10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2005

OR

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

For the Transition Period from        to      

Commission File Number 000-30093

Websense, Inc.

(Exact name of registrant as specified in its charter)

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

10240 Sorrento Valley Road
San Diego, California 92121
858-320-8000

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes x  No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes o  No x

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (each as defined in Exchange Act Rule 12(b)-2):   Large accelerated filer x  Accelerated filer o  Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in the Rule 12b-2 of the Act):   Yes o  No x

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2005 was approximately $1,035 million (based on the closing price for shares of the registrant’s Common Stock as reported by the Nasdaq National Market for that date). Shares of Common Stock held by each officer, director and holder of 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of February 15, 2006 was 24,010,998.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held June 6, 2006 are incorporated by reference into Part III.

Certain exhibits filed with the registrant’s prior registration statement, form 10-K and forms 10-Q are incorporated herein by reference into Part IV of this Report.

Websense, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2005

TABLE OF CONTENTS

		Page
Part I
Item 1.	Business		3
Item 1A.	Risk Factors		18
Item 1B.	Unresolved Staff Comments.		28
Item 2.	Properties		28
Item 3.	Legal Proceedings.		28
Item 4.	Submission of Matters to a Vote of Security Holders		28
Part II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and
	Issuer Purchases of Equity Securities.		29
Item 6.	Selected Financial Data		31
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.		40
Item 8.	Financial Statements and Supplementary Data		42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		65
Item 9A.	Controls and Procedures		65
Item 9B.	Other Information		67
Part III
Item 10.	Directors and Executive Officers of the Registrant		67
Item 11.	Executive Compensation		67
Item 12.	Security Ownership of Certain Beneficial Owners and Management and
	Related Stockholder Matters.		67
Item 13.	Certain Relationships and Related Transactions		68
Item 14.	Principal Accountant Fees and Services .		68
Part IV
Item 15.	Exhibits and Financial Statement Schedules .		69
	Signatures		71

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PART I

Forward-Looking Statements

This report on Form 10-K may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. Such statements may include but are not limited to statements concerning the following:

·anticipated trends in revenue;

·growth opportunities in domestic and international markets;

·new channels of distribution;

·customer acceptance and satisfaction with our products;

·expected trends in operating and other expenses;

·anticipated cash and intentions regarding usage of cash;

·changes in effective tax rates; and

·anticipated product enhancements or releases.

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

You should carefully review and consider the various disclosures in this report regarding factors that could cause actual results to differ materially from anticipated results, including those factors under the caption “Risk Factors” under Item 1A below, and elsewhere in this report.

Item 1.Business

Overview

We provide employee internet management (EIM) and web security software products that enable organizations to reduce the risks associated with web-based malicious attacks, spyware, and phishing, as well as analyze, report and manage how their employees use computing resources. At the foundation of our product offering is the Websense Enterprise® software application, which serves as a central policy engine and management and reporting console and enables the extended functionality of our add-on products. Websense Enterprise gives organizations the ability to enhance network security, improve employee productivity, mitigate potential legal liability and conserve network bandwidth by allowing organizations to identify potential risk areas and implement web access and application usage policies that reduce these risks. Over the past 10 years, our products have evolved from software that prevents employees from downloading unacceptable internet content (such as adult materials), to products that prevent employee access to the most undesirable and dangerous elements on the internet—websites that contain or will download viruses, spyware, keyloggers, phishing exploits and an ever-increasing variety of malicious code.

In 1996, we released our first software product, Websense Internet Screening System. Since that time, we have focused on developing and selling EIM and web security solutions. Websense Enterprise and Websense Enterprise—Corporate Edition™ are our core web filtering solutions and serve as management platforms for related Websense add-on modules, such as our Premium Groups™, Real Time Security

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Updates™, Bandwidth Optimizer™, Instant Messaging (IM) Attachment Manager™, Client Policy Manager™ and Remote Filtering. We have also created suites of some of our products to address specific customer needs, such as the Websense Web Security Suite™ and Websense Web Security Suite—Lockdown Edition™.

Our Security Premium Group™, for example, leverages our longstanding ability to identify,   categorize, and restrict employee access to undesirable websites by further preventing employees from accessing websites that contain spyware, worms and other mobile malicious code, even though they otherwise may be appropriate business websites. By preventing access to these sites, we expanded our traditional employee internet management tools to offer proactive protection against web-based threats.With the recent launch of our Remote Filtering product in October 2005, we broadened our product line to protect mobile workers with the same EIM and security features employees receive within the office.

In October 2005, we announced an agreement with Nortel Networks to develop a web content filtering solution to protect GSM/UMTS mobile handsets from receiving and accessing unwanted content. Our solution will be embedded in certain Nortel Networks’ switches that are installed by wireless carriers. The wireless carriers will determine whether our solution is offered to wireless customers. To date, our product has not been commercially launched through this channel. We expect the product to be generally available from Nortel Networks in mid-2006.

Our software applications operate in conjunction with our proprietary databases of:

·website universal resource locators (URLs), including sites containing spyware, viruses and other malware;

·software applications and executable files, including commonly-used productivity applications, games, hacking tools and viruses; and

·commonly used network and internet protocols, such as http, instant messaging protocols and peer-to-peer protocols.

Recently, our research efforts expanded through our Websense Security Labs™ to include the identification and classification of malicious code, malware, spyware and adware located on internet sites. Our newest line of products that provide blocking and containment of spyware and malware attacks from employee desktops and laptop computers, Client Policy Manager and the Lockdown Edition of our Web Security Suite, depend upon these continual research efforts of Websense Security Labs.

Our products operate at four primary points of policy enforcement:  the internet gateway, the network, the employee desktop and the mobile device, such as a wireless enabled laptop computer. Our databases are updated each business day using a proprietary process of automated content assessment and classification, with manual verification. Subscribers to our Real Time Security Updates product receive updates of the security risk categories of the URL and application databases in real time as new malicious or high-risk URLs and executable files are identified and categorized by our Websense Security Labs.

The Websense URL database is currently organized into more than 90 categories and encompasses more than 15 million websites. The software application database has classified over 1.4 million software applications and executable files in more than 50 categories. We also maintain a database of commonly used internet protocols.

Websense Enterprise and the add-on modules are easy to deploy and use. They integrate with a wide range of network access platforms, including market-leading firewalls, caching appliances, proxy-servers, switches, routers and other network appliances, and can scale with our customers’ needs to serve a virtually unlimited number of users across multiple locations.

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We currently derive all of our revenue from subscriptions to the Websense Enterprise-based solutions and expect this to continue in the future as more offerings are added to the Websense Enterprise platforms. We operate in one industry segment, as defined by generally accepted accounting principles.

Our business commenced operations in 1994 as NetPartners Internet Solutions, a reseller of computer security products. In 1999, we changed our name to Websense, Inc. to reflect the shift in our business focus to a developer of web filtering solutions. Our principal offices are located at 10240 Sorrento Valley Road, San Diego, CA  92121.

Industry Background

As part of their overall business strategies, many organizations use the internet to enable critical business applications that are accessed over their corporate networks. Many employees also use their organization’s computing resources for recreational “web surfing,” peer-to-peer file sharing, downloading of high-bandwidth content, instant messaging and other personal matters. However, unmanaged use of organizational computing and network resources, including internet access, can result in increased risk and cost to the organization, including increased security risks, lost employee productivity, increased network bandwidth consumption, and potential legal liability. In recent years, the same activities that made employees efficient and productive—doing research over the Internet, sharing files and sending instant messages and emails to customers and co-workers—have also made IT infrastructures vulnerable to mobile malicious code, spyware, viruses, Trojan horses and phishing and pharming exploits.

Traditionally, organizations have attempted to mitigate the legal liability, productivity and bandwidth waste risks through written policies governing acceptable employee use of computing resources, and they have sought to protect against external security risks with a combination of firewalls, intrusion detection/prevention software and anti-virus software. With the growth in spyware, key logging applications, and phishing sites, combined with the rapid increase in employee use of instant messaging and peer-to-peer file sharing and the proliferation of blended attacks on computing networks, organizations are finding  that  existing security measures leave significant time and technology gaps in their protection. Written internet access and software application usage policies are easily ignored, difficult to enforce and do not proactively curtail undesirable internet and software application usage. Firewalls can provide protection against external threats such as hacking, but do little to prevent employees from hacking into their own organization’s data from inside the corporate firewall. Anti-virus software provides protection from e-mail borne viruses, but does not prevent the possible theft or corruption of corporate data by spyware, and offers only limited protection against viruses that proliferate via peer-to-peer networks and instant messaging. Existing anti-virus and anti-spyware software also requires time to identify and reverse engineer the virus or spyware application before it can be remediated and removed from infected systems.

Given the necessity of corporate internet access and the continuing adoption of the web as a mass communication, entertainment, information and commerce medium, we believe there is a significant opportunity for employee internet management and web security solutions that effectively address the needs of organizations to protect themselves from web-based threats and manage employee usage of the computing environment, including internet access and desktop application use. Additionally, although the web and e-mail are the primary drivers of internet traffic today, the rapid emergence of internet-enabled applications creates the need for software that applies management policies to file types, applications, and protocols, as well as web pages, at multiple points on the information technology infrastructure. Software tools are needed to implement policy-based bandwidth management and regulation of applications such as instant messaging, peer-to-peer file exchange tools, interactive games and desktop software applications. These solutions must also be adaptable enough to manage new applications and technologies as they are developed.

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Our Products and Services

Websense Enterprise.   Websense Enterprise is the foundation of our software offerings and includes our proprietary central policy engine, central management console and multiple reporting options. Websense Enterprise gives business managers the ability to implement customized internet access and use policies for different users and groups within the business, and supports an organization’s efforts to enhance network security, improve employee productivity, mitigate potential legal liability, and conserve network bandwidth. Websense Enterprise and its available add-on modules allow organizations to manage employees’ use of corporate computing resources by filtering access to websites, applications, protocols and bandwidth based on management-defined policies.

We sell subscriptions to Websense Enterprise based on the number of users to be managed. Websense Enterprise—Corporate Edition offers the same functionality as Websense Enterprise with additional administrative features relevant to large or distributed enterprises. Websense Enterprise and Websense Enterprise—Corporate Edition serve as management platforms for related Websense add-on modules, such as our Premium Groups, Real Time Security Updates, Bandwidth Optimizer, Instant Messaging (IM) Attachment Manager, Client Policy Manager and Remote Filtering. Our Websense Web Security Suites include Websense Enterprise and a select group of add-on products and services for a single price to address specific customer needs, such as the need for enhanced network security. Revenues from sales of subscriptions to Websense Enterprise and related add-on products accounted for all of our revenues in 2005, 2004 and 2003.

Deployment Options.   Websense Enterprise integrates with an organization’s network server, proxy server, switch, router or firewall and is designed to work in networks of virtually any size and configuration. We currently offer three deployment options:

·Integrated deployment on a separate server that is tightly integrated with the network gateway platform to offer pass-through filtering that maximizes stability, scalability and performance.

·Embedded deployment on an appliance or gateway product to reduce hardware expense and enhance ease-of-use, particularly in remote locations.

·Stand-alone deployment utilizing a network agent to deliver pass-by filtering capabilities in any network environment.

Web Filtering.   Websense Enterprise enables employers to proactively analyze, report and manage employee access to websites based on the content of the requested website. Our software application provides patented flexibility for managers when customizing, implementing and modifying internet access policies for various groups, user types and individuals. A graphical interface enables business managers to define the categories of websites to which access will be managed. The filtering software examines each internet access request, determines the category of the requested website and applies the policies that have been defined by the company. Some examples of management options include:

·Allow: The request is allowed to proceed, because the organization has chosen not to restrict access to the category applicable to the website.

·Block: The requested website is in a category that is not allowed to be accessed according to the policy in effect.

·Time-based Quotas: Users are allowed a specified amount of personal surfing time within categories that are determined by the administrator. Once the user reaches his or her quota time, he or she is no longer able to access sites in those categories.

·Continue with Exception Report: The user is reminded about the organization’s internet usage policy, but can choose to access the requested website.

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·Time of Day:  Filtering options can be managed by time of day. For example, access to shopping sites could be blocked during business hours and permitted at all other times.

The breadth and specificity of website categories we have defined provide flexibility in selecting which types of material should be allowed, blocked or reported. We identify the types of content that we believe employers would deem to be unacceptable, inappropriate or undesirable in a work environment based on input we receive from our customers, and define the categories accordingly.

Reporting and Analysis.Websense Enterprise includes several reporting modulesto meet the information needs of different management groups.

·Websense Reporter is a batch-based reporting application that can generate more than 80 tabular and graphical reports based on an organization’s historical internet use. It analyzes information from internet monitoring logs and builds visual charts in a variety of pre-set or customizable formats for easy distribution to and interpretation by managers.

·Websense Real-Time Analyzer™ utilizes the network agent in Websense Enterprise to monitor and analyze network traffic on-the-fly. This allows IT managers to identify potential risks and bandwidth bottlenecks associated with different types of network traffic.

·Websense Explorer is a browser-based forensics and analytics reporting tool for non-technical business managers that enables them to drill down on internet use data by risk class, user group, or individual.

Add-On Modules.There are three primary types of add-on products that extend and enhance the policy enforcement capabilities of Websense Enterprise:  additional database categories; products that extend the management capabilities of Websense Enterprise at the gateway and on the network; and products that enforce policies at the desktop and on mobile devices, such as laptop computers. These add-on products rely on the application framework of the Websense Enterprise platform and our proprietary databases of software applications and protocols. We plan to continue to develop and market new products and services based on our Websense Enterprise platform and our proprietary search and categorization technologies.  For example, in October 2005, we introduced Remote Filtering to extend the web filtering features of Websense Enterprise to laptop computers and other mobile devices when they are disconnected from the corporate network.

The three Premium Group add-on products include specialized database categories that augment the categories included with Websense Enterprise and provide additional policy enforcement options at the internet gateway.

·Security Premium Group.™ The Security Premium Group allows management of access to sites associated with spyware, phishing, and malicious mobile code.

·Bandwidth Premium Group.™ The Bandwidth Premium Group allows management of access to bandwidth intensive sites, including streaming media, internet radio and television, personal network storage/backup, internet telephony, and peer-to-peer file sharing.

·Productivity Premium Group.™ The Productivity Premium Group allows management of access to advertisements, message boards, freeware/software downloads, online brokerage & trading, instant messaging, and pay-to-surf sites.

Add-on products that extend the management capabilities of Websense Enterprise at the gateway and on the network include:

·Bandwidth Optimizer. The Bandwidth Optimizer module allows customers to dynamically manage network usage by prioritizing business and non-business related traffic flows and disabling non-business related traffic when available network bandwidth drops below pre-determined levels. Our

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customers can apply management policies based on content category, protocols, user group, individual, or network segment. Bandwidth Optimizer relies on the central policy engine in the Websense Enterprise platform, a network agent that monitors network traffic and a database of protocols, file types and content categories to automatically monitor network bandwidth levels and dynamically allow or deny network application requests.

·Instant Messaging (IM) Attachment Manager. The IM Attachment Manager module enhances the built-in management capabilities of Websense Enterprise by allowing organizations to control the transmission and receipt of files via IM clients. The IM Attachment Manager module allows customers to apply policies to file attachments over the most popular IM applications, define custom file attachment policies by user, by group, or by workstation, using popular management options such as warn/continue screens, and provide real-time and historical views of employee use of IM file attachments. Used in conjunction with Bandwidth Optimizer, the IM Attachment Manager can manage the transmission of attachments by bandwidth availability.

Our desktop policy management add-on products are:

·Client Policy Manager. The Client Policy Manager (CPM) product allows our customers to implement management policies, such as block, allow or defer, for usage of software applications and other executables on desktop computers, by application type, by user type, or by individual user. CPM can be used to inventory desktop software, provide a categorized view of applications in the desktop environment, and identify potential security threats from hacking and spyware applications. It can also be used to create lists of allowable applications and block the launch of others, enhancing security by preventing the launch of certain categories of executables such as hacking tools or spyware.

CPM utilizes the application framework of Websense Enterprise and references our Client Policy Manager database of over 1.4 million software applications and executable files. We are expanding this database as well as adapting the database to actual employee computing patterns through the use of AppCatcher, a patent-pending feature by which customers anonymously send uncategorized applications and other executables launched by their employees to us for review and categorization into our database. CPM includes two reporting modules, CPM Reporter, which provides Web-based reports based on historical application usage, and Explorer for CPM, a click-through browser-based interface that provides immediate access to application usage information by user, group, category, machine, or risk class.

·Remote Filtering. Remote Filtering utilizes the CPM desktop agent to extend the corporate web filtering policies to laptop computers and other mobile devices when they are disconnected from the corporate network. By using remote filtering, IT administrators can enforce security policies, such as blocking access to sites containing spyware, even when a laptop computer is accessing the internet from an unmanaged server. This enables the network manager to reduce the risk that mobile devices will infect the network with malicious code when the device again connects to the network.

Additional products or services include:

·Real Time Security Updates. Real Time Security Updates allow subscribing organizations to receive database updates for web-based and application-based threats in real time as they are identified and categorized by the Websense Security Labs.

·Websense Web Protection Services™:  SiteWatcher™, BrandWatcher™ and ThreatWatcher™  Services. The SiteWatcher and BrandWatcher services monitor our customer’s web sites and brands for malicious code or illegal use in a phishing attack and notify the customer if either occurs. The ThreatWatcher service helps customers to prevent malicious attacks on their web servers by

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identifying vulnerabilities. These products are available only as part of the Websense Web Security Suite or Websense Web Security Suite—Lockdown Edition.

·Priority One 24x7 Support. Priority One support gives customers access to a dedicated team of senior technical support specialists 24 hours a day via a toll-free support hotline.

·Content Filtering for Mobile Devices. In October 2005, we announced an agreement with Nortel Networks to develop a web content filtering solution to protect GSM/UMTS mobile handsets from receiving and accessing unwanted content. Our solution will be embedded in certain Nortel Networks’ switches that are installed by wireless carriers. The wireless carriers will determine whether our solution is offered to wireless customers. To date, our product has not been commercially launched through this channel. We expect the product to be generally available from Nortel Networks in mid-2006.

The principal benefits of our products include:

Enhanced Network and Data Security.The Websense Web Security Suites, Websense Enterprise, the Security Premium Group and other add-on products, provide an additional layer of protection to an organization’s network and data security by blocking employee access to sites that pose security risks. These sites include phishing sites and sites containing malicious code, spyware, hacking tools, and other high risk software. Websense Enterprise also prevents “back channel” communication with servers collecting data from spyware applications. This allows an organization to reduce the risk of malicious code attacks - such as Web-based worms, viruses, Visual Basic scripts and more—and prevent back-channel communication of important corporate or personal data by spyware and key logging programs. Additionally, Client Policy Manager can be used to prevent the launch of viruses, hacking tools, peer-to-peer file sharing programs and other malicious executable files or otherwise unauthorized applications at the employee’s desktop or laptop computer, including when disconnected from the network. This helps prevent the spread of viruses throughout the network and reduces the risk of unauthorized data access by employees. To further enhance security and reduce the window of exposure to viruses and other malware, Real Time Security Updates can be downloaded in real time as new threats are identified and categorized. Instant Messaging Attachment Manager also increases the built-in instant messaging management capabilities of Websense Enterprise by allowing managers to control the sending and receiving of file attachments.

Increased Employee Productivity.   Our software gives businesses the ability to more effectively manage employees’ use of corporate computing resources, including internet access, application use at the desktop and network bandwidth, thereby reducing non-productive use of these assets by employees. Websense Enterprise enables organizations to identify the pattern and scope of employees’ internet use, and to manage access to potentially non-business related content and applications such as instant messaging and peer-to-peer file sharing. In addition, our software allows managers to permit or deny internet access based on the employee, type of user, time of day, amount of personal surfing time, and type of content being accessed. Websense Enterprise may also be configured to set time-based quotas for each employee, allowing for limited personal surfing during the workday, limiting workplace distractions but allowing appropriate use of the organization’s high-speed internet connection. Our Client Policy Manager add-on module allows managers to apply similar policies to employees’ use of non-business related applications on their desktop or laptop computers, such as games and hacking tools.

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

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reducing the risk that unauthorized copyrighted material or other inappropriate content is being downloaded and stored on company servers.

Conservation of Information Technology Resources.   We believe Websense Enterprise allows organizations to reduce bandwidth consumption by managing personal internet use and access to websites, in particular those which may contain bandwidth-intensive content, such as streaming audio and video, MP3 music files, multi-player games and other new media. The Bandwidth Optimizer add-on module, used in conjunction with Websense Enterprise, further enhances bandwidth management capabilities by monitoring network usage in real-time and by allowing employee access management based on available bandwidth thresholds. For example, Bandwidth Optimizer can temporarily disable non-business network traffic when available bandwidth drops below pre-determined thresholds. Reducing the bandwidth consumed by non-business-related internet traffic allows an organization to use its network more efficiently and effectively, and helps ensure that bandwidth is available for mission-critical business applications such as voice-over-IP. In addition, by limiting access to bandwidth-intensive content, organizations are able to save valuable network storage from being cluttered with MP3s, images or other non-business files.

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

Access to Comprehensive Databases of URLs, Software Applications and Network Protocols.   We provide access to proprietary databases that categorize website URLs, software applications and executables and commonly used network and internet protocols. We have categorized more than 15 million websites in our URL database, and more than three million dead links have been purged from the database. These website URLs have been classified into more than 90 different categories to enable organizations flexibility in determining the types of internet content that are appropriate for their workplace culture. In the software application database, we have categorized over 1.4 million software applications and executable files in more than 50 categories, such as instant messaging, spyware, hacking and games.  We add approximately 22,000 newly categorized websites and applications each business day to our databases and make these updates available to our customers for daily differential downloads. Subscribers to Real Time Security Updates are able to update the security categories of the databases in real time as new threats are identified and categorized by the Websense Security Labs.

Ability to Easily Configure and Manage Employee Internet and Application Usage Policies from a Single Management Console.   Websense Enterprise allows organizations to configure specific internet and application usage policies for various groups, user types or individuals from a single management console. Through our intuitive interface, we allow managers to implement internet and application use policies with limited investment of information technology resources and personnel. Organizations may choose internet use options which include blocking websites, setting time periods for access, allowing access but generating an exception report, allowing users a specified amount of personal surfing or deferring access until additional network bandwidth is available. Organizations can apply similar policies to the use of applications at the desktop, specifying permissions based on application category, user group, workstation, or IP address.

Multiple Options for Identifying, Analyzing and Reporting on Employee Internet and Application Use.Websense Enterprise includes several analysis and reporting modules to provide managers and information technology (IT) administrators with multiple options for identifying, analyzing and reporting on internet and desktop application activity and the risks associated with employee computing. These options include a reporting engine with pre-defined and customizable report templates, a real-time analyzer that provides a current view of network activity and browser-based reporting tools that allow non-technical managers to view internet and application use data.

Ability to Adapt to our Customers’ Employee Computing Patterns.   We utilize our relationship with our customers to help our software adapt to evolving employee computing and internet access patterns. We

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accomplish this with WebCatcher™, a patent-pending feature by which customers anonymously send uncategorized websites visited by their employees to us for review and categorization into the Websense URL database. AppCatcher™, another patent-pending feature, creates the same feedback mechanism for software applications and network protocols. As new websites, protocols and applications are categorized, the updated databases are available for daily download by the entire customer base. Updates to the security categories are available in real time to subscribing customers.

Ability to Scale and Operate on a Variety of Network Platforms.   Our software is designed to have minimal impact on network performance. Websense Enterprise is available on a broad range of network platforms, and can support up to 50,000 users on a single server. Our software works with popular proxy servers, firewalls, cache engines, switches and routers offered by internet infrastructure providers such as Blue Coat Systems, Check Point Software, Cisco Systems, Juniper Networks/NetScreen, Microsoft, Network Appliance, and Nokia.

Ability to Integrate with Existing Security Software Infrastructures.Websense Enterprise—Corporate Edition can be integrated with several industry leading identity management, security alerting and network access control systems to increase the functionality of these systems. Data collected through the monitoring and reporting features of Websense Enterprise can be fed into these systems to create a comprehensive view of network activity and help managers more easily identify security risks.

Technology Integrations

In 2005, we implemented the Websense Web Security Ecosystem™—a comprehensive ecosystem of world class security and networking technology providers that enable easy deployment and integration of Websense solutions in enterprise environments. The Websense Web Security Ecosystem incorporates vendors from leading security and networking markets, including:  network access control, internet gateways, certified appliance platforms, security event management and identity management. The Websense Web Security Ecosystem provides interoperability of joint solutions for seamless integration in enterprise environments.

The table below lists many of the platforms included in the Websense Web Security Ecosystem:

Firewall Solutions:	Cache/Proxy Solutions:
·3Com	·  Blue Coat Systems
·Check Point Software	·  Cisco Content Engine
·Cisco PIX	·  IMimic DataReactor
·CyberGuard	·  Inktomi Traffic Server
·Juniper Networks/NetScreen	·  Microsoft Proxy Server
·Microsoft ISA Server	·  Network Appliance NetCache
·ServGate	·  Squid Proxy
·SonicWall	·  Stratacache Flyer
	·  Sun ONE Web Proxy Server (formerly iPlanet)
Appliance Solutions:	·  3Com Webcache
·Blue Coat Systems
·Cisco Systems Content Engine	Switch/Router Solutions:
·Crossbeam Systems C-Series	·  Cisco Catalyst Switches
·Crossbeam Systems X-Series	·  Cisco Routers
·Network Appliance NetCache
·Network Engines NS
·Stratacache Flyer

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Identity Management Solutions:	Security Event Management Solutions:
·HP Open View	·Arcsight
·IBM Tivoli	·Network Intelligence
·Novell Nsure
·Novell Nsure	Network Access Control Solutions:
·Microsoft Identity Integration Server	·Cisco Network Admission Control

Customers

Our more than 24,000 customers range from companies with as few as 50 employees to members of the Global 1000 and to government agencies and educational institutions. In total, these customers have subscribed to approximately 23.9 million seats as of December 31, 2005. No customer accounted for more than 10% of our total revenues in 2005, 2004 or 2003.

Sales, Marketing and Distribution

Sales.   We sell our products and services through both indirect and direct channels. For 2005, indirect channel sales comprised over 80% of total revenues. In the United States, we typically sell our products through a network of approximately 1,000 value added resellers. Internationally, we sell our products through a multi-tiered distribution network of more than 200 distributors and resellers in over 80 countries, who sell to customers located in over 150 countries.

Our channel sales efforts are coordinated worldwide through a sales team of approximately 200 individuals. Customers that buy direct from us are typically large organizations that prefer a direct relationship.

In 2005, we generated 33% of our total revenue from customers outside of the United States. Revenue generated in the United Kingdom represented 10% of our total revenues. See Note 4 of Notes to the Consolidated Financial Statements for further explanation of our revenue based on geography. Our current international efforts are focused on expanding our indirect sales channels in Europe, Latin America, Asia/Pacific, and Australia. Our continuing reliance on sales in international markets exposes us to risks attendant to foreign sales. See “Item 1A. Risk Factors—Sales to customers outside the United States have accounted for a significant portion of our revenue, and we expect this trend to continue, which exposes us to risks inherent in international sales.”

Marketing.   Our marketing strategy is to raise awareness of the potential risks associated with unmanaged use of corporate computing resources, generate qualified sales leads for our channel partners, and increase recognition of Websense as a provider of web security and employee internet management solutions.

Our marketing efforts are targeted toward business executives, including information technology professionals, chief executives, upper level management and human resource personnel. We actively manage our public relations programs, communicating directly with technology professionals and the media, in an effort to promote greater awareness of the growing problems caused by viruses, spyware, phishing sites, and key logging, as well as employee misuse of the internet and other computing resources at work. We also provide potential customers and channel partners with free trials of Websense Enterprise and the add-on modules, typically for 30-day periods. Our additional marketing initiatives include:

·advertising online and in high-technology trade magazines, management journals and other business oriented periodicals;

·participation in and sponsorship of trade shows and industry events;

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·providing free subscriptions to security alerts from Websense Security Labs, which inform subscribers of newly identified security threats, such as phishing sites and sites infected with spyware and malicious code;

·hosting regional and international seminars, webinars, and training sessions for our sales organization and reseller partners, as well as customers and prospects;

·cooperative marketing efforts with our internet infrastructure partners including Web link exchanges, joint press announcements, joint trade show activities, channel marketing campaigns, road shows and seminars;

·conducting speaking engagements on topics of interest to our customers and prospects;

·use of our website to communicate with our indirect sales channels, and provide product and company information to interested parties; and

·providing and distributing soft and hard-copy collateral on our company, products, solutions, technologies, partnerships and benefits.

Customer Service, Training and Support

We believe that superior customer support is critical to retaining and expanding our customer base. Our technical support group provides dependable and timely resolution of customer technical inquiries and is available to customers by telephone, e-mail and over the Web. Our training services group delivers education, training and pre-sales support to our customers. We also offer online training to our customers and resellers to provide them with the knowledge and skills to successfully deploy, use and maintain our products. Our customer service team is responsible for handling general customer inquiries, answering questions about the ordering process, updating and maintaining customer account information, investigating the status of orders and payments, as well as processing customer orders. In addition, our customer service team proactively updates customers on a variety of topics, including release dates of new products and updates to existing products.

Research and Development

We have invested significant time and resources in creating a structured process for undertaking product and database development projects. Our research and development department is divided into several groups, which include database production, software development, quality and assurance, documentation and research. Individuals are grouped along product lines and work as part of cross-disciplined teams designed to provide a framework for defining and addressing the activities required to bring product concepts and development projects to market successfully. The Websense Security Labs focus exclusively on identifying and categorizing malicious web sites and applications, augmenting the capabilities of the database production teams. Research and development expenses totaled $16.3 million in 2005, $14.5 million in 2004 and $12.8 million in 2003. Research and development expenses as a percentage of revenue were 11% in 2005, 13% in 2004, and 16% in 2003.

Technology

Software Architecture.   Websense Enterprise is a server-based system designed to function in networks of virtually any size and configuration. Websense Enterprise is composed of a system of analyzing, reporting and management applications integrated in a proprietary central policy engine. It is designed to accommodate network growth without impairing performance or requiring major infrastructure modifications and can scale to support networks of nearly any size. Websense Enterprise integrates with major firewalls, proxy servers, caching engines, network switches and routers. We have designed our products to run on multiple network platforms and in multiple locations. Websense

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Enterprise can also include agents at the desktop and on the network that allow customers to manage applications, protocols, and network bandwidth through its Client Policy Manager product as well as other add-on application modules.

Database Content Analysis and Updating.   We use a process of automated content assessment and classification with manual verification to gather and classify new websites and applications for our databases. Our automated search technology uses Java-based tools and proprietary algorithmic classification systems to automatically search the internet to identify and catalog websites into one of our more than 90 database categories. Additionally, the optional WebCatcher and AppCatcher features of Websense Enterprise collect unrecognized sites, software applications and protocols from customers and return them to us for review and categorization.

Competition

The market for our products is fragmented, highly and increasingly competitive, quickly evolving and subject to rapid technological change. Increased competition may result in reduced market acceptance of our products, pricing pressure and reduced gross margins, any of which could seriously harm our business. Competitors vary in size and in the scope and breadth of the products and services they offer. Our current principal competitors include:

·companies offering web filtering products, such as SurfControl, Secure Computing,  Computer Associates, Microsoft, St. Bernard Software and Trend Micro;

·companies integrating web filtering into specialized security appliances, such as 8e6 Technologies, Blue Coat Systems, Cisco Systems, McAfee and SonicWALL;

·companies offering web security solutions, such as McAfee, Microsoft, Symantec and Trend Micro; and

·companies offering desktop security solutions such as Cisco Systems, Check Point Software, McAfee, Microsoft and Symantec.

We also face current and potential competition from vendors of internet servers, operating systems and networking hardware, many of which now, or may in the future, develop and/or bundle web security, employee internet management or other competitive products with their offerings. We compete against and expect increased competition from anti-virus software developers, traditional network management software developers and Web management service providers. Many of our current and potential competitors have longer operating histories and significantly greater financial, technical, marketing or other resources. They may have significantly greater name recognition, established marketing relationships and access to a larger installed base of customers. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the functionality of their products to address customer needs. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share.

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

·a product’s ability to scale and support the requirements of complex networks;

·the robustness of the solution, allowing management of emerging software and internet applications, protocols and URLs;

·quality of a large and professionally maintained category databases;

·availability of real time updates for security risk categories, such as spyware, key logging, phishing and viruses;

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·breadth of product line, giving customers a number of implementation choices;

·ease of implementation, reducing overall cost of ownership;

·depth of monitoring, reporting and analysis capabilities;

·capacity to integrate with key network providers and security infrastructure software;

·quality of customer support; and

·price.

Intellectual Property Rights

Our intellectual property rights are important to our business. We rely on a combination of trademark, copyright, patent and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and Websense brand. We have registered our Websense® trademark in the United States, Japan, the European Union, Canada, Australia, China, Switzerland, Norway, Mexico, Colombia, Argentina, Singapore, Taiwan and Turkey. We have also registered the Websense Enterprise® trademark in the United States, Japan, Canada, Australia and China. In addition, we have registrations for the Websense trademark pending in several other countries. Effective trademark protection may not be available in every country where our products are available.

We currently have three patents issued in the United States, one patent issued in an international market, eight patent applications pending in the United States and sixteen pending international patent applications that seek to protect our proprietary database and filtering technologies, including issued and pending patents relating to our flexible filtering management options, and pending patents relating to our WebCatcher, AppCatcher and Network Lockdown product features. No assurance can be given that our pending patent applications will result in issued patents.

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

Employees

As of February 15, 2006, we had 635 employees. None of our employees are represented by a labor union, and we have never experienced a work stoppage. We believe that our relations with our employees are good.

Website Access to SEC Filings

We maintain an internet website at www.websense.com. The content of our website is not part of this report. We make available, free of charge, through our internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

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Executive Officers

Our executive officers and their ages as of February 15, 2006 are as follows:

	Name	Age		Position(s)
John B. Carrington		61	Executive Chairman of the Board
Gene Hodges.		54	President and Chief Executive Officer
Douglas C. Wride		52	Chief Financial Officer
Leo Cole.		48	Vice President of Marketing
Karen V. Goodrum		48	Vice President of Finance & Accounting
Michael A. Newman.		36	Vice President & General Counsel
Kian Saneii		41	Vice President of Business Development

John B. Carrington has served as a Director and our Chairman of the Board since June 1999. Mr. Carrington also served as our Chief Executive Officer from May 1999 to January 2006, as well as our President from May 1999 to January 2003 and from August 2005 to January 2006. Prior to joining Websense, Mr. Carrington was Chairman, President and Chief Executive Officer of Artios, Inc., a provider of hardware and software design solutions to companies in the packaging industry, from August 1996 until it was acquired by BARCO n.a. in December 1998. He received his B.S. in Business Administration from the University of Texas.

Gene Hodges has served as our President and Chief Executive Officer, and as a Director, since January 2006. From 1995 to January 2006, Mr. Hodges held various management positions at McAfee, Inc., a publicly-held security software company, most recently as its President. Prior to joining McAfee, Mr. Hodges was Vice-President of Marketing for Mobileware, a wireless data startup, and managed the Office Automation business unit for Digital Equipment Corporation. Mr. Hodges received a B.A. in Astronomy from Haverford College and completed the Harvard Advanced Management Program for business executives.

Douglas C. Wride has served as our Chief Financial Officer since June 1999. From March 1997 to December 1998, Mr. Wride served as Chief Financial Officer of Artios, Inc. Mr. Wride also served as Chief Operating Officer of Artios from July 1997 to December 1998. From April 1996 to March 1997, Mr. Wride served as Chief Operating Officer and Chief Financial Officer of NetCount, LLC, a provider of internet measurement and research services. Mr. Wride is a C.P.A. and received his B.S. in Business/Accounting from the University of Southern California.

Leo Cole has served as our Vice President of Marketing since June 2004. Prior to joining Websense, Mr. Cole worked for IBM for 25 years where he held various management and executive positions. He joined the Tivoli division of IBM in 1992, where he held executive roles in the areas of Product Development, Marketing, and Business Development, including serving as the Director of Product Management and Strategy for the Security Business Unit. Mr. Cole received his B.S. in Computer Science from Syracuse University and his M.B.A. from the University of Tennessee, Knoxville.

Karen V. Goodrum has served as our Vice President of Finance & Accounting since October 2003, and prior to that, as Vice President of Finance & Administration from August 2000. From January 1997 to February 2000, Ms. Goodrum served as Chief Financial Officer for COMPS.Com, Inc., a provider of commercial real estate information services. Ms. Goodrum received her B.A. in Education from the University of Maryland, College Park, and her M.B.A. from San Diego State University.

Michael A. Newman has served as our Vice President & General Counsel since September 2002. From April 1999 to September 2002, he served in various capacities in the legal department of Gateway, Inc., a publicly traded PC manufacturer, most recently as Senior Staff Counsel, Securities, Finance and Corporate Development. From February 1996 to April 1999, he practiced as an attorney in

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the San Diego office of Cooley Godward, LLP, a law firm specializing in the representation of high-growth information technology and life sciences companies. Mr. Newman received his B.S. in Business Administration from Georgetown University, and a J.D. from Harvard Law School.

Kian Saneii has served as our Vice President of Business Development since August 2001 and also as our Vice President of Marketing from August 2003 to May 2004. From August 1999 to February 2001, he was Senior Vice President of Worldwide Marketing and Business Development at IPNet Solutions, Inc., a provider of business-to-business integration and supply-chain collaboration solutions. From July 1997 to July 1999, he served as Senior Vice President of Worldwide Marketing for IMA Corporation, a supplier of customer relationship management solutions. Mr. Saneii received his B.S. in Computer Science from New York University, and an M.S. in Computer Science from Rutgers University.

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Item 1A. Risk Factors

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

Our future success depends on our ability to sell new, renewal and upgraded subscriptions to Websense Enterprise and the related add-on products.

All of our revenue comes from new and renewal subscriptions to Websense Enterprise and its related add-on products, and we expect this trend to continue for the foreseeable future. If Websense Enterprise or the add-on productsfail to meet the needs of our existing and target customers, or if they do not compare favorably in price and performance to competing products, our operating results and our business will be significantly impaired. If we cannot sufficiently increase our customer base with the addition of new customers, we will not be able to grow our business to meet expectations.

Subscriptions for Websense Enterprise typically have durations of 12, 24 or 36 months. Our customers have no obligation to renew their subscriptions upon expiration. In order to maintain our revenue we must be successful in selling renewal subscriptions and in selling further subscriptions to existing customers in order to add additional seats or product offerings within their respective organizations. This may require increasingly costly sales efforts targeting senior management and other management personnel associated with our customers’ internet and security infrastructure. We may not be able to maintain or continue to generate increasing revenue from existing customers.

Failure of our add-on products, particularly our security products, to achieve more widespread market acceptance will seriously harm our business.

Our future financial performance depends on our ability to diversify our offerings by successfully developing, introducing and gaining customer acceptance of our new products and services, particularly our security offerings. We currently have two platforms for our core software, Websense Enterprise and Websense Enterprise—Corporate Edition. We also sell a number of add-on products such as our three Premium Groups (Security, Productivity and Bandwidth), Remote Filtering, Client Policy Manager, Real-Time Security Updates, Bandwidth Optimizer and Instant Messaging Attachment Manager. In addition, we have developed security services that we include within our Websense Web Security Suites, such as ThreatWatcher, BrandWatcher and SiteWatcher. We may not be successful in achieving market acceptance of these or any new products that we develop or of enhanced versions of Websense Enterprise. Moreover, our recent increased emphasis on the development, marketing and sale of our security offerings could distract us from sales of our core Websense Enterprise offering, negatively impacting our overall sales. Any failure or delay in diversifying our existing offerings, or diversification at the detriment to our core Websense Enterprise offering, could harm our business, results of operations and financial condition.

We face increasing competition, which places pressure on our pricing and which could prevent us from increasing revenue or maintaining profitability. In addition, as we increase our emphasis on our security-oriented products, we face competition from better-established security companies that have significantly greater resources.

The market for our products is intensely competitive and is likely to become even more so in the future, within both the employee internet management, or EIM, market as well as the web security market. Our current principal EIM competitors frequently offer their products at a significantly lower price than our products, which has resulted in pricing pressures on sales of our product and potentially could result in the commoditization of EIM products. We also face current and potential competition from vendors of

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internet servers, operating systems and networking hardware, many of which now, or may in the future, develop and/or bundle EIM or other competitive products with their products. If we are unable to maintain the current pricing on sales of our products or increase our pricing in the future, our profitability could be negatively impacted. Even if our products provide greater functionality and are more effective than certain other competitive products, potential customers might accept this limited functionality in lieu of purchasing our products. In addition, our own indirect sales channels may decide to develop or sell competing products instead of our products. Pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our products to achieve or maintain more widespread market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition. Our current principal competitors include:

·companies offering web filtering products, such as SurfControl, Secure Computing, Computer Associates, Microsoft, St. Bernard Software and Trend Micro;

·companies integrating web filtering into specialized security appliances, such as 8e6 Technologies, Blue Coat Systems, Cisco Systems, McAfee and SonicWALL;

·companies offering web security solutions, such as McAfee, Microsoft, Symantec and Trend Micro; and

·companies offering desktop security solutions such as Check Point Software, Cisco Systems, McAfee, Microsoft and Symantec.

As we develop and market our products with an increasing security-oriented emphasis, we also face increasing competition from security solutions providers. Many of our competitors within the web security market, such as Symantec Corporation, McAfee, Inc., Trend Micro, Cisco Systems and Microsoft Corporation enjoy substantial competitive advantages, including:

·greater name recognition and larger marketing budgets and resources;

·established marketing relationships and access to larger customer bases; and

·substantially greater financial, technical and other resources.

As a result, we may be unable to gain sufficient traction as a provider of web security solutions, and our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the functionality of their products to address customer needs. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. For all of the foregoing reasons, we may not be able to compete successfully against our current and future competitors.

The market for our products continues to emerge, and if we are not successful in promoting awareness of the need for our products and of our Websense brand, our growth may be limited.

Based on our experience with potential customers, we believe that many corporations do not recognize or acknowledge the existence or scope of problems caused by misuse or abuse of the internet or of network computers. In addition, there may be a time-limited opportunity to achieve and maintain a significant share of the market for web security solutions due in part to the emerging nature of these markets and the substantial resources available to our existing and potential competitors. If employers do not recognize or acknowledge the problems associated with unrestricted employee access to the Internet, the gaps in their traditional security infrastructures and the ability of Websense security products to provide an additional layer of protection, then the market for our products may develop more slowly than we expect, which could adversely affect our operating results. Developing and maintaining awareness of

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our Websense brand is critical to achieving widespread acceptance of our existing and future products. Furthermore, we believe that the importance of brand recognition will increase as competition in our market develops. Successful promotion of our Websense brand will depend largely on the effectiveness of our marketing efforts and on our ability to develop reliable and useful products at competitive prices. If we fail to successfully promote our Websense brand, or if our expenses to promote and maintain our Websense brand are greater than anticipated, our results of operations and financial condition could suffer.

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

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

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

We market and sell our products outside the United States through value-added resellers, distributors and other resellers. International sales represented approximately 33% of our total revenue in 2005 and approximately 32% in 2004, and international sales increased 37% in absolute dollars in 2005 compared with 2004. As a key component of our business strategy, we intend to expand our international sales, but success cannot be assured. In addition to the risks associated with our domestic sales, our international sales are subject to the following risks:

·dependence on foreign distributors and their sales channels;

·localization of our products and our ability to properly categorize and filter websites containing foreign languages;

·laws and business practices favoring local competitors;

·compliance with multiple, conflicting and changing governmental laws and regulations,  including tax laws and regulations;

·foreign currency fluctuations;

·longer accounts receivable payment cycles and other collection difficulties; and

·regional economic and political conditions.

Such factors could have a material adverse effect on our future international sales. Any reduction in international sales, or our failure to further develop our international distribution channels, could have a material adverse effect on our business, results of operations and financial condition.

Our international revenue is currently primarily denominated in U.S. dollars. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our products more expensive for international customers, which could harm our business. In 2005, we began billing certain international customers in Euros. In 2006, we anticipate billing certain international customers in other foreign currencies. This may increase our risks associated with fluctuations in foreign currency exchange rates since we cannot be assured of receiving the same U.S. dollar equivalent as when we bill exclusively in

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U.S. dollars. We engage in currency hedging activities with the intent of limiting the risk of exchange rate fluctuation. Our hedging activities also involve inherent risks that could result in an unforeseen loss. If we fail to properly forecast rate fluctuations these activities could have a negative impact.

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

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

If we acquire any companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.

We may acquire or make investments in complementary companies, services and technologies in the future. We have not made any acquisitions or investments to date, and therefore our ability as an organization to make acquisitions or investments is unproven. Although we review the records of companies or businesses we are interested in acquiring, even an in-depth review may not reveal existing or potential problems or permit us to become familiar enough with a business to assess fully its capabilities and deficiencies.

Acquisitions and investments involve numerous risks, including:

·difficulties in integrating operations, technologies, services and personnel;

·diversion of financial and management resources from existing operations;

·risk of entering new markets;

·potential loss of key employees;

·assumption of liabilities of the acquired company, including debt and litigation; and

·inability to generate sufficient revenue to offset acquisition or investment costs.

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

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

Our quarterly operating results have varied significantly in the past, and will likely vary in the future primarily as the result of fluctuations in our billings, revenues, operating expenses and tax provisions. Although a significant portion of our revenue in any quarter comes from previously deferred revenue, a meaningful portion of our revenue in any quarter depends on subscriptions to our products that are sold in that quarter. The risk of quarterly fluctuations is increased by the fact that a significant portion of our quarterly sales have historically been generated during the last month of each fiscal quarter, with many of

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the largest enterprise customers purchasing subscriptions to our products nearer to the end of the last month of each quarter. Due to the unpredictability of these end-of-period buying patterns, forecasts may not be achieved.

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

·timing of marketing expenses for activities such as trade shows and advertising campaigns;

·quarterly variations in general and administrative expenses, such as recruiting expenses and professional services fees;

·increased research and development costs prior to new or enhanced product launches; and

·timing of expenses associated with commissions paid on sales of subscriptions to our products.

Consequently, our results of operations may not meet the expectations of current or potential investors. If this occurs, the price of our common stock may decline.

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

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

·announcements of technological innovations or new products or services by our competitors;

·demand for our products, including fluctuations in subscription renewals;

·changes in the pricing policies of our competitors; and

·changes in government regulations.

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

·announcements of technological innovations or new products or services by us;

·changes in our pricing policies; and

·quarterly variations in our revenues and operating expenses.

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

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

We depend on our indirect sales channels, including value-added resellers, distributors, and providers of managed internet services, to offer our products to a larger customer base than can be reached through a direct sales effort. We need to expand our existing indirect sales channel relationships and enter into new

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indirect sales channel relationships to increase our current and future market share and revenue. We may be unable to maintain and expand our existing relationships or enter into new relationships on commercially reasonable terms or at all. If we are unable to maintain and expand our existing relationships or enter into new relationships, we would lose customer introductions and co-marketing benefits and our operating results could suffer. Our ability to meaningfully increase the amount of our products sold through our sales channels also depends on our ability to adequately and efficiently support these channel partners with, among other things, appropriate financial incentives to encourage pre-sales investment and sales tools, such as sales training, technical training and product collateral needed to support their customers and prospects. Any failure to properly and efficiently support our sales channels will result in lost sales opportunities.

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

We anticipate that sales from our various indirect sales channels, including value-added resellers, distributors, providers of managed internet services and others, will continue to account for a significant majority of our total revenue in future periods. None of these parties is obligated to continue selling our products or to make any purchases from us. Our ability to generate increased revenue depends upon the ability and willingness of our indirect sales channels to market and sell our products. If they are unsuccessful in their efforts or are unwilling or unable to market and sell our new product offerings such as our security-oriented offerings, our operating results will suffer. We cannot control the level of effort these parties expend or the extent to which any of them will be successful in marketing and selling our products. Some of our indirect sales channels also market and sell products that compete with our products or may decide to do so in the future. We may not be able to prevent these parties from devoting greater resources to support our competitors’ products and/or eliminating their efforts to sell our products.

Any failure to protect our proprietary technology or establish our Websense brand would negatively impact our business.

Intellectual property is critical to our success, and we rely upon trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our Websense brand. We rely on trade secrets to protect technology where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, collaborators and consultants to enter into confidentiality agreements, we cannot assure that these agreements will not be breached or that we will have adequate remedies for any breach. We may not be able to adequately protect our trade secrets or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information.

We have registered our Websense and Websense Enterprise trademarks in several countries and have registrations for the Websense trademark pending in several other countries. Effective trademark protection may not be available in every country where our products are available. Furthermore, any of our trademarks may be challenged by others or invalidated through administrative process or litigation.

We currently have only three issued patents in the United States and one corresponding issued patent internationally, and we may be unable to obtain further patent protection in the future. We have several pending patent applications in the United States and in other countries. We cannot ensure that:

·we were the first to make the inventions covered by each of our pending patent applications;

·we were the first to file patent applications for these inventions;

·others will not independently develop similar or alternative technologies or duplicate any of our technologies;

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·any of our pending patent applications will result in issued patents;

·any patents issued to us will provide us with any competitive advantages or will not be challenged by third parties;

·we will develop additional proprietary technologies that are patentable; or

·the patents of others will not have a negative effect on our ability to do business.

Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual property rights as United States laws, and mechanisms for enforcement of intellectual property rights may be inadequate. As a result our means of protecting our proprietary technology and brands may not be adequate. Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property, including the misappropriation or misuse of the content of our proprietary databases of universal resource locators (URLs) and software applications. Any such infringement or misappropriation could have a material adverse effect on our business, results of operations and financial condition.

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

The software and internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of patent infringement or other violations of intellectual property rights. As we expand our product offerings in the security area where larger companies with large patent portfolios compete, the possibility of an intellectual property claim against us grows. We may also incur more expense in our product development efforts if we need to license patents or design around patents to avoid infringement claims. Our technologies and products may not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be time-consuming and expensive to litigate or settle, and could divert management attention from executing our business plan.

Our database categories and our process for classifying URLs and software applications within those categories are subjective, and we may not be able to categorize URLs and software applications in accordance with our customers’ expectations.

We may not succeed in accurately categorizing internet and application content to meet our customers’ expectations. We rely upon a combination of automated filtering technology and human review to categorize URLs and software applications in our proprietary databases. Our customers may not agree with our determinations that particular URLs and software applications should be included or not included in specific categories of our databases. In addition, it is possible that our filtering processes may place objectionable or security risk material in categories that are generally unrestricted by our users’ internet and computer access policies, which could result in such material not being blocked from the network. Any miscategorization could result in customer dissatisfaction and harm our reputation. Any failure to effectively categorize and filter URLs and software applications according to our customers’ expectations will impair the growth of our business and our efforts to increase brand acceptance.

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

The success of our products depend on the breadth and accuracy of our databases. Although our databases currently catalog more than 15 million URLs and over 1.4 million software applications and executable files, they contain only a portion of such material that exists. In addition, the total number of URLs and software applications is growing rapidly, and we expect this rapid growth rate to continue in the future. In particular, URLs and software applications that pose security risks tend to develop and evolve at a much faster rate than other content that we identify and categorize. Accordingly, we must identify and

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categorize content for our security risk categories at an extremely rapid rate with our Real Time Security Updates. Our databases and database technologies may not be able to keep pace with the growth in the number of URLs and software applications, especially the growing amount of content utilizing foreign languages and the increasing sophistication of malicious code and the delivery mechanisms associated with spyware, phishing and other hazards associated with the Internet. Further, the ongoing evolution of the Internet and computing environments will require us to continually improve the functionality, features and reliability of our databases. Because our products primarily manage access to URLs and software applications included in our databases, if our databases do not contain a meaningful portion of relevant content, the effectiveness of Websense Enterprise will be significantly diminished. Any failure of our databases to keep pace with the rapid growth and technological change of the Internet will impair the market acceptance of our products, which in turn will harm our business, results of operations and financial condition.

Failure of our products to work properly or misuse of our products could impact sales, increase costs, and create risks of potential negative publicity and legal liability.

Our products are complex and are deployed in a wide variety of complex network environments. Our products may have errors or defects that users identify after deployment, which could harm our reputation and our business. In addition, products as complex as ours frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found errors in versions of our products, and we may find such errors in the future. Because customers rely on our products to manage employee behavior and to protect against security risks, any significant defects or errors in our products may result in negative publicity or legal claims. For example, an actual or perceived breach of network or computer security at one of our customers, regardless of whether the breach is attributable to our products, could adversely affect the market’s perception of our security products. Moreover, parties whose websites or software applications are placed in security-risk categories or other categories with negative connotations may seek redress against us for falsely labeling them or for interfering with their business. The occurrence of errors could adversely affect sales of our products, divert the attention of engineering personnel from our product development efforts and cause significant customer relations or legal problems.

Our products may also be misused or abused by customers or non-customer third parties who obtain access and use of our products. These situations may arise where an organization uses our products in a manner that impacts their end users’ or employees’ privacy or where our products are misappropriated to censor private access to the internet. Any of these situations could result in negative press coverage and negatively affect our reputation.

Our worldwide income tax provisions and other tax accruals may be insufficient if any taxing authorities assume taxing positions that are contrary to our positions.

Significant judgment is required in determining our worldwide provision for income taxes and for our accruals for other state, federal and international taxes such as sales and VAT taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of intercompany arrangements to share revenue and costs. In such arrangements there are uncertainties about the amount and manner of such sharing, which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although we believe that our approach to determining the amount of such arrangements is reasonable, no assurance can be given that the final tax authority review of these matters will not be materially different than that which is reflected in our historical income tax provisions and other tax accruals. Such differences could have a material effect on our income tax provisions or benefits, or other tax accruals, in the period in which such determination is made, and consequently, on our net income for such period.

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From time to time, we are also audited by various state, federal and international authorities relating to tax matters. We fully cooperate with all audits. Our audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit and appeals process. As each audit is concluded, adjustments, if any, are appropriately recorded in our financial statements in the period determined. To provide for potential tax exposures, we maintain allowances for tax contingencies based on reasonable estimates of our potential exposure with respect to the tax liabilities that may result from such audits. However, if the reserves are insufficient upon completion of any audits, there could be an adverse impact on our financial position and results of operations.

We are subject to changes in financial accounting standards, which may adversely affect our reported financial results or the way we conduct business.

Accounting policies affecting software revenue recognition have been the subject of frequent interpretations, significantly affecting the way we sell our products. Future changes in financial accounting standards, including pronouncements relating to revenue recognition, may have a significant effect on our reported results, including reporting of transactions completed before the effective date of the changes.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), which will be effective in our first quarter of fiscal 2006.  As permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), we currently account for share-based payments to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees (APB No. 25), and, as such, generally recognize no compensation cost for employee stock option grants or the discounts that we provide under our employee stock purchase plans. Under the new rules, commencing with our first quarter of fiscal 2006, we are required to adopt a fair value-based method for measuring the compensation expense related to employee stock awards; we anticipate that this will lead to an additional compensation expense of approximately $5.0 million in the first quarter of 2006, thereby reducing net income and earnings per share. Note 1 to our Consolidated Financial Statements in this report provides our pro forma net income and earnings per share as if we had used a fair value-based method similar to the methods required under SFAS 123R to measure the compensation expense for employee stock awards during fiscal 2005, 2004 and 2003. In addition, the adoption of this standard could limit our ability to continue to use stock options as an incentive and retention tool, which could, in turn, hurt our ability to recruit employees and retain existing employees. However, overall, our cash flows will be unaffected.

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

Our success depends largely upon the continued services of our executive officers and other key management personnel. We are also substantially dependent on the continued service of our existing engineering personnel because of the complexity of our products and technologies. We do not have employment agreements with a majority of our executive officers, key management or development personnel and, therefore, they could terminate their employment with us at any time without penalty. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees could seriously harm our business, results of operations and financial condition. In such an event we may be unable to recruit personnel to replace these individuals in a timely manner, or at all, on acceptable terms. In January 2006, we hired a new CEO, Gene Hodges, to succeed John Carrington who had served as our CEO since 1999. We cannot provide any assurance that our new CEO will lead the company’s strategic direction or anticipate market changes and requirements in the same manner or with the same results as our former CEO.

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

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

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

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

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

Although we have taken measures to secure our systems against security risks and other causes of disruption of electronic services, our servers are vulnerable to physical or electronic break-ins and service disruptions, which could lead to interruptions, delays, loss of data or the inability to process customer requests. Such events could be very expensive to remedy, could damage our reputation and could discourage existing and potential customers from using our products.

Evolving regulation of the internet may affect us adversely.

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

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

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

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board. Additionally, we have authorized preferred stock that is undesignated, making it possible for the board to issue up to 5,000,000 shares of preferred stock with voting or other rights and preferences that could impede the success of any attempted change of control. Delaware law also could make it more difficult for a third party to acquire us. Section 203 of the Delaware General Corporation Law may have an anti-takeover effect with respect to transactions not approved in advance by our board, including discouraging attempts that might result in a premium over the market price of the shares of common stock held by our stockholders.

We do not intend to pay dividends.

We have not declared or paid any cash dividends on our common stock since we have been a publicly traded company. We currently intend to retain any future cash flows from operations to fund growth and, do not expect to pay any dividends in the foreseeable future.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate headquarters and principal offices are located in San Diego, California, where we leased approximately 105,000 square feet as of December 31, 2005. This lease expires in December 2008, with an option to extend the lease for an additional five years and an option to terminate the lease early as of December 31, 2007. We believe that our current space is adequate for our current needs and sufficient space is available to meet our identified future needs. We lease office space in Brazil, France, Germany, Ireland, Italy, Japan and the UK in executive suite arrangements on monthly, annual or two-year arrangements, depending on the local market.

Item 3. Legal Proceedings

We are not a party to any material legal proceedings.

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

There were no matters submitted to a vote of the security holders during the fourth quarter of the fiscal year-ended December 31, 2005.

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Part II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq National Market (Nasdaq) under the symbol “WBSN.” The following table sets forth the range of high and low closing prices on Nasdaq of our common stock for the periods indicated, as reported by Nasdaq. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

Year Ended December 31, 2005	High		Low
First Quarter	$	61.52	$	45.00
Second Quarter	56.37		45.82
Third Quarter	54.22		46.21
Fourth Quarter	67.95		51.08

Year Ended December 31, 2004	High		Low
First Quarter	$	32.90	$	26.18
Second Quarter	37.48		28.57
Third Quarter	43.65		30.01
Fourth Quarter	52.66		38.96

To date, we have neither declared nor paid any cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in the operation and development of our business and for stock repurchases and, therefore, do not expect to declare or pay any cash dividends on our common stock in the foreseeable future. As of February 15, 2006, there were approximately 7,100 holders of record of our common stock. See Item 12—“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding our equity compensation plans.

On January 31, 2006, we announced that our Board of Directors authorized a two-for-one stock split of our common stock, to be effected in the form of a special dividend of one share of our common stock for each share outstanding. The additional shares issued as a result of the stock split will be distributed on or about March 17, 2006 to stockholders of record at the close of business on February 13, 2006. The shares and per share data presented above and in the accompanying consolidated financial statements and notes thereto have not been restated to give effect to this pending stock split.

Use of Proceeds

On March 28, 2000, we completed our initial public offering for the sale of 4,000,000 shares of common stock at a price to the public of $18 per share, which resulted in net proceeds of $65.7 million after payment of the underwriters’ commissions and deductions of offering expenses. The registration statement (No. 333-95619) relating to our initial public offering was declared effective on March 28, 2000. Subsequent to our initial public offering, a portion of the offering proceeds were used to repay the $1.5 million balance of our fixed term loan agreements with financial institutions. The remaining proceeds have conformed with our intended use outlined in the prospectus related to such offering. We currently have approximately $64.2 million remaining from our IPO proceeds.

Issuer Purchases of Equity Securities

On April 3, 2003, we announced that our Board of Directors authorized a stock repurchase program of up to 2 million shares of our common stock. On August 15, 2005, we announced that our Board of Directors increased the size of the stock repurchase program by an additional 2 million shares of our

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common stock, for a total program size of up to 4 million shares of our common stock. The following table provides information regarding our stock repurchases in the quarter ended December 31, 2005:

Month	Number of shares purchased during month(1)		Average price paid per share			Cumulative number of shares purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
October 1st through 31st of 2005		—		—			1,835,030		2,164,970
November 1st through 30th of 2005		27,500		$	63.62		1,862,530		2,137,470
December 1st through 31st of 2005		72,500		$	65.32		1,935,030		2,064,970
Total		100,000		$	64.86		1,935,030		2,064,970

(1)The purchases were made in open-market transactions.

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Item 6.Selected Financial Data

You should read the following selected financial data in conjunction with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this annual report. We derived the income statement data for the years ended December 31, 2005, 2004 and 2003 and the balance sheet data as of December 31, 2005 and 2004 from our financial statements audited by Ernst & Young LLP, which appear elsewhere in this report. We derived the income statement data for the years ended December 31, 2002 and 2001 and the balance sheet data as of December 31, 2003, 2002 and 2001 from our financial statements audited by Ernst & Young LLP, which are not included in this annual report. Our historical results are not necessarily indicative of operating results to be expected in the future.

	Years Ended December 31,
	2005		2004		2003		2002			2001
	(In thousands, except for per share data)
Income Statement Data:
Revenues	$	148,636	$	111,859	$	81,734	$	60,965		$	35,893
Cost of revenues	10,642		7,769		5,523		4,170			3,602
Gross margin	137,994		104,090		76,211		56,795			32,291
Operating expenses:
Selling and marketing	55,288		42,625		31,845		26,201			19,707
Research and development	16,277		14,509		12,843		10,957			7,642
General and administrative	11,729		8,200		6,649		5,960			5,358
Amortization of stock-based compensation	—		—		83		448			860
Total operating expenses	83,294		65,334		51,420		43,566			33,567
Income (loss) from operations	54,700		38,756		24,791		13,229			(1,276		)
Other income, net	5,411		2,226		2,292		2,711			4,500
Income before income taxes	60,111		40,982		27,083		15,940			3,224
Provision (benefit) for income taxes	21,343		14,806		10,395		(797		)	108
Net income	$	38,768	$	26,176	$	16,688	$	16,737		$	3,116
Net income per share:
Basic	$	1.63	$	1.13	$	0.76	$	0.79		$	0.16
Diluted	$	1.58	$	1.09	$	0.73	$	0.72		$	0.14
Weighted average shares—basic	23,746		23,080		22,038		21,211			20,082
Weighted average shares—diluted	24,598		24,114		22,976		23,338			22,780

	As of December 31,
	2005		2004		2003		2002		2001
	(In thousands)
Balance Sheet Data:
Cash and cash equivalents and marketable securities	$	320,389	$	243,788	$	182,859	$	140,466	$	103,108
Working capital	255,103		195,635		145,322		114,459		79,846
Total assets	403,675		315,293		233,613		180,188		119,812
Deferred revenue	179,925		132,317		93,960		64,679		43,478
Total stockholders’ equity	205,811		167,944		128,929		106,711		70,680

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

The following discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report. See “Risk Factors” under Item 1A above regarding certain factors known to us that could cause reported financial information not to be necessarily indicative of future results.

Forward Looking Statements

This report on Form 10-K may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. Such statements may include but are not limited to statements concerning the following:

·anticipated trends in revenue;

·growth opportunities in domestic and international markets;

·customer acceptance and satisfaction with our products;

·expected trends in operating and other expenses;

·anticipated cash and intentions regarding usage of cash;

·changes in effective tax rates; and

·anticipated product enhancements or releases.

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

Overview

We provide employee internet management (EIM) and web security software products that enable organizations to reduce the risks associated with web-based malicious attacks, spyware, and phishing, as well as analyze, report and manage how their employees use computing resources. At the foundation of our product offering is the Websense Enterprise® software application, which serves as a central policy engine and management and reporting console and enables the extended functionality of our add-on products. Websense Enterprise gives organizations the ability to enhance network security, improve employee productivity, mitigate potential legal liability and conserve network bandwidth by allowing organizations to identify potential risk areas and implement web access and application usage policies that reduce these risks.

In 1996, we released our first software product, Websense Internet Screening System. Since that time, we have focused our business on developing and selling EIM and web security solutions. Websense Enterprise and Websense Enterprise—Corporate Edition™ are our core web filtering solutions and provide fully featured web filtering and serve as management platforms for related Websense add-on modules, such as our Premium Groups™, Real Time Security Updates™, Bandwidth Optimizer™, Instant Messaging (IM) Attachment Manager™, Client Policy Manager™ and Remote Filtering. We have also created suites of some of our products to address specific customer needs, such as the Websense Web Security Suite™ and Websense Web Security Suite—Lockdown Edition™. We currently derive all of our revenue from subscriptions to the Websense Enterprise-based solutions and expect this trend to continue in the future as more offerings are added to the Websense Enterprise platforms. In October 2005, we

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announced an agreement with Nortel Networks to develop a web content filtering solution to protect GSM/UMTS mobile handsets from receiving and accessing unwanted content. We expect the product to be generally available from Nortel Networks in mid-2006.

During 2005, we derived 33% of revenue from international sales, compared with 32% for 2004, with the United Kingdom comprising approximately 10% of our total revenue in both years. We believe international markets continue to represent a significant growth opportunity and we are continuing to expand our international operations, particularly in selected countries in the European, Asia/Pacific and Latin American markets.

We sell Websense Enterprise through both indirect and direct channels. Sales through indirect channels currently account for more than 80% of our revenue, and our strategy is to continue to rely on indirect sales channels for a significant majority of our sales.

As described elsewhere in this report, we recognize revenue from subscriptions to Websense Enterprise, including add-on modules, on a monthly straight-line basis over the term of the subscription. We recognize the operating expenses related to these sales as they are incurred. These operating expenses include sales commissions, which are based on the total amount of the subscription contract and are fully expensed in the period the product is delivered. Operating expenses have continued to increase as compared with prior periods due to expanded selling and marketing efforts, continued product research and development and investments in administrative infrastructure to support subscription sales that we will recognize as revenue in subsequent periods.

Critical Accounting Policies

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

Revenue Recognition.When a purchase decision is made for Websense Enterprise, customers enter into a subscription agreement, which is generally 12, 24 or 36 months in duration and for a fixed number of users. Other services such as upgrades/enhancements and standard post-contract technical support services are sold together with Websense Enterprise and provided throughout the subscription term. We recognize revenue on a monthly straight-line basis, commencing with the month the subscription begins, over the term of the subscription agreement provided collectability is reasonably assured. Upon entering into a subscription arrangement for a fixed or determinable fee, we electronically deliver access codes to users and then promptly invoice customers for the full amount of their subscriptions. Payment is due for the full term of the subscription, generally within 30 to 60 days of the invoice. We record amounts billed to customers in excess of recognizable revenue as deferred revenue on our balance sheet. Upon expiration of the subscription, customers who wish to re-subscribe typically must do so at then current rates to continue using Websense Enterprise. Our revenue is significantly influenced by new and renewal subscriptions, and a decrease in subscription amounts could negatively impact our future revenue.

Accounting for Share-Based Compensation.Through December 31, 2005, we accounted for our share-based employee compensation plans under the measurement and recognition provisions of APB Opinion No. 25,  and related Interpretations, as permitted by Financial Accounting Standards Board (FASB) SFAS No. 123. In conjunction with our initial public offering, we reviewed our exercise prices and arrived at the deemed fair value for each option grant during 1999. With respect to the 3,220,500 options granted during 1999 and through March 27, 2000, we recorded deferred compensation of $5.4 million for the difference between the exercise price per share and the deemed fair value per share at the grant date. The approximate weighted-average exercise price per share and the approximate weighted-average deemed fair value per share for the options was $1.64 and $3.31, respectively. Deferred stock compensation was recognized and amortized on an accelerated basis in accordance with Financial Accounting Standards Board Interpretation (FIN) No. 28, Accounting for Stock Appreciation Rights and

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Other Variable Stock Option Award Programs (FIN No. 28), over the vesting period of the related options, generally four years. Deferred stock compensation was fully amortized as of December 31, 2003. Beyond the $5.4 million of deferred compensation related to our IPO, we recorded no other share-based employee compensation expense for options granted under our Amended and Restated 2000 Stock Incentive Plan (2000 Plan), its predecessor plans (or options granted as non-plan inducement options) as all other options granted had exercise prices equal to the fair market value of our common stock on the date of grant. We also recorded no compensation expense in connection with our Employee Stock Purchase Plan as the purchase price of the stock was not less than 85% of the lower of the fair market value of our common stock at the beginning of each offering period or at the end of each purchase period. In accordance with SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (SFAS No. 148), we disclosed our net income or loss and net income or loss per share as if we had applied the fair value-based method in measuring compensation expense for our share-based incentive programs.

Effective January 1, 2006, we will adopt the fair value recognition provisions of SFAS No. 123(R), using the modified prospective transition method. Under that transition method, compensation expense that we recognize beginning on that date will include: (a) compensation expense for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation expense for all share-based payments granted on or after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods will not be restated. At December 31, 2005, there was $32.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. We expect to recognize that cost over a weighted average period of 2.0 years.

We estimate the fair value of options granted using the Black-Scholes option valuation model and the assumptions shown in Note 1 to the financial statements. We estimate the expected term of options granted based on the history of grants and exercises in our option database. We estimate the volatility of our common stock at the date of grant based on both the historical volatility as well as the implied volatility of publicly traded options on our common stock, consistent with SFAS No. 123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107. We base the risk-free interest rate that we use in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with equivalent remaining terms. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. We amortize the fair value ratably over the vesting period of the awards, which is typically four years. We may elect to use different assumptions under the Black-Scholes option valuation model in the future or select a different option valuation model altogether, which could materially affect our net income or loss and net income or loss per share in the future.

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

Deferred Tax Assets.   As required by SFAS No. 109, Accounting for Income Taxes (SFAS No. 109), we recognize tax assets on the balance sheet if it is “more likely than not” that they will be realized on future tax returns. At December 31, 2005, we had deferred tax assets of $21.8 million. We believe that it is more likely than not that our deferred tax assets will be realized. Factors considered by us included: our earnings history, projected earnings based on current operations, and projected future taxable income in excess of stock option deductions. However, should we determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged

34

against income or additional paid-in capital in the period such determination was made. See Note 8 of Notes to the Consolidated Financial Statements for further explanation of our deferred tax assets.

Income Tax Provision and Tax Contingency Reserve.Significant judgment is required in determining our consolidated income tax provision and evaluating our U.S. and foreign tax positions. It is our policy to maintain tax contingency reserves for tax audit issues that are likely to occur and can reasonably be estimated. We review the reserves as circumstances warrant and adjust the reserves as events occur that affect our potential liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues or rendering of court decisions affecting a particular tax issue. Tax reserve contingencies and changes to the reserves are evaluated and recorded in our tax provision in the period in which the above noted events occur.

Results of Operations

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

	Years ended December 31,
	2005			2004			2003
Revenues		100	%		100	%		100	%
Cost of revenues		7			7			7
Gross margin		93			93			93
Operating expenses:
Selling and marketing		37			38			39
Research and development		11			13			16
General and administrative		8			7			8
Total operating expenses		56			58			63
Income from operations		37			35			30
Other income, net		3			2			3
Income before income taxes		40			37			33
Provision for income taxes		14			14			13
Net income		26	%		23	%		20	%

Years ended December 31, 2005 and 2004

Revenue

Revenue increased to $148.6 million in 2005 from $111.9 million in 2004. The increase was primarily a result of the addition of new, renewed and upgraded subscriptions from our customers. Approximately 65% of subscription revenue recognized in 2005 was derived from renewal business. We expect total revenue growth amounts in 2006 to exceed total revenue growth in 2005, although the percentage revenue growth rate may be lower in 2006 than in 2005 as a result of the increasing overall revenue base.

Cost of Revenue

Cost of revenue consists of the costs of content review, technical support and infrastructure costs associated with maintaining our databases. Cost of revenue increased to $10.6 million in 2005 from $7.8 million in 2004. The increase was primarily due to the costs associated with additional personnel in our technical support and database groups, as well as allocated costs. We allocate the total costs for human resources, employee benefits, payroll taxes, information technology, facilities, fixed asset depreciation and legal costs to each of our functional areas based on salaries and headcount data. We expect cost of revenue to increase in the future due to stock-based compensation expense and to support the growth and

35

maintenance of our databases as well as the technical support needs of our customers. As a percentage of revenue, cost of revenue remained unchanged at 7% during the years-ended 2005 and 2004. We expect that cost of revenue, as a percentage of revenue, will remain below 10% of revenue for the foreseeable future.

Gross Margin

Gross margin increased to $138.0 million in 2005 from $104.1 million in 2004. The increase was due to increased revenue. As a percentage of revenue, gross margin remained unchanged at 93% for the years-ended 2005 and 2004. We expect that gross margin, as a percentage of revenue, will remain in excess of 90% of revenue for the foreseeable future.

Operating Expenses

Selling and marketing.   Selling and marketing expenses consist primarily of salaries, commissions and benefits related to personnel engaged in selling, marketing and customer support functions, along with costs related to public relations, advertising, promotions and travel as well as allocated costs. Selling and marketing expenses increased to $55.3 million in 2005 from $42.6 million in 2004. The increase in selling and marketing expenses of $12.7 million was primarily due to increased personnel costs and related travel and allocated costs as well as higher commission related to higher sales levels. We expect selling and marketing expenses to increase significantly in absolute dollars in the future driven primarily by stock-based compensation expense, and also as more personnel are added to support our expanding selling and marketing efforts worldwide and as increased sales result in higher overall sales commission expenses.

Research and development.   Research and development expenses consist primarily of salaries and benefits for software developers, contract programmers and allocated costs. Research and development expenses increased to $16.3 million in 2005 from $14.5 million in 2004. The increase of $1.8 million in research and development expenses was primarily a result of increased personnel needed to support our expanding list of technology partners, the enhancements of Websense Enterprise and additional products as well as increased allocated costs. We expect research and development expenses to increase significantly in absolute dollars in future periods driven primarily by stock-based compensation expense, and also as a result of our continued enhancements of our products.

General and administrative.   General and administrative expenses consist primarily of salaries, benefits and related expenses for our executive, finance, human resources and administrative personnel, third party professional service fees and allocated costs. General and administrative expenses increased to $11.7 million in 2005 from $8.2 million in 2004. The $3.5 million increase in general and administrative expenses was primarily a result of additional personnel needed to support our growing operations, increased allocated costs and an increase in professional accounting fees driven by compliance with the Sarbanes-Oxley Act of 2002. We expect general and administrative expenses to increase significantly in absolute dollars in future periods driven primarily by stock-based compensation expense, including stock-based compensation expense associated with the hiring of our new CEO, and also reflecting growth in operations, increasing expenses associated with being a public company and expansion of our international operations.

Other Income, Net

Net other income increased to $5.4 million in 2005 from $2.2 million in 2004. The increase was due primarily to higher interest rates realized on our increased balances of cash, cash equivalents and marketable securities as of December 31, 2005 compared with December 31, 2004. The majority of our investments of cash and cash equivalents and marketable securities are tax-exempt. We expect that the

36

majority of our cash and cash equivalents and marketable securities will continue to be held in tax-exempt investments during the foreseeable future.

Provision for Income Taxes

In 2005, United States and foreign income tax expense was $21.3 million as compared to $14.8 million for 2004. The annual effective income tax rate for 2005 was 35.5% compared to 36.1% for 2004. The annual effective tax rate for 2005 was lower than the 2004 effective tax rate primarily due to an increase in foreign earnings taxed at less than the United States federal income tax rate, an increase in tax-exempt interest income and an increase in federal and state research and development tax credits.

In 2006 and thereafter, we anticipate that our effective tax rate may continue to decrease due to benefits derived from lower tax rates associated with foreign income.

Years ended December 31, 2004 and 2003

Revenue

Revenue increased to $111.9 million in 2004 from $81.7 million in 2003. The increase was primarily a result of the addition of new, renewed and upgraded subscriptions from our customers. Approximately 65% of subscription revenue recognized in 2004 was derived from renewal business.

Cost of Revenue

Cost of revenue increased to $7.8 million in 2004 from $5.5 million in 2003. The increase was primarily due to the costs associated with additional personnel in our technical support and database groups, as well as allocated costs. As a percentage of revenue, cost of revenue remained unchanged at 7% during the years-ended 2004 and 2003.

Gross Margin

Gross margin increased to $104.1 million in 2004 from $76.2 million in 2003. The increase was due to increased revenue. As a percentage of revenue, gross margin remained unchanged at 93% for the years-ended 2004 and 2003.

Operating Expenses

Selling and marketing.   Selling and marketing expenses increased to $42.6 million in 2004 from $31.8 million in 2003. The increase in selling and marketing expenses of $10.8 million was primarily due to increased headcount costs and related travel and allocated costs as well as higher commission and co-op marketing expenses related to higher sales levels.

Research and development.   Research and development expenses increased to $14.5 million in 2004 from $12.8 million in 2003. The increase of $1.7 million in research and development expenses was primarily a result of increased compensation costs and allocated costs to support our expanding list of technology partners and enhancements of our products.

General and administrative.   General and administrative expenses increased to $8.2 million in 2004 from $6.6 million in 2003. The $1.6 million increase in general and administrative expenses was primarily a result of an increase in professional accounting fees driven primarily by compliance with the Sarbanes-Oxley Act of 2002, and allocated costs and additional personnel needed to support our growing operations.

37

Other Income, Net

Net other income decreased to $2.2 million in 2004 from $2.3 million in 2003. The decrease was due primarily to lower interest rates realized on our cash, cash equivalents and marketable securities despite increased balances as of December 31, 2004 as compared with December 31, 2003. The lower interest rates were substantially the result of our strategy beginning in the second quarter of 2003 to purchase lower interest tax-exempt investments in order to maximize the after-tax return on our investments. Also contributing to the decrease were realized losses from settled foreign currency forward contracts. As of December 31, 2004, the majority of our total cash and cash equivalents and marketable securities were tax-exempt.

Provision for Income Taxes

In 2004, United States and foreign income tax expense was $14.8 million as compared to $10.4 million for 2003. The annual effective income tax rate for 2004 was 36.1% compared to 38.4% for 2003. The annual effective tax rate for 2004 was lower than the 2003 effective tax rate primarily due to an increase in foreign earnings taxed at less than the United States federal income tax rate, an increase in tax-exempt interest income and an increase in federal and state research and development tax credits.

Liquidity and Capital Resources

As of December 31, 2005, we had cash and cash equivalents of $61.6 million, investments in marketable securities of $258.8 million, and retained earnings of $56.4 million. As of December 31, 2004, we had cash and cash equivalents of $38.9 million, investments in marketable securities of $204.9 million and retained earnings of $17.7 million.

Net cash provided by operating activities was $100.7 million in 2005 compared with net cash provided by operating activities of $65.2 million in 2004. The $35.5 million increase in cash provided by operating activities in 2005 was primarily due to an increase in our net income, an increase in tax benefit from exercise of stock options and an increase in deferred revenue (subscription amounts in excess of recognizable revenue are recorded as deferred revenue). Our operating cash flow is significantly influenced by subscription renewals and accounts receivable collections, and a decrease in subscription renewals or accounts receivable collections would negatively impact our operating cash flow.

Net cash used in investing activities was $57.6 million in 2005 compared with net cash used in investing activities of $61.1 million in 2004. The $3.5 million decrease in net cash used by investing activities in 2005 was primarily due to fewer purchases of marketable securities to offset maturities and sales of marketable securities.

Net cash used by financing activities was $20.4 million in 2005 compared with net cash used by financing activities of $0.6 million in 2004. The $19.8 million increase in net cash used by financing activities in 2005 was primarily due to the use of $48.3 million for repurchases of 929,030 shares of our common stock in 2005, compared with the use of $23.0 million for repurchases of 610,000 shares of our common stock in 2004.

We have operating lease and software license commitments of approximately $2.2 million in 2006, $2.0 million in 2007, and $0.3 million in 2008. A significant majority of our operating lease commitments are related to our corporate headquarters lease, which extends through 2008. Our corporate headquarters lease includes escalating rent payments from 2004 to 2008. The rent expense related to our corporate headquarters lease is recorded monthly on a straight-line basis in accordance with generally accepted accounting principles.

38

Future minimum annual payments under non-cancelable operating leases and software licenses at December 31, 2005 are as follows (in thousands):

	Operating Leases			Software Licenses			Total
2006		$	1,889		$	314	$	2,203
2007		1,937			79		2,016
2008		325			—		325
		$	4,151		$	393	$	4,544

As of December 31, 2005 and 2004, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

On April 3, 2003, we announced that our Board of Directors authorized a stock repurchase program of up to 2 million shares of our common stock. On August 15, 2005, we announced that our Board of Directors increased the size of the stock repurchase program by an additional 2 million shares, for a total program size of up to 4 million shares. The repurchases will be made from time to time on the open market at prevailing market prices or in privately negotiated transactions. Depending on market conditions and other factors, purchases under this program may be commenced or suspended at any time, or from time to time, without prior notice. As of December 31, 2005, we had repurchased 1,935,030 shares of our common stock under this program, for an aggregate of $79.0 million at an average price of $40.83 per share.

As of December 31, 2004, we had retired all 1,006,000 shares of our common stock that had been repurchased prior to that date. In accordance with APB Opinion No. 6, Status of Accounting Research Bulletins, the treasury stock retirement was effected by reducing the following on our Consolidated Balance Sheets:  treasury stock by $30.7 million, common stock by $0.1 million, additional paid-in capital by $6.4 million and retained earnings by $24.2 million. There was no effect to our overall equity position as a result of the retirement. We do not expect to retire shares of our common stock that we repurchased during 2005, or shares that we may repurchase during 2006, in the foreseeable future.

On January 31, 2006, we announced that our Board of Directors authorized a two-for-one stock split of our common stock, to be effected in the form of a special dividend of one share of our common stock for each share outstanding. The additional shares issued as a result of the stock split will be distributed on or about March 17, 2006 to stockholders of record at the close of business on February 13, 2006. The shares and per share data presented in the accompanying consolidated financial statements and notes thereto have not been restated to give effect to this pending stock split.

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

39

Summarized Quarterly Data (Unaudited)

The following tables present unaudited quarterly financial information for the eight quarters ended December 31, 2005. We believe this information reflects all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The results for any quarter are not necessarily indicative of results for any future period.

	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
	(In thousands, except per share data)
2005
Revenue		$	34,182		$	36,026		$	38,300		$	40,128
Gross margin		31,682			33,525			35,471			37,316
Income from operations		12,459			12,708			14,465			15,068
Income before income taxes		13,413			13,909			16,000			16,789
Net income		8,612			8,934			10,111			11,111
Basic income per share(1)		$	0.36		$	0.37		$	0.43		$	0.47
Diluted income per share(1)		$	0.35		$	0.36		$	0.41		$	0.45
2004
Revenue		$	24,611		$	26,643		$	28,917		$	31,688
Gross margin		22,920			24,869			26,914			29,387
Income from operations		7,718			8,753			10,678			11,607
Income before income taxes		8,131			9,209			11,276			12,366
Net income		5,127			5,807			7,106			8,136
Basic income per share(1)		$	0.23		$	0.25		$	0.31		$	0.35
Diluted income per share(1)		$	0.22		$	0.24		$	0.29		$	0.33

(1)Basic and diluted net income per share computations for each quarter are independent and may not add up to the net income per share computation for the respective year. See Note 1 of Notes to the Consolidated Financial Statements for an explanation of the determination of basic and diluted net income per share.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

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

We are exposed to changes in interest rates primarily from our short-term available-for-sale investments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments at December 31, 2005. Changes in interest rates over time will, however, affect our interest income.

We utilize foreign currency forward contracts and zero-cost collar contracts to hedge foreign currency market exposures of underlying assets and liabilities. In April 2005, we began billing customers in Euro-denominated countries in the Euro. In addition, working funds necessary to facilitate the short-term operations of our subsidiaries are kept in the local currencies in which they do business. Our objective is to

40

reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates. We do not use foreign currency contracts for speculative or trading purposes.

As of December 31, 2005 and 2004 we had committed to foreign currency forward contracts in the Euro with a notional amount of $4.0 and $0.4 million, respectively. Our Euro commitment at December 31, 2005 and 2004, represents 3.4 and 0.3 million Euros at a weighted average forward rate of 1.184 and 1.329, respectively. The fair value of these forward contracts was $4.0 and $0.4 million at December 31, 2005 and 2004. All of the foreign currency forward contracts will be settled before March 31, 2006. The $3.6 million increase in our Euro hedged position is primarily due to our billing customers in Euro-denominated countries in the Euro, starting in April 2005. For the year-ended December 31, 2005, less than 10% of our total billings were denominated in the Euro. In 2006, we will continue billing certain international customers in Euros, and we expect to continue to hedge the corresponding exposure consistent with 2005. We do not expect foreign currency billings to represent more than 15% of our total billings during 2006.

As of December 31, 2005, we had committed to zero-cost collar contracts in the British Pound, with a notional amount of $4.3 million. As of December 31, 2004 we had committed to foreign currency forward contracts in the British Pound, with a notional amount of $0.6 million. As of December 31, 2005, our British Pound commitment represents 2.4 million British Pounds at a weighted average ceiling and floor of 1.8025 and 1.7460, respectively. As of December 31, 2004, our British Pound commitment represented 300,000 British Pounds at a weighted average forward rate of 1.912. The fair value of these zero-cost collar and foreign currency forward contracts was $4.2 and $0.6 million at December 31, 2005 and 2004, respectively. All of the zero-cost collar contracts will be settled before June 30, 2006. The $3.7 million increase in our British Pound hedged position is primarily due to our decision to lengthen the period hedged as well as increase the percentage of working funds hedged. In 2006, we expect an increase in British Pound expenditures and our corresponding hedged commitments to be consistent with our increase in overall operating expenditures.

Given our foreign exchange position, a 10% change in foreign exchange rates upon which these foreign exchange contracts are based would result in exchange gains and losses. In all material aspects, these exchange gains and losses would be fully offset by exchange gains and losses on the underlying net monetary exposures for which the contracts are designated as hedges. We do not expect material exchange rate gains and losses from unhedged foreign currency exposures.

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Item 8.Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Websense, Inc.

We have audited the accompanying consolidated balance sheets of Websense, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Websense, Inc. at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Websense Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Diego, California
February 22, 2006

42

Websense, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)

	December 31,
	2005				2004
Assets
Current assets:
Cash and cash equivalents		$	61,629		$	38,878
Marketable securities		258,760			204,910
Accounts receivable, net of allowance for doubtful accounts of $1,460 and $1,140 at December 31, 2005 and 2004		50,570			44,309
Prepaid income taxes		1,962			3,201
Current portion of deferred income taxes		15,772			8,530
Other current assets		3,467			1,525
Total current assets		392,160			301,353
Property and equipment, net		4,923			3,955
Deferred income taxes, less current portion		6,043			9,523
Deposits and other assets		549			462
Total assets		$	403,675		$	315,293
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	2,073		$	1,100
Accrued payroll and related benefits		8,476			7,163
Other accrued expenses		5,085			5,011
Income taxes payable		2,305			1,758
Current portion of deferred revenue		119,118			90,686
Total current liabilities		137,057			105,718
Deferred revenue, less current portion		60,807			41,631
Stockholders’ equity:
Common stock—$0.01 par value; 100,000 shares authorized; 23,971 and 23,526 shares issued and outstanding at December 31, 2005 and 2004		249			235
Additional paid-in capital		198,077			150,447
Treasury stock		(48,340		)	—
Retained earnings		56,449			17,681
Accumulated other comprehensive loss		(624		)	(419		)
Total stockholders’ equity		205,811			167,944
Total liabilities and stockholders’ equity		$	403,675		$	315,293

See accompanying notes.

43

Websense, Inc.
Consolidated Income Statements
(In thousands, except per share amounts)

	Years Ended December 31,
	2005		2004		2003
Revenues	$	148,636	$	111,859	$	81,734
Cost of revenues	10,642		7,769		5,523
Gross margin	137,994		104,090		76,211
Operating expenses:
Selling and marketing (exclusive of $0, $0 and $32 for the years ended December 31, 2005, 2004 and 2003, respectively, reported below as amortization of stock-based compensation)	55,288		42,625		31,845
Research and development (exclusive of $0, $0 and $17 for the years ended December 31, 2005, 2004 and 2003, respectively, reported below as amortization of stock-based compensation)	16,277		14,509		12,843
General and administrative (exclusive of $0, $0 and $34 for the years ended December 31, 2005, 2004 and 2003, respectively, reported below as amortization of stock-based compensation)	11,729		8,200		6,649
Amortization of stock-based compensation	—		—		83
Total operating expenses	83,294		65,334		51,420
Income from operations	54,700		38,756		24,791
Other income, net	5,411		2,226		2,292
Income before income taxes	60,111		40,982		27,083
Provision for income taxes	21,343		14,806		10,395
Net income	$	38,768	$	26,176	$	16,688
Net income per share:
Basic net income per share	$	1.63	$	1.13	$	0.76
Diluted net income per share	$	1.58	$	1.09	$	0.73
Weighted average shares—basic	23,746		23,080		22,038
Weighted average shares—diluted	24,598		24,114		22,976

See accompanying notes.

44

Websense, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)

	Common stock							Additional paid-in				Treasury				Deferred				Retained earnings				Accumulated other comprehensive				Total  stockholders’
	Shares			Amount				capital				stock				compensation				(deficit)				income (loss)				equity
Balance at December 31, 2002		21,734			$	217			$	107,058			$	—			$	(83	)		$	(957	)		$	476			$	106,711
Issuance of common stock upon exercise of options		953			10				4,723				—				—				—				—				4,733
Issuance of common stock for stock purchase plan		151			1				1,831				—				—				—				—				1,832
Issuance of common stock upon exercise of warrant		3			—				—				—				—				—				—				—
Amortization of deferred compensation		—			—				—				—				83				—				—				83
Purchase of treasury stock		(396	)		—				—				(7,684		)		—				—				—				(7,684		)
Tax benefit of stock options		—			—				7,027				—				—				—				—				7,027
Comprehensive income:
Net income		—			—				—				—				—				16,688				—				16,688
Net change in unrealized loss on marketable securities		—			—				—				—				—				—				(461		)		(461		)
Comprehensive income																													16,227
Balance at December 31, 2003		22,445			228				120,639				(7,684		)		—				15,731				15				128,929
Issuance of common stock upon exercise of options		1,473			15				19,811				—				—				—				—				19,826
Issuance of common stock for stock purchase plan		190			2				2,531				—				—				—				—				2,533
Issuance of common stock upon exercise of warrant		28			—				—				—				—				—				—				—
Purchase of treasury stock		(610	)		—				—				(22,980		)		—				—				—				(22,980		)
Retirement of treasury stock					(10		)		(6,428		)		30,664								(24,226		)						—
Tax benefit of stock options		—			—				13,894				—				—				—				—				13,894
Comprehensive income:
Net income		—			—				—				—				—				26,176				—				26,176
Net change in unrealized loss on marketable securities		—			—				—				—				—				—				(442		)		(442		)
Net change in unrealized gain on fair market valuation of foreign currency contracts		—			—				—				—				—				—				8				8
Comprehensive income																													25,742
Balance at December 31, 2004		23,526			235				150,447				—				—				17,681				(419		)		167,944
Issuance of common stock upon exercise of options		1,217			12				24,594				—				—				—				—				24,606
Issuance of common stock for stock purchase plan		157			2				3,356				—				—				—				—				3,358
Purchase of treasury stock		(929	)		—				—				(48,340		)		—				—				—				(48,340		)
Tax benefit of stock options		—			—				19,680				—				—				—				—				19,680
Comprehensive income:
Net income		—			—				—				—				—				38,768				—				38,768
Net change in unrealized loss on marketable securities		—			—				—				—				—				—				(112		)		(112		)
Net change in unrealized loss on fair market valuation of foreign currency contracts		—			—				—				—				—				—				(93		)		(93		)
Comprehensive income																													38,563
Balance at December 31, 2005		23,971			$	249			$	198,077			$	(48,340	)		$	—			$	56,449			$	(624	)		$	205,811

See accompanying notes.

45

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

	Years ended December 31,
	2005			2004			2003
Operating activities:
Net income	$	38,768		$	26,176		$	16,688
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,631			2,277			2,016
Amortization of deferred compensation	—			—			83
Deferred revenue	47,608			38,357			29,281
Unrealized gain (loss) on hedging contracts	(93		)	8			—
Tax benefit from exercise of stock options	19,680			13,894			7,027
Changes in operating assets and liabilities:
Accounts receivable	(6,261		)	(16,310		)	(8,159		)
Prepaid income taxes	1,239			(2,537		)	(664		)
Other current assets	(1,942		)	(254		)	(87		)
Deposits and other assets	(87		)	(44		)	(119		)
Deferred income taxes	(3,762		)	(648		)	(1,973		)
Accounts payable	973			357			(18		)
Accrued payroll and related benefits	1,313			1,922			1,614
Other accrued expenses	74			1,176			395
Income taxes payable	547			853			(65		)
Net cash provided by operating activities	100,688			65,227			46,019
Investing activities:
Purchase of property and equipment	(3,599		)	(3,235		)	(2,046		)
Purchases of marketable securities	(477,282		)	(270,130		)	(197,880		)
Maturities of marketable securities	422,278			211,120			83,233
Sales of marketable securities	1,042			1,193			77,854
Net cash used in investing activities	(57,561		)	(61,052		)	(38,839		)
Financing activities:
Proceeds from exercise of stock options and warrants	24,606			19,826			4,733
Proceeds from issuance of common stock for stock purchase plan	3,358			2,533			1,832
Purchase of treasury stock	(48,340		)	(22,980		)	(7,684		)
Net cash used in financing activities	(20,376		)	(621		)	(1,119		)
Increase in cash and cash equivalents	22,751			3,554			6,061
Cash and cash equivalents at beginning of year	38,878			35,324			29,263
Cash and cash equivalents at end of year	$	61,629		$	38,878		$	35,324
Supplemental disclosures of cash flow information:
Income taxes paid	$	3,656		$	3,447		$	6,211
Unrealized loss on marketable securities	$	(112	)	$	(442	)	$	(461	)

See accompanying notes.

46

Websense, Inc.
Notes to Consolidated Financial Statements
December 31, 2005

1.Summary of Significant Accounting Policies

Description of Business

Websense, Inc. (“Websense” or the “Company”) commenced operations in 1994. The Company provides employee internet management (EIM) and web security software products that enable organizations to reduce the risks associated with web-based malicious attacks, spyware and phishing, as well as to analyze, report and manage how their employees use computing resources, including internet access, instant messaging (IM), peer-to-peer file sharing, network bandwidth and software applications. The Company’s Websense Enterprise solution supports an organization’s efforts to enhance security, improve employee productivity, mitigate potential legal liability and conserve network bandwidth.

Use of Estimates

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

Reclassifications

Certain prior year reclassifications have been made for consistent presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in the United Kingdom, Japan, Ireland, Australia, France, Germany, Brazil and Italy. Significant intercompany accounts and transactions have been eliminated in consolidation. Activities performed by the subsidiaries are a direct and integral extension of the Company’s primary business.

For the years ended December 31, 2005, 2004 and 2003, the Company’s billings were primarily denominated in its functional currency, which is the U.S. dollar. As such, the Company has not recorded foreign currency translation gains or losses. However, the Company incurred foreign currency transaction losses of $32,000, $76,000 and $57,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Revenue Recognition

The Company has adopted American Institute of Certified Public Accountants Statement of Position No. 97-2, Software Revenue Recognition (SOP No. 97-2) as amended by SOP No. 98-9, as well as Staff Accounting Bulletin No. 104, Revenue Recognition, as issued by the Securities and Exchange Commission. These statements and bulletin provide guidance for recognizing revenue related to sales by software vendors.

The Company sells Websense Enterprise on a subscription basis. A subscription is generally 12, 24 or 36 months in duration and for a fixed number of users. Other services such as upgrades/enhancements and standard post-contract technical support services are sold together with Websense Enterprise and provided throughout the subscription term. The Company recognizes revenue on a monthly straight-line basis, commencing with the month the subscription begins, over the term of the subscription agreement

47

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

1.Summary of Significant Accounting Policies (Continued)

provided collectability is reasonably assured. Upon entering into a subscription arrangement for a fixed or determinable fee, the Company electronically delivers access codes to users and then promptly invoices customers for the full amount of their subscriptions. Payment is due for the full term of the subscription, generally within 30-60 days of invoicing.

The Company records amounts billed to customers in excess of recognizable revenue as deferred revenue in the accompanying balance sheets.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of ninety days or less when purchased to be cash equivalents. The Company generally invests its excess cash in fixed income obligations with strong credit ratings. Such investments are made in accordance with the Company’s investment policy, which establishes guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified if necessary to take advantage of trends in yields and interest rates. The Company has not experienced any losses on its cash and cash equivalents.

Marketable Securities

Marketable securities at December 31, 2005 consist of tax-exempt auction rate notes and municipal bonds. The Company currently classifies all investment securities as available for sale. Securities classified as available for sale are reported at fair value, adjusted for other than temporary declines in value. The Company records other than temporary declines in value to earnings as realized losses. Unrealized holding gains and losses on securities available for sale are reported as a net amount in a separate component of stockholders’ equity until realized. Realized gains and losses are recorded based on the specific identification method.

Historically, the fair values of the Company’s tax-exempt auction rate notes have not changed due to the high credit quality and short-term nature of these securities. However, if the fair value of its tax-exempt auction notes did change when interest rates and/or dividends reset at auction, the Company would recognize unrealized holding gains and/or losses on these investments as a net amount in a separate component of stockholders’ equity until realized. The Company would then recognize realized gains and/or losses based on the specific identification method.

Interest on Cash and Marketable Securities

The Company’s interest on cash and marketable securities, included as a component of other income, net, is $6.1 million, $2.5 million and $2.2 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Disclosures About Fair Value of Financial Instruments

The fair values of investment securities have been determined using values supplied by an independent pricing service and are disclosed together with carrying amounts in Note 2. The carrying value

48

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

1.Summary of Significant Accounting Policies (Continued)

of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values.

Foreign Currency Hedges

Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, established accounting and reporting standards requiring recognition of all derivatives as assets or liabilities in the consolidated balance sheets and measurement of those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivative instruments will be recorded to earnings or other comprehensive income depending on the use of the derivative instrument and whether it qualifies for hedge accounting. The Company uses derivatives to manage foreign currency risk and not for speculative or trading purposes. The Company’s objective is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates.

Beginning in 2004, the Company has utilized foreign currency forward contracts. Beginning in 2005, the Company also started to utilize zero-cost collar contracts to hedge anticipated British Pound expenses. All such contracts entered into were designated as either fair value hedges or cash flow hedges and were considered effective, where desired, as defined by SFAS No. 133, as amended. None of the contracts were terminated prior to settlement. Net realized losses related to these contracts settled during the year are included in other income, net in the accompanying consolidated income statements and amounted to $195,000 and $186,000 in 2005 and 2004, respectively.

As of December 31, 2005 and 2004, the Company had committed to foreign currency forward contracts in the Euro, with a notional amount of $4.0 and $0.4 million, respectively. The Company’s Euro commitment represents 3.4 and 0.3 million Euros at a weighted average forward rate of 1.184 and 1.329, respectively. Euro commitments at December 31, 2005 were designated as fair value hedges and were not required to be tested for effectiveness as hedge accounting was not desired. Euro commitments at December 31, 2004 were designated as cash flow hedges and determined effective. The fair value of these forward contracts was $4.0 and $0.4 million at December 31, 2005 and 2004. All of the foreign currency forward contracts will be settled before March 31, 2006. Realized gains or losses related to the settlements, if any, will be recorded in other income, net at the time of settlement.

As of December 31, 2005, the Company had committed to zero-cost collar contracts in the British Pound, with a notional amount of $4.3 million. As of December 31, 2004, the Company had committed to foreign currency forward contracts in the British Pound, with a notional amount of $0.6 million. All of these contracts were designated as cash flow hedges and were determined effective as of December 31, 2005 and 2004. The fair value of these zero-cost collar and foreign currency forward contracts was $4.2 and $0.6 million at December 31, 2005 and 2004, respectively. All of the zero-cost collar contracts will be settled before June 30, 2006. Realized gains and losses related to the settlements, if any, will be recorded in all operating categories the Company hedges its British Pound expenditures against.

49

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

1.Summary of Significant Accounting Policies (Continued)

Concentration of Credit Risk

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

Property and Equipment

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

Computer Software Costs

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

The Company accounts for internally developed computer software costs, incurred in the application stage, in accordance with SOP No. 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use. There have been no such costs capitalized to date as the costs incurred for internally developed computer software have not been significant.

Advertising Expenses

Advertising costs are expensed as incurred. Total advertising costs for the years ended December 31, 2005, 2004 and 2003 were $4.8 million, $4.1 million and $3.4 million, respectively.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, issued in December 2002, requires the use of option valuation models for traded options that were not developed for use in valuing employee stock options which have vesting restrictions and are not traded. Under APB No. 25, when the exercise price of the Company’s employee stock options is not less than the fair value for the underlying stock on the date of grant, no compensation expense is recognized. At the time stock options were granted, the Company believed that the exercise price was at a price not less than the fair value of the underlying common stock. In conjunction with the Company’s initial public offering, the Company reviewed its exercise prices and arrived at the deemed fair value for each option grant during 1999. With respect to the 3,220,500 options granted during 1999 and through March 27, 2000, the Company recorded deferred compensation of $5.4 million for the difference between the exercise price per share and the deemed fair value per share at the grant date. The approximate weighted-average exercise price per share and the approximate weighted-average deemed fair value per share for the options

50

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

1.Summary of Significant Accounting Policies (Continued)

was $1.64 and $3.31, respectively. Deferred stock compensation was recognized and amortized on an accelerated basis in accordance with Financial Accounting Standards Board Interpretation FIN No. 28 over the vesting period of the related options, generally four years. Deferred stock compensation was fully amortized as of December 31, 2003.

Pro forma information regarding net income is required by SFAS No. 123, as amended by SFAS No. 148, and has been determined as if the Company has accounted for its employee stock options and employee stock purchase plan under the fair value method of SFAS No. 123, as amended by SFAS No. 148.

The pro forma effects of stock-based compensation on net income and net income per share have been estimated at the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions:

	Stock Options						Employee Stock Purchase Plan
	Year Ended December 31,						Year Ended December 31,
	2005		2004		2003		2005		2004		2003
Average expected life (years)	4.88		5.00		5.00		1.25		1.25		1.25
Average expected volatility factor	44.16	%	52.06	%	98.94	%	44.57	%	59.30	%	86.75	%
Average risk-free interest rate	3.99	%	3.39	%	2.53	%	3.63	%	2.15	%	1.36	%
Average expected dividend yield	—		—		—		—		—		—

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

	Years Ended December 31,
	2005			2004			2003
Net income as reported	$	38,768		$	26,176		$	16,688
Add: Stock-based employee compensation cost included in net income as reported, net of tax(1),(2)	—			—			51
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of tax(2)	(10,794		)	(9,700		)	(9,185		)
Pro forma net income	$	27,974		$	16,476		$	7,554
Basic net income per share as reported	$	1.63		$	1.13		$	0.76
Pro forma basic net income per share	$	1.18		$	0.71		$	0.34
Diluted net income per share as reported	$	1.58		$	1.09		$	0.73
Pro forma diluted net income per share	$	1.14		$	0.68		$	0.33

(1)The Company was recognizing deferred stock-based compensation expense on the deemed fair value of options granted prior to the initial public offering in March 2000. This expense was amortized on an accelerated basis, in accordance with FIN No. 28, over approximately a four-year period, which began in March 2000 and ended in December 2003.

51

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

1.Summary of Significant Accounting Policies (Continued)

(2)The Company had an effective tax rate of approximately 36%, 36% and 38% in 2005, 2004 and 2003, respectively.

For purposes of pro forma disclosures, the estimated fair value is amortized to expense ratably over the options vesting period. The effect of applying SFAS No. 123, as amended by SFAS No. 148, for purposes of providing pro forma disclosures may not be representative of the effects on the Company’s operating results in future years.

The appropriate volatility factor for stock options and for the Employee Stock Purchase Plan is the estimated future volatility of the Company’s stock over the expected life of the options. Prior to the fourth quarter of 2005, the Company estimated the volatility factors for stock options, and for the Employee Stock Purchase Plan using the historical volatility of the Company’s stock only. Beginning in the fourth quarter of 2005, the Company estimated the volatility factors for both the Company’s stock options and for the Company’s Employee Stock Purchase Plan using a blended formula that considers both the historical volatility of the Company’s stock as well as the implied volatility of the Company’s stock based on publicly traded options, which the Company believes provides a more accurate estimate of expected volatility factors over the life of the options.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), which will be effective in the Company’s first quarter of fiscal 2006. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the intrinsic value method in accordance with APB No. 25 and, as such, generally recognizes no compensation cost for employee stock option grants or the discounts the Company provides under its employee stock purchase plans. Under the new rules, commencing with the Company’s first quarter of fiscal 2006, the Company is required to adopt a fair value-based method for measuring the compensation expense related to employee stock awards; this will lead to additional compensation expense of approximately $5.0 million, thereby reducing net income and earnings per share. Had the Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described above, with additional compensation expense of approximately $16.7 million in 2005. The fourth quarter of 2005 alone represents approximately $4.4 million. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current guidance. This requirement will reduce the Company’s net operating cash flows and increase net financing cash flows in periods after adoption. The Company cannot estimate what those amounts will be in the future, however, the amount of operating cash flows recognized in 2005, 2004 and 2003 for such tax deductions were $19.7 million, $13.9 million and $7.0 million, respectively. However, overall, the Company’s cash flows will be unaffected.

Comprehensive Income

The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and

52

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

1.Summary of Significant Accounting Policies (Continued)

losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. Comprehensive income for the years ended December 31, 2005, 2004 and 2003 was $38.6 million, $25.7 million and $16.2 million, respectively. The difference from reported net income, in the years ended December 31, 2005, 2004 and 2003 is due to the changes in unrealized loss on marketable securities of ($112,000), ($442,000) and ($461,000), respectively, and to the changes in unrealized gain (loss) on the fair market valuation of foreign currency forward contracts of ($93,000), $8,000 and $0, respectively.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following (in thousands):

	December 31,
	2005		2004
Unrealized loss on marketable securities	$	539	$	427
Unrealized loss on fair market valuation of foreign currency contracts	85		(8		)
	$	624	$	419

Net Income Per Share

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

Dilutive securities include options, warrants and preferred stock as if converted and restricted stock subject to vesting. In 2005, the difference between the weighted average shares used in determining basic EPS versus diluted EPS related to dilutive stock options totaled 852,000. Potentially dilutive securities totaling 106,000, 201,000 and 1,376,000 for the years ended December 31, 2005, 2004 and 2003, respectively, were excluded from historical basic and diluted earnings per share because of their anti-dilutive effect as a result of stock options which have exercise prices greater than the average market price of the common shares.

53

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

1.Summary of Significant Accounting Policies (Continued)

The following is a reconciliation of numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all periods presented.

	Net Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(In thousands, except per share amounts)
For the Years Ended:
December 31, 2005:
Basic EPS		$	38,768		23,746		$	1.63
Effect of options		—			852		(0.05		)
Diluted EPS		$	38,768		24,598		$	1.58
December 31, 2004:
Basic EPS		$	26,176		23,080		$	1.13
Effect of options		—			1,034		(0.04		)
Diluted EPS		$	26,176		24,114		$	1.09
December 31, 2003:
Basic EPS		$	16,688		22,038		$	0.76
Effect of options		—			938		(0.03		)
Diluted EPS		$	16,688		22,976		$	0.73

Tax Matters

From time to time, the Company is audited by various state, federal and international authorities relating to tax matters. The Company fully cooperates with all audits, but defends its positions vigorously. The Company’s audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit and appeals process. As each audit is concluded, adjustments, if any, are appropriately recorded in the Company’s financial statements in the period determined.

Recently Issued Accounting Standards

Beyond the adoption of SFAS No. 123R in the Company’s first quarter of fiscal 2006, as described above under “Stock-Based Compensation”, the Company does not expect any recently issued accounting standards to have a material impact on the results of its operations in the foreseeable future.

2.   Marketable Securities

Investments in marketable securities consisted of the following at December 31, 2005 (in thousands):

	Amortized Cost		Unrealized Gains			Unrealized (Losses)				Estimated Fair Value
Auction Rate Notes	$	66,469		$	—		$	—			$	66,469
Municipal Bonds	192,830			—			(539		)		192,291
	$	259,299		$	—		$	(539	)		$	258,760

54

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

2.Marketable Securities (Continued)

Investments in marketable securities consisted of the following at December 31, 2004 (in thousands):

	Amortized Cost		Unrealized Gains			Unrealized (Losses)				Estimated Fair Value
Auction Rate Notes	$	68,101		$	—		$	—			$	68,101
Municipal Bonds	137,236			—			(427		)		136,809
	$	205,337		$	—		$	(427	)		$	204,910

The amortized cost and estimated fair value of the securities at December 31, 2005 and 2004, by contractual maturity, are shown below (in thousands).

	2005				2004
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within 1 year	$	230,677	$	230,299	$	155,537	$	155,346
Due between 1 and 3 years	28,622		28,461		49,800		49,564
	$	259,299	$	258,760	$	205,337	$	204,910

Realized gains (losses) from investments in marketable securities for the years ended 2005, 2004 and 2003 were ($5,000), $4,000 and $194,000, respectively.

55

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

3.   Property and Equipment

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

	Estimated		December 31,
	Useful Lives		2005			2004
Computer hardware and software		3 years	$	14,756			$	11,563
Office furniture and equipment		3-7 years	2,452				2,097
Other equipment		3 years	590				539
			17,798				14,199
Accumulated depreciation			(12,875		)		(10,244		)
			$	4,923			$	3,955

Depreciation expense for 2005, 2004 and 2003 was $2.6 million, $2.3 million and $2.0 million, respectively.

4.   Geographic Information

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

	Years Ended December 31,
	2005		2004		2003
United States	$	99,589	$	75,891	$	56,006
Europe, Middle East and Africa	33,429		23,831		16,932
Asia/Pacific	6,124		4,861		4,045
Canada and Latin America	9,494		7,276		4,751
	$	148,636	$	111,859	$	81,734

The United Kingdom represented $14.2 million, $10.1 million and $7.4 million of total revenue for the years ended 2005, 2004 and 2003, respectively. No other foreign country represented more than 5% of total revenue.

5.Deferred Revenue

The Company expects to recognize revenues related to subscriptions in existence as of December 31, 2005 as follows (in thousands):

Years Ending December 31:
2006	$	119,118
2007	43,982
2008 and thereafter	16,825
	$	179,925

56

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

6.Commitments and Guarantees

The Company leases its facilities and certain equipment under non-cancelable operating leases, which expire at various dates through December 2008. The facilities leases contain renewal options and are subject to cost increases.

Future minimum annual payments under non-cancelable operating leases and software licenses at December 31, 2005 are as follows (in thousands):

	Operating Leases			Software Licenses			Total
Years Ending December 31:
2006		$	1,889		$	314	$	2,203
2007		1,937			79		2,016
2008		325			—		325
		$	4,151		$	393	$	4,544

Rent expense totaled $3.9 million, $2.8 million and $2.3 million for the years ended December 31, 2005, 2004 and 2003, respectively.

FIN No. 45, Guarantees of Indebtedness of Others (FIN No. 45), elaborates on previously existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties, indemnifications or to guarantees accounted for as derivatives.

The Company provides indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of its products. The Company evaluates estimated losses for such indemnifications under SFAS No. 5, Accounting for Contingencies, as interpreted by FIN No. 45. The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, the Company has not encountered material costs as a result of such obligations and has not accrued any liabilities related to such indemnifications in its financial statements.

7.Stockholders’ Equity

Warrants

In connection with the Company’s Series B convertible preferred stock offering between June and September 1999, the Company issued warrants to purchase 62,500 shares of common stock for $3.00 per share to financial consultants. The warrants were exercisable in whole or in part at any time and from time to time until their expiration. In April 2000, warrants to purchase 4,688 shares of common stock were exercised. In November 2001, warrants to purchase 23,437 shares of common stock were exercised. In July 2003, April 2004 and July 2004, warrants to purchase 4,000, 9,375 and 21,000 shares of common stock

57

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

7.Stockholders’ Equity (Continued)

were exercised, which resulted in 3,406, 8,467 and 19,287 shares of common stock being issued, respectively, due to the cashless exercise of these warrants. At the end of 2004, all warrants had been exercised.

Stock Option Plan

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

The Board of Directors replaced the 1998 Stock Plan with the Amended and Restated 2000 Stock Incentive Plan (2000 Plan) under which 4,500,000 shares of the Company’s common stock were initially authorized for future issuance, and reserved for purchase upon exercise of options granted. In addition, the 2000 Plan provides for automatic annual increases in the number of shares authorized and reserved for issuance thereunder (beginning in 2001) equal to the lesser of (i) 4% of the Company’s outstanding shares on the last business day in December of the calendar year immediately preceding or (ii) 1,500,000 shares. At December 31, 2005, a total of 8,820,233 shares have been authorized and reserved for issuance under the 2000 Plan of which 793,240 remain available for grant.

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

The exercise price of incentive stock options must equal at least the fair value on the date of grant and the exercise price of non-statutory stock options and the issuance price of common stock under the stock issuance program may be no less than 85% of the fair value on the date of grant or issuance. Through April 2005, the option grants were generally exercisable for a period of ten years, and beginning in May 2005, the option grants are generally exercisable for a period of seven years after the date of grant and generally vest 25% one year from date of grant and ratably each month thereafter for a period of 36 months. Unvested common shares obtained through early exercise of options are subject to repurchase by the Company at the original issue price. To date, only non-statutory options have been granted under the 2000 Plan.

In 2002, the Company issued options as an incentive for certain persons to commence employment that were not covered under the 2000 Plan. In accordance with Section 4350(i) of the NASD Marketplace Rules for the Nasdaq Stock Market, in 2002 the Company issued 177,000 such options, which have substantially the same terms as options issued under the 2000 Plan.

58

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

7.Stockholders’ Equity (Continued)

The following table summarizes stock option activity under the 1998 and 2000 Stock Plans and options issued in 2002 not covered under a formal plan and related information:

	Number of Shares		Weighted Average Exercise Price
Balance at December 31, 2002	4,262,836			$	14.39
Granted	971,750			17.45
Exercised	(952,391	)		4.97
Cancelled	(347,119	)		21.82
Balance at December 31, 2003	3,935,076			16.77
Granted	976,000			37.26
Exercised	(1,473,028	)		13.46
Cancelled	(321,468	)		22.28
Balance at December 31, 2004	3,116,580			24.18
Granted	1,019,500			52.40
Exercised	(1,217,756	)		20.21
Cancelled	(310,976	)		35.53
Balance at December 31, 2005	2,607,348			35.72

The following table summarizes all options outstanding and exercisable by price range as of December 31, 2005:

	Options Outstanding						Options Exercisable
		Weighted
		Average							Weighted
		Remaining		Weighted					Average
Range of	Number of	Contractual Life		Average			Number of		Exercise
Exercise Prices	Shares	In Years		Exercise Price			Shares		Price
$  0.20-$18.50	548,332		5.99		$	13.17		386,988		$	12.64
$18.81-$32.23	536,010		6.88		26.29			342,475		26.95
$32.27-$45.50	523,631		8.53		37.06			125,270		36.87
$46.01-$51.25	629,925		7.04		50.12			4,538		50.15
$51.37-$67.52	369,450		7.81		56.43			8,688		52.12
	2,607,348		7.19		35.72			867,959		22.38

The weighted average fair value of options granted during 2005, 2004 and 2003 was $22.76, $17.98 and $13.03 per share, respectively.

59

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

7.Stockholders’ Equity (Continued)

The following table summarizes the shares reserved for future grants:

Shares reserved for future grants at December 31, 2002	72,729
Shares reserved for future grants during 2003 based on the automatic increase in shares authorized	869,375
Shares granted during 2003	(971,750	)
Shares cancelled during 2003	347,119
Shares reserved for future grants at December 31, 2003	317,473
Shares reserved for future grants during 2004 based on the automatic increase in shares authorized	897,796
Shares granted during 2004	(976,000	)
Shares cancelled during 2004	321,468
Shares reserved for future grants at December 31, 2004	560,737
Shares reserved for future grants during 2005 based on the automatic increase in shares authorized	941,027
Shares granted during 2005	(1,019,500	)
Shares cancelled during 2004	310,976
Shares reserved for future grants at December 31, 2005	793,240

Employee Stock Purchase Plan

In February 2000, the Company adopted the 2000 Employee Stock Purchase Plan. The purchase plan provides for automatic annual increases in the number of shares reserved for issuance thereunder (beginning in 2001) equal to the lesser of (i) 1% of the Company’s outstanding shares on the last business day in December of the calendar year immediately preceding or (ii) 375,000 shares. The purchase plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. Under the purchase plan, the Board of Directors may authorize participation by eligible employees, including officers, in periodic offerings following commencement of the purchase plan. Shares issued and available for issuance are as follows:

Shares reserved for issuance at December 31, 2002	420,679
Shares reserved for issuance during 2003 based on the automatic increase in shares authorized	217,344
Shares issued during 2003	(150,739	)
Shares reserved for issuance at December 31, 2003	487,284
Shares reserved for issuance during 2004 based on the automatic increase in shares authorized	224,449
Shares issued during 2004	(189,988	)
Shares reserved for issuance at December 31, 2004	521,745
Shares reserved for issuance during 2005 based on the automatic increase in shares authorized	235,257
Shares issued during 2005	(156,799	)
Shares reserved for issuance at December 31, 2005	600,203

60

Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

7.Stockholders’ Equity (Continued)

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

Shares Reserved for Future Issuance

The following shares of common stock are reserved for future issuance as of December 31, 2005:

Stock options:
Granted and outstanding.	2,607,348
Reserved for future grants	793,240
Employee Stock Purchase Plan:
Reserved for future issuance	600,203
Total:	4,000,791

Treasury Stock

On April 3, 2003, the Company announced that its Board authorized a stock repurchase program of up to 2 million shares of its common stock. On August 15, 2005, the Company announced that its Board increased the size of the stock repurchase program by an additional 2 million shares, for a total program size of up to 4 million shares. The repurchases will be made from time to time on the open market at prevailing market prices or in privately negotiated transactions. Depending on market conditions and other factors, purchases under this program may be commenced or suspended at any time, or from time to time, without prior notice. As of December 31, 2005, the Company had repurchased 1,935,030 shares of its common stock under this program, for an aggregate of $79.0 million at an average price of $40.83 per share.

As of December 31, 2004, the Company had retired all 1,006,000 shares of its common stock that had been repurchased prior to that date. No shares of common stock that were repurchased during 2005 were retired. In accordance with APB No. 6, Status of Accounting Research Bulletins, the treasury stock retirement was effected by reducing the following on the Company’s Consolidated Balance Sheets: treasury stock by $30.7 million, common stock by $0.1 million, additional paid-in capital by $6.4 million and retained earnings by $24.2 million. There was no effect to the Company’s overall equity position as a result of the retirement.

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Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

8.Income Taxes

For financial reporting purposes, income before income taxes includes the following components:

	Year Ended December 31,
	2005		2004		2003
	(In thousands)
Income before income taxes
United States	$	50,321	$	36,712	$	26,551
Foreign	9,790		4,270		532
Total	$	60,111	$	40,982	$	27,083

The provision for income taxes is as follows:

	Year Ended December 31,
	2005			2004			2003
	(In thousands)
Current
Federal	$	19,590		$	12,535		$	10,103
Foreign	1,909			759			401
State	2,945			2,160			1,864
	24,444			15,454			12,368
Deferred
Federal	(2,750		)	(367		)	(1,735		)
Foreign	(232		)	—			—
State	(119		)	(281		)	(238		)
	(3,101		)	(648		)	(1,973		)
Income tax expense	$	21,343		$	14,806		$	10,395

The reconciliation of income tax computed at the federal statutory rate to the provision for income taxes is as follows:

	Year Ended December 31,
	2005			2004			2003
Statutory Rate		35.0	%		35.0	%		35.0	%
Foreign tax		(2.3	)		(0.9	)		0.1
State tax		4.8			5.5			5.9
Valuation allowance		(0.4	)		(0.9	)		(0.1	)
Credits		(0.4	)		(1.7	)		(1.2	)
Tax-exempt interest		(2.9	)		(2.1	)		(0.8	)
Other		1.7			1.2			(0.5	)
		35.5	%		36.1	%		38.4	%

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Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

8.      Income Taxes (Continued)

Significant components of the Company’s deferred tax assets and liabilities as of December 31, are as follows:

	2005			2004
	(In thousands)
Deferred tax assets
Tax credit carryforwards	$	2,516		$	2,306
Deferred revenue	17,410			14,415
Foreign deferred taxes	778			103
Other	1,658			1,332
Total deferred tax assets	22,362			18,156
Valuation allowance for deferred tax assets	(547		)	(103		)
Net deferred taxes	$	21,815		$	18,053

A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Periodically, management reassesses the need for a valuation allowance. At December 31, 2005, the valuation allowance related to net operating losses generated in 2004 and 2005 by the Company’s wholly-owned subsidiary in the United Kingdom. These losses are the result of stock option deductions and therefore, when the losses are utilized in the future, the tax benefit will be credited to paid in capital rather than the provision for income taxes.

As of December 31, 2005, the Company has federal and California research and development tax credit carryforwards of approximately $1.7 million and $1.3 million, respectively. These credits will begin to expire in 2023 unless previously utilized.

Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, use of the Company’s tax credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within a three year period. Based on IRC Sections 382 and 383, management believes that a change in ownership may have occurred. However, management does not believe that such change would have a significant impact on the Company’s ability to utilize its tax credit carryforwards.

As of December 31, 2005, the Company had approximately $7.6 million of undistributed earnings related to its foreign subsidiaries. Management believes that these earnings will be indefinitely reinvested in foreign jurisdictions; accordingly, the Company has not provided for U.S. federal income taxes related to these earnings. However, upon distribution of these earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the various foreign countries. It is estimated that the total tax liability, reduced by anticipated foreign tax credits, upon such a distribution would be approximately $1.6 million.

It is the Company’s policy to establish reserves for taxes that will probably become payable in future years as a result of an examination by tax authorities. The Company establishes the reserves based on management’s assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to temporary differences. The tax reserves are analyzed regularly and adjustments are made as events occur to warrant adjustment to the reserves.

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Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

9.      Employee Retirement Plan

Effective May 1, 1997, the Company established a 401(k) defined contribution retirement plan (401(k) Plan) covering substantially all employees. The 401(k) Plan provides for voluntary employee contributions from 1% to 50% of annual compensation, as defined, and did not provide for matching contributions from the Company as of December 31, 2003. In January 2004, the Company’s Board of Directors approved a discretionary employer matching contribution of 25% for each employee deferral contribution made during the plan year, up to 6% of the participant’s compensation. The amount of employer expenses including the employer match contributed to the 401(k) Plan during the years ended December 31, 2005 and 2004 were $430,000 and $369,000, respectively.

10.   Subsequent Events

On January 9, 2006, the Company entered into an employment agreement with Gene Hodges (the “Agreement”). Pursuant to the Agreement, Mr. Hodges agreed to serve as President and Chief Executive Officer of the Company, reporting to its Board of Directors, with employment commencing on a full-time basis on January 9, 2006, and continuing at will until either party gives notice of termination. At the Company’s January 24, 2006 Board of Directors meeting, the Board increased the number of authorized directors to seven and appointed Mr. Hodges as a director on the Board to fill the vacancy created by the increase.

As an inducement for Mr. Hodges to join the Company, Mr. Hodges was granted non-qualified stock options to purchase 600,000 shares of common stock outside the Company’s Amended and Restated 2000 Stock Incentive Plan. The option exercise price is equal to the closing price of the Company’s common stock on the first date of Mr. Hodges’ employment. The options will vest over four to seven year periods in accordance with pre-determined vesting schedules, provided Mr. Hodges remains employed by the Company, and are subject to partial or full acceleration of vesting under certain circumstances. Additionally, Mr. Hodges was awarded 48,000 restricted stock units pursuant to the Company’s Amended and Restated 2000 Stock Incentive Plan. The restricted stock units vest equally over four years, provided Mr. Hodges remains employed by the Company, and are subject to full acceleration of vesting under certain circumstances.

On January 31, 2006, the Company announced that the Board of Directors authorized a two-for-one stock split of the Company’s common stock, to be effected in the form of a special dividend of one share of its common stock for each share of its common stock outstanding. The additional shares issued as a result of the stock split will be distributed on or about March 17, 2006 to stockholders of record at the close of business on February 13, 2006.

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

None

Item 9A.Controls and Procedures

We maintain disclosure controls and procedures which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer, or CEO, and chief financial officer, or CFO, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our CEO and CFO, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2005.

An evaluation was also performed under the supervision and with the participation of our management, including our CEO and CFO, of any change in our internal controls over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. That evaluation did not identify any change in our internal controls over financial reporting that occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

65

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

The Board of Directors and Stockholders
Websense, Inc.

We have audited management’s assessment, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting” that Websense, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Websense’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (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 receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Websense, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Websense, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005 of Websense, Inc. and our report dated February 22, 2006 expressed an unqualified opinion thereon.

	/s/ ERNST & YOUNG LLP
San Diego, California
February 22, 2006

66

Item 9B.Other Information.

None

PART III

Item 10.Directors and Executive Officers of the Registrant

(a)  Directors.   Information concerning our directors is incorporated by reference from the section captioned “Proposal 1: Election of Directors” contained in our Proxy Statement related to the Annual Meeting of Stockholders to be held on June 6, 2006.

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

(c)  Compliance with Section 16(a) of the Exchange Act.   Information concerning compliance with Section 16(a) of the Exchange Act is incorporated by reference from the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” contained in our Proxy Statement related to the Annual Meeting of Stockholders to be held on June 6, 2006.

(d) The company has adopted a Code of Business Conduct which, together with the policies referred to therein, is applicable to all directors, officers and employees of the company. In addition, the company has adopted a Code of Ethics for the Chief Executive Officer, Senior Financial Officers and All Finance and Accounting Department Personnel (“Code of Ethics”). The Code of Business Conduct and the Code of Ethics cover all areas of professional conduct, including conflicts of interest, disclosure obligations, insider trading and confidential information, as well as compliance with all laws, rules and regulations applicable to our business. The company encourages all employees, officers and directors to promptly report any violations of any of the company’s policies. In the event that an amendment to, or a waiver from, a provision of the Code of Business Conduct or Code of Ethics that applies to any of our directors or executive officers is necessary, the company intends to post such information on its website. A copy of our Code of Business Conduct and our Code of Ethics can be obtained from our website at www.websense.com.

Item 11.Executive Compensation

The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the section captioned “Executive Compensation and Other Information” in our Proxy Statement related to the Annual Meeting of Stockholders to be held on June 6, 2006.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 of Form 10-K concerning security ownership of certain beneficial owners and management is incorporated by reference from the information contained in the section captioned “Ownership of Securities” in our Proxy Statement related to the Annual Meeting of Stockholders to be held on June 6, 2006.

67

The following table provides information as of December 31, 2005 with respect to the shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted- average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities subject to outstanding options, warrants and rights)
Equity compensation plans approved by security holders(1)		2,542,303		$	36.28		1,393,443	(3)
Equity compensation plans not approved by security holders(2)		65,045		$	13.84		—
Total		2,607,348		$	35.72		1,393,443

(1)Consists solely of the Amended and Restated 2000 Stock Incentive Plan and the Employee Stock Purchase Plan.

(2)Consists of 177,000 stock option grants made to certain new employees in 2002 in order to induce them to commence employment with the company, of which 65,045 are outstanding. The outstanding stock options have substantially the same terms as stock options issued under the Amended and Restated 2000 Stock Incentive Plan and have a weighted average exercise price of $13.84 per share.

(3)Consists of shares available for future issuance under the Employee Stock Purchase Plan and the Amended and Restated 2000 Stock Incentive Plan. As of December 31, 2005, an aggregate of 600,203 shares of Common Stock were available for issuance under the Employee Stock Purchase Plan and 793,240 shares of Common Stock were available for issuance under the Amended and Restated 2000 Stock Incentive Plan. The number of shares of Common Stock available for issuance under the Employee Stock Purchase Plan and the Amended and Restated 2000 Stock Incentive Plan automatically increases on the first trading day of January each calendar year by an amount equal to 1% and 4%, respectively, of the total number of shares of Common Stock outstanding on the last trading day of December in the immediately preceding calendar year but in no event will any such increase exceed 375,000 shares and 1,500,000 shares, respectively, of Common Stock.

Item 13.Certain Relationships and Related Transactions

The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the section captioned “Certain Relationships and Related Transactions” in our Proxy Statement related to the Annual Meeting of Stockholders to be held on June 6, 2006.

Item 14.Principal Accounting Fees and Services

The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in the section captioned “Proposal 2: Ratification of Selection of Independent Auditors” in our Proxy Statement related to the Annual Meeting of Stockholders to be held on June 6, 2006.

68

PART IV

Item 15.      Exhibits and Financial Statement Schedules

(a)    The following documents are filed as part of this report:

1.Financial Statement Schedules.

Schedule II Valuation and Qualifying Accounts

Schedules not listed above have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.

2.Exhibits

Exhibit Number	Description of Document
3.1(1)	Amended and Restated Certificate of Incorporation
3.2(1)	Restated Bylaws
4.1(1)	Specimen Stock Certificate of Websense, Inc.
10.1(1)	Amended and Restated Registration Rights Agreement dated June 9, 1999
10.2(1)	Form of Subscription Agreement regarding Series B Preferred Stock
10.3(1)*	Employment Agreement by and between Websense, Inc. and John B. Carrington, dated May 10, 1999
10.4*	Amendment to Employment Agreement by and between Websense, Inc. and John B. Carrington, dated January 24, 2006
10.5(1)*	Employment Agreement by and between Websense, Inc. and Douglas C. Wride, dated June 11, 1999
10.6*	Amendment to Employment Agreement by and between Websense, Inc. and Douglas C. Wride, dated January 24, 2006
10.7(2)*	Employment Agreement by and between Websense, Inc. and Gene Hodges, dated January 9, 2006
10.8(1)*	1998 Equity Incentive Plan
10.9(1)*	Standard Terms and Conditions Relating to Incentive Stock Option Under the 1998 Equity Incentive Plan
10.10*	Amended and Restated 2000 Stock Incentive Plan
10.11(1)*	2000 Stock Incentive Plan, Notice of Grant of Stock Option
10.12(1)*	2000 Stock Incentive Plan, Form of Incentive Stock Option Agreement
10.13*	2000 Stock Incentive Plan, Form of Deferred Issuance Stock Issuance Agreement
10.14(1)*	2000 Employee Stock Purchase Plan
10.15*	Form of Non-Plan Inducement Stock Option Agreement for Gene Hodges dated January 9, 2006
10.16(1)	Form of Indemnification Agreement between Websense, Inc. and its directors
10.17(1)	Form of Indemnification Agreement between Websense, Inc. and its officers
10.18(3)*	Officers’ Bonus Term Sheet
10.19(3)*	Non-Employee Directors Compensation Term Sheet
10.20(4)	Lease Agreement between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated April 19, 2002; First Amendment to Lease between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated October 1, 2002; Second Amendment to Lease between Websense, Inc. and Sorrento Valley Road LLC, dated April 30, 2003.
10.21(5)	Third Amendment to Lease between Websense, Inc. and Sorrento Valley Road LLC, dated July 30, 2004.

69

10.22	Fourth Amendment to Lease between Websense, Inc. and Sorrento Valley Road LLC, dated March 24, 2005
21.1	Subsidiaries of the Registrant
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
31.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
32.1	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(b) and 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) and 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the united States Code

*Indicates management contract or compensatory plan or arrangement.

(1)Previously filed as an exhibit to our Registration Statement on Form S-1 (Registration No. 333-95619) and incorporated herein by reference.

(2)Previously filed as an exhibit to our Form 8-K filed on January 11, 2006 and incorporated herein by reference.

(3)Previously filed as an exhibit to our Form 10-K for the period ended December 31, 2004 and incorporated herein by reference.

(4)Previously filed as an exhibit to our Form 10-Q for the period ended June 30, 2003 and incorporated herein by reference.

(5)Previously filed as an exhibit to our Form 10-Q for the period ended September 30, 2004 and incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

WEBSENSE, INC.
By:	/s/ DOUGLAS C. WRIDE
	Douglas C. Wride
	Chief Financial Officer

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

	Signature		Title		Date
/s/ GENE HODGES		Director, President and Chief Executive Officer		March 1, 2006
Gene Hodges		(principal executive officer)
/s/ DOUGLAS C. WRIDE		Chief Financial Officer (principal financial		March 1, 2006
Douglas C. Wride		and accounting officer)
/s/ JOHN B. CARRINGTON				March 1, 2006
John B. Carrington		Chairman of the Board
/s/ MARK ST.CLARE				March 1, 2006
Mark St.Clare		Director
/s/ BRUCE T. COLEMAN				March 1, 2006
Bruce T. Coleman		Director
/s/ JOHN SCHAEFER				March 1, 2006
John Schaefer		Director
/s/ GARY E. SUTTON				March 1, 2006
Gary E. Sutton		Director
/s/ PETER WALLER				March 1, 2006
Peter Waller		Director

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Schedule II—VALUATION AND QUALIFYING ACCOUNTS
WEBSENSE, INC.
(In thousands)

A	B			C						D				E
				Additions
Description	Balance at beginning of period			Charged to Costs and Expenses		Charged to Other Accounts- Describe				Deductions- Describe				Balance at End of Period
YEAR ENDED DECEMBER 31, 2003
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts		$	180		—		$	700	(2)		$	355	(1)		$	525
YEAR ENDED DECEMBER 31, 2004
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts		$	525		—		$	975	(2)		$	360	(1)		$	1,140
YEAR ENDED DECEMBER 31, 2005
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts		$	1,140		—		$	825	(2)		$	505	(1)		$	1,460

(1)Uncollectible accounts written off, net of recoveries.

(2)Amount represents reserve recorded as a reduction of deferred revenue and represents customer balances deemed uncollectible. The reserve is amortized as a reduction of revenue over the average life of all subscriptions.

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 EXHIBIT INDEX

Exhibit Number	Description of Document
3.1(1)	Amended and Restated Certificate of Incorporation
3.2(1)	Restated Bylaws
4.1(1)	Specimen Stock Certificate of Websense, Inc.
10.1(1)	Amended and Restated Registration Rights Agreement dated June 9, 1999
10.2(1)	Form of Subscription Agreement regarding Series B Preferred Stock
10.3(1)*	Employment Agreement by and between Websense, Inc. and John B. Carrington, dated May 10, 1999
10.4*	Amendment to Employment Agreement by and between Websense, Inc. and John B. Carrington, dated January 24, 2006
10.5(1)*	Employment Agreement by and between Websense, Inc. and Douglas C. Wride, dated June 11, 1999
10.6*	Amendment to Employment Agreement by and between Websense, Inc. and Douglas C. Wride, dated January 24, 2006
10.7(2)*	Employment Agreement by and between Websense, Inc. and Gene Hodges, dated January 9, 2006
10.8(1)*	1998 Equity Incentive Plan
10.9(1)*	Standard Terms and Conditions Relating to Incentive Stock Option Under the 1998 Equity Incentive Plan
10.10*	Amended and Restated 2000 Stock Incentive Plan
10.11(1)*	2000 Stock Incentive Plan, Notice of Grant of Stock Option
10.12(1)*	2000 Stock Incentive Plan, Form of Incentive Stock Option Agreement
10.13*	2000 Stock Incentive Plan, Form of Deferred Issuance Stock Issuance Agreement
10.14(1)*	2000 Employee Stock Purchase Plan
10.15*	Form of Non-Plan Inducement Stock Option Agreement for Gene Hodges dated January 9, 2006
10.16(1)	Form of Indemnification Agreement between Websense, Inc. and its directors
10.17(1)	Form of Indemnification Agreement between Websense, Inc. and its officers
10.18(3)*	Officers’ Bonus Term Sheet
10.19(3)*	Non-Employee Directors Compensation Term Sheet
10.20(4)	Lease Agreement between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated April 19, 2002; First Amendment to Lease between Websense, Inc. and Legacy-RECP Sorrento OPCO, LLC, dated October 1, 2002; Second Amendment to Lease between Websense, Inc. and Sorrento Valley Road LLC, dated April 30, 2003.
10.21(5)	Third Amendment to Lease between Websense, Inc. and Sorrento Valley Road LLC, dated July 30, 2004.
10.22	Fourth Amendment to Lease between Websense, Inc. and Sorrento Valley Road LLC, dated March 24, 2005
21.1	Subsidiaries of the Registrant
23.1	Consent of Independent Registered Public Accounting Firm

31.1	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
31.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
32.1	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(b) and 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) and 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the united States Code

*Indicates management contract or compensatory plan or arrangement.

(1)Previously filed as an exhibit to our Registration Statement on Form S-1 (Registration No. 333-95619) and incorporated herein by reference.

(2)Previously filed as an exhibit to our Form 8-K filed on January 11, 2006 and incorporated herein by reference.

(3)Previously filed as an exhibit to our Form 10-K for the period ended December 31, 2004 and incorporated herein by reference.

(4)Previously filed as an exhibit to our Form 10-Q for the period ended June 30, 2003 and incorporated herein by reference.

(5)Previously filed as an exhibit to our Form 10-Q for the period ended September 30, 2004 and incorporated herein by reference.

EX-10.4

Exhibit 10.4

January 24, 2006

VIA HAND DELIVERY

Dear John,

This letter agreement between you and Websense, Inc. (the “Company”) confirms an amendment to the terms of your employment agreement of May 10, 1999, between you and the Company (the “Employment Agreement”).  Under this letter agreement, a new paragraph “(m)” is hereby added to Section 4 of the Employment Agreement which paragraph reads as follows:

“(m)Notwithstanding the foregoing, if the Company determines that any cash severance payment benefit payable to you fails to satisfy the distribution requirement of Section 409A(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), as a result of Section 409A(a)(2)(B)(i) of the Code, then the payment schedule will be modified as follows:  If acceleration of the benefit will avoid application of Section 409(a)(1) of the Code, then the Company will accelerate the payment of the benefit to the minimum extent necessary so that the benefit is not subject to the provisions of Section 409A(a)(1) of the Code.  If acceleration of the benefit would not avoid the application of Section 409A(a)(1) of the Code, however, then the Company will delay the benefit to the minimum extent necessary so that the benefit is not subject to the provisions of Section 409A(a)(1) of the Code.  If any payments are delayed as a result of the previous sentence, all such delayed payments shall become payable in a lump sum on the first day they can be paid following the termination date.  Thereafter, payments will resume in accordance with the payment schedule set forth in this letter.  The Board may attach conditions to or adjust the severance amounts paid to preserve, as closely as possible, the economic consequences that would have applied in the absence of these requirements; provided, however, that no such condition or adjustment shall result in the payments being subject to Section 409A(a)(1) of the Code.”

If this amendment of the Employment Agreement is acceptable to you, please sign below and return one original to me.

Sincerely,

Gene Hodges

President and Chief Executive Officer

AGREED:

Date:	January 24, 2006
		John Carrington

EX-10.6

Exhibit 10.6

January 24, 2006

VIA HAND DELIVERY

Dear Doug,

This letter agreement between you and Websense, Inc. (the “Company”) confirms an amendment to the terms of your employment agreement of June 11, 1999, between you and the Company (the “Employment Agreement”).  Under this letter agreement, a new paragraph “(d)” is hereby added to Section 5 of the Employment Agreement which paragraph reads as follows:

“(d)Notwithstanding the foregoing, if the Company determines that any cash severance payment benefit payable to you fails to satisfy the distribution requirement of Section 409A(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), as a result of Section 409A(a)(2)(B)(i) of the Code, then the payment schedule will be modified as follows:  If acceleration of the benefit will avoid application of Section 409(a)(1) of the Code, then the Company will accelerate the payment of the benefit to the minimum extent necessary so that the benefit is not subject to the provisions of Section 409A(a)(1) of the Code.  If acceleration of the benefit would not avoid the application of Section 409A(a)(1) of the Code, however, then the Company will delay the benefit to the minimum extent necessary so that the benefit is not subject to the provisions of Section 409A(a)(1) of the Code.  If any payments are delayed as a result of the previous sentence, all such delayed payments shall become payable in a lump sum on the first day they can be paid following the termination date.  Thereafter, payments will resume in accordance with the payment schedule set forth in this letter.  The Board may attach conditions to or adjust the severance amounts paid to preserve, as closely as possible, the economic consequences that would have applied in the absence of these requirements; provided, however, that no such condition or adjustment shall result in the payments being subject to Section 409A(a)(1) of the Code.”

If this amendment of the Employment Agreement is acceptable to you, please sign below and return one original to me.

Sincerely,

Gene Hodges

President and Chief Executive Officer

AGREED:

Date:	January 24, 2006
		Douglas Wride

EX-10.10

Exhibit 10.10

WEBSENSE, INC.
AMENDED AND RESTATED
2000 STOCK INCENTIVE PLAN

ARTICLE ONE
GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

This 2000 Stock Incentive Plan is intended to promote the interests of Websense, Inc., a Delaware corporation, by providing eligible persons in the Corporation’s service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in such service.

Capitalized terms shall have the meanings assigned to such terms in the attached Appendix.

II. STRUCTURE OF THE PLAN

A.The Plan shall be divided into five separate equity incentives programs:

•the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock,

•the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special option grants,

•the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary),

•the Automatic Option Grant Program under which eligible non-employee Board members shall automatically receive option grants at designated intervals over their period of continued Board service, and

•the Director Fee Option Grant Program under which non-employee Board members may elect to have all or any portion of their annual retainer fee otherwise payable in cash applied to a special stock option grant.

B.The provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan.

III. ADMINISTRATION OF THE PLAN

A.The Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. Administration of the Discretionary Option Grant and Stock Issuance Programs

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with respect to all other persons eligible to participate in those programs may, at the Board’s discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. However, any discretionary option grants or stock issuances for members of the Primary Committee must be authorized by a disinterested majority of the Board.

B.Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee.

C.Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of those programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or any stock option or stock issuance thereunder.

D.The Primary Committee shall have the sole and exclusive authority to determine which Section 16 Insiders and other highly compensated Employees shall be eligible for participation in the Salary Investment Option Grant Program for one or more calendar years. However, all option grants under the Salary Investment Option Grant Program shall be made in accordance with the express terms of that program, and the Primary Committee shall not exercise any discretionary functions with respect to the option grants made under that program.

E.Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan.

F.Administration of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the terms of those programs, and no Plan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under those programs.

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IV. ELIGIBILITY

A.The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows:

(i)Employees,

(ii)non-employee members of the Board or the board of directors of any Parent or Subsidiary, and

(iii)consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).

B.Only Employees who are Section 16 Insiders or other highly compensated individuals shall be eligible to participate in the Salary Investment Option Grant Program.

C.Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine, (i) with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive such grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive such issuances, the time or times when the issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration for such shares.

D.The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program.

E.The individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to (i) those individuals who first become non-employee Board members on or after the Underwriting Date, whether through appointment by the Board or election by the Corporation’s stockholders, and (ii) those individuals who continue to serve as non-employee Board members at one or more Annual Stockholders Meetings held after the Underwriting Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant under the Automatic Option Grant Program at the time he or she first becomes a non-employee Board member, but shall be eligible to receive periodic option grants under the Automatic Option Grant Program while he or she continues to serve as a non-employee Board member.

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F.All non-employee Board members shall be eligible to participate in the Director Fee Option Grant Program.

V. STOCK SUBJECT TO THE PLAN

A.The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market.  The number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed 4,500,000 shares.  Such reserve shall consist of (i) the number of shares estimated to remain available for issuance, as of the Plan Effective Date, under the Predecessor Plan as last approved by the Corporation’s stockholders, including the shares subject to outstanding options under the Predecessor Plan, (ii) plus an additional increase of approximately 1,000,000 shares to be approved by the Corporation’s stockholders prior to the Underwriting Date.

B.The number of shares of Common Stock available for issuance under the Plan shall automatically increase on the first trading day of January each calendar year during the term of the Plan, beginning with calendar year 2001, by an amount equal to four percent (4%) of the total number of shares of Common Stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 1,500,000 shares.

C.No one person participating in the Plan may receive stock options, separately exercisable stock appreciation rights and direct stock issuances for more than 750,000 shares of Common Stock in the aggregate per calendar year.

D.Shares of Common Stock subject to outstanding options (including options incorporated into this Plan from the Predecessor Plan) shall be available for subsequent issuance under the Plan to the extent (i) those options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation at the original issue price paid per share, pursuant to the Corporation’s repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. Shares of Common Stock underlying one or more stock appreciation rights exercised under Section IV of Article Two, Section III of Article Three, Section II of Article Five or Section III of Article Six of the Plan shall NOT be available for subsequent issuance under the Plan.

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E.If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan, (v) the number and/or class of securities and exercise price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plan and (vi) the maximum number and/or class of securities by which the share reserve is to increase automatically each calendar year pursuant to the provisions of Section V.B of this Article One. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.

ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM

I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options.

A. EXERCISE PRICE.

1.The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

2.The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Seven and the documents evidencing the option, be payable in one or more of the forms specified below:

(i)cash or check made payable to the Corporation,

(ii)shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or

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(iii)to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.

Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

B.EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date.

C. EFFECT OF TERMINATION OF SERVICE.

1.The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death:

(i)Any option outstanding at the time of the Optionee’s cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term.

(ii)Any option held by the Optionee at the time of death and exercisable in whole or in part at that time may be subsequently exercised by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or by the Optionee’s designated beneficiary or beneficiaries of that option.

(iii)Should the Optionee’s Service be terminated for Misconduct or should the Optionee otherwise engage in Misconduct while holding one or more outstanding options under this Article Two, then all those options shall terminate immediately and cease to be outstanding.

(iv)During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or (if earlier)

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upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares.

2.The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to:

(i)extend the period of time for which the option is to remain exercisable following the Optionee’s cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or

(ii)permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee’s cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service.

D.STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares.

E.REPURCHASE RIGHTS. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right.

F.LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or the laws of inheritance following the Optionee’s death. Non-Statutory Options shall be subject to the same restriction, except that a Non-Statutory Option may be assigned in whole or in part during the Optionee’s lifetime to one or more members of the Optionee’s family or to a trust established exclusively for one or more such family members or to Optionee’s former spouse, to the extent such assignment is in connection with the Optionee’s estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to

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the assignee as the Plan Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Two, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee’s death.

II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Seven shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II.

A.ELIGIBILITY. Incentive Options may only be granted to Employees.

B.DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.

C.10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

A.In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. However, an outstanding option shall NOT become exercisable on such an accelerated basis if and to the extent: (i) such option is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Corporate

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Transaction on any shares for which the option is not otherwise at that time exercisable and provides for subsequent payout in accordance with the same exercise/vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant.

B.All outstanding repurchase rights shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.

C.Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).

D.Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year and (iv) the maximum number and/or class of securities by which the share reserve is to increase automatically each calendar year. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Discretionary Option Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction.

E.The Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall, immediately prior to the effective date of such Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to those options and may be exercised for any or all of those shares as fully vested shares of Common Stock, whether or not those options are to be assumed in the Corporate Transaction. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation’s repurchase rights under the Discretionary Option Grant Program so that those rights shall not be assignable in connection with such Corporate Transaction and

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shall accordingly terminate upon the consummation of such Corporate Transaction, and the shares subject to those terminated rights shall thereupon vest in full.

F.The Plan Administrator shall have full power and authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall become exercisable for all the shares of Common Stock at the time subject to those options in the event the Optionee’s Service is subsequently terminated by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed and do not otherwise accelerate. In addition, the Plan Administrator may structure one or more of the Corporation’s repurchase rights so that those rights shall immediately terminate with respect to any shares held by the Optionee at the time of his or her Involuntary Termination, and the shares subject to those terminated repurchase rights shall accordingly vest in full at that time.

G.The Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall, immediately prior to the effective date of a Change in Control, become exercisable for all the shares of Common Stock at the time subject to those options and may be exercised for any or all of those shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation’s repurchase rights under the Discretionary Option Grant Program so that those rights shall terminate automatically upon the consummation of such Change in Control, and the shares subject to those terminated rights shall thereupon vest in full. Alternatively, the Plan Administrator may condition the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program and the termination of one or more of the Corporation’s outstanding repurchase rights under such program upon the subsequent termination of the Optionee’s Service by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of such Change in Control.

H.The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Nonstatutory Option under the Federal tax laws.

I.The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from

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the Predecessor Plan) and to grant in substitution new options covering the same or a different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date.

V. STOCK APPRECIATION RIGHTS

A.The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights.

B.The following terms shall govern the grant and exercise of tandem stock appreciation rights:

(i)One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares.

(ii)No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate.

(iii)If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date.

ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM

I. OPTION GRANTS

The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years (if any) for which the Salary Investment Option Grant Program is to be in effect and to select the Section 16 Insiders and other highly compensated Employees eligible to

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participate in the Salary Investment Option Grant Program for such calendar year or years. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely authorization shall automatically be granted an option under the Salary Investment Grant Program on the first trading day in January of the calendar year for which the salary reduction is to be in effect.

II. OPTION TERMS

Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below.

A. EXERCISE PRICE.

1.The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date.

2.The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

B.NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number):

X = A / (B x 66-2/3%), where

X is the number of option shares,

A is the dollar amount by which the Optionee’s base salary is to be reduced for the calendar year pursuant to his or her election under the Salary Investment Option Grant Program, and

B is the Fair Market Value per share of Common Stock on the option grant date.

C.EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee’s completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date.

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D.EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease Service for any reason while holding one or more options under this Article Three, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Service. Should the Optionee die while holding one or more options under this Article Three, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee’s cessation of Service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or by the designated beneficiary or beneficiaries of the option. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee’s cessation of Service. However, the option shall, immediately upon the Optionee’s cessation of Service for any reason, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable.

III. CORPORATE TRANSACTION/
CHANGE IN CONTROL

A.In the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. Each such outstanding option shall terminate immediately following the Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed and shall remain exercisable for the fully vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee’s cessation of Service.

B.In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. The option shall remain so exercisable until the earliest to occur of (i) the expiration of the ten (10)-year option term, (ii) the expiration of the three (3)-year period measured from the date of the Optionee’s cessation of Service, or (iii) the termination of the option in connection with a Corporate Transaction.

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C.Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Salary Investment Option Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction.

D.The grant of options under the Salary Investment Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

IV. REMAINING TERMS

The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program.

ARTICLE FOUR
STOCK ISSUANCE PROGRAM

I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to share right awards which entitle the recipients to receive those shares upon the attainment of designated performance goals.

A. PURCHASE PRICE.

1.The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the issuance date.

2.Subject to the provisions of Section I of Article Seven, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of

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consideration which the Plan Administrator may deem appropriate in each individual instance:

(i)cash or check made payable to the Corporation, or

(ii)past services rendered to the Corporation (or any Parent or Subsidiary).

B. VESTING PROVISIONS.

1.Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant’s period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to share right awards which entitle the recipients to receive those shares upon the attainment of designated performance goals.

2.Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

3.The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.

4.Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant’s purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and

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shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares.

5.The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock which would otherwise occur upon the cessation of the Participant’s Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives.

6.Outstanding share right awards under the Stock Issuance Program shall automatically terminate, and no shares of Common Stock shall actually be issued in satisfaction of those awards, if the performance goals established for such awards are not attained. The Plan Administrator, however, shall have the discretionary authority to issue shares of Common Stock under one or more outstanding share right awards as to which the designated performance goals have not been attained.

II. CORPORATE TRANSACTION/CHANGE IN CONTROL

A.All of the Corporation’s outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement.

B.The Plan Administrator shall have the discretionary authority to structure one or more of the Corporation’s repurchase rights under the Stock Issuance Program so that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant’s Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights are assigned to the successor corporation (or parent thereof).

C.The Plan Administrator shall also have the discretionary authority to structure one or more of the Corporation’s repurchase rights under the Stock Issuance Program so that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant’s Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control.

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III. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.

ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM

I. OPTION TERMS

A.GRANT DATES. Option grants shall be made on the dates specified below:

1.Each individual who is first elected or appointed as a non-employee Board member at any time on or after the Underwriting Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 50,000 shares of Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent or Subsidiary.

2.On the date of each Annual Stockholders Meeting held after the Underwriting Date, each individual who is to continue to serve as a non-employee Board member, whether or not that individual is standing for re-election to the Board at that particular Annual Meeting, shall automatically be granted a Non-Statutory Option to purchase 2,500 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. There shall be no limit on the number of such 2,500-share option grants any one non-employee Board member may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) or who have otherwise received one or more stock option grants from the Corporation prior to the Underwriting Date shall be eligible to receive one or more such annual option grants over their period of continued Board service.

B. EXERCISE PRICE.

1.The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

2.The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

C.OPTION TERM. Each option shall have a term of ten (10) years measured from the option grant date.

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D.EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately exercisable for any or all of the option shares. However, any unvested shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee’s cessation of Board service prior to vesting in those shares. The shares subject to each initial 50,000-share grant shall vest, and the Corporation’s repurchase right shall lapse, in a series of four (4) successive equal annual installments upon the Optionee’s completion of each year of service as a Board member over the four (4)-year period measured from the option grant date. The shares subject to each annual 2,500-share option grant shall vest in one installment upon the Optionee’s completion of the one (1)-year period of service measured from the grant date.

E.LIMITED TRANSFERABILITY OF OPTIONS. Each option under this Article Five may be assigned in whole or in part during the Optionee’s lifetime to one or more members of the Optionee’s family or to a trust established exclusively for one or more such family members or to Optionee’s former spouse, to the extent such assignment is in connection with the Optionee’s estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. The Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Five, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee’s death.

F.TERMINATION OF BOARD SERVICE. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member:

(i)The Optionee (or, in the event of Optionee’s death, the personal representative of the Optionee’s estate or the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or the designated beneficiary or beneficiaries of such option) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option.

(ii)During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee’s cessation of Board service.

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(iii)Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully vested shares of Common Stock.

(iv)In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Board service for any reason other than death or Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares.

II. CORPORATE TRANSACTION/
CHANGE IN CONTROL

A.In the event of any Corporate Transaction while the Optionee remains a Board member, the shares of Common Stock at the time subject to each outstanding option under the Automatic Option Grant Program but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the option shares as fully vested shares of Common Stock and may be exercised for any or all of those vested shares. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).

B.In connection with any Change in Control while the Optionee remains a Board member, the shares of Common Stock at the time subject to each outstanding option under the Automatic Option Grant Program but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the option shares as fully vested shares of Common Stock and may be exercised for any or all of those vested shares. Each such option shall remain exercisable for such fully vested option shares until the earliest to occur of (i) the expiration of the ten (10)-year option term, (ii) the expiration of the twelve (12)-month period measured from the date of the Optionee’s cessation of Board service, or (iii) the termination of the option in connection with a Corporate Transaction.

C.All outstanding repurchase rights under the Automatic Option Grant Program shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction or Change in Control.

D.Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the

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number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Automatic Option Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction.

E.The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

III. REMAINING TERMS

The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program.

ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM

I. OPTION GRANTS

The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years for which the Director Fee Option Grant Program is to be in effect. For each such calendar year the program is in effect, each non-employee Board member may irrevocably elect to apply all or any portion of the annual retainer fee otherwise payable in cash for his or her service on the Board for that year to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation’s Chief Financial Officer prior to the first day of the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program on the first trading day in January in the calendar year for which the annual retainer fee which is the subject of that election would otherwise be payable in cash.

II. OPTION TERMS

Each option shall be a Non-Statutory Option governed by the terms and conditions specified below.

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A. EXERCISE PRICE.

1.The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date.

2.The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

B.NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number):

X = A / (B x 66-2/3%), where

X is the number of option shares,

A is the portion of the annual retainer fee subject to the non-employee Board member’s election under the Director Fee Option Grant Program, and

B is the Fair Market Value per share of Common Stock on the option grant date.

C.EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) equal monthly installments upon the Optionee’s completion of each calendar month of Board service during the calendar year for which the retainer fee election is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date.

D.LIMITED TRANSFERABILITY OF OPTIONS. Each option under this Article Six may be assigned in whole or in part during the Optionee’s lifetime to one or more members of the Optionee’s family or to a trust established exclusively for one or more such family members or to Optionee’s former spouse, to the extent such assignment is in connection with Optionee’s estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. The Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Six, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee’s death.

E.TERMINATION OF BOARD SERVICE. Should the Optionee cease Board service for any reason (other than death or Permanent Disability) while holding one or more options

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under this Director Fee Option Grant Program, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the Optionee under this Director Fee Option Grant Program at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable.

F.DEATH OR PERMANENT DISABILITY. Should the Optionee’s service as a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee under this Director Fee Option Grant Program shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. To the extent such option is held by the Optionee at the time of his or her death, that option may be exercised by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or by the designated beneficiary or beneficiaries of such option.

Should the Optionee die after cessation of Board service but while holding one or more options under this Director Fee Option Grant Program, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee’s cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or by the designated beneficiary or beneficiaries of such option. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
(3)-year period measured from the date of the Optionee’s cessation of Board service.

III. CORPORATE TRANSACTION/
CHANGE IN CONTROL

A.In the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. Each such outstanding option shall terminate immediately following the Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed and shall remain exercisable for the fully vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee’s cessation of Board service.

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B.In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. The option shall remain so exercisable until the earliest to occur of (i) the expiration of the ten (10)-year option term, (ii) the expiration of the three (3)-year period measured from the date of the Optionee’s cessation of Board service, or (iii) the termination of the option in connection with a Corporate Transaction.

C.Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Director Fee Option Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction.

D.The grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

IV. REMAINING TERMS

The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program.

ARTICLE SEVEN
MISCELLANEOUS

I. FINANCING

The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest-bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion.

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In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares (less the par value of such shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase.

II. TAX WITHHOLDING

A.The Corporation’s obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements.

B.The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant or Director Fee Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the Withholding Taxes to which such holders may become subject in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats:

(i)Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder.

(ii)Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Withholding Taxes) with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder.

III. EFFECTIVE DATE AND TERM OF THE PLAN

A.The Plan shall become effective immediately on the Plan Effective Date. However, the Salary Investment Option Grant Program and the Director Fee Option Grant Program shall not be implemented until such time as the Primary Committee may deem appropriate. Options may be granted under the Discretionary Option Grant at any time on or after the Plan Effective Date, and the initial option grants under the Automatic Option Grant Program shall also be made on the Plan Effective Date to any non-employee Board members eligible for such grants at that time. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation’s stockholders. If such stockholder approval is not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted

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under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan.

B.The Plan shall serve as the successor to the Predecessor Plan, and no further option grants or direct stock issuances shall be made under the Predecessor Plan after the Plan Effective Date. All options outstanding under the Predecessor Plan on the Plan Effective Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock.

C.One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Corporate Transactions and Changes in Control, may, in the Plan Administrator’s discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise contain such provisions.

D.The Plan shall terminate upon the earliest to occur of (i) January 31, 2010, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Should the Plan terminate on January 31, 2010, then all option grants and unvested stock issuances outstanding at that time shall continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances.

IV. AMENDMENT OF THE PLAN

A.The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws or regulations.

B.Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess

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shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding.

V. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes.

VI. REGULATORY APPROVALS

A.The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it.

B.No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading.

VII. NO EMPLOYMENT/SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause.

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APPENDIX

The following definitions shall be in effect under the Plan:

A.AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant program in effect under Article Five of the Plan.

B.BOARD shall mean the Corporation’s Board of Directors.

C.CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through either of the following transactions:

(i)the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders, or

(ii)a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination.

D.CODE shall mean the Internal Revenue Code of 1986, as amended.

E.COMMON STOCK shall mean the Corporation’s common stock.

F.CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party:

(i)a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or

(ii)the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation.

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G.CORPORATION shall mean Websense, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of Websense, Inc. which shall by appropriate action adopt the Plan.

H.DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option grant in effect for non-employee Board members under Article Six of the Plan.

I.DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect under Article Two of the Plan.

J.EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

K.EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise.

L.FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

(i)If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(ii)If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(iii)For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offering pursuant to the Underwriting Agreement.

M.INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422.

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N.INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of:

(i)such individual’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

(ii)such individual’s voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual’s consent.

O.MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary).

P.1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

Q.NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422.

R.OPTIONEE shall mean any person to whom an option is granted under the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option Grant or Director Fee Option Grant Program.

S.PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

T.PARTICIPANT shall mean any person who is issued shares of Common Stock under the Stock Issuance Program.

U.PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by

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reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more.

V.PLAN shall mean the Corporation’s 2000 Stock Incentive Plan, as set forth in this document.

W.PLAN ADMINISTRATOR shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction.

X.PLAN EFFECTIVE DATE shall mean the date the Plan shall become effective and shall be coincident with the Underwriting Date.

Y.PREDECESSOR PLAN shall mean the Corporation’s 1998 Equity Incentive Plan in effect immediately prior to the Plan Effective Date hereunder.

Z.PRIMARY COMMITTEE shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and to administer the Salary Investment Option Grant Program solely with respect to the selection of the eligible individuals who may participate in such program.

AA.SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary investment option grant program in effect under Article Three of the Plan.

BB.SECONDARY COMMITTEE shall mean a committee of one or more Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders.

CC.SECTION 16 INSIDER shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act.

DD.SERVICE shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance.

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EE.STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange.

FF.STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program.

GG.STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under Article Four of the Plan.

HH.SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

II.10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).

JJ.UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock.

KK.UNDERWRITING DATE shall mean the date on which the Underwriting Agreement is executed and priced in connection with an initial public offering of the Common Stock.

LL.WITHHOLDING TAXES shall mean the Federal, state and local income and employment withholding taxes to which the holder of Non-Statutory Options or unvested shares of Common Stock may become subject in connection with the exercise of those options or the vesting of those shares.

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EX-10.13

Exhibit 10.13

WEBSENSE, INC.
DELAYED ISSUANCE STOCK ISSUANCE AWARD GRANT NOTICE
(2000 Stock Incentive Plan)

Websense, Inc. (the “Corporation”), pursuant to its 2000 Stock Incentive Plan of Websense, Inc. (the “Plan”), hereby awards to Employee a right to purchase the number of shares of Common Stock (the “Shares”) set forth below (the “Award”).  This Award shall be evidenced by a Delayed Issuance Stock Issuance Award Agreement (the “Award Agreement”). This Award is subject to all of the terms and conditions as set forth herein and in the applicable Award Agreement, the Plan, and the Employee’s Delayed Issuance Stock Issuance Award Election Agreement (the “Election Agreement”), all of which are attached hereto and incorporated herein in their entirety.

Employee:
Date of Grant:
Number of Shares subject to Award:
Consideration:	Participant’s Services

Vesting Schedule:The Shares subject to this Award will vest in accordance with the following schedule:

The Award shall vest with respect to ¹/₄ of the Shares on each of the first, second, third and fourth anniversaries of the Date of Grant.

In the event the Corporation terminates Employee’s employment other than for Cause (as defined in the Award Agreement), or Employee resigns his employment for Good Reason (as defined in the Award Agreement), contingent upon the Employee providing the Corporation with a fully-effective waiver and release of claims in a form satisfactory to the Corporation, the Award will be fully vested.

Additional Terms/Acknowledgements:  The undersigned acknowledges receipt of, and understands and agrees to, this Grant Notice, the Award Agreement and the Plan.  Employee further acknowledges that as of the Date of Grant, this Grant Notice, the Award Agreement, the Election Agreement and the Plan set forth the entire understanding between Employee and the Corporation regarding the acquisition of Shares and supersede all prior oral and written

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agreements on that subject with the exception of (i) awards previously granted and delivered to Employee under the Plan, and (ii) the following agreements only:

OTHER AGREEMENTS:

WEBSENSE, INC.	EMPLOYEE:
By:
Signature	Signature
Title:	Date:
Date:

ATTACHMENTS:  Award Agreement, Election Agreement, and 2000 Stock Incentive Plan of Websense, Inc.

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ATTACHMENT I
AWARD AGREEMENT

ATTACHMENT II
ELECTION AGREEMENT

WEBSENSE, INC.

DELAYED ISSUANCE STOCK ISSUANCE AWARD AGREEMENT

Pursuant to the Delayed Issuance Stock Issuance Award Grant Notice (“Grant Notice”) and this Delayed Issuance Stock Issuance Award Agreement (“Award Agreement”), Websense, Inc. (the “Corporation”) has awarded you a Delayed Issuance Stock Issuance right pursuant to Article 4 of the Websense, Inc. 2000 Stock Incentive Plan (the “Plan”) for the number of shares of Common Stock (the “Shares”) as indicated in the Grant Notice (collectively, the “Award”).  Defined terms not explicitly defined in this Award Agreement but defined in the Plan shall have the same definitions as in the Plan.

The details of your Award are as follows.

1.CONSIDERATION.   Consideration for this Award is satisfied by your services to the Corporation.

2.VESTING.  Subject to the limitations contained herein, your Award shall vest as provided in the Grant Notice, provided that vesting shall cease upon the termination of your Service.  Any Shares covered by this Award Agreement that have not vested shall be forfeited upon the termination of your Service.  Notwithstanding the foregoing, if you elect to defer receipt of the shares pursuant to Section 4 of this Award Agreement, then any shares subject to this Award that would otherwise vest within the 12-month period following the date of such election shall instead vest on the date that is 12 months following the date of your election to defer.

3.DIVIDENDS.  You shall be entitled to receive cash payments equal to any cash dividends and other distributions paid with respect to a corresponding number of Shares covered by your Award, provided that if any such dividends or distributions are paid in Shares, the Fair Market Value of such Shares shall be converted into additional Shares covered by the Award, and further provided that such additional Shares shall be subject to the same forfeiture restrictions and restrictions on transferability as apply to the Awards with respect to which they relate.

4.DISTRIBUTION OF SHARES OF COMMON STOCK.  The Corporation shall deliver to you a number of Shares of the Corporation’s Stock equal to the number of vested Shares subject to your Award, including any additional Shares received pursuant to Section 3 above, on the vesting date or dates provided in your Grant Notice; provided however, that if the first vesting date occurs no sooner than 12 months following the Date of Grant specified in your Grant Notice and if, within the 30-day period following the Date of Grant indicated on your Grant Notice, you elect to defer delivery of such Shares beyond the vesting date, then the Corporation will deliver the Shares to you on the date or dates that you so elect (the “Settlement Date”).  If such deferral election is made, the Board (or appropriate committee thereof) shall, in its sole discretion, establish the rules and procedures for such payment deferrals, including, without limitation, rules

and procedures as may be required to cause the delivery of Shares to comply with the distribution requirements of Section 409A of the Code.

5.EFFECT OF CHANGE IN CONTROL.  If (a) within the eighteen (18) months immediately following a Change in Control your employment is terminated by the Corporation or any successor or assign without Cause or you resign your employment for Good Reason or (ii) the Corporation terminates your employment without Cause during the pendency of a merger agreement or tender offer which would result in a Change in Control, contingent upon you providing the Corporation with a fully-effective waiver and release of claims in a form satisfactory to the Corporation, this Award shall become immediately and fully vested.  For purposes of this Award Agreement, the following definitions shall apply:

(a)“Cause” for termination shall mean a termination of your employment by the Corporation based upon a good faith determination by the Board that one or more of the following has occurred: (a) your commission of a material act of fraud with respect to the Corporation, (b) your intentional refusal or willful failure to carry out the reasonable instructions of the Board, (c) your conviction of, or plea of nolo contendere to, at any time, a misdemeanor crime of moral turpitude or a felony (even if such has occurred prior to your employment with the Corporation), (d) your gross misconduct in connection with the performance of your duties, or (e) your material breach of your obligations to the Corporation or any agreement between you and the Corporation.

(b)“Change in Control” shall mean shall mean any of the following:

(i)the acquisition by any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than by the Corporation or any affiliate thereof or any affiliate of a shareholder of the Corporation immediately prior to such acquisition, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the combined voting power or economic interests of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors;

(ii)a change in the composition of the Board occurring within a twenty-four month period, as a result of which fewer than a majority of the directors of the Board are Incumbent Directors;

(iii)a reorganization, merger, or consolidation, in each case, with respect to which all or substantially all of the persons that were the respective beneficial owners of the voting securities of the Corporation immediately prior to such reorganization, merger, or consolidation do not, following such reorganization, merger, or consolidation, beneficially own, directly or indirectly, more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Corporation resulting from such reorganization, merger, or consolidation; or

(iv)the sale or other disposition of all or substantially all of the assets of the Corporation in one transaction or series of related transactions.

(v)Notwithstanding the foregoing, a Change in Control shall not be deemed to occur because a majority or more of the outstanding voting securities of the Corporation is acquired by (a) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Corporation or any of its affiliates, or (b) any person that, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Corporation in approximately the same proportion as their ownership of stock in the Corporation immediately prior to such acquisition.

(c)“Good Reason” shall mean your resignation within ninety (90) days of the occurrence of any one or more of the following events without your written consent, provided that you comply with a reasonable Good Reason process providing the Corporation with an opportunity to cure the alleged Good Reason: (a) a material reduction in your base salary and/or target bonus other than in connection with a Corporation-wide reduction in executive compensation, (b) a material reduction in your benefits, other than in connection with a Corporation-wide reduction in executive benefits, (c) a material and significant reduction in your authority, title and/or duties without Sufficient Basis, (d) a requirement that you relocate more than thirty-five (35) miles from your then-current office location. Notwithstanding the foregoing sentence, your receipt of less bonus or no bonus as a result of not meeting the relevant goals for a bonus is not a Good Reason.

(d)“Incumbent Directors” shall mean members of the Board who are (a) members of the Board as of the date hereof, or (b) elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination.

(e)“Sufficient Basis” shall mean a reassignment or reduction in duties as a result of disciplinary action based upon serious violation of Corporation policy or violation of an agreement between you and the Corporation.

6.CERTAIN ADJUSTMENTS.  In the event of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other event which the Board deems, in its sole discretion, to be similar circumstances, the Board (or appropriate committee thereof) may make such adjustments to the number and/or kind of shares of stock or securities subject to this Award and any other provision of this Award affected by such change, as the Board may determine in its sole discretion.

7.COMPLIANCE WITH LAW.  Under no circumstances shall Shares or other assets be issued or delivered to you pursuant to the provisions of this Award Agreement unless, in the opinion of counsel for the Corporation or its successors, there shall have been compliance with all applicable requirements of Federal and state securities laws, all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is at the time listed for trading and all other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery.

8.RESTRICTIVE LEGENDS.  The Shares issued under your Award shall be endorsed with appropriate legends, if any, determined by the Corporation.

9.TRANSFERABILITY.  Your Award is not transferable, except by will or by the laws of inheritance.  Notwithstanding the foregoing, by delivering written notice to the Corporation, in a form satisfactory to the Corporation, you may designate a third party who, in the event of your death, shall thereafter be entitled to receive any distribution of Shares pursuant to Section 4 of this Award Agreement.

10.AT WILL EMPLOYMENT.  Nothing in this Award Agreement or in the Plan shall confer upon you any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way your rights, or the rights of the Corporation (or any Parent or Subsidiary employing or retaining you), which rights are hereby expressly reserved by each, to terminate your Service at any time for any reason, with or without cause.

11.UNSECURED OBLIGATION.  Your Award is unfunded, and as a holder of vested Award, you shall be considered an unsecured creditor of the Corporation with respect to the Corporation’s obligation, if any, to issue Shares pursuant to this Award Agreement.  You shall not have voting or any other rights as a stockholder of the Corporation with respect to the Shares purchased pursuant to this Award Agreement until such Shares are issued to you pursuant to Section 4 of this Award Agreement.   Upon such issuance, you will obtain full voting and other rights as a stockholder of the Corporation.  Nothing contained in this Award Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Corporation or any other person.

12.WITHHOLDING OBLIGATIONS.

(a)On or before the time you receive a distribution of Shares pursuant to your Award, or at any time thereafter as requested by the Corporation, you hereby authorize any required withholding from, at the Corporation’s election, the Shares,  payroll and any other amounts payable to you and otherwise agree to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Corporation or a Subsidiary, if any, which arise in connection with your Award.

(b)Unless the tax withholding obligations of the Corporation and/or any Subsidiary are satisfied, the Corporation shall have no obligation to issue a certificate for such Shares.

13.NOTICES.  Any notice required to be given under this Award Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice at the address indicated below such party’s signature line on this Award Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph to all other parties to this Award Agreement.

14.HEADINGS.  The headings of the Sections in this Award Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Award Agreement or to affect the meaning of this Award Agreement.

15.AMENDMENT.  This Award Agreement may be amended only by a writing executed by the Corporation and you which specifically states that it is amending this Award Agreement. Notwithstanding the foregoing, this Award Agreement may be amended solely by the Board (or appropriate committee thereof) by a writing which specifically states that it is amending this Award Agreement, so long as a copy of such amendment is delivered to you, and provided that no such amendment adversely affecting your rights hereunder may be made without your written consent. Without limiting the foregoing, the Board (or appropriate committee thereof) reserves the right to change, by written notice to you, the provisions of this Award Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such change shall be applicable only to rights relating to that portion of the Delayed Issuance Stock Purchase which is then subject to restrictions as provided herein.

16.MISCELLANEOUS.

(a)The rights and obligations of the Corporation under your Award shall be transferable by the Corporation to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Corporation’s successors and assigns.

(b)You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Corporation to carry out the purposes or intent of your Award.

(c)You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.

(d)This Award Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

(e)All obligations of the Corporation under the Plan and this Award Agreement shall be binding on any successor to the Corporation, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Corporation.

17.GOVERNING PLAN DOCUMENT.  Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan.  In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control; provided, however, that Section 4 of this Award Agreement shall govern the timing of any distribution of Shares under your Award; and provided further, however, that Section 5 of this Award Agreement shall govern the timing of any such distribution in the event of a Change in

Control.  The Board (or appropriate committee thereof) shall have the power to interpret the Plan and this Award Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Board (or appropriate committee thereof) shall be final and binding upon you, the Corporation, and all other interested persons. No member of the Board or committee of the Board shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Award Agreement.

18.EFFECT ON OTHER EMPLOYEE BENEFIT PLANS.  The value of the Delayed Issuance Stock Issuance Award subject to this Award Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating the Employee’s benefits under any employee benefit plan sponsored by the Corporation or any Subsidiary except as such plan otherwise expressly provides. The Corporation expressly reserves its rights to amend, modify, or terminate any of the Corporation’s or any Subsidiary’s employee benefit plans.

19.GOVERNING LAW.  This Award Agreement shall be governed by, and construed in accordance with, the laws of the State of California without resort to that State’s conflict-of-laws rules.

20.SEVERABILITY.  If all or any part of this Award Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Award Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Award Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

IN WITNESS WHEREOF, the parties have executed and delivered this Award Agreement effective as of the day and set forth below.

WEBSENSE, INC.

By:

Title:

Date:

EMPLOYEE

Signature

Address:

Date:

WEBSENSE, INC.

DELAYED ISSUANCE STOCK ISSUANCE AWARD ELECTION AGREEMENT

Please complete this Election Agreement and return a signed copy to                   ,    [Title]    of Websense, Inc. (the “Corporation”) by                , 200   .

NOTE:  THIS ELECTION AGREEMENT MUST BE COMPLETED AND RETURNED WITHIN 30 DAYS OF THE DATE OF GRANT AS INDICATED ON YOUR DELAYED ISSUANCE STOCK ISSUANCE AWARD GRANT NOTICE (THE “GRANT NOTICE”).  IF THE FIRST VESTING DATE OCCURS NO SOONER THAN 12 MONTHS FOLLOWING THE DATE OF GRANT AND IF, WITHIN THE 30-DAY PERIOD FOLLOWING THE DATE OF GRANT INDICATED ON YOUR GRANT NOTICE, YOU ELECT TO DEFER DELIVERY OF SUCH SHARES BEYOND THE VESTING DATE, THEN THE CORPORATION WILL DELIVER THE SHARES TO YOU ON THE DATE OR DATES THAT YOU ELECT.  IN ADDITION, ANY SHARES SUBJECT TO THE AWARD THAT WOULD OTHERWISE VEST WITHIN THE 12-MONTH PERIOD FOLLOWING THE DATE OF SUCH ELECTION SHALL INSTEAD VEST ON THE DATE THAT IS 12 MONTHS FOLLOWING THE DATE OF YOUR ELECTION TO DEFER.

Defined terms not explicitly defined in this Election Agreement but defined in the Plan, your Delayed Issuance Stock Issuance Award Agreement or your Grant Notice shall have the same definitions as in such documents.

Name: SS #:

INSTRUCTIONS

In making this election, the following rules apply:

•You may elect a Settlement Date that occurs after the date of vesting.  The “Settlement Date” is the date as of which you will receive the vested Shares associated with the Delayed Issuance Stock Issuance Award that you elected to defer below.  Unless you timely elect otherwise on this Election Agreement, the Shares will be issued to you on the date or dates upon which they vest as indicated on your Grant Notice.

•This Election Agreement is irrevocable.

DEFERRAL ELECTION

I hereby irrevocably elect to defer receipt of the Shares associated with the above-referenced Delayed Issuance Stock Issuance Award until the following date(s) and in the following increment(s).  I acknowledge that only vested Shares will be issued to me and that the Settlement Date may occur after vesting.   (CHOOSE ONE ALTERNATIVE BELOW)

ALTERNATIVE #1 (ON VESTING DATE):

¨I elect to have my vested Shares issued to me on the vesting date(s) indicated on my Grant Notice.

ALTERNATIVE #2 (SPECIFIED EVENT – CHECK ONE BOX):

I elect to have my vested Shares issued to me on the following event (check boxes that apply):

¨days following my termination of Service

¨Upon the earlier of a Change in Control or        days following my termination of Service

ALTERNATIVE #3:  (SPECIFIED DATE(S) — CHECK BOXES THAT APPLY)

A.	¨
		Number		Month	Day	Year
B.	¨
		Number		Month	Day	Year
C.	¨
		Number		Month	Day	Year
D.	¨
		Number		Month	Day	Year
E.	¨	Notwithstanding the election that I made in A-D above, I elect to have my vested Shares issued to me on the following date, in the event such date occurs prior to the date(s) selected above (check boxes that apply):
		¨	days following my termination of Service
		¨	Immediately upon a Change in Control
		¨	Upon the earlier of a Change in Control or       days following my termination of Service

•If no Settlement Date is elected, then the issuance of vested Shares will occur upon the vesting date(s) indicated on your Grant Notice.

•Notwithstanding any provision in this Election Form or your Grant Notice, Award Agreement or the Plan to the contrary, the issuance of the vested Shares shall be made in a manner that complies with the requirements of Code Section 409A, which may include, without limitation, deferring the payment of such benefit for six (6) months after your termination of Service, provided however, that nothing in this paragraph shall require the payment of benefits to you earlier than they would otherwise be payable under the Award.

•If a calendar year only is elected, but not a specific day or month, then the issuance of the vested Shares will occur upon the earliest date in the calendar year when you may sell the shares on the open market without violating the Corporation’s insider trading policy or the Corporation’s window trading policy.

Manner of Transfer

All of the Shares you are entitled to receive on the Settlement Date specified in this Election Agreement will be transferred to you on or as soon as practicable after such Settlement Date.

Terms and Conditions

By signing this form, you hereby acknowledge your understanding and acceptance of the following:

l.Corporation Right to Early Transfer.  Notwithstanding any election made herein, the Corporation or any Subsidiary reserves the right to transfer to you all of the vested and then unissued Shares associated with the Delayed Issuance Stock Issuance Award subject to this Election Agreement at any time following the termination of your employment with the Corporation or any Subsidiary.

2.Withholding.  The Corporation shall have the right to deduct from all deferrals or payments hereunder, any federal, state, or local tax required by law to be withheld.

3.Nonassignable.  Your rights and interests under this Election Agreement may not be assigned, pledged, or transferred by you other than as provided in the 2000 Stock Incentive Plan of Websense, Inc.

4.Bookkeeping Account.  The Corporation will establish a bookkeeping account to reflect the number of Shares that you acquired pursuant to your Delayed Issuance Stock Issuance Award and the Fair Market Value of such Shares that are subject to this Election Agreement.

5.Stock Certificates.  Share certificates (each, a “Certificate”) evidencing the issuance of the Shares pursuant to your Delayed Issuance Stock Issuance Award shall be issued to you as of the applicable Settlement Dates (or such earlier date payment is to be made pursuant to this Election Agreement) and shall be registered in your name. Subject to the withholding requirements outlined above, Certificates representing the unrestricted Shares will be delivered to you as soon as practicable after the Settlement Date.

6.Change in Control.  As used in this Election Agreement, “Change in Control” shall have the meaning contained in the Award Agreement; provided however, that a distribution upon a Change in Control shall only occur if such distribution complies with the distribution requirements of Code Section 409A and the regulations promulgated thereunder.

7.Governing Law.  This Agreement shall be construed and administered according to the laws of the State of California.

By executing this Election Agreement, I hereby acknowledge my understanding of and agreement with all the terms and provisions set forth in this Election Agreement.

EMPLOYEE	WEBSENSE, INC.
	By:
	Name:
	Title:
Date:	Date:

EX-10.15

Exhibit 10.15

WEBSENSE, INC.

NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following option grant (the “Option”) to purchase shares of the Common Stock of Websense, Inc. (the “Corporation”):

Optionee:  Vernon Gene Hodges

Grant Date:  January 9, 2006

Vesting Commencement Date:  January 9, 2006

Exercise Price:  $          per share

Number of Option Shares:            shares

Expiration Date:

Type of Option:  Non-Statutory Stock Option

Exercise Schedule:  The Option shall become exercisable for twenty-five percent (25%) of the Option Shares upon Optionee’s completion of                      year(s) of Service measured from the Vesting Commencement Date and shall become exercisable for the balance of the Option Shares in a series of thirty-six (36) successive equal monthly installments upon Optionee’s completion of each additional month of Service over the thirty-six (36) month period measured from the first anniversary of the Vesting Commencement Date.

In the event the Corporation terminates Optionee’s employment other than for Cause, or Optionee resigns his employment for Good Reason, contingent upon Optionee providing the Corporation with a fully-effective waiver and release of claims in a form satisfactory to the Corporation, the vesting of the Option Shares that are not vested at the time of such termination or resignation shall be accelerated such that the Option Shares that would have vested if Optionee had remained continuously employed by the Corporation for a period of twelve (12) months following the date of such termination or resignation shall be vested.

Except as provided above, in no event shall the Option become exercisable for any additional Option Shares after Optionee’s cessation of Service.

Optionee understands and agrees that the Option is granted subject to and in accordance with and further agrees to be bound by the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A. Optionee hereby acknowledges the receipt of a copy of the official prospectus for the Option in the form attached hereto as Exhibit B.

Employment at Will. Nothing in this Notice or in the attached Stock Option Agreement shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or without cause.

Definitions. Except as otherwise specified herein, all capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Stock Option Agreement.

DATED:
	WEBSENSE, INC.
	By:
	Title:
	OPTIONEE
	Address:

ATTACHMENTS
Exhibit A - Stock Option Agreement
Exhibit B – Option Summary and Prospectus

EXHIBIT A

STOCK OPTION AGREEMENT

EXHIBIT B

OPTION SUMMARY AND PROSPECTUS

Non-Plan Inducement Grant

WEBSENSE, INC.

STOCK OPTION AGREEMENT

RECITALS

A.Optionee has not previously been an employee or a non-employee member of the Corporation’s Board.

B.Consistent with Nasdaq Marketplace Rule 4350(i)(1)(A)(iv), the Corporation has  made the promise of a stock option to Optionee as an inducement material to Optionee’s entering into Service with the Corporation.

C.Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Corporation’s grant of an option to Optionee.

D.All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1.Grant of Option. The Corporation hereby grants to Optionee, as of the Grant Date, a Non-Statutory Option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price.

2.Option Term. This option shall expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6.

3.Limited Transferability.

(a)This option shall be neither transferable nor assignable by Optionee other than by will or the laws of inheritance following Optionee’s death and may be exercised, during Optionee’s lifetime, only by Optionee. However, Optionee may  designate one or more persons as the beneficiary or beneficiaries of this option, and this option shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding this option. Such beneficiary or beneficiaries shall take the transferred option subject to all the terms and conditions of this Agreement, including (without limitation) the limited time period during which this option may, pursuant to Paragraph 5, be exercised following Optionee’s death.

(b)In addition, to the extent that such action is permitted by the Board and is consistent with applicable securities laws, this option may be assigned in whole or in part during Optionee’s lifetime to one or more members of Optionee’s family or to a trust established

for the exclusive benefit of one or more such family members or to Optionee’s former spouse, to the extent such assignment is in connection with the Optionee’s estate plan or pursuant to a domestic relations order. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment.

4.Dates of Exercise. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate, and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6.

5.Cessation of Service. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable:

(a)Should Optionee cease to remain in Service for any reason (other than death, Permanent Disability or Misconduct) while holding this option, then Optionee shall have a period of three (3) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date.

(b)Should Optionee die while holding this option, then the personal representative of Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s will or the laws of inheritance shall have the right to exercise this option. However, if Optionee has designated one or more beneficiaries of this option, then those persons shall have the exclusive right to exercise this option following Optionee’s death. Any such right to exercise this option shall lapse, and this option shall cease to be outstanding, upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee’s death or (ii) the Expiration Date.

(c)Should Optionee cease Service by reason of Permanent Disability while holding this option, then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option. In no event shall this option be exercisable at any time after the Expiration Date.

(d)During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of Option Shares for which the option is exercisable at the time of Optionee’s cessation of Service. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any exercisable Option Shares for which the option has not been exercised. However, this option shall, immediately upon Optionee’s cessation of Service for any reason, terminate and cease to be outstanding with respect to any Option Shares for which this option is not otherwise at that time exercisable.

2

(e)Should Optionee’s Service be terminated for Misconduct or should Optionee otherwise engage in any Misconduct while this option is outstanding, then this option shall terminate immediately and cease to remain outstanding.

6.Special Acceleration of Option. If (a) within the eighteen (18) months immediately following a Change in Control your employment is terminated by the Corporation or any successor or assign without Cause or you resign your employment for Good Reason or (ii) the Corporation terminates your employment without Cause during the pendency of a merger agreement or tender offer which would result in a Change in Control, contingent upon you providing the Corporation with a fully-effective waiver and release of claims in a form satisfactory to the Corporation, this option, to the extent outstanding at the time of a Change in Control but not otherwise fully exercisable, shall automatically accelerate so that this option shall, immediately prior to the Change in Control, become exercisable for all of the Option Shares at the time subject to this option and may be exercised for any or all of those Option Shares as fully vested shares of Common Stock. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

7.Adjustment in Option Shares. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

8.Stockholder Rights. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares.

9.Manner of Exercising Option.

(a)In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions:

(i)Execute and deliver to the Corporation a Notice of Exercise for the Option Shares for which the option is exercised.

(ii)Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms:

(A)cash or check made payable to the Corporation;

3

(B)shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid an additional charge to the Corporation’s earnings for financial reporting purposes over that recognized at the date of grantand valued at Fair Market Value on the Exercise Date; or

(C)if previously authorized by the Board, in its sole discretion, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable instructions (i) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (ii) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.

Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Notice of Exercise delivered to the Corporation in connection with the option exercise.

(iii)Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option.

(iv)Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise.

(b)As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto.

(c)In no event may this option be exercised for any fractional shares.

10.Compliance with Laws and Regulations.

(a)The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance.

4

(b)The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals.

11.Successors and Assigns. Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee’s assigns, the legal representatives, heirs and legatees of Optionee’s estate and any beneficiaries of this option designated by Optionee.

12.Notices. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

13.Construction. All decisions of the Board with respect to any question or issue arising under this Agreement shall be conclusive and binding on all persons having an interest in this option.

14.Governing Law. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State’s conflict-of-laws rules.

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EXHIBIT I

NOTICE OF EXERCISE

I hereby notify Websense, Inc. (the “Corporation”) that I elect to purchase                              shares of the Corporation’s Common Stock (the “Purchased Shares”) at the option exercise price of $                          per share (the “Exercise Price”) pursuant to that certain option (the “Option”) granted to me on                                     ,               .

Concurrently with the delivery of this Exercise Notice to the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation (or other documents) evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. Alternatively, if previously authorized by the Board, in its sole discretion, I may utilize the special broker-dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price.

                                            ,               

Date

	Optionee
	Address:
Print name in exact manner it is to appear on the stock certificate:
Address to which certificate is to be sent, if different from address above:
Social Security Number:

APPENDIX

The following definitions shall be in effect under the Agreement:

A.Agreement shall mean this Stock Option Agreement.

B.Board shall mean the Corporation’s Board of Directors.

C.Cause for termination shall mean a termination of your employment by the Corporation based upon a good faith determination by the Board that one or more of the following has occurred: (a) your commission of a material act of fraud with respect to the Corporation, (b) your intentional refusal or willful failure to carry out the reasonable instructions of the Board, (c) your conviction of, or plea of nolo contendere to, at any time, a misdemeanor crime of moral turpitude or a felony (even if such has occurred prior to your employment with the Corporation), (d) your gross misconduct in connection with the performance of your duties, or (e) your material breach of your obligations to the Corporation or any agreement between you and the Corporation.

D.Change in Control shall mean shall mean any of the following:

(i)the acquisition by any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than by the Corporation or any affiliate thereof or any affiliate of a shareholder of the Corporation immediately prior to such acquisition, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the combined voting power or economic interests of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors;

(ii)a change in the composition of the Board occurring within a twenty-four month period, as a result of which fewer than a majority of the directors of the Board are Incumbent Directors;

(iii)a reorganization, merger, or consolidation, in each case, with respect to which all or substantially all of the persons that were the respective beneficial owners of the voting securities of the Corporation immediately prior to such reorganization, merger, or consolidation do not, following such reorganization, merger, or consolidation, beneficially own, directly or indirectly, more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the Corporation resulting from such reorganization, merger, or consolidation; or

(iv)the sale or other disposition of all or substantially all of the assets of the Corporation in one transaction or series of related transactions.

(v)Notwithstanding the foregoing, a Change in Control shall not be deemed to occur because a majority or more of the outstanding voting securities of the Corporation is acquired by (a) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Corporation or any of its affiliates, or (b) any person that, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Corporation in approximately the same proportion as their ownership of stock in the Corporation immediately prior to such acquisition.

E.Common Stock shall mean shares of the Corporation’s common stock.

F.Code shall mean the Internal Revenue Code of 1986, as amended.

G.Corporation shall mean Websense, Inc., a Delaware corporation, and any successor corporation to all or substantially all of the assets or voting stock of Websense, Inc. which shall by appropriate action assume the Option.

H.Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

I.Exercise Date shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement.

J.Exercise Price shall mean the exercise price per Option Share as specified in the Grant Notice.

K.Expiration Date shall mean the date on which the option expires as specified in the Grant Notice.

L.Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

(i)If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists, or

(ii)If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Board to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If there is no closing selling price for

the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

M.Good Reason shall mean your resignation within ninety (90) days of the occurrence of any one or more of the following events without your written consent, provided that you comply with a reasonable Good Reason process providing the Corporation with an opportunity to cure the alleged Good Reason: (a) a material reduction in your base salary and/or target bonus other than in connection with a Corporation-wide reduction in executive compensation, (b) a material reduction in your benefits, other than in connection with a Corporation-wide reduction in executive benefits, (c) a material and significant reduction in your authority, title and/or duties without Sufficient Basis, (d) a requirement that you relocate more than thirty-five (35) miles from your then-current office location. Notwithstanding the foregoing sentence, your receipt of less bonus or no bonus as a result of not meeting the relevant goals for a bonus is not a Good Reason.

N.Grant Date shall mean the date of grant of the option as specified in the Grant Notice.

O.Grant Notice shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby.

P.Incumbent Directors shall mean members of the Board who are (a) members of the Board as of the date hereof, or (b) elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination.

Q.Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of Optionee or any other individual in the Service of the Corporation (or any Parent or Subsidiary).

R.Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422.

S.Notice of Exercise shall mean the notice of exercise in the form attached hereto as Exhibit I.

T.Option Shares shall mean the number of shares of Common Stock subject to the option as specified in the Grant Notice.

U.Optionee shall mean the person to whom the option is granted as specified in the Grant Notice.

V.Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

W.Permanent Disability shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more.

X.Service shall mean the Optionee’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor.

Y.Stock Exchange shall mean the American Stock Exchange or the New York Stock Exchange.

Z.Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

AA.Sufficient Basis shall mean a reassignment or reduction in duties as a result of disciplinary action based upon serious violation of Corporation policy or violation of an agreement between you and the Corporation.

NON-PLAN INDUCEMENT GRANT

WEBSENSE, INC.

NON-PLAN INDUCEMENT GRANT

SUMMARY AND PROSPECTUS

The date of this Prospectus is January 9, 2006

TABLE OF CONTENTS

		Page
QUESTIONS AND ANSWERS ABOUT THE OPTION GRANTS		1
GRANT OF OPTIONS		1
1.	How are options granted?	1
2.	How is the exercise price determined?	1
3.	How is the fair market value of the Common Stock determined?	1
4.	What type of option have I been granted?	1
5.	Can the Corporation cancel my option and grant me a new option?	1
6.	Can I assign or transfer my option?	2
7.	When do I acquire the rights of a stockholder?	2
EXERCISE OF OPTIONS		2
8.	When may I exercise my option?	2
9.	When will my option terminate?	2
10.	How do I exercise my option?	2
11.	How do I pay the exercise price?	2
12.	Can my tax withholding obligations upon exercise of my option be satisfied from the shares of Common Stock purchased under my option?	3
EARLY TERMINATION OF OPTIONS		3
13.	What happens to my options if my service terminates?	3
14.	What happens to my options if I am discharged from service for Misconduct?	3
15.	What happens to my options if I die or become disabled?	4
16.	What happens to my options if the Corporation is acquired or merged?	4
17.	What happens to my options that are assumed upon a Corporate Transaction?	4
18.	What happens to my options if there is a change in control of the Corporation?	5
DISPOSITION OF SHARES		5
19.	When can I sell my shares acquired pursuant to the exercise of my option?	5
MISCELLANEOUS		5
20.	Is financing available?	5
21.	Do I have the right to remain employed until my options vest?	6
22.	Are there any circumstances which would cause me to lose my rights with respect to an option grant?	6
23.	Does the grant of an option affect my eligibility to participate in stock plans or other compensatory plans of the Corporation?	6
24.	What is a parent corporation?	6
25.	What is a subsidiary corporation?	6
26.	What shares of Common Stock will be issued to me upon exercise of my option?	6
27.	What happens if there is a change in the Corporation’s capital structure?	6
28.	Can my option be amended or terminated?	6
RESTRICTIONS ON RESALE		7
29.	What restrictions apply if I am a Section 16 Insider?	7
30.	What restrictions apply if I am an affiliate?	8
QUESTIONS AND ANSWERS ON FEDERAL TAX CONSEQUENCES		8
T1.	Will the grant of a non-statutory option result in federal income tax liability to me?	8

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T2.	Will the exercise of a non-statutory option result in federal income tax liability to me?	8
T3.	Will I recognize additional income when I sell shares acquired under a non-statutory option?	8
T4.	What are the consequences of paying the exercise price of a non-statutory option in the form of shares of Common Stock previously acquired upon the exercise of employee options or through open-market purchases?	9
T5.	What are the federal tax consequences to the Corporation?	9
FEDERAL TAX RATES		9
T6.	What are the applicable federal tax rates?	9
CORPORATION INFORMATION		9

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THIS DOCUMENT CONSTITUTES PART OF THE OFFICIAL PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.

Websense, Inc., a Delaware corporation (the “Corporation”), is offering shares of its common stock (the “Common Stock”) to eligible individuals pursuant to special inducement non-statutory stock option grants. The purpose of the grants is to offer persons who have not previously been employees or directors of the Corporation, or following a bona fide period of non-employment (“New Hires”) the opportunity to acquire an ownership interest in the Corporation as an inducement material to such persons entering into employment with the Corporation. Unless the context indicates otherwise, all references to the Corporation in this Summary and Prospectus include Websense, Inc. and its parent and subsidiary corporations, whether now existing or subsequently established.

QUESTIONS AND ANSWERS ABOUT THE OPTION GRANTS

This Summary and Prospectus sets forth in question and answer format the principal terms of the option grants which may be made from time to time to New Hires as an inducement material to such individuals entering into employment with the Corporation, including individuals who will commence providing services to the Corporation as executive officers of the Corporation or Board members subject to the short-swing profit restrictions of Section 16(b) of the Securities Exchange Act of 1934 (the “1934 Act”). Such individuals will be referred to in this document as “Section 16 Insiders.”

GRANT OF OPTIONS

1.How are options granted?

The Board has complete discretion to determine when and to whom options will be granted and the terms of each such grant. Your option grant will be evidenced by one or more option documents (collectively, the “Option Agreement”) executed by the Corporation and you.

2.How is the exercise price determined?

The exercise price of your option will be determined by the Board.

3.How is the fair market value of the Common Stock determined?

The fair market value per share of Common Stock on any relevant date will be the closing selling price per share on that date, as reported on the Nasdaq National Market and published in The Wall Street Journal. If the Common Stock is not traded on that day, the fair market value will be the closing selling price per share on the last preceding date for which such quotation exists.

4.What type of option have I been granted?

You have been granted a non-statutory stock option that is not intended to satisfy the requirements of Internal Revenue Code Section 422 to be an “Incentive Stock Option.”  For information about the tax consequences of your option transactions, see the “Questions and Answers on Federal Tax Consequences” section below.

5.Can the Corporation cancel my option and grant me a new option?

Yes. The Board has the authority to cancel outstanding options and to issue new options in replacement, but your consent will be required in connection with your participation in any such cancellation/regrant program. The new options can cover the same or a different number of shares of Common Stock and will have an

exercise price per share not less than the fair market value of the Common Stock on the new grant date. In addition, it is likely that the new options will have a vesting schedule based on the new grant date, without any credit provided for the period the cancelled options were outstanding.

6.Can I assign or transfer my option?

Generally, no. Your option generally cannot be assigned or transferred, except by the provisions of your will or the laws of inheritance following your death or pursuant to any beneficiary designation you have in effect for your option at the time of your death. However, to the extent permitted by the Board,your option will be assignable in whole or in part during your lifetime to one or more members of your immediate family or to a trust established exclusively for one or more such family members or to your former spouse. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. No such assignment will be permitted, however, unless it is effected in connection with your estate plan or pursuant to a domestic relations order.

7.When do I acquire the rights of a stockholder?

You will not have any stockholder rights with respect to the option shares. You will not acquire stockholder rights until you exercise the option, pay the exercise price and become a holder of record of the purchased shares.

EXERCISE OF OPTIONS

8.When may I exercise my option?

Your option will become exercisable for the option shares in a series of installments over the period that you remain in the Corporation’s service. The exercise schedule applicable to your option will be determined by the Board at the time of grant and will be set forth in the Option Agreement. You may exercise your option at any time for the shares for which your option is exercisable, provided you do so before the option terminates.

9.When will my option terminate?

The actual expiration date of your option will be set forth in the Option Agreement. Your option may, however, terminate prior to its designated expiration date in the event of your termination of service or upon the occurrence of certain other events. See the “Early Termination of Options” section below.

10.How do I exercise my option?

To exercise your option, you must provide the Corporation with written notice of the exercise in which you indicate the number of shares to be purchased under your option. The notice must be accompanied by payment of the exercise price for the purchased shares, together with appropriate proof that the person exercising the option (if other than yourself) has the right to effect such exercise. You will be required to satisfy all applicable income and employment tax withholding requirements at that time. For information about such tax withholding, see the “Questions and Answers on Federal Tax Consequences” section below.

11.How do I pay the exercise price?

The exercise price may be paid in cash or check payable to the Corporation or in shares of Common Stock. Any shares delivered in payment of the exercise price will be valued at fair market value on the exercise date and must have been held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes (generally a six (6)-month period).

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The Board may, in its sole discretion, elect to allow you to use a cashless exercise procedure to exercise your option. To use this procedure, you must provide irrevocable instructions to a Corporation-designated brokerage firm to effect the immediate sale of the vested shares of Common Stock purchased under your option and to pay over to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable withholding taxes. Concurrently with such instructions, you must also direct the Corporation to deliver the certificates for the purchased shares to the brokerage firm in order to complete the sale.

12.Can my tax withholding obligations upon exercise of my option be satisfied from the shares of Common Stock purchased under my option?

The Board may, in its sole discretion, elect to allow you to have the Corporation withhold, from the shares of Common Stock purchased under your option, a portion of those shares with a fair market value equal to a designated percentage (not to exceed one hundred percent (100%)) of the federal, state and local income and employment withholding taxes to which you may become subject in connection with the exercise of your option. In lieu of such direct withholding, the Board may allow you to deliver previously acquired shares of Common Stock in satisfaction of the withholding tax liability. However, no shares of Common Stock will actually be withheld or accepted in satisfaction of such withholding tax liability except to the extent approved by the Board, and any such withheld or delivered shares will be valued at fair market value on the date of the option exercise.

EARLY TERMINATION OF OPTIONS

13.What happens to my options if my service terminates?

After your termination of service for any reason other than death, disability or Misconduct (as defined below in Question 14), you will have a limited period of time in which to exercise your outstanding options for any shares of Common Stock in which you are vested on the date your service terminates. The length of this period will be set forth in your Option Agreement and will generally not be in excess of three (3) months. However, your option will in all events terminate on the specified expiration date of the option term. To the extent your options are not exercisable for one or more vested shares at the time of your termination of service, your options will immediately terminate and cease to be outstanding with respect to those unvested shares.

Unless your Option Agreement specifically provides otherwise, you will be deemed to continue in service for so long as you render services to the Corporation, whether as (i) an employee, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance, (ii) a non-employee Board member or (iii) a consultant or other independent advisor.

The Board has the discretion to extend the period during which you may exercise one or more of your options following your termination of service and/or to permit such options to be exercised not only with respect to the number of shares of Common Stock in which you are at the time vested but also with respect to one or more additional installments in which you would have vested had you continued in service. You will be notified in writing in the event the Board decides to provide you with any of those additional benefits.

14.What happens to my options if I am discharged from service for Misconduct?

Should you be discharged from service for Misconduct or otherwise engage in Misconduct while your options are outstanding, then all of your outstanding options will immediately terminate. Misconduct includes (i) any act of fraud, embezzlement or dishonesty, (ii) any unauthorized use or disclosure of confidential information or trade secrets of the Corporation, or (iii) any other intentional misconduct adversely affecting the business or affairs of the Corporation in a material manner. However, the foregoing list is not inclusive of all the acts or omissions which may be considered as grounds for dismissal or discharge of any individual in the Corporation’s service.

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15.What happens to my options if I die or become disabled?

If you die while any of your options are outstanding, the personal representative of your estate or the person or persons to whom the options are transferred by the provisions of your will or the laws of inheritance or pursuant to the beneficiary designation you have in effect for those options may exercise each of those options for any or all vested shares of Common Stock for which the option was exercisable on the date your service with the Corporation terminated, less any shares you may have subsequently purchased prior to your death. The right to exercise each such option will lapse upon the earlier of (i) the expiration of the option term or (ii) the first anniversary of the date of your death.

If you terminate your service with the Corporation because you become permanently disabled, you will normally have a period of twelve (12) months from such termination date during which to exercise your options for any or all of the vested shares for which those options were exercisable at the time of such termination. In no event, however, may you exercise any option after the specified expiration of the option term. For purposes of your option grant, you will be deemed to be permanently disabled if you are unable to perform any substantial gainful activity by reason of any medically-determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) consecutive months or more.

16.What happens to my options if the Corporation is acquired or merged?

In the event of a Corporate Transaction, your option will automatically vest on an accelerated basis so that your option will, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares. However, your option will not vest and become exercisable on such an accelerated basis, if and to the extent: (i) the option is assumed by the successor corporation, (ii) such option is replaced with a cash incentive program which preserves the option spread existing on the unvested shares subject to the option at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those option shares or (iii) the acceleration of the option is subject to other limitations imposed by the Board in the Option Agreement.

Your option will, to the extent not assumed by the successor corporation, terminate and cease to be outstanding immediately following the completion of the Corporate Transaction.

A Corporate Transaction will be deemed to occur upon (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction or (ii) a sale, transfer or other disposition of all or substantially all the assets of the Corporation in liquidation or dissolution of the Corporation.

17.What happens to my options that are assumed upon a Corporate Transaction?

If your option is assumed by a successor corporation in a Corporation Transaction, then your option will, immediately after the Corporate Transaction, be appropriately adjusted to apply to the number and class of securities which would have been issued to you in consummation of the Corporate Transaction had your option been exercised immediately prior to the Corporate Transaction. Appropriate adjustments will also be made to the exercise price payable per share under your assumed option, provided the aggregate exercise price for the option shares will remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of your option, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction.

The Board may structure one or more options so that those options will immediately vest and become exercisable for all the option shares as fully vested shares upon an Involuntary Termination of the

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optionee’s service within a designated period (not to exceed eighteen (18) months) following the effective date of a Corporate Transaction in which the options are assumed or are otherwise continued in effect. You should review your Option Agreement to determine whether the options you hold will in fact accelerate upon such an Involuntary Termination.

An Involuntary Termination will be deemed to occur upon (i) the optionee’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct or (ii) such individual’s voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate performance-based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the optionee’s consent.

18.What happens to my options if there is a change in control of the Corporation?

The Board may structure one or more options so that those options will immediately vest and become exercisable for all the option shares as fully vested shares either upon the occurrence of a Change in Control or upon an Involuntary Termination of the optionee’s service within a designated period (not to exceed eighteen (18) months) following the effective date of that Change in Control. You should review your Option Agreement to determine whether the options you hold will in fact accelerate upon a Change in Control or your subsequent Involuntary Termination.

A Change in Control will be deemed to occur in the event (i) any person directly or indirectly acquires securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders or (ii) there is a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board.

DISPOSITION OF SHARES

19.When can I sell my shares acquired pursuant to the exercise of my option?

If you are a Section 16 Insider, you will be subject to certain restrictions in connection with your option grant. These restrictions are described in detail in the “Restrictions on Resale” section below.

MISCELLANEOUS

20.Is financing available?

As a result of the Sarbanes-Oxley Act of 2002, the Company may no longer allow Section 16 Insiders to finance their acquisition of shares of Common Stock through the use of promissory notes. However, if you are not a Section 16 Insider, the Board may assist you in the acquisition of shares of Common Stock by permitting you to pay the purchase price for the shares through a promissory note payable in one or more installments. The terms of any such promissory note, including the interest rate and terms of repayment, will be established in the sole discretion of the Board. Promissory notes will be made on a full-recourse basis, and the maximum credit available to you may not exceed the purchase price payable for the acquired shares plus any withholding tax liability incurred by you in connection with such acquisition. In addition, the Corporation will comply with all applicable requirements of Regulation U of the Board of Governors of the Federal Reserve System in connection with any financing extended to you.

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21.Do I have the right to remain employed until my options vest?

No. Nothing in any option grant is intended to provide any person with the right to remain in the Corporation’s service for any specific period, and both you and the Corporation will each have the right to terminate your service at any time and for any reason, with or without cause.

22.Are there any circumstances which would cause me to lose my rights with respect to an option grant?

Yes. The grant of options and the issuance of Common Stock under such options are subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Corporation’s grant of options. It is possible that the Corporation could be prevented from granting options or from issuing shares of Common Stock in the event one or more required approvals or permits were not obtained.

23.Does the grant of an option affect my eligibility to participate in stock plans or other compensatory plans of the Corporation?

No. Option grants do not in any way affect, limit or restrict your eligibility to participate in any other stock plan or other compensation or benefit plan or program maintained by the Corporation.

24.What is a parent corporation?

A corporation is a parent corporation if such corporation owns, directly or indirectly, stock possessing fifty percent (50%) or more of the total combined voting power of the Corporation’s outstanding securities.

25.What is a subsidiary corporation?

A corporation is a subsidiary corporation if the Corporation owns, directly or indirectly, stock possessing fifty percent (50%) or more of the total combined voting power of the outstanding securities of that corporation.

26.What shares of Common Stock will be issued to me upon exercise of my option?

The Common Stock will be made available either from authorized but unissued shares of Common Stock or from shares of Common Stock reacquired by the Corporation, including shares repurchased on the open market.

27.What happens if there is a change in the Corporation’s capital structure?

In the event of a Recapitalization, appropriate adjustments will automatically be made to the number and/or class of securities and the exercise price per share in effect under your outstanding options. The adjustments to your outstanding options will preclude the dilution or enlargement of your rights and benefits available under those options.

A Recapitalization will include any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration.

28.Can my option be amended or terminated?

Yes. However, no amendment or modification may, without your consent, adversely affect your rights and obligations under your outstanding stock options.

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RESTRICTIONS ON RESALE

29.What restrictions apply if I am a Section 16 Insider?

Section 16(b) of the 1934 Act requires the Corporation to recover any profit realized by any officer, director or beneficial owner of more than ten percent (10%) of the outstanding Common Stock (a “Section 16 Insider”) from any purchase and sale, or sale and purchase, of such Common Stock made within a period of less than six (6) months.

The Securities and Exchange Commission (the “SEC”) has issued a series of revised rules under Section 16(b) of the 1934 Act which govern the short-swing liability treatment of certain transactions effected by a Section 16 Insider under equity incentive plans. The application of those rules to option transactions may be summarized as follows.

Option Grant. The receipt of an option grant will not be treated as an exempt “purchase” of the underlying option shares for short-swing liability purposes.

Option Exercise. The exercise of an option will be an exempt purchase so that it will not be treated as a “purchase” of the acquired shares for short-swing liability purposes.

Delivery of Shares. The delivery of shares of Common Stock in payment of the exercise price will be treated as an exempt sale for short-swing liability purposes.

Stock Withholding. The withholding of a portion of the shares of Common Stock otherwise issuable to the Section 16 Insider by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of his or her outstanding option will be treated as an exempt sale for short-swing liability purposes if such withholding is approved by the Board at the time of the option exercise or at any earlier time. The delivery of shares of Common Stock out of the Section 16 Insider’s existing investment portfolio in satisfaction of the applicable tax withholding liability similarly will be treated as an exempt sale for short-swing liability purposes if approved by the Board.

Sale of Shares. The sale of any shares acquired will be treated as a “sale” for short-swing liability purposes and will be matched with any non-exempt purchases of Common Stock (e.g. open-market purchases) made within six (6) months before or after the date of such sale.

Reporting Requirements

As a result of the Sarbanes-Oxley Act of 2002, each of the following transactions involving the Section 16 Insider must be reported on a Form 4 filed by such individual no later than the close of the second business day following the date on which such transaction occurs:

•Receipt of option grant

•Exercise of option grant, whether or not the acquired shares are sold immediately

•Sale of Common Stock acquired upon option exercise

If the exercise price is paid with shares of Common Stock, then the disposition of those shares should also be reported on the same Form 4 for the option exercise.

When shares of Common Stock are withheld in satisfaction of applicable withholding taxes, the Section 16 Insider should report the gross number of shares acquired upon the exercise of the option (including the withheld shares) on the Form 4 reporting the option exercise and should also report the disposition of the withheld shares on that same Form 4 on which the option exercise is reported.

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30.What restrictions apply if I am an affiliate?

In general, persons with power to manage and direct the policies of the Corporation, their relatives and trusts, estates, corporations or other entities controlled by any of those persons may be deemed to be affiliates of the Corporation. Affiliates of the Corporation are obligated to resell their shares of Common Stock in compliance with SEC Rule 144. This rule requires such sales to be effected in “brokers’ transactions,” as defined in the rule, and a written notice of each sale must be filed with the SEC at the time of such sale. The rule also limits the number of shares which may be sold in any three (3)-month period to the greater of (i) one percent (1%) of the outstanding shares of Common Stock or (ii) the average weekly reported volume of trading in such shares on all securities exchanges during the four (4) calendar weeks preceding the filing of the required notice of proposed sale. However, there will be no Rule 144 holding period requirements applicable to the shares of Common Stock acquired pursuant to the exercise of your option.

As an officer or director of the Corporation, you should consult with counsel before offering for sale any shares of Common Stock acquired pursuant to the exercise of an option in order to assure your compliance with Rule 144, Section 16 and all other applicable provisions of federal and state securities laws.

QUESTIONS AND ANSWERS ON FEDERAL TAX CONSEQUENCES

CIRCULAR 230 DISCLAIMER. THE FOLLOWING DISCLAIMER IS PROVIDED IN ACCORDANCE WITH THE INTERNAL REVENUE SERVICE’S CIRCULAR 230 (21 C.F.R. PART 10). THIS ADVICE IS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED BY YOU FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED ON YOU. THIS ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF PARTICIPATION IN THE COMPANY’S EQUITY INCENTIVE PLANS. YOU SHOULD SEEK ADVICE BASED ON YOUR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

The following is a general description of the United States federal income tax consequences of certain option transactions. You should understand, however, that this tax information is not complete. For example, it does not address state or local tax laws or the application of laws if you are subject to tax laws in other countries. Furthermore, because tax laws and regulations may change, and interpretations of these laws and regulations can change the way the laws and regulations apply to you, this information may need to be updated after the delivery of this prospectus. Therefore, you should consult with a tax advisor if you have questions relating to the tax consequences of participation in, and the sale of shares received under the Plan.

T1.Will the grant of a non-statutory option result in federal income tax liability to me?

No.

T2.Will the exercise of a non-statutory option result in federal income tax liability to me?

You will recognize ordinary income in the year in which your non-statutory option is exercised in an amount equal to the excess of (i) the fair market value of the purchased shares on the exercise date over (ii) the exercise price paid for those shares. This income will be reported by the Corporation on your W-2 wage statement for the year of exercise (or on a Form 1099 if you are not an employee), and you will be required to satisfy the tax withholding requirements applicable to this income.

T3.Will I recognize additional income when I sell shares acquired under a non-statutory option?

Yes. You will recognize a capital gain to the extent the amount realized upon the sale of such shares exceeds their fair market value at the time you recognized the ordinary income with respect to their acquisition. A capital loss will result to the extent the amount realized upon the sale is less than such fair market value. The gain or loss will be long-term if the shares are held for more than one (1) year prior to the disposition.

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(Please see Question T6 below for the tax rates applicable to capital gain.)  The holding period normally starts at the time the non-statutory option is exercised.

T4.What are the consequences of paying the exercise price of a non-statutory option in the form of shares of Common Stock previously acquired upon the exercise of employee options or through open-market purchases?

You will not recognize any taxable income to the extent the shares of Common Stock received upon the exercise of the non-statutory option equal in number the shares of Common Stock delivered in payment of the exercise price. For Federal income tax purposes, these newly-acquired shares will have the same basis and capital gain holding period as the delivered shares. To the extent the delivered shares were acquired under an Incentive Option, the new shares received upon the exercise of the non-statutory option will continue to be subject to taxation as Incentive Option shares.

The additional shares of Common Stock received upon the exercise of the non-statutory option will, in general, have to be reported as ordinary income for the year of exercise in an amount equal to their fair market value on the exercise date. These additional shares will have a tax basis equal to such fair market value and a capital gain holding period measured (in general) from the exercise date.

T5.What are the federal tax consequences to the Corporation?

The Corporation will be entitled to an income tax deduction equal to the amount of ordinary income you recognize in connection with the exercise of the non-statutory option. The deduction will, in general, be allowed for the taxable year of the Corporation in which you recognize such ordinary income.

FEDERAL TAX RATES

T6.What are the applicable federal tax rates?

Currently, the maximum marginal federal income tax rate applicable to ordinary income and short-term capital gain is 35% for 2005. Currently, the maximum marginal federal income tax rate for long-term capital gain is 15%. Even lower long-term capital gain rates may apply to taxpayers in the 15% and 10% marginal income tax brackets.

Additionally, capital gains and losses are subject to certain other provisions of the Internal Revenue Code of 1986, as amended (the “Code”) not applicable to ordinary income. For example, capital gains and losses are netted against other capital gains and losses, but only $3,000 of net capital losses may be deducted against ordinary income in any calendar year by any individual taxpayer. Consult your tax advisor for more information regarding the rates and provisions that apply to you.

CORPORATION INFORMATION

Websense, Inc. is a Delaware corporation which maintains its principal executive offices at 10240 Sorrento Valley Road, San Diego, CA  92121. The telephone number at the executive offices is (858) 320-8000. You may contact the Corporation at this address or telephone number for further information.

An important part of your participation in the Plan is understanding the Company, its products, operations, and financial condition. You can keep yourself informed about the Company by reviewing proxy statements, reports to stockholders, and other documents that we prepare for our stockholders and the general public. If you become one of our stockholders, you will be entitled to attend our stockholder meetings and to vote in the election of directors and on other matters brought before the stockholders.

9

The United States federal securities laws require the Company to provide information about its business and financial status in (a) Annual Reports, commonly filed on a Form 10-K; (b) Quarterly Reports, commonly filed on a Form 10-Q; and (c) Current Reports relating to important corporate events occurring during the year, commonly filed on a Form 8-K. These reports are filed with the Securities and Exchange Commission (the “SEC”). The Company also prepares and files with the SEC a proxy statement in connection with its Annual Meeting of Stockholders. The proxy statement provides further information about the Company and its officers, directors, and major stockholders.

From time to time the Company may also file other documents with the SEC as required by Sections 13(a), 13(c), 14 and 15(d) of the 1934 Act. The following documents we filed with the SEC are incorporated by reference into these materials, which constitute the prospectus for the Plan:

(a)The Company’s latest annual report on Form 10-K filed pursuant to Sections 13(a) or 15(d) of the 1934 Act, or either (1) our latest prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, that contains audited financial statements for our latest fiscal year for which such statements have been filed, or (2) our effective registration statement on Form 10 or 20-F filed under the 1934 Act containing audited financial statements for our latest fiscal year.

(b)All other reports filed pursuant to Sections 13(a) or 15(d) of the 1934 Act since the end of the fiscal year covered by the annual report, the prospectus or the registration statement referred to in (a) above.

(c)The description of our common stock which is contained in a registration statement filed under the 1934 Act, including any amendment or report filed for the purpose of updating such description.

All reports and other documents filed pursuant to Sections 13(a), 13(c), 14 and 15(d) of the 1934 Act shall be deemed to be incorporated by reference herein and to be a part of this prospectus from the date of the filing of such reports and documents, if such reports or other documents are filed (a) after the date of this prospectus, and (b) prior to the filing of a post effective amendment which indicates that all securities offered pursuant to the registration statement on Form S-8 we filed with the SEC registering the shares reserved under the Plan have been sold or which deregisters all securities then remaining unsold.

A copy of these documents is always available without charge and upon written or oral request directed to the Stock Plan Administrator at 10240 Sorrento Valley Road, San Diego, CA 92121 or (858) 320-8000. If you are already one of our stockholders or a participant in any of our equity incentive plans, you should already receive either paper or electronic copies of our proxy statement, reports to stockholders, and other stockholder communications. If you have not already received a copy of our current annual report, a copy should be delivered to you with these materials. Whether or not you have already received this information, copies of our current annual report or other stockholder communications are always available without charge and upon written or oral request directed to the Stock Administrator. Alternatively, copies of the most recent reports containing audited financial statements for our most recent fiscal year (which may be the final prospectus by which shares of our common stock are sold to the general public or the annual report to our stockholders) and our other SEC filings, are available through the Company’s filings with the SEC on the following web site:

http://www.sec.gov/edgar/searchedgar/companysearch.html.

*    *    *    *

10

EX-10.22

Exhibit 10.22

FOURTH AMENDMENT TO LEASE

(Creekside)

THIS FOURTH AMENDMENT TO LEASE (“Fourth Amendment”) is made and entered into as of the            day of March, 2005, by and between SORRENTO VALLEY ROAD, LLC, a Delaware limited liability company (“Landlord”) and WEBSENSE, INC., a Delaware corporation (“Tenant”).

R E C I T A L S:

A.Legacy-RECP Sorrento OPCO, LLC, a Delaware limited liability company (“Original Landlord”) and Tenant entered into that certain Office Lease dated as of April 19, 2002 (the “Original Lease”), as amended by (i) that certain First Amendment to Lease dated as of October 1, 2002 by and between Original Landlord and Tenant (the “First Amendment”), (ii) that certain Second Amendment to Lease dated as of April 30, 2003 by and between Tenant and Landlord (as successor-in-interest in the Lease to Original Landlord) (the “Second Amendment”), and (iii) that certain Third Amendment to Lease dated as of July 30, 2004 by and between Tenant and Landlord (the “Third Amendment”), whereby Landlord leased to Tenant and Tenant leased from Landlord certain office space located in the Project.  The Original Lease, as amended by the First Amendment,  the Second Amendment and the Third Amendment, may be referenced to herein as the “Lease.”

B.By this Fourth Amendment, Landlord and Tenant desire to (i) confirm the Expansion Space Commencement Date of Tenant’s lease of the Expansion Space (as such terms are defined in the Third Amendment), (ii) memorialize Landlord’s and Tenant’s agreement regarding the performance of certain work in the Expansion Space, and (iii) to otherwise modify the Lease as provided herein.

C.Unless otherwise defined herein, capitalized terms as used herein shall have the same meanings as given thereto in the Lease.

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

A G R E E M E N T:

1.Expansion Space Commencement Date.  Landlord and Tenant hereby acknowledge and agree that the Expansion Space Commencement Date of Tenant’s leasing of the Expansion Space (described in the Third Amendment) is December 30, 2004.

2.Landlord’s Further Improvement Work in the Expansion Space.  Tenant acknowledges and agrees that Landlord has, as of the date hereof, performed the following work (collectively, “Landlord’s Work”) in the Expansion Space:  (i) repaired the water damage in the kitchen and other areas in the Expansion Space affected by such water damage; (ii) installed three (3) Carrier rooftop units to cool the “improved” area of the Expansion Space that were previously serviced by the existing Liebert units (which Carrier rooftop units were also ducted and prepared for normal office use by Landlord); (iii) installed a Carrier 6-ton rooftop air conditioning heat pump unit over the “shell” space of the Expansion Space (with Tenant, at its cost, to distribute the air generated by the heat pump as and when desired by Tenant); and (iv) repaired the leaks in the rooftop, which rooftop will continue to be monitored by Landlord for further repair as needed.  In addition to the foregoing, Landlord will, at Landlord’s sole cost and expense, on or before March 31, 2005 (or as soon thereafter as reasonably possible), remove the existing Liebert units and repair any structural damage caused by such removal; provided, however, that Tenant shall perform any other remediation/improvement work required as a result of such removal or as otherwise may be desired by Tenant.

3.Tenant’s and Landlord’s Repair Obligations for the Expansion Space.  Landlord and Tenant acknowledge and agree that Landlord’s and Tenant’s repair obligations with respect to the Premises (as provided in and subject to the terms and provisions of the Lease) also apply to the Expansion Space.

4.Release of Liability.  This Fourth Amendment shall fully and finally settle all demands, charges, claims, accounts or causes of action of any nature, including, without limitation, both known and unknown claims and causes of action that may arise out of or in connection with the obligations of the parties pertaining to the condition of the Expansion Space and Landlord’s Work.

Each of the parties expressly waives the provisions of California Civil Code Section 1542, which provides:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Each party acknowledges that it has received the advice of legal counsel with respect to the aforementioned waiver and understands the terms thereof.

5.Brokers.  Each party represents and warrants to the other that no broker, agent or finder negotiated or was instrumental in negotiating or consummating this Fourth Amendment.  Each party further agrees to defend, indemnify and hold harmless the other party from and against any claim for commission or finder’s fee by any entity who claims or alleges that they were retained or engaged by the first party or at the request of such party in connection with this Fourth Amendment.

6.Signing Authority.  Each individual executing this Fourth Amendment on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in the State of California and that Tenant has full right and authority to execute and deliver this Fourth Amendment and that each person signing on behalf of Tenant is authorized to do so.

7.No Further Modification.  Except as set forth in this Fourth Amendment, all of the terms and provisions of the Lease shall remain unmodified and in full force and effect.

IN WITNESS WHEREOF, this Fourth Amendment has been executed as of the day and year first above written.

“Landlord”:
SORRENTO VALLEY ROAD, LLC.,
a Delaware limited liability company
By:	Principal Life Insurance Company, an Iowa Corporation, its sole member
	By:	Principal Real Estate Investors, LLC, a Delaware limited liability company, its authorized signatory
		By:
		Title:
“Tenant”:
WEBSENSE, INC.,
a Delaware corporation
By:
	Name:
	Its:
By:
	Name:
	Its:

2

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

Legal name	Country
Websense UK Limited	United Kingdom
Websense Japan KK	Japan
Websense (Australia) Pty Limited	Australia
Websense International Limited	Ireland
Websense Holdings International Limited	Ireland
Websense France S.A.R.L.	France
Websense Deutschland GmbH	Germany
Websense Italia S.r.l.	Italy
Websense Brasil Gerenciamento e Segurança de Internet Ltda.	Brazil

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-118488, 333-106167, 333-87088, 333-60354 and 333-33382) pertaining to the Amended and Restated 2000 Stock Incentive Plan and 2000 Employee Stock Purchase Plan of Websense, Inc. of our reports dated February 22, 2006, with respect to the consolidated financial statements and schedule of Websense, Inc.  Websense, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Websense, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

	/s/ Ernst & Young LLP
San Diego, CA
February 27, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Gene Hodges, certify that:

1. I have reviewed this annual report on Form 10-K of Websense, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting  to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

(d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  March 1, 2006
	By:	/s/ GENE HODGES
		Gene Hodges
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Douglas C. Wride, certify that:

1. I have reviewed this annual report on Form 10-K of Websense, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting  to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

(d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  March 1, 2006
	By:	/s/ DOUGLAS C. WRIDE
		Douglas C. Wride
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

Gene Hodges, Chief Executive Officer of Websense, Inc., hereby certifies pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350) that, to the best of his knowledge:

1. The Annual Report on Form 10-K of Websense, Inc. for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and

2. The information contained in the Annual Report on Form 10-K of Websense, Inc. for the year ended December 31, 2005 fairly presents, in all material respects, the financial condition and results of operations of Websense, Inc. for the period covered by the Annual Report.

Dated:  March 1, 2006
	By:	/s/ GENE HODGES
		Gene Hodges
		President and Chief Executive Officer

*  A signed original of this written statement has been provided to Websense, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This written statement accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission, and is not to be incorporated by reference into any filing of Websense, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, irrespective of any general incorporation language contained in such filing.

EX-32.2

Exhibit 32.2

CERTIFICATION

Douglas C. Wride, Chief Financial Officer of Websense, Inc., hereby certifies pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350) that, to the best of his knowledge:

1. The Annual Report on Form 10-K of Websense, Inc. for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and

2. The information contained in the Annual Report on Form 10-K of Websense, Inc. for the year ended December 31, 2005 fairly presents, in all material respects, the financial condition and results of operations of Websense, Inc. for the period covered by the Annual Report.

Dated:  March 1, 2006
	By:	/s/ DOUGLAS C. WRIDE
		Douglas C. Wride
		Chief Financial Officer

*  A signed original of this written statement has been provided to Websense, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This written statement accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission, and is not to be incorporated by reference into any filing of Websense, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, irrespective of any general incorporation language contained in such filing.