a basis for decisions affecting online marketing, our customers can use
our other Active Marketing Suite applications to implement their decisions. Our customers
can use our website search application to influence how visitors navigate their website and
search for content and products. Our web content management application allows our
customers to publish and modify website content. We expect to release our keyword bid
management application later in 2006, which will enable our customers to develop and
execute complex keyword bidding strategies.
    
    Improve Marketing Return on Investment.Our web analytics reports help businesses
determine where their marketing budgets are best spent. We measure and report online
responses to both online and offline marketing campaigns. Using our services, our customers
can run simultaneous campaigns, assess results in real time and then reallocate marketing
resources to the most effective campaigns. They can identify which referral sources
generate the most customer leads and can assess each campaigns return on investment in
terms of sales relative to costs.
    
    Offer a Lower Total Cost of Ownership.Compared to traditional software, our on-demand
services can normally be quickly deployed, which allows our customers to avoid spending
time installing or maintaining software. Our services provide a low total cost of ownership
by eliminating the need for large investments in software licenses and upgrades, hardware,
extensive implementation and integration services and additional information technology
staff. Our services are also compatible with all commonly used operating systems and web
browsers. Additionally, our on-site licenses are, once installed, updated in an automated
fashion over encrypted network connections which run over the Internet or private network
lines, reducing our requirement to support back releases and creating a hybrid version of
in-house software with some of the efficiencies of on-demand delivery.
    
    Are Secure and Scalable.Our services are delivered over the Internet and have been
designed to provide our customers with high levels of security, performance and
reliability. We maintain security through the use of firewalls, intrusion detection,
proprietary monitoring, and network policies and procedures. Our proprietary data
management systems are highly scalable and can handle large volumes of data at high speeds.
Our systems generally use commercially available hardware and proprietary software.
 Our Strategy
  
    
    Expand the Features and Functionality of Our Services.We plan to further enhance the
features and functionality of our on-demand applications, as well as adapt our services to
changing Internet environments and business practices. We also plan to continue to increase
the number of languages supported by our services. We believe that our multi-tenant
application architecture is well-designed to accommodate new features and functions. For
our on-demand solutions, most additions of new features and functions are centrally
implemented entirely by us on our servers, which results in the upgrades becoming part of
our services. As a result, customers benefit from our upgrades with no action required on
their part.
    
    Pursue New Customers in Our Existing Markets, Cross-Sell Our Products and Expand into
New Geographic Markets.Our on-demand applications currently serve diverse organizations,
including Fortune 500 corporations, small and medium businesses and educational
institutions. We intend to continue marketing our services to a broad range of
organizations, primarily through our direct sales force. We plan to increase the number of
sales people that we employ and to develop other marketing or distribution channels for our
services. Additionally, we plan to leverage our sales force to cross-sell all of the
applications in our Active Marketing Suite across our current and potential customer base.
We also plan to increase our marketing efforts to customers outside
of North America by recruiting local sales and support
professionals, and we may also expand outside North America by selectively pursuing
acquisitions.
 3




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
    
    Progressively Integrate Our Digital Marketing Applications.In May 2005, we acquired
Avivo, a provider of on-demand website search and web content management applications, and
in February 2006, we acquired Visual Sciences, a provider of streaming data analysis and
visualization software and on-demand services. We intend to launch our keyword bid
management application during 2006. We believe that there are significant benefits through
the integration of data, analysis and functionality of our web analytics, website search,
web content management and keyword bid management applications. We intend to integrate
these applications, as well as future applications we acquire or develop in order to
enhance the value of the services we provide to our customers.
    
    Continue to Develop and Acquire Related Services and Technologies.We believe that our
success in web analytics will help us sell related, on-demand digital marketing services
such as website search applications, web content management, keyword bid management, call
center analytics, marketing surveys, email marketing and affiliate marketing networks. In
the past year, we have developed or acquired several of these digital marketing
applications, and we intend to develop or acquire additional applications. We believe our
strengths in data analysis, scalability and delivery of on-demand application services will
allow us to compete effectively with other companies that may attempt to offer comparable
digital marketing services.
    
    Provide Superior Customer Service and Build Lasting Relationships with Our Customers.
We believe that we can generate more revenue from our customers by promoting wider and more
diverse deployments of our services. We seek to learn industry best practices based on
feedback from our customers and to incorporate these practices into our technology and
professional services. This strategy enhances the value our customers receive from our
services. We intend to keep our customers satisfied by responding promptly to their
feedback and requests and by building technology that helps them achieve their goals.
    
    Encourage the Development of Third-Party Applications that Integrate with and are
Complementary to Our Services.Our services are designed to allow third-party developers
to create applications complementary to our core services offering. Our analytic reporting
and data collection processes can be integrated with third-party applications through our
published APIs and through standard-format data feeds. We actively encourage our customers
to integrate our services with other systems and applications that they use to increase the
value of our services.
 Our Services
  Service
    
    DescriptionHBX On-Demand Web Analytics
    
    HBX is our on-demand web analytics service
that collects, processes, stores and
reports on Internet user behavior based on
browser activity. Reports that we provide
give our customers an extensive analysis of
what visitors are doing on their web pages.
For example, HBX can be used to inform our
customers which marketing initiatives
visitors responded to, what search engines
they used, what keywords they entered, how
much time they spent on web pages, what
they bought online, when they abandoned
shopping carts and what geographic area
they live in.
 4




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Service
    
    DescriptionWebSideStory Search
    
    Search is our on-demand application that
delivers relevant search results to
visitors of our customers websites and
guides them, step-by-step, to the products
and information they want. Search also
enables our customers to learn from their
website visitors behavior and improve
their business decisions based on what
visitors are searching for and how often
they find what they want. Customers can
customize the search interface and results
templates to match their website design.WebSideStory Publish
    
    Publish is our on-demand web content
management application that helps
businesses improve their website. Publish
allows marketers and website owners to
control website content, without
sacrificing control over workflow, design
and permissions required by web teams. For
example, customers of Publish can navigate
their own website to the content they want
to modify, click a button and make the
change. An additional click of a button
will publish the changed content. Little to
no training is required to utilize this
application, and no technical expertise is
needed.WebSideStory Bid
(expected to be released
during 2006)
    
    Bid is our on-demand keyword bid management
application that will enable search engine
marketers to actively manage pay-per-click
bids from a single, easy-to-use interface.
Bid will be integrated with HBX to enable
customers to analyze the effectiveness of
their keyword bid strategies. We plan to
release the first version of Bid during
 2006.Visual Site
    
    Visual Site provides customers real-time
visibility into Internet channel campaigns,
sites, visitors and segments.Visual Call
    
    Visual Call provides customers real-time
visibility into voice channel systems,
customers and segments.Visual Mail
    
    Visual Mail provides customers real-time
visibility into e-mail channel content,
customers and segments.
  Professional Services.
 HBX DataFeed.
 HitBox Professional.
 Express Search.
 5




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Technology and Operations
 Technology
       Operations
  6




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Customers
  Sales and Marketing
 Direct Sales
  Marketing
   
    
    advertising on industry-related websites;
    
    participation in, and sponsorship of, Internet user conferences, trade shows and industry events;
    
    partnering with well-known organizations within the industry;
    
    using our website to provide product and company information and industry-related downloads; and
    
    issuing press releases about business and product developments as appropriate.
 Customer Service and Support
  7




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International Sales
  Competition
  
    
    web analytics providers such as Coremetrics, Omniture and WebTrends;
    
    website search providers such as Endeca, Google and Verity; and
    
    web content management providers such as Interwoven and Vignette.
    
    
    product functionality and breadth of services offered;
    
    speed and ease of implementation and use;
    
    price and cost of ownership;
    
    brand name and reputation;
    
    rates of user adoption among the decision makers;
    
    performance, security, scalability, reliability and flexibility of the services;
 8




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
    
    ability to gather and process large amounts of data;
    
    ease of integration with existing applications; and
    
    quality of customer support and services.
  Intellectual Property
      9




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United States and Foreign Government Regulation
      Employees
  10




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Available Information
  www.websidestory.com
 
 Item 1A. Risks Factors
 The following information sets forth factors that could cause our actual results to differ
materially from those contained in forward-looking statements we have made in this annual report
and those we may make from time to time.
 Risks Related to Our Business
 Our web analytics services comprise a substantial majority of our revenue, and our business will be
harmed if customer demand for these services declines.
  We have limited experience with digital marketing applications and our efforts to expand our
services beyond web analytics may not be successful.
  11




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Our
indebtedness could adversely affect our financial health.
 pari passu
  
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    impair our ability to obtain additional financing in the future for working capital
needs, capital expenditures, acquisitions and general corporate purposes;
    
    require us to dedicate our cash flows from operations to the payment of principal and
interest on our indebtedness, thereby eliminating or reducing the availability of our cash
flows to fund working capital needs, capital expenditures, acquisitions and other general
corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate; and
    
    place us at a disadvantage compared to our competitors that have less indebtedness.
  If we cannot successfully integrate our business with the business of Avivo and Visual Sciences, or
if the benefits of these acquisitions do not meet the expectations of investors or financial or
industry analysts, the market price of our common stock may decline.
  
    
    we may not be able to integrate our business with the business of Avivo or Visual
Sciences in a timely and efficient manner, or at all;
    
    the combined company may not achieve the benefits of either acquisition as rapidly as,
or to the extent, anticipated by investors or financial or industry analysts;
    
    we may not be able to expand the customer base of Avivo or Visual Sciences and, in
particular, may not be able to continue to generate advertising revenue from Avivos free
website search services; or
    
    the former stockholders of Avivo or Visual Sciences could dispose of a significant
portion of our common stock that they received in connection with the acquisition.
 12




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We operate in highly competitive markets, which could make it difficult for us to acquire and
retain customers.
  
    
    web analytics providers such as Coremetrics, Omniture and WebTrends;
    
    website search providers such as Endeca, Google and Verity; and
    
    web content management providers such as Interwoven and Vignette.
    13




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Most of our services are sold pursuant to short-term subscription agreements, and if our customers
elect not to renew these agreements, our revenue may decrease.
  Because we recognize the majority of our revenue from subscriptions to our services over the term
of the applicable agreement, the lack of subscription renewals or new subscription agreements may
not be immediately reflected in our operating results.
  We have only recently become profitable and may not be able to maintain our profitability.
  If we fail to respond to rapidly changing technology or evolving industry standards, our services
may become obsolete or less competitive.
  We may be liable to our customers and may lose customers if we provide poor service, if our
services do not comply with our agreements or if there is a loss of data.
  14




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We may expand through acquisitions of, or investments in, other companies or through business
relationships, all of which may divert our managements attention, result in additional dilution to
our stockholders or consume resources that are necessary to sustain our business.
   
    
    issue additional equity securities that would dilute our stockholders;
    
    use cash that we may need in the future to operate our business;
    
    incur debt on terms unfavorable to us or that we are unable to repay;
    
    incur large charges or substantial liabilities;
    
    encounter difficulties retaining key employees of the acquired company or integrating
diverse business cultures; and
    
    become subject to adverse tax consequences, or incur substantial depreciation or
deferred compensation charges.
  15




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Fluctuations in our operating results may make it difficult to predict our future performance and
may result in volatility in the market price of our common stock.
  
    
    our ability to retain and increase sales to existing customers, attract new customers
and satisfy our customers requirements;
    
    the timing and success of new product introductions or upgrades by us or our competitors;
    
    changes in our pricing policies or payment terms or those of our competitors;
    
    concerns relating to the security of our network and systems;
    
    the rate of success of our domestic and international expansion;
    
    our ability to hire and retain key executives and technical and sales and marketing personnel;
    
    our ability to expand our operations and the amount and timing of expenditures related
to this expansion;
    
    limitations in the scalability of our network and systems;
    
    costs related to the integration of Avivo and Visual Sciences with our business and the
development or acquisition of other technologies, products or businesses; and
    
    general economic, industry and market conditions.
   We rely on a small number of third parties to support our network, any disruption of which could
affect our ability to provide our services and could harm our reputation.
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A rapid expansion of our network and systems could cause us to lose data or cause our network or
systems to fail.
  If our security measures are breached and unauthorized access is obtained, our services may be
perceived as not being secure, and customers may hold us liable or reduce their use of our
services.
  17




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Any failure to adequately expand our direct sales force will impede our growth.
  We may encounter difficulties managing our growth, which could adversely affect our results of
operations.
  If we are unable to effectively and efficiently implement the necessary initiatives to eliminate
the material weaknesses identified in our internal control over reporting or if we have other
material weaknesses in our internal control over financial reporting, there could be an adverse
effect on our financial reporting.
   18




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The success of our business depends in large part on our ability to protect and enforce our
intellectual property rights.
    If a third party asserts that we are infringing its intellectual property, whether successful or
not, it could subject us to costly and time-consuming litigation or expensive licenses, and our
business may be harmed.
  
    
    divert managements attention;
 19




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
    
    result in costly and time-consuming litigation;
    
    require us to enter into royalty or licensing agreements, which may not be available on
acceptable terms, or at all; or
    
    require us to redesign our software and services to avoid infringement.
  If we fail to develop our brands cost-effectively, our business may suffer.
  We rely on our management team and will need to hire additional personnel to grow our business.
    Our business strategy includes expanding our international operations; therefore, our business is
susceptible to risks associated with international operations.
  20




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
    
    unexpected changes in foreign regulatory requirements;
    
    localization of our service, including translation into foreign languages and associated expenses;
    
    fluctuations in currency exchange rates;
    
    political, social and economic instability abroad, including conflicts in the Middle
East, terrorist attacks and security concerns in general;
    
    longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
    
    difficulties in managing and staffing international operations;
    
    potentially adverse tax consequences, including the complexities of foreign value added
tax systems and restrictions on the repatriation of earnings;
    
    maintaining and servicing computer hardware in distant locations;
    
    the burdens of complying with a wide variety of foreign laws and different legal standards; and
    
    reduced or varied protection for intellectual property rights in some countries.
   Changes in financial accounting standards or practices or existing taxation rules or practices may
cause adverse, unexpected financial reporting fluctuations and affect our reported results of
operations.
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 21




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Our net operating loss carryforwards may expire unutilized, which could prevent us
from offsetting future taxable income.
     Risks Related to Our Industry
 Widespread blocking or erasing of cookies or limitations on our ability to use cookies may impede
our ability to collect information with our technology and reduce the value of that data.
  22




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Privacy concerns and laws or other domestic or foreign regulations may subject us to litigation or
limit our ability to collect and use Internet user information, resulting in a decrease in the
value of our services and an adverse impact on the sales of our services.
   23




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The success of our business depends on the continued growth of the Internet as a business tool and
the growth of the web analytics market.
   Risks Related to the Securities Market and the Ownership of Our Common Stock
 Our stock price may be volatile and you may not be able to sell your shares at an attractive price.
  24




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
    
    variations in our operating results;
    
    announcements of technological innovations, new services or service enhancements or
significant agreements by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    changes in the estimates of our operating results or changes in recommendations by any
securities analysts that elect to follow our common stock;
    
    sales of our common stock, including sales by officers, directors and funds affiliated
with them;
    
    fluctuations in stock market prices and trading volumes of similar companies or of the
markets generally;
    
    market conditions in our industry, the industries of our customers and the economy as a whole; or
    
    economic and political factors, including wars, terrorism and political unrest.
 We will require additional capital prior to April 2007 to satisfy our senior note obligations; and
we might require additional capital to support business growth; this capital might not be available
on acceptable terms, or at all.
  Future sales of our common stock by our stockholders may depress our stock price.
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Our executive officers and directors and their affiliates may exercise influence over stockholder
voting matters in a manner that may not be in the best interest of all of our stockholders.
  Provisions in our amended and restated certificate of incorporation and bylaws or under Delaware
law might discourage, delay or prevent a change of control of our company or changes in our
management and, therefore, depress the trading price of our common stock.
  
    
    establish a classified board of directors so that not all members of our board are
elected at one time;
    
    provide that directors may only be removed for cause and only with the approval of the
holders of 66 2/3% of our outstanding voting stock;
    
    require super-majority voting to amend some provisions in our amended and restated
certificate of incorporation and bylaws;
    
    authorize the issuance of blank check preferred stock that our board of directors
could issue to increase the number of outstanding shares to discourage a takeover attempt;
    
    prohibit stockholder action by written consent, requiring all stockholder actions to be
taken at a meeting of our stockholders;
    
    provide that the board of directors is expressly authorized to make, alter or repeal our
bylaws; and
    
    establish advance notice requirements for nominations for elections to our board or for
proposing matters that can be acted upon by stockholders at stockholder meetings.
  
 Item 1B. Unresolved Staff Comments.
  26




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Item 2. Properties.
      
 Item 3. Legal Proceedings.
    
 Item 4. Submission of Matters to a Vote of Security Holders.
  27




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Market Information
  Fiscal Year Ended December 31, 2004
    
    High
    
    LowThird Quarter (from September 28, 2004).
    
    $
    9.25
    
    
    $
    9.04Fourth Quarter
    
    $
    14.01
    
    
    $
    9.50
 Fiscal Year Ended December 31, 2005
    
    High
    
    LowFirst Quarter
    
    $
    13.46
    
    
    $
    10.76Second Quarter
    
    $
    15.10
    
    
    $
    9.95Third Quarter
    
    $
    19.10
    
    
    $
    13.63Fourth Quarter
    
    $
    20.60
    
    
    $
    15.27
  Dividend Policy
  Recent Sales of Unregistered Securities
    28




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Use of Proceeds from Sales of Registered Securities
    Issuer Purchases of Equity Securities
  
 Item 6. Selected Financial Data.
    29




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Condensed Consolidated Statement of Operations Data (in thousands, except share and per share data)
 Year Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001Revenues
    
    $
    39,452
    
    
    $
    22,602
    
    
    $
    16,360
    
    
    $
    13,570
    
    
    $
    14,447Income (loss) from operations
    
    
    5,758
    
    
    
    1,642
    
    
    
    (2,608
    )
    
    
    (1,887
    )
    
    
    (3,780
    )(Benefit from) Provision for income taxes,
    
    
    (3,073
    )
    
    
    46
    
    
    
    (31
    )
    
    
    (19
    )
    
    
    (8
    )Net income (loss)
    
    
    9,659
    
    
    
    1,768
    
    
    
    (2,078
    )
    
    
    (2,625
    )
    
    
    (4,663
    )Net income (loss)
attributable to common
stockholders
    
    
    9,659
    
    
    
    (947
    )
    
    
    (3,644
    )
    
    
    (3,992
    )
    
    
    (6,317
    )Net income (loss) per share
attributable to common
stockholders:basic
    
    
    0.56
    
    
    
    (0.13
    )
    
    
    (0.91
    )
    
    
    (1.05
    )
    
    
    (1.67
    )diluted
    
    
    0.51
    
    
    
    (0.13
    )
    
    
    (0.91
    )
    
    
    (1.05
    )
    
    
    (1.67
    )Weighted-average shares used
in computing per share
amount:basic
    
    
    17,231,411
    
    
    
    7,300,809
    
    
    
    4,001,979
    
    
    
    3,806,550
    
    
    
    3,784,319diluted
    
    
    18,774,978
    
    
    
    7,300,809
    
    
    
    4,001,979
    
    
    
    3,806,550
    
    
    
    3,784,319
 Condensed Consolidated Balance Sheet Data (in thousands)
 As of December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001Cash, cash equivalents and short-term
marketable securities
    
    $
    34,956
    
    
    $
    22,033
    
    
    $
    5,690
    
    
    $
    4,563
    
    
    $
    4,704Working capital
    
    
    24,692
    
    
    
    17,664
    
    
    
    2,679
    
    
    
    2,740
    
    
    
    4,210Total assets
    
    
    87,743
    
    
    
    37,618
    
    
    
    9,917
    
    
    
    8,605
    
    
    
    20,685Redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    14,056
    
    
    
    12,519
    
    
    
    11,181Convertible redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    28,837
    
    
    
    30,008
    
    
    
    31,266Accumulated deficit
    
    
    (44,609
    )
    
    
    (54,268
    )
    
    
    (56,036
    )
    
    
    (53,958
    )
    
    
    (51,333
    )Total liabilities and stockholders equity (deficit)
    
    $
    69,816
    
    
    $
    28,145
    
    
    $
    (39,179
    )
    
    $
    (38,273
    )
    
    $
    (35,945
    )
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following discussion contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth above under
Item 1A Risk Factors. This Managements Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial statements and related notes
for the year ended December 31, 2005, which are included elsewhere in this annual report.
 Overview
  30




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Sources of Revenues
    31




---



##### Table of Contents



Cost of Revenues and Operating Expenses
 Cost of Revenues
  Sales and Marketing Expenses
  Technology Development Expenses
  General and Administrative Expenses
  Stock-Based Compensation Expenses
  Critical Accounting Policies and Estimates
  32




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##### Table of Contents



Allowance for Doubtful Accounts
  Accounting for Stock-Based Compensation
   33




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##### Table of Contents



Business Combinations
  Impairments of Long-lived Assets and Goodwill
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 Goodwill
and Other Intangible Assets Accounting for
the Impairment or Disposal of Long-Lived Assets
 Income Taxes
  34




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##### Table of Contents



Results of Operations
  Year Ended December 31,2005
    
    
    2004
    
    
    2003RevenuesSubscriptions
    
    
    96
    %
    
    
    99
    %
    
    
    96
    %Advertising
    
    
    4
    %
    
    
    1
    %
    
    
    4
    %Total revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenuesCost of revenue
    
    
    17
    %
    
    
    15
    %
    
    
    20
    %Amortization of intangibles
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %Stock-based compensation
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Total cost of revenues
    
    
    18
    %
    
    
    15
    %
    
    
    20
    %Gross profit
    
    
    82
    %
    
    
    85
    %
    
    
    80
    %Operating expensesSales and marketing
    
    
    37
    %
    
    
    43
    %
    
    
    44
    %Technology development
    
    
    12
    %
    
    
    17
    %
    
    
    21
    %General and administrative
    
    
    14
    %
    
    
    15
    %
    
    
    23
    %Amortization of intangibles
    
    
    3
    %
    
    
    0
    %
    
    
    0
    %Stock-based compensation
    
    
    2
    %
    
    
    4
    %
    
    
    8
    %Total operating expenses
    
    
    68
    %
    
    
    79
    %
    
    
    96
    %Income (loss) from operations
    
    
    14
    %
    
    
    6
    %
    
    
    -16
    %Interest expense
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Interest income
    
    
    2
    %
    
    
    1
    %
    
    
    0
    %Other expense
    
    
    0
    %
    
    
    0
    %
    
    
    3
    %Income (loss) before benefit from income taxes
    
    
    16
    %
    
    
    7
    %
    
    
    -13
    %Benefit from income taxes
    
    
    -8
    %
    
    
    0
    %
    
    
    0
    %Net income (loss)
    
    
    24
    %
    
    
    7
    %
    
    
    -13
    %Constructive dividend on redemption of redeemable preferred stock
    
    
    0
    %
    
    
    -6
    %
    
    
    0
    %Accretion of discount on redeemable preferred stock
    
    
    0
    %
    
    
    -6
    %
    
    
    -10
    %Net income (loss) attributable to common stockholders
    
    
    24
    %
    
    
    -5
    %
    
    
    -23
    %
 Years Ended December 31, 2005 and 2004
 Revenues
  Subscription Revenues.
 35




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##### Table of Contents



Advertising Revenues.
 Cost of Revenues and Operating Expenses
 Cost of Revenues.
 Sales and Marketing Expenses.
 Technology Development Expenses.
 General and Administrative Expenses.
 36




---



##### Table of Contents



Stock-Based Compensation Expenses
  Other Income, Net
  Benefit from Income Taxes
  Years Ended December 31, 2004 and 2003
 Revenues
  Subscription Revenues.
 Advertising Revenues.
 37




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##### Table of Contents



Cost of Revenues and Operating Expenses
 Cost of Revenues.
 Sales and Marketing Expenses.
 Technology Development Expenses.
 General and Administrative Expenses.
 Stock-Based Compensation Expenses
  Other Income, Net
  38




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##### Table of Contents



Provision for (Benefit from) Income Taxes
  Net Operating Losses
    Liquidity and Capital Resources
 Overview
   39




---



##### Table of Contents



pari passu
  Visual Sciences Acquisition
 Avivo Acquisition
 Initial Public Offering of Common Stock
 Cash
Flows (in thousands)
 Year Ended December 31,2005
    
    2004
    
    2003Net cash provided by (used in)Operating activities
    
    $
    7,887
    
    
    $
    4,703
    
    
    $
    2,352Investing activities
    
    
    5,645
    
    
    
    (26,437
    )
    
    
    (739
    )Financing activities
    
    
    827
    
    
    
    21,749
    
    
    
    (642
    )Effect of exchange rate changes on cash
    
    
    (101
    )
    
    
    5
    
    
    
    156Net change in cash and cash equivalents
    
    $
    14,258
    
    
    $
    20
    
    
    $
    1,127
 40




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##### Table of Contents



Operating Activities
    Investing Activities
    Financing Activities
    Factors That May Affect Future Financial Condition And Liquidity
  41




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##### Table of Contents



Payments Due by Period
    
    MoreLess than
    
    1-3
    
    4-5
    
    thanContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 Years(in thousands)Capital lease obligations
    
    $
    173
    
    
    $
    83
    
    
    $
    65
    
    
    $
    25
    
    
    $
    Operating lease obligations
    
    $
    12,452
    
    
    $
    866
    
    
    $
    3,585
    
    
    $
    3,813
    
    
    $
    4,188
  
    
    the costs of serving more customers;
    
    the costs of our network infrastructure;
    
    the costs of our research and development activities to improve our service offerings; and
    
    the extent to which we acquire or invest in other technologies and businesses.
    
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 Foreign Currency Exchange Risk
  42




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Interest Rate Sensitivity
  43




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Item 8. Financial Statements and Supplementary Data.
  Condensed Consolidated Quarterly Data (unaudited, in thousands, except share and per share data)
 Three Months EndedDec. 31,
    
    Sept. 30,
    
    June 30,
    
    March 31,
    
    Dec. 31,
    
    Sept. 30,
    
    June 30,
    
    March 31,2005
    
    2005
    
    2005
    
    2005
    
    2004
    
    2004
    
    2004
    
    2004Quarterly
Consolidated
Statement of
Operations Revenues
    
    $
    11,746
    
    
    $
    11,337
    
    
    $
    9,412
    
    
    $
    6,957
    
    
    $
    6,534
    
    
    $
    5,735
    
    
    $
    5,293
    
    
    $
    5,040Cost of revenues
    
    
    2,031
    
    
    
    2,046
    
    
    
    1,692
    
    
    
    1,007
    
    
    
    928
    
    
    
    849
    
    
    
    787
    
    
    
    751Gross profit
    
    
    9,715
    
    
    
    9,291
    
    
    
    7,720
    
    
    
    5,950
    
    
    
    5,606
    
    
    
    4,886
    
    
    
    4,506
    
    
    
    4,289Operating expenses
    
    
    7,693
    
    
    
    7,677
    
    
    
    6,544
    
    
    
    5,004
    
    
    
    4,998
    
    
    
    4,244
    
    
    
    4,302
    
    
    
    4,101Operating profit
    
    
    2,022
    
    
    
    1,614
    
    
    
    1,176
    
    
    
    946
    
    
    
    608
    
    
    
    642
    
    
    
    204
    
    
    
    188Net income
    
    
    5,572
    
    
    
    1,759
    
    
    
    1,261
    
    
    
    1,067
    
    
    
    760
    
    
    
    628
    
    
    
    215
    
    
    
    165Net income (loss)
attributable to
common shareholders
    
    
    5,572
    
    
    
    1,759
    
    
    
    1,261
    
    
    
    1,067
    
    
    
    (629
    )
    
    
    
    
    
    
    (255
    )
    
    
    (233
    )Net income (loss)
per share
attributable to
common
shareholders:Basic
    
    $
    0.31
    
    
    $
    0.10
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    (0.04
    )
    
    $
    
    
    
    $
    (0.06
    )
    
    $
    (0.05
    )Diluted
    
    $
    0.28
    
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    (0.04
    )
    
    $
    
    
    
    $
    (0.06
    )
    
    $
    (0.05
    )Weighted-average
number of shares
used in per share
amounts:Basic
    
    
    18,243
    
    
    
    18,094
    
    
    
    17,102
    
    
    
    15,447
    
    
    
    15,402
    
    
    
    4,663
    
    
    
    4,614
    
    
    
    4,463Diluted
    
    
    19,884
    
    
    
    19,757
    
    
    
    18,459
    
    
    
    16,922
    
    
    
    15,402
    
    
    
    11,603
    
    
    
    4,614
    
    
    
    4,463
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 (a) Evaluation of Disclosure Controls and Procedures
  44




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##### Table of Contents



(b)
    
    Managements Report on Internal Control Over Financial Reporting
  (1)
    
    pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;(2)
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
the authorization of our management and directors; and(3)
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
   45




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##### Table of Contents



Internal Control-Integrated Framework
  1.
    
    We did not maintain a sufficient complement of personnel with an appropriate level of
accounting knowledge, experience and training in the selection and application of
accounting principles generally accepted in the United States of America commensurate with
our financial reporting requirements. Specifically, we lacked a sufficient number of
personnel possessing adequate knowledge, experience and training in the application of
accounting principles to support our financial accounting and reporting functions. This
control deficiency contributed to the material weakness described in 2 below.
Additionally, this control deficiency could result in a misstatement of significant
accounts and disclosures that would result in a material misstatement to our interim or
annual consolidated financial statements that would not be prevented or detected.
Accordingly, management has determined that this control deficiency constitutes a material
weakness.2.
    
    We did not maintain effective controls over the selection, application and monitoring
of our accounting policies related to leasing transactions. Specifically, our controls
over the selection, application and monitoring of accounting policies related to lease,
lease amendments and sub-lease transactions were ineffective to ensure such transactions
were accounted for accurately, completely and in conformity with accounting principles
generally accepted in the United States of America. This control deficiency resulted in
the restatement of our 2004 annual consolidated financial statements and the interim
consolidated financial statements for the quarters ended March 31, 2005 and June 30, 2005,
as well as an audit adjustment to the 2005 annual consolidated financial statements.
Additionally, this control deficiency could result in a misstatement of rent expense,
rental income and sub-lease obligations that would result in a
material misstatement to our interim or annual consolidated financial statements that would not be
prevented or detected. Accordingly, management has determined that this control
deficiency constitutes a material weakness.
  Internal Control-Integrated Framework
  (c)
    
    Managements Remediation Initiatives
  46




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##### Table of Contents




    
    On February 3, 2006, we hired a new chief financial officer. Our new chief
financial officer is a CPA with 17 years of experience as a financial professional.
Our chief financial officer possesses knowledge in accounting and the
application of generally accepted accounting principles.
    
    We have initiated a search for a qualified individual to support our financial
accounting and reporting functions. We have improved the documentation of our job
descriptions within the financial accounting and reporting functions; however, this
area will be enhanced with the addition of a qualified accountant. We are and have
been actively recruiting for the accountant position for several months and will
strive to fill the position as soon as possible.
    
    Currently, existing staff is addressing our application of generally accepted
accounting principles. Additionally, we have engaged a financial consulting firm to
assist in the accounting and financial reporting functions as we continue to actively
search for a permanent hire. As deemed necessary, we will leverage their resources and
expertise to help us maintain compliance with accounting principles generally accepted
in the United States of America.
  
    
    We reviewed the terms of our leases and subleases, together with the applicable
accounting literature relating to lease accounting, to determine the proper accounting
treatment for our headquarters lease and sub-lease and to confirm the accounting
treatment for our other leases.
    
    We changed our internal control over financial reporting to identify the procedures
to follow for appropriate lease and sub-lease accounting.
    
    We provided training to our accounting department personnel regarding correct lease
and sub-lease accounting procedures.
    
    We expanded the procedures in our internal control over financial reporting related
to periodic reviews of non-routine transactions.
 (d)
    
    Changes in Internal Control Over Financial Reporting
  
 Item 9B. Other Information.
  47




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##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
  
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accounting Fees and Services.
  48




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 (a) Documents filed as part of this report:
  
    
    Report of Independent Registered Public Accounting Firm;
    
    Consolidated balance sheets as of December 31, 2005 and 2004;
    
    Consolidated statements of operations for the fiscal years ended December 31, 2005, 2004 and 2003;
    
    Consolidated statements of stockholders equity (deficit) and  comprehensive
income (loss) for the fiscal years ended December 31, 2005, 2004 and 2003;
    
    Consolidated statements of cash flows for the fiscal years ended December 31,
2005, 2004 and 2003; and
    
    Notes to consolidated financial statements.
   (b) Exhibits:
 ExhibitNumber
    
    Description2.1(1)
    
    Agreement and Plan of Merger dated as of February 8, 2005 by and among the Registrant,
WSSI Acquisition Company, Avivo Corporation and Charles M. Linehan, as the Holder
Representative.2.2(2)
    
    Agreement and Plan of Merger dated as of February 1, 2006 by and among the Registrant,
VS Acquisition, LLC, Visual Sciences, LLC and Ned Scherer, as the Holder
Representative.3.1(3)
    
    Amended and Restated Certificate of Incorporation.3.2(3)
    
    Amended and Restated Bylaws.4.1(3)
    
    Form of Common Stock Certificate.4.2(2)
    
    Second Amended and Restated Registration Rights Agreement dated as of February 1, 2006
by and among the Registrant and certain investors set forth therein.4.3(3) +
    
    Warrant to Purchase Series D Convertible Preferred Stock dated April 1, 2003 by and
between the Registrant and Jeffrey W. Lunsford.
 49




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##### Table of Contents



ExhibitNumber
    
    Description4.4
    
    Warrant to Purchase Common Stock dated as of November 21, 2005 and issued by the
Registrant in favor of Starsoft Development Labs, Inc.4.5(2)
    
    Form of Warrant to Purchase Common Stock dated as of February 1, 2006 and issued by the
Registrant in favor of the former holders of units of membership interest in Visual
Sciences, LLC.10.1(3) +
    
    Amended and Restated 2000 Equity Incentive Plan.10.2(4) +
    
    2004 Equity Incentive Award Plan and Form of Option Grant Agreement.10.3(5) +
    
    Avivo Corporation 1999 Equity Incentive Plan and Form of Option Grant Agreement.10.4(3) +
    
    Common Stock Purchase Agreement dated as of April 1, 2003 by and between the Registrant
and Jeffrey W. Lunsford.10.5(3) +
    
    Amended and Restated Employment Agreement dated as of July 21, 2004 by and between the
Registrant and Jeffrey W. Lunsford.10.6(6) +
    
    Offer Letter dated as of January 26, 2006 by and between the Registrant and Claire Long.10.7(3) +
    
    Offer Letter dated as of May 15, 2003 by and between the Registrant and Rand Schulman.10.8 +
    
    Offer Letter dated as of November 21, 2005 by and between the Registrant and Andrew S.
Greenhalgh.10.9(3) +
    
    Offer Letter dated as of February 12, 2003 by and between the Registrant and
Christopher Reid.10.10(3) +
    
    Employment Agreement dated as of July 1, 2000 by and between WebSideStory Holding B.V.
and Daniel Guilloux.10.11(3) +
    
    Amendment to Employment Agreement dated as of November 15, 2002 by and between
WebSideStory Holding B.V. and Daniel Guilloux.10.12 +
    
    Amended and Restated Employment Agreement dated as of February 1, 2006 by and between
Visual Sciences, LLC and James W. MacIntyre, IV.10.13 +
    
    Amended and Restated Employment Agreement dated as of February 1, 2006 by and between
Visual Sciences, LLC and David R. Scherer.10.14(3) +
    
    Form of Indemnification Agreement by and between the Registrant and the persons listed
on Schedule A thereto.10.15(3) +
    
    Form of Change in Control Agreement between the Registrant and the persons listed on
Schedule A thereto.10.16(6) +
    
    Change in Control Agreement dated as of January 18, 2006 by and between the Registrant
and Claire Long.10.17
    
    Master Service Agreement dated as of August 10, 2005 by and between the Registrant and
Level 3 Communications, LLC.
 50




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##### Table of Contents



ExhibitNumber
    
    Description10.18
    
    Addendum to Master Service Agreement dated as of September 22, 2005 by and between the
Registrant and Level 3 Communications, LLC.10.19(3)
    
    Office Lease dated as of August 23, 1999 by and between the Registrant and LNR Seaview,
Inc.10.20(3)
    
    First Amendment to Office Lease dated as of July 3, 2001 by and between the Registrant
and LNR Seaview, Inc.10.21
    
    Second Amendment to Office Lease dated as of December 7, 2005 by and between the
Registrant and Seaview PFG, LLC (as assignee of LNR Seaview, Inc.)10.22(3)
    
    Sublease dated as of July 3, 2001 by and between the Registrant and RF Magic, Inc.10.23(3)
    
    Amendment to Sublease dated as of September 10, 2003 by and between the Registrant and
RF Magic, Inc.10.24(3)
    
    Sublease dated as of July 6, 2001 by and between the Registrant and Avexus, Inc.10.25(3)
    
    Addendum to Sublease dated as of April 18, 2002 by and between the Registrant and
Avexus, Inc.10.26(3) 
    
    Revised Master Service Agreement dated as of August 29, 2003 by and among the
Registrant, Buena Vista Internet Group, ESPN Internet Ventures, ABCNews Internet
Ventures, Infoseek Corporation, ABC Multimedia, Inc. and Walt Disney Parks & Resorts
Online.10.27(3) 
    
    Amendment to Revised Master Service Agreement dated as of March 31, 2004 by and among
the Registrant, Buena Vista Internet Group, ESPN Internet Ventures, ABCNews Internet
Ventures, Infoseek Corporation, ABC Multimedia, Inc. and Walt Disney Parks & Resorts
Online.10.28(3) 
    
    Patent Cross-License Agreement dated December 12, 2003 by and between the Registrant
and NetIQ Corporation.10.29(3) 
    
    Salesforce.com JoinForces Product Alliance Program Agreement dated as of May 21, 2004
by and between the Registrant and Salesforce.com, Inc.10.30(2)
    
    Form of Senior Note dated as of February 1, 2006 and issued by the Registrant in favor
of the former holders of units of membership interest in Visual Sciences, LLC.21.1
    
    List of Subsidiaries.23.1
    
    Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14
promulgated under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14
promulgated under the Securities Exchange Act of 1934.
 51




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##### Table of Contents



ExhibitNumber
    
    Description32*
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 (1)
    
    Incorporated by reference to the Current Report on Form 8-K of the Registrant filed with the
Securities and Exchange Commission on February 10, 2005.(2)
    
    Incorporated by reference to the Current Report on Form 8-K of the Registrant filed with the
Securities and Exchange Commission on February 7, 2006.(3)
    
    Incorporated by reference to the Registration Statement on Form S-1 of the Registrant
(Registration No. 333-115916) filed with the Securities and Exchange Commission on May 27,
2004.(4)
    
    Incorporated by reference to the Registration Statement on Form S-8 of the Registrant
(Registration No. 333-119350) filed with the Securities and Exchange Commission on September
28, 2004.(5)
    
    Incorporated by reference to the Registration Statement on Form S-8 of the Registrant
(Registration No. 333-124754) filed with the Securities and Exchange Commission on May 10,
2005.(6)
    
    Incorporated by reference to the Current Report on Form 8-K of the Registrant filed with the
Securities and Exchange Commission on January 24, 2006.
    
    WebSideStory, Inc. has been granted confidential treatment with
respect to certain portions of this exhibit (indicated by asterisks),
which have been separately filed with the Securities and Exchange
Commission.+
    
    Indicates management contract or compensatory plan.*
    
    These certifications are being furnished solely to accompany this annual report pursuant to
18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities
Exchange Act of 1934 and are not to be incorporated by reference into any filing of
WebSideStory, Inc., whether made before or after the date hereof, regardless of any general
incorporation language in such filing. 52




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##### Table of Contents



SIGNATURES
  WEBSIDESTORY, INC.Dated: March 16, 2006
    
    By:
    
    /s/ JEFFREY W. LUNSFORD

Jeffrey W. LunsfordPresident, Chief Executive Officerand Chairman of the Board
  Name
    
    Title
    
    Date/s/ JEFFREY W. LUNSFORD

Jeffrey W. Lunsford
    
    President, Chief Executive Officer and Chairman
of the Board (Principal Executive Officer)
    
    March 16, 2006/s/ CLAIRE LONG

Claire Long
    
    Chief Financial Officer(Principal Financial and Accounting Officer)
    
    March 16, 2006/s/ ANIL ARORA

Anil Arora
    
    Director
    
    March 16, 2006/s/ CHARLES J. FITZGERALD, JR.

Charles J. Fitzgerald, Jr.
    
    Director
    
    March 16, 2006/s/ JAMES R. GLYNN

James R. Glynn
    
    Director
    
    March 16, 2006/s/ WILLIAM H. HARRIS, JR.

William H. Harris, Jr.
    
    Director
    
    March 16, 2006/s/ KURT R. JAGGERS

Kurt R. Jaggers
    
    Director
    
    March 16, 2006/s/ JAMES S. MAHAN III

James S. Mahan III
    
    Director
    
    March 16, 2006
 53




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##### Table of Contents



WebSideStory, Inc.
Index To Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    F-5Consolidated Statements of Operations for the fiscal years ended December 31, 2005, 2004 and 2003
    
    
    F-6Consolidated Statements of Stockholders Equity (Deficit) and Comprehensive Income (Loss) for
the fiscal years ended December 31, 2005, 2004 and 2003
    
    
    F-7Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2005, 2004 and 2003
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-9
 F-1




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##### Table of Contents



REPORT OF
 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   Consolidated financial statements
  Internal control over financial reporting
 Internal Control  Integrated Framework
  F-2




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##### Table of Contents



F-3




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##### Table of Contents



Internal ControlIntegrated Framework Internal ControlIntegrated
Framework
  
 F-4




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##### Table of Contents



WEBSIDESTORY, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share data)
 December 31,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assetsCash and cash equivalents
    
    $
    19,968
    
    
    $
    5,710Investments
    
    
    11,712
    
    
    
    16,323Accounts receivable, net
    
    
    7,842
    
    
    
    3,704Deferred tax
assets
    
    
    507
    
    
    
    37Prepaid expenses and other current assets
    
    
    2,304
    
    
    
    943Total current assets
    
    
    42,333
    
    
    
    26,717Property and equipment, net
    
    
    2,532
    
    
    
    1,884Investments
    
    
    3,276
    
    
    
    8,676Goodwill
    
    
    21,286
    
    
    
    Intangible assets, net
    
    
    6,901
    
    
    
    Deferred tax
assets
    
    
    9,166
    
    
    
    Other assets
    
    
    2,249
    
    
    
    341$
    87,743
    
    
    $
    37,618Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    877
    
    
    $
    307Accrued liabilities
    
    
    3,880
    
    
    
    2,337Deferred revenue
    
    
    12,801
    
    
    
    6,364Capital lease short term
    
    
    83
    
    
    
    18Note payable
    
    
    
    
    
    
    27Total current liabilities
    
    
    17,641
    
    
    
    9,053Deferred rent
    
    
    108
    
    
    
    115Capital lease long term
    
    
    90
    
    
    
    100Other liabilities
    
    
    88
    
    
    
    205Total liabilities
    
    
    17,927
    
    
    
    9,473Commitments and contingenciesStockholders equityPreferred stock, $0.001 par value; 10,000,000 shares authorized and no shares issued
and outstanding at December 31, 2005 and December 31, 2004
    
    
    
    
    
    
    Common stock, $0.001 par value; 75,000,000 shares authorized, 18,401,180 and 15,624,856
shares issued and outstanding at December 31, 2005 and
December 31, 2004, respectively
    
    
    18
    
    
    
    16Additional paid in capital
    
    
    114,934
    
    
    
    82,895Unearned stock-based compensation
    
    
    (630
    )
    
    
    (779
    )Accumulated other comprehensive income
    
    
    103
    
    
    
    281Accumulated deficit
    
    
    (44,609
    )
    
    
    (54,268
    )Total stockholders equity
    
    
    69,816
    
    
    
    28,145$
    87,743
    
    
    $
    37,618
  F-5




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##### Table of Contents



WEBSIDESTORY, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except share and per share data)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003RevenuesSubscriptions
    
    $
    37,728
    
    
    $
    22,476
    
    
    $
    15,678Advertising
    
    
    1,724
    
    
    
    126
    
    
    
    682Total revenues
    
    
    39,452
    
    
    
    22,602
    
    
    
    16,360Cost of revenuesCost of revenue
    
    
    6,516
    
    
    
    3,300
    
    
    
    3,206Amortization of intangibles
    
    
    202
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    58
    
    
    
    15
    
    
    
    11Total cost of revenues
    
    
    6,776
    
    
    
    3,315
    
    
    
    3,217Gross profit
    
    
    32,676
    
    
    
    19,287
    
    
    
    13,143Operating expensesSales and marketing
    
    
    14,471
    
    
    
    9,713
    
    
    
    7,258Technology development
    
    
    4,621
    
    
    
    3,755
    
    
    
    3,398General and administrative
    
    
    5,739
    
    
    
    3,310
    
    
    
    3,761Amortization of intangibles
    
    
    1,147
    
    
    
    
    
    
    
    Stock-based compensation (*)
    
    
    940
    
    
    
    867
    
    
    
    1,334Total operating expenses
    
    
    26,918
    
    
    
    17,645
    
    
    
    15,751Income from operations
    
    
    5,758
    
    
    
    1,642
    
    
    
    (2,608
    )Interest expense
    
    
    (34
    )
    
    
    (38
    )
    
    
    (46
    )Interest income
    
    
    905
    
    
    
    205
    
    
    
    56Other (expense) income
    
    
    (43
    )
    
    
    5
    
    
    
    489Total other income
    
    
    828
    
    
    
    172
    
    
    
    499Income (loss) before provision for income taxes
    
    
    6,586
    
    
    
    1,814
    
    
    
    (2,109
    )(Benefit from) provision for income taxes
    
    
    (3,073
    )
    
    
    46
    
    
    
    (31
    )Net income (loss)
    
    $
    9,659
    
    
    $
    1,768
    
    
    $
    (2,078
    )Constructive dividend on redemption of redeemable preferred stock
    
    
    
    
    
    
    (1,389
    )Accretion of discount on redeemable preferred stock
    
    
    
    
    
    
    (1,326
    )
    
    
    (1,566
    )Net income (loss) attributable to common stockholders
    
    $
    9,659
    
    
    $
    (947
    )
    
    $
    (3,644
    )Net income (loss) per share attributable to common shareholders:Basic
    
    $
    0.56
    
    
    $
    (0.13
    )
    
    $
    (0.91
    )Diluted
    
    $
    0.51
    
    
    $
    (0.13
    )
    
    $
    (0.91
    )Weighted
average number of shares used in per share amounts:Basic
    
    
    17,231,411
    
    
    
    7,300,809
    
    
    
    4,001,979Diluted
    
    
    18,774,978
    
    
    
    7,300,809
    
    
    
    4,001,979
 
 (*) Stock-based compensationSales and marketing
    
    $
    183
    
    
    $
    209
    
    
    $
    330Technology development
    
    
    334
    
    
    
    37
    
    
    
    76General and administrative
    
    
    423
    
    
    
    621
    
    
    
    928$
    940
    
    
    $
    867
    
    
    $
    1,334
  F-6




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##### Table of Contents



WEBSIDESTORY, INC.
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
For the three years ended December 31, 2005
(in thousands, except share data)
 AccumulatedAdditional
    
    
    Unearned
    
    
    Other
    
    
    
    
    
    
    Stockholders
    
    
    ComprehensiveCommon Stock
    
    
    Paid-in
    
    
    Stock-based
    
    
    Comprehensive
    
    
    Accumulated
    
    
    (Deficit) /
    
    
    (Loss) /Shares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Income
    
    
    Deficit
    
    
    Equity
    
    
    IncomeBalance at December 31, 2002
    
    
    3,807,118
    
    
    $
    4
    
    
    $
    15,857
    
    
    $
    (296
    )
    
    $
    120
    
    
    $
    (53,958
    )
    
    $
    (38,273
    )
    
    $
    (2,543
    )Restricted stock purchases
    
    
    729,609
    
    
    
    1
    
    
    
    1,113
    
    
    
    (1,111
    )
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    Exercise of stock options
    
    
    40,710
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    Unearned stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,094
    
    
    
    (1,094
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,344
    
    
    
    
    
    
    
    
    
    
    
    1,344
    
    
    
    Accretion of discount on redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,537
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,537
    )
    
    
    Amortization of premium on Series A
convertible redeemable preferred
stock
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    Accretion of discount on Series B and
Series C convertible redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    Foreign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    156
    
    
    
    156Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,078
    )
    
    
    (2,078
    )
    
    
    (2,078
    )Balance at December 31, 2003
    
    
    4,577,437
    
    
    $
    5
    
    
    $
    17,733
    
    
    $
    (1,157
    )
    
    $
    276
    
    
    $
    (56,036
    )
    
    $
    (39,179
    )
    
    $
    (1,922
    )Issuance of common stock for cash net
of $4.4 million issuance costs
    
    
    5,000,000
    
    
    $
    5
    
    
    $
    38,082
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    38,087
    
    
    $
    Conversion of convertible redeemable
preferred stock
    
    
    5,634,131
    
    
    
    6
    
    
    
    28,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,006
    
    
    
    Exercise of stock options and warrants
    
    
    413,288
    
    
    
    
    
    
    
    439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    439
    
    
    
    Unearned stock-based compensation
    
    
    
    
    
    
    
    
    
    
    504
    
    
    
    (504
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    882
    
    
    
    
    
    
    
    
    
    
    
    882
    
    
    
    Accretion of discount on redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,305
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,305
    )
    
    
    Amortization of premium on Series A
convertible redeemable preferred
stock
    
    
    
    
    
    
    
    
    
    
    852
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    852
    
    
    
    Accretion of discount on Series B and
Series C convertible redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    Constructive dividend on redemption
of redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,389
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,389
    )
    
    
    Foreign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    5Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,768
    
    
    
    1,768
    
    
    
    1,768Balance at December 31, 2004
    
    
    15,624,856
    
    
    $
    16
    
    
    $
    82,895
    
    
    $
    (779
    )
    
    $
    281
    
    
    $
    (54,268
    )
    
    $
    28,145
    
    
    $
    1,773Exercise of stock options
    
    
    334,713
    
    
    $
    
    
    
    $
    974
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    974
    
    
    $
    Tax benefit from stock option exercise
    
    
    
    
    
    
    
    
    
    
    1,729
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,729
    
    
    
    Warrant Exercise
    
    
    74,639
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock issuance for acquisition
    
    
    2,366,972
    
    
    
    2
    
    
    
    29,138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,140
    
    
    
    Warrant issuance
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    Option assumption for acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (651
    )
    
    
    
    
    
    
    
    
    
    
    (651
    )
    
    
    Modification of option award
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    Unearned stock-based compensation
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    783
    
    
    
    
    
    
    
    
    
    
    
    783
    
    
    
    Foreign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )
    
    
    (21
    )Unrealized loss on available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (157
    )
    
    
    
    
    
    
    (157
    )
    
    
    (157
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,659
    
    
    
    9,659
    
    
    
    9,659Balance at December 31, 2005
    
    
    18,401,180
    
    
    $
    18
    
    
    $
    114,934
    
    
    $
    (630
    )
    
    $
    103
    
    
    $
    (44,609
    )
    
    $
    69,816
    
    
    $
    9,481
  F-7




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##### Table of Contents



WEBSIDESTORY, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activitiesNet income (loss)
    
    $
    9,659
    
    
    $
    1,768
    
    
    $
    (2,078
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activitiesDepreciation and amortization
    
    
    2,660
    
    
    
    1,009
    
    
    
    1,210Bad debt provision
    
    
    112
    
    
    
    28
    
    
    
    274Stock-based compensation
    
    
    998
    
    
    
    882
    
    
    
    1,345Deferred income taxes
    
    
    (3,318
    )
    
    
    64
    
    
    
    (101
    )Changes in operating assets and liabilities,
net of effect of acquisition:Accounts receivable
    
    
    (3,633
    )
    
    
    (1,475
    )
    
    
    (576
    )Prepaid expenses and other assets
    
    
    (3,019
    )
    
    
    (717
    )
    
    
    (297
    )Accounts payable and accrued liabilities
    
    
    1,323
    
    
    
    829
    
    
    
    464Deferred revenue
    
    
    3,238
    
    
    
    2,430
    
    
    
    1,812Deferred rent
    
    
    (15
    )
    
    
    29
    
    
    
    85Other liabilities
    
    
    (118
    )
    
    
    (144
    )
    
    
    214Net cash provided by operating activities
    
    
    7,887
    
    
    
    4,703
    
    
    
    2,352Cash flows from investing activitiesPurchase of investments
    
    
    (15,276
    )
    
    
    (34,156
    )
    
    
    Maturities of investments
    
    
    25,131
    
    
    
    9,157
    
    
    
    Purchase of property and equipment
    
    
    (1,526
    )
    
    
    (1,438
    )
    
    
    (739
    )Acquisition, net of cash acquired
    
    
    (2,684
    )
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    5,645
    
    
    
    (26,437
    )
    
    
    (739
    )Cash flows from financing activitiesExercise of stock options and warrants
    
    
    974
    
    
    
    439
    
    
    
    34Payments on line of credit
    
    
    
    
    
    
    
    
    
    
    3Payments on equipment term loan
    
    
    
    
    
    
    
    
    
    
    (679
    )Payments on capital lease
    
    
    (62
    )
    
    
    (27
    )
    
    
    Payments on note payable
    
    
    (85
    )
    
    
    
    
    
    
    Redemption of redeemable preferred stock
    
    
    
    
    
    
    (16,750
    )
    
    
    Proceeds from sale of common stock
    
    
    
    
    
    
    38,087
    
    
    
    Net cash provided by (used in) financing activities
    
    
    827
    
    
    
    21,749
    
    
    
    (642
    )Effect of exchange rate changes on cash
    
    
    (101
    )
    
    
    5
    
    
    
    156Net increase in cash and cash equivalents
    
    
    14,258
    
    
    
    20
    
    
    
    1,127Cash and cash equivalents at beginning of period
    
    
    5,710
    
    
    
    5,690
    
    
    
    4,563Cash and cash equivalents at end of period
    
    $
    19,968
    
    
    $
    5,710
    
    
    $
    5,690Supplemental cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    4
    
    
    $
    19Cash paid for taxes
    
    $
    77
    
    
    $
    22
    
    
    $
    Supplemental disclosure of non-cash investing and financing activities:Equipment acquired under capital lease
    
    $
    
    
    
    $
    126
    
    
    $
    Equipment acquired under note payable
    
    $
    
    
    
    $
    27
    
    
    $
    
  F-8




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##### Table of Contents



WEBSIDESTORY, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. The Company
 Nature of Business
   2. Summary of Significant Accounting Policies
 Use of Estimates
  Principles of Consolidation
  Foreign Currency
  F-9




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##### Table of Contents



Concentration of Risk
     Geographical Information
  Year
Ended December 31,2005
    
    
    2004
    
    
    2003United States
    
    $
    33,831
    
    
    $
    18,983
    
    
    $
    14,585Europe
    
    
    5,621
    
    
    
    3,619
    
    
    
    1,775$
    39,452
    
    
    $
    22,602
    
    
    $
    16,360
 Revenue Recognition
 Revenue Recognition in Financial Statements Accounting For Revenue Arrangements with Multiple Deliverables
    F-10




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##### Table of Contents



Cash and Cash Equivalents
  Investments
   Accounts Receivable
  Deferred Commissions
   Property and Equipment
  Computers, equipment and software
    
    3 yearsFurniture and fixtures
    
    5 yearsLeasehold improvements
    
    Shorter of the estimated useful life
of 7 years or the remaining lease
term
 F-11




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##### Table of Contents



Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets Accounting for the Impairment or Disposal of Long-Lived
Assets
 Impairment of Long-Lived Assets
  Software and Website Development Costs
  Comprehensive Income (Loss)
  Accounting for Stock-Based Compensation
 Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plan
 F-12




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Net income (loss) attributable to common stockholders  as reported
    
    $
    9,659
    
    
    $
    (947
    )
    
    $
    (3,644
    )Add: Stock-based employee compensation as reported
in the statements of operations
    
    
    600
    
    
    
    882
    
    
    
    1,345Deduct: Total stock-based employee compensation expense
determined under the fair
value based method for all
awards
    
    
    (2,452
    )
    
    
    (1,127
    )
    
    
    (1,359
    )Pro forma net income (loss) attributable to common stockholders
    
    $
    7,807
    
    
    $
    (1,192
    )
    
    $
    (3,658
    )Net income (loss) per share attributable to common stockholdersbasic  as reported
    
    $
    0.56
    
    
    $
    (0.13
    )
    
    $
    (0.91
    )diluted  as reported
    
    $
    0.51
    
    
    $
    (0.13
    )
    
    $
    (0.91
    )basic  pro forma
    
    $
    0.45
    
    
    $
    (0.16
    )
    
    $
    (0.91
    )diluted  pro forma
    
    $
    0.42
    
    
    $
    (0.16
    )
    
    $
    (0.91
    )
  Year Ended December 31,2005
    
    2004
    
    2003Risk-free interest rate
    
    
    3.70
    %
    
    
    2.95
    %
    
    
    1.90
    %Expected volatility
    
    
    52.39
    %
    
    
    31.86
    %
    
    
    0.00
    %Expected life (in years)
    
    
    3.3
    
    
    
    3.9
    
    
    
    3.3Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 Earnings (Loss) Per Share
  F-13




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##### Table of Contents



Year Ended December 31,2004
    
    2003Potential common shares excluded from diluted loss per share:Unvested common stock
    
    
    
    
    
    
    285,200
    
    
    
    307,227Convertible redeemable preferred stock
    
    
    
    
    
    
    4,225,598
    
    
    
    5,634,131Options and warrants
    
    
    
    
    
    
    1,084,220
    
    
    
    490,783Total
    
    
    
    
    
    
    5,595,018
    
    
    
    6,432,141
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Numerator:Net income (loss) attributable to common stockholders
    
    $
    9,659
    
    
    $
    (947
    )
    
    $
    (3,644
    )Denominator:Weighted average common shares outstanding
    
    
    17,231,411
    
    
    
    7,300,809
    
    
    
    4,001,979Denominator of basic calculation
    
    
    17,231,411
    
    
    
    7,300,809
    
    
    
    4,001,979Effect of
dilutive securities:Weighted average stock options, warrants and
restricted
common stock
    
    
    1,543,567
    
    
    
    
    
    
    
    Denominator of diluted calculation
    
    
    18,774,978
    
    
    
    7,300,809
    
    
    
    4,001,979Net income (loss) per share:Basic
    
    $
    0.56
    
    
    $
    (0.13
    )
    
    $
    (0.91
    )Diluted
    
    $
    0.51
    
    
    $
    (0.13
    )
    
    $
    (0.91
    )
  Income Taxes
  Warranties and Indemnification
    F-14




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##### Table of Contents



Advertising Expenses
  Recent Accounting Pronouncements
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 3. Composition of Certain Balance Sheet Captions
 Investments
  Short-term
    
    
    Long-termDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004InvestmentsHeld to maturityCertificates of deposit
    
    $
    
    
    
    $
    3,014
    
    
    $
    
    
    
    $
    1,244Mortgage backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,527Federal agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,905
    
    
    
    3,014
    
    
    
    
    
    
    
    8,676Available for saleCertificates of deposit
    
    
    3,418
    
    
    
    
    
    
    
    755
    
    
    
    Mortgage backed securities
    
    
    3,983
    
    
    
    
    
    
    
    2,521
    
    
    
    Federal agencies
    
    
    4,311
    
    
    
    
    
    
    
    
    
    
    
    Auction rate securities
    
    
    
    
    
    
    13,309
    
    
    
    
    
    
    
    11,712
    
    
    
    13,309
    
    
    
    3,276
    
    
    
    $
    11,712
    
    
    $
    16,323
    
    
    $
    3,276
    
    
    $
    8,676
  F-15




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##### Table of Contents



Accounts Receivable
  December 31,
    
    
    December 31,2005
    
    
    2004Accounts receivableTrade accounts receivable
    
    $
    8,207
    
    
    $
    4,111Allowance for doubtful accounts
    
    
    (365
    )
    
    
    (407
    )$
    7,842
    
    
    $
    3,704
  December 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003Allowance for doubtful accountsBeginning balance
    
    $
    407
    
    
    $
    553
    
    
    $
    597Bad debt provision
    
    
    112
    
    
    
    28
    
    
    
    274Write offs
    
    
    (207
    )
    
    
    (192
    )
    
    
    (325
    )Write off recoveries
    
    
    53
    
    
    
    18
    
    
    
    7Ending balance
    
    $
    365
    
    
    $
    407
    
    
    $
    553
 Prepaid expenses and other current assets
  December 31,
    
    
    December 31,2005
    
    
    2004Prepaid expenses and other current assetsDeferred commissions
    
    $
    1,314
    
    
    $
    459Other prepaid expenses
    
    
    990
    
    
    
    484$
    2,304
    
    
    $
    943
 Property
and equipment
  F-16




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##### Table of Contents



December 31,
    
    
    December 31,2005
    
    
    2004Property and equipment, netComputers and office equipment
    
    $
    5,252
    
    
    $
    7,777Furniture and fixtures
    
    
    1,025
    
    
    
    1,042Leasehold improvements
    
    
    369
    
    
    
    4666,646
    
    
    
    9,285Accumulated depreciation and amortization
    
    
    (4,114
    )
    
    
    (7,401
    )$
    2,532
    
    
    $
    1,884
   Goodwill and Intangible Assets
  December 31, 2005Grosscarrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetIntangible assets, netCustomer contracts
    
    $
    7,340
    
    
    $
    (1,147
    )
    
    $
    6,193Acquired complete technology
    
    
    910
    
    
    
    (202
    )
    
    
    708$
    8,250
    
    
    $
    (1,349
    )
    
    $
    6,901
    Other Assets
  F-17




---



##### Table of Contents



December 31,
    
    
    December 31,2005
    
    
    2004Other assetsCapitalized internal-use software development costs, net of accumulated
amortization of $239 and $81, respectively
    
    $
    1,280
    
    
    $
    210Restricted cash held in escrow
    
    
    807
    
    
    
    Long term deposits and other noncurrent assets
    
    
    162
    
    
    
    131$
    2,249
    
    
    $
    341
 Accrued Expenses and Other Current Liabilities
  December 31,
    
    
    December 31,2005
    
    
    2004Accrued liabilitiesAccrued bonuses and commissions
    
    $
    1,579
    
    
    $
    917Accrued payroll and vacation
    
    
    1,017
    
    
    
    501Accrued accounting and legal services
    
    
    487
    
    
    
    190Accrued sublease liability
    
    
    240
    
    
    
    144Accrued sales tax
    
    
    111
    
    
    
    262Other accrued expenses
    
    
    446
    
    
    
    323$
    3,880
    
    
    $
    2,337
 4. Warrants
   As of December 31, 2005Number of Shares
    
    Expiration Date
    
    Exercise Price202,358
    
    January 2013
    
    $ 
 As of December 31, 2004Number of Shares
    
    Expiration Date
    
    Exercise Price126,474
    
    
    January 2013
    
    $
    2,857
    
    
    March 2005
    
    
    37.8066,240
    
    
    February 2006
    
    
    2.2734,504
    
    
    April 2006
    
    $
    5.11230,075
  F-18




---



##### Table of Contents



5. Acquisition
     F-19




---



##### Table of Contents



May 4, 2005Cash
    
    $
    1,200Accounts receivable
    
    
    943Property and equipment
    
    
    290Deferred tax assets
    
    
    4,625Intangible assets
    
    
    8,250Goodwill
    
    
    21,286Other assets
    
    
    230Accounts payable and accrued liabilities
    
    
    (905
    )Deferred revenues
    
    
    (3,428
    )Other liabilities
    
    
    (118
    )Deferred stock-based compensation
    
    
    651Purchase price, including transaction costs
    
    $
    33,024
  Twelve months endedDecember 31,
    
    December 31,2005
    
    2004Pro forma revenues
    
    $
    42,821
    
    
    $
    28,957Pro forma net income (loss)
    
    
    9,466
    
    
    
    (2,141
    )Pro forma earnings (loss) per share  basic
    
    
    0.48
    
    
    
    (0.22
    )Pro forma earnings (loss) per share  diluted
    
    $
    0.45
    
    
    $
    (0.22
    )
  6. Stock Option Plans
   F-20




---



##### Table of Contents



Business Combinations
   Weighted-AverageOptions
    
    
    ExerciseOutstanding
    
    
    PricesBalance at December 31, 2002
    
    
    1,064,591
    
    
    $
    2.73Granted
    
    
    362,771
    
    
    
    0.84Exercised
    
    
    (40,710
    )
    
    
    0.84Forfeited
    
    
    (297,208
    )
    
    
    3.32Balance at December 31, 2003
    
    
    1,089,444
    
    
    
    2.00Granted
    
    
    1,053,321
    
    
    
    7.54Exercised
    
    
    (406,862
    )
    
    
    1.04Forfeited
    
    
    (99,241
    )
    
    
    4.88Balance at December 31, 2004
    
    
    1,636,662
    
    
    
    5.62Granted
    
    
    1,644,598
    
    
    
    11.65Exercised
    
    
    (334,713
    )
    
    
    2.92Forfeited
    
    
    (131,951
    )
    
    
    9.31Balance at December 31, 2005
    
    
    2,814,596
    
    
    
    9.29Options exercisable at December 31, 2005
    
    
    552,363
    
    
    
    4.68Options exercisable at December 31, 2004
    
    
    405,795
    
    
    
    3.31Options exercisable at December 31, 2003
    
    
    614,314
    
    
    
    2.71
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Weighted-average fair value:Options granted below fair value
    
    $
    8.40
    
    
    $
    1.92
    
    
    $
    1.40Options granted above fair value
    
    
    4.72
    
    
    
    0.21
    
    
    
    
 F-21




---



##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Options equal to fair value
    
    
    5.14
    
    
    
    4.37
    
    
    
    Weighted-average exercise price:Options granted at or below fair value
    
    
    11.64
    
    
    
    7.59
    
    
    
    0.84Options granted above fair value
    
    
    12.02
    
    
    
    6.74
    
    
    
    
  Options Outstanding
    

Options
ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Remaining
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life (Years)
    
    Price
    
    Exercisable
    
    Price$  0.84
  $  0.84
    
    
    317,342
    
    
    
    6.8
    
    
    $
    0.84
    
    
    
    210,129
    
    
    $
    0.841.16      4.90
    
    
    157,285
    
    
    
    8.4
    
    
    
    2.95
    
    
    
    116,508
    
    
    
    3.385.25
     5.25
    
    
    309,752
    
    
    
    8.2
    
    
    
    5.25
    
    
    
    101,642
    
    
    
    5.258.00
     8.00
    
    
    35,263
    
    
    
    8.7
    
    
    
    8.00
    
    
    
    5,278
    
    
    
    8.008.50
     8.50
    
    
    390,714
    
    
    
    8.7
    
    
    
    8.50
    
    
    
    32,811
    
    
    
    8.508.68
   11.00
    
    
    178,925
    
    
    
    8.3
    
    
    
    10.27
    
    
    
    49,434
    
    
    
    9.7711.04
   11.04
    
    
    419,000
    
    
    
    9.3
    
    
    
    11.04
    
    
    
    
    
    
    
    11.05
   11.45
    
    
    76,450
    
    
    
    9.3
    
    
    
    11.28
    
    
    
    551
    
    
    
    11.4511.53
   11.53
    
    
    447,465
    
    
    
    9.0
    
    
    
    11.53
    
    
    
    
    
    
    
    $11.58  $30.80
    
    
    482,400
    
    
    
    9.1
    
    
    
    15.97
    
    
    
    36,010
    
    
    
    18.08
  WeightedWeighted
    
    Weighted
    
    AverageNumber
    
    Average
    
    Average Fair
    
    Intrinsicof Shares
    
    Exercise
    
    Value Per
    
    Value PerGrants Made During Quarter Ended
    
    Granted
    
    Price
    
    Share
    
    ShareMarch 31, 2003
    
    
    57,142
    
    
    $
    0.84
    
    
    $
    1.18
    
    
    $
    0.34June 30, 2003
    
    
    800,527
    
    
    
    0.24
    
    
    
    1.47
    
    
    
    1.23September 30, 2003
    
    
    224,142
    
    
    
    0.25
    
    
    
    2.38
    
    
    
    2.13December 31, 2003
    
    
    10,569
    
    
    
    0.84
    
    
    
    3.84
    
    
    
    3.00March 31, 2004
    
    
    262,926
    
    
    
    5.16
    
    
    
    5.55
    
    
    
    0.39June 30, 2004
    
    
    181,421
    
    
    
    5.51
    
    
    
    7.98
    
    
    
    2.47September 30, 2004
    
    
    451,143
    
    
    
    8.49
    
    
    
    8.45
    
    
    
    December 31, 2004
    
    
    157,831
    
    
    
    11.13
    
    
    
    11.13
    
    
    
    March 31, 2005
    
    
    540,114
    
    
    
    11.52
    
    
    
    11.58
    
    
    
    0.06June 30, 2005
    
    
    789,684
    
    
    
    9.50
    
    
    
    11.22
    
    
    
    1.72September 30, 2005
    
    
    184,750
    
    
    
    16.27
    
    
    
    16.46
    
    
    
    0.19December 31, 2005
    
    
    130,050
    
    
    
    18.64
    
    
    
    18.64
    
    
    
    
  7. Qualified Retirement Plan
  F-22




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##### Table of Contents



8. Commitments and Contingencies
    Gross
    
    
    Sublease
    
    
    NetPayments
    
    
    Income
    
    
    PaymentsYear ending December 31,2006
    
    $
    1,591
    
    
    $
    725
    
    
    $
    8662007
    
    
    1,807
    
    
    
    61
    
    
    
    1,7462008
    
    
    1,839
    
    
    
    
    
    
    
    1,8392009
    
    
    1,891
    
    
    
    
    
    
    
    1,8912010+
    
    
    6,110
    
    
    
    
    
    
    
    6,110$
    13,238
    
    
    $
    786
    
    
    $
    12,452
 9. Income Taxes
  Year Ended December 31,2005
    
    
    2004
    
    
    2003CurrentFederal
    
    $
    64
    
    
    $
    25
    
    
    $
    State
    
    
    56
    
    
    
    2
    
    
    
    2Foreign
    
    
    204
    
    
    
    21
    
    
    
    68324
    
    
    
    48
    
    
    
    70DeferredFederal
    
    
    (2,997
    )
    
    
    
    
    
    
    State
    
    
    (438
    )
    
    
    
    
    
    
    Foreign
    
    
    38
    
    
    
    (2
    )
    
    
    (101
    )(3,397
    )
    
    
    (2
    )
    
    
    (101
    )$
    (3,073
    )
    
    $
    46
    
    
    $
    (31
    )
  2005
    
    
    2004
    
    
    2003Deferred tax assetsAccrued bonuses and vacation
    
    $
    250
    
    
    $
    96
    
    
    $
    159Allowance for doubtful accounts
    
    
    95
    
    
    
    108
    
    
    
    211Stock-based compensation related to nonstatutory stock options
    
    
    1,111
    
    
    
    925
    
    
    
    594Capitalized legal, net of amortization
    
    
    
    
    
    
    
    
    
    
    26Depreciation and amortization
    
    
    308
    
    
    
    152
    
    
    
    433Federal net operating loss carryforward
    
    
    10,078
    
    
    
    4,336
    
    
    
    4,759State net operating loss carryforward
    
    
    1,030
    
    
    
    341
    
    
    
    432
 F-23




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Other
    
    
    75
    
    
    
    239
    
    
    
    15812,947
    
    
    
    6,197
    
    
    
    6,772Deferred tax liabilitiesOther identified intangibles
    
    
    (2,764
    )
    
    
    
    
    
    
    Capitalized software and website development costs
    
    
    (510
    )
    
    
    (83
    )
    
    
    (42
    )(3,274
    )
    
    
    6,114
    
    
    
    6,730Valuation allowance
    
    
    
    
    
    
    (6,077
    )
    
    
    (6,629
    )$
    9,673
    
    
    $
    37
    
    
    $
    101
     2005
    
    
    2004
    
    
    2003Computed expected federal tax expense
    
    $
    2,208
    
    
    $
    611
    
    
    $
    (666
    )State taxes, net of federal benefit
    
    
    391
    
    
    
    139
    
    
    
    15Stock-based compensation expense
    
    
    (13
    )
    
    
    (30
    )
    
    
    23Alternative minimum tax
    
    
    
    
    
    
    11
    
    
    
    Other
    
    
    215
    
    
    
    58
    
    
    
    3Valuation allowance
    
    
    (5,874
    )
    
    
    (743
    )
    
    
    594$
    (3,073
    )
    
    $
    46
    
    
    $
    (31
    )
 10. Subsequent Events
 Acquisition
  F-24




---



##### Table of Contents



pari passu
 Litigation
   F-25




---



##### Table of Contents



Index to Exhibits
 ExhibitNumber
    
    Description2.1(1)
    
    Agreement and Plan of Merger dated as of February 8, 2005 by and among the Registrant,
WSSI Acquisition Company, Avivo Corporation and Charles M. Linehan, as the Holder
Representative.2.2(2)
    
    Agreement and Plan of Merger dated as of February 1, 2006 by and among the Registrant,
VS Acquisition, LLC, Visual Sciences, LLC and Ned Scherer, as the Holder
Representative.3.1(3)
    
    Amended and Restated Certificate of Incorporation.3.2(3)
    
    Amended and Restated Bylaws.4.1(3)
    
    Form of Common Stock Certificate.4.2(2)
    
    Second Amended and Restated Registration Rights Agreement dated as of February 1, 2006
by and among the Registrant and certain investors set forth therein.4.3(3) +
    
    Warrant to Purchase Series D Convertible Preferred Stock dated April 1, 2003 by and
between the Registrant and Jeffrey W. Lunsford.4.4
    
    Warrant to Purchase Common Stock dated as of November 21, 2005 and issued by the
Registrant in favor of Starsoft Development Labs, Inc.4.5(2)
    
    Form of Warrant to Purchase Common Stock dated as of February 1, 2006 and issued by the
Registrant in favor of the former holders of units of membership interest in Visual
Sciences, LLC.10.1(3) +
    
    Amended and Restated 2000 Equity Incentive Plan.10.2(4) +
    
    2004 Equity Incentive Award Plan and Form of Option Grant Agreement.10.3(5) +
    
    Avivo Corporation 1999 Equity Incentive Plan and Form of Option Grant Agreement.10.4(3) +
    
    Common Stock Purchase Agreement dated as of April 1, 2003 by and between the Registrant
and Jeffrey W. Lunsford.10.5(3) +
    
    Amended and Restated Employment Agreement dated as of July 21, 2004 by and between the
Registrant and Jeffrey W. Lunsford.10.6(6) +
    
    Offer Letter dated as of January 26, 2006 by and between the Registrant and Claire Long.10.7(3) +
    
    Offer Letter dated as of May 15, 2003 by and between the Registrant and Rand Schulman.10.8 +
    
    Offer Letter dated as of November 21, 2005 by and between the Registrant and Andrew S.
Greenhalgh.10.9(3) +
    
    Offer Letter dated as of February 12, 2003 by and between the Registrant and
Christopher Reid.10.10(3) +
    
    Employment Agreement dated as of July 1, 2000 by and between WebSideStory Holding B.V.
and Daniel Guilloux.




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##### Table of Contents



ExhibitNumber
    
    Description10.11(3) +
    
    Amendment to Employment Agreement dated as of November 15, 2002 by and between
WebSideStory Holding B.V. and Daniel Guilloux.10.12 +
    
    Amended and Restated Employment Agreement dated as of February 1, 2006 by and between
Visual Sciences, LLC and James W. MacIntyre, IV.10.13 +
    
    Amended and Restated Employment Agreement dated as of February 1, 2006 by and between
Visual Sciences, LLC and David R. Scherer.10.14(3) +
    
    Form of Indemnification Agreement by and between the Registrant and the persons listed
on Schedule A thereto.10.15(3) +
    
    Form of Change in Control Agreement between the Registrant and the persons listed on
Schedule A thereto.10.16(6) +
    
    Change in Control Agreement dated as of January 18, 2006 by and between the Registrant
and Claire Long.10.17
    
    Master Service Agreement dated as of August 10, 2005 by and between the Registrant and
Level 3 Communications, LLC.10.18
    
    Addendum to Master Service Agreement dated as of September 22, 2005 by and between the
Registrant and Level 3 Communications, LLC.10.19(3)
    
    Office Lease dated as of August 23, 1999 by and between the Registrant and LNR Seaview,
Inc.10.20(3)
    
    First Amendment to Office Lease dated as of July 3, 2001 by and between the Registrant
and LNR Seaview, Inc.10.21
    
    Second Amendment to Office Lease dated as of December 7, 2005 by and between the
Registrant and Seaview PFG, LLC (as assignee of LNR Seaview, Inc.)10.22(3)
    
    Sublease dated as of July 3, 2001 by and between the Registrant and RF Magic, Inc.10.23(3)
    
    Amendment to Sublease dated as of September 10, 2003 by and between the Registrant and
RF Magic, Inc.10.24(3)
    
    Sublease dated as of July 6, 2001 by and between the Registrant and Avexus, Inc.10.25(3)
    
    Addendum to Sublease dated as of April 18, 2002 by and between the Registrant and
Avexus, Inc.10.26(3) 
    
    Revised Master Service Agreement dated as of August 29, 2003 by and among the
Registrant, Buena Vista Internet Group, ESPN Internet Ventures, ABCNews Internet
Ventures, Infoseek Corporation, ABC Multimedia, Inc. and Walt Disney Parks & Resorts
Online.10.27(3) 
    
    Amendment to Revised Master Service Agreement dated as of March 31, 2004 by and among
the Registrant, Buena Vista Internet Group, ESPN Internet Ventures, ABCNews Internet
Ventures, Infoseek Corporation, ABC Multimedia, Inc. and Walt Disney Parks & Resorts
Online.




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##### Table of Contents



ExhibitNumber
    
    Description10.28(3) 
    
    Patent Cross-License Agreement dated December 12, 2003 by and between the Registrant
and NetIQ Corporation.10.29(3) 
    
    Salesforce.com JoinForces Product Alliance Program Agreement dated as of May 21, 2004
by and between the Registrant and Salesforce.com, Inc.10.30(2)
    
    Form of Senior Note dated as of February 1, 2006 and issued by the Registrant in favor
of the former holders of units of membership interest in Visual Sciences, LLC.21.1
    
    List of Subsidiaries.23.1
    
    Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14
promulgated under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14
promulgated under the Securities Exchange Act of 1934.32*
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 (1)
    
    Incorporated by reference to the Current Report on Form 8-K of the Registrant filed with the
Securities and Exchange Commission on February 10, 2005.(2)
    
    Incorporated by reference to the Current Report on Form 8-K of the Registrant filed with the
Securities and Exchange Commission on February 7, 2006.(3)
    
    Incorporated by reference to the Registration Statement on Form S-1 of the Registrant
(Registration No. 333-115916) filed with the Securities and Exchange Commission on May 27,
2004.(4)
    
    Incorporated by reference to the Registration Statement on Form S-8 of the Registrant
(Registration No. 333-119350) filed with the Securities and Exchange Commission on September
28, 2004.(5)
    
    Incorporated by reference to the Registration Statement on Form S-8 of the Registrant
(Registration No. 333-124754) filed with the Securities and Exchange Commission on May 10,
2005.(6)
    
    Incorporated by reference to the Current Report on Form 8-K of the Registrant filed with the
Securities and Exchange Commission on January 24, 2006.
    
    WebSideStory, Inc. has been granted confidential treatment with
respect to certain portions of this exhibit (indicated by asterisks),
which have been separately filed with the Securities and Exchange
Commission.+
    
    Indicates management contract or compensatory plan.*
    
    These certifications are being furnished solely to accompany this annual report pursuant to
18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities
Exchange Act of 1934 and are not to be incorporated by reference into any filing of
WebSideStory, Inc., whether made before or after the date hereof, regardless of any general
incorporation language in such filing.