Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)

Commission File Number 000-30093

Websense, Inc.

10240 Sorrento Valley Road

     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 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 þ    No o    (2) Yes þ    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 an accelerated filer (as defined in Exchange Act Rule 12(b)-2):    Yes þ    No o

     The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 28, 2002 was approximately $540 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 28, 2003 was 21,810,630.

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 11, 2003 are incorporated by reference into Part III.

     Certain exhibits filed with the Registrant’s prior registration statements and forms 10-K are incorporated herein by reference into Part IV of this Report.

Table of Contents

WEBSENSE, INC.

1

Table of Contents

PART I

Forward Looking Statements

      From time to time we have made and may continue to make “forward looking statements” within the meaning of the federal securities laws. This report on Form 10-K may contain forward-looking statements 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 “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. Such statements include but are not limited to statements concerning the following:

	•	anticipated trends in revenue;
	•	growth opportunities in domestic and international markets;
	•	customer acceptance and satisfaction with our products;
	•	expected trends in operating expenses; and
	•	anticipated cash and intentions regarding usage of cash.

      Actual results may differ materially from results anticipated in such forward-looking statements. We assume no obligation to update any forward-looking statements to reflect events or circumstances arising after the date of this report.

      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 “Risks and Uncertainties” under Item 7 below, and elsewhere in this report.

Item 1.     Business

Overview

      We provide employee Internet management (EIM) products that enable businesses to analyze, report and manage how their employees use computing resources at work, including Internet access. Our primary product, Websense Enterprise®, gives businesses the ability to rapidly implement and configure Internet access policies in support of their efforts to improve employee productivity, conserve network bandwidth, mitigate potential legal liability, and enhance network security. Websense Enterprise also serves as a platform for related new and anticipated future Websense offerings, such as Client Application Manager™ and Bandwidth Optimizer™.

      Our flexible and easy-to-use software applications operate in conjunction with our proprietary Websense Master Database and Premium Group Databases, which are available for daily incremental downloads. These databases are organized into more than 80 categories and encompass more than four million Web sites as of December 31, 2002, representing more than one billion Web pages. Our Website databases are updated with approximately 5,000 newly categorized Web sites each business day using a proprietary process of automated site content assessment and classification with manual verification.

      Websense Enterprise is easy to deploy and use, and requires minimal support by an organization’s information technology department. Our products are integrated with a wide range of network access platforms, including market-leading firewalls, caching appliances, proxy-servers, switches, routers and other network appliances, and can grow with our customers’ needs across multi-location corporations, regional and international offices. We currently operate in one industry segment, as defined by generally accepted accounting principles.

      Our business was incorporated in 1994 as NetPartners Internet Solutions, as a reseller of computer network security products. In 1996, we released Websense Internet Screening System, our first product as a software developer. In 1999, we released Websense Enterprise Version 4, a redesigned version of our software, and changed our name to Websense, Inc. to reflect the shift in our business focus from a value-added reseller

2

Table of Contents

Industry Background

      As a highly flexible network capable of carrying almost any type of digital traffic, the Internet continues to evolve as a critical business tool and an important communications and commerce platform for enterprises worldwide. As part of their overall business strategies, many organizations are using the Internet to enable business applications that are accessed over their corporate networks. Companies utilize the Internet to optimize their extended supply chains, automate their sales forces, track shipments and communicate with employees, customers, partners and suppliers. Due to the efficiencies, cost-savings and competitive advantages that can be gained by leveraging the Internet, many businesses are continuing to build out their computer networks and information technology infrastructure. In order to accommodate a significant number of simultaneous users and the increasing volume of data transfer associated with enterprise Internet use, many organizations continue to make substantial investments in wide-bandwidth connections such as dedicated T-1 lines, enabling high-speed Internet access.

      The Internet has also become a highly popular consumer medium for communication, entertainment, information and commerce. Market research firm International Data Corp. (IDC) has projected that the number of corporate Internet users worldwide will grow from an estimated 250 million in 2002 to more than 409 million in 2005. This rapid adoption of the Internet has been accompanied by remarkable growth in the number of consumer-oriented content and commerce Web sites and by an expanding assortment of Web-based consumer services. Internet users today have the ability to communicate through e-mail and instant messaging, retrieve news and information from numerous Internet sources, make online purchases of goods and services ranging from books to airline tickets, and otherwise access a broad range of non-business content and commerce Web sites. As the rapid evolution of Web content and technology continues, the amount of data, types of data and size of files traveling across the Internet have also grown. Consumers now access and download large, complex files such as streaming audio and video, MP3 music files, multi-player games and a variety of other new media, all of which consume large amounts of network bandwidth. In addition, consumers — including employees, who have access to broadband connections in their offices — are creating security risks by accessing Web sites that offer free software downloads, pirated software and peer-to-peer applications and may contain mobile malicious code or spyware.

      Internet access at work is fast, convenient and essentially free to employees. According to recent data from Internet research firm ComScore Networks, only approximately 28 percent of people accessing the Internet from home use a high-speed connection, compared to 87 percent at work. Therefore, in general, employees enjoy quicker and relatively unrestricted Internet access from their desktop computers. As a result, many employees use their employers’ Internet connections for recreational “surfing” or personal matters during business hours. However, unmanaged non-business use of company computing and network resources, including Internet access, by employees can result in lost employee productivity, increased network bandwidth consumption, increased network security risks, and potential legal liability. These factors in turn contribute to higher costs for companies that make computing and network resources available to their employees.

      Recent research and news reports widely document the hidden costs of open Internet access in the workplace. This non-business use of the Internet can consume large portions of expensive network bandwidth and decrease employee productivity. According to a recent study we commissioned with Harris Interactive in December 2001, more than 75 percent of mid- to large-sized companies surveyed had reprimanded or disciplined employees for Internet misuse while at work, and nearly half of those companies had terminated employees for inappropriate Internet activity.

      Businesses are increasingly recognizing the problem of personal Internet use in the workplace, and traditionally have attempted to manage or modify employee behavior through written policies. These policies are easily ignored and difficult to enforce. In order to monitor compliance, managers may require their information technology professionals to manually review the log files of Web pages visited that are generated

3

Table of Contents

      To address the problems associated with improper Internet use in the workplace, many businesses have sought products that enable them to proactively manage their employees’ Internet access. Early Internet filtering software for the enterprise was largely derived from products that were originally developed to help parents prevent their children from accessing adult content at home, and used keyword matching and dynamic page review to block content. These products, and other more recent products, lack the ability to meet the needs of growing organizations, cannot operate on multiple network platforms, do not provide the flexibility required by management and can be labor-intensive to deploy, consuming valuable information technology resources. In addition, these applications generally do not operate in conjunction with a comprehensive database that is consistently refreshed. Moreover, many of these products’ databases have typically focused on fewer categories such as sex, violence and inappropriate language, ignoring the emergence of new Web content and the subtleties within categories, such as sex and sex education, for example.

      Workplace management of non-business-related Internet access is an increasingly important priority because of its impact on employee productivity, network bandwidth consumption, network and data security and potential legal liability. Given the necessity of corporate Internet access and consumers’ continuing adoption of the Web as a mass communication, entertainment, information and commerce medium, we believe there is a significant opportunity for an employee Internet management solution that effectively addresses the needs of businesses to manage employee usage. 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 content. As a result, enterprise requirements for content filtering and reporting tools are expanding to include policy-based bandwidth management and regulation of non-Web applications such as instant messaging, peer- to-peer file exchange tools, interactive games and desktop software applications and executables. These solutions must also be adaptable enough to manage new applications and technologies as they are developed.

Our Employee Internet Management Solutions

      We provide employee Internet management products that enable businesses to analyze, report, and manage how their employees use the Internet. Our primary product is Websense Enterprise, a software and database package that gives business managers the ability to implement customized Internet access policies for different users and groups within the business, and supports an organization’s efforts to improve employee productivity, conserve network bandwidth, enhance network security, and mitigate potential legal liability. The application component of Websense Enterprise allows managers the flexibility to select the types of Internet content they wish to allow, block or defer access to based on the database categories we have defined. Our software enforces these managerial selections by comparing Web site requests with the addresses we have categorized in our database. Websense Enterprise is sold on a subscription basis. The principal benefits of our products include:

      Increased Employee Productivity. Websense Enterprise gives businesses the ability to more effectively manage employee Internet access, thereby reducing non-productive Internet use. Our software enables organizations to identify the pattern and scope of Internet use and to manage access to non-business related content or particular categories of Internet content chosen by an organization. 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 defer access until after work hours or 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.

4

Table of Contents

      Conservation of IT Resources. We believe Websense Enterprise allows organizations to reduce bandwidth consumption by managing personal Internet use and access to Web sites, 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. Reducing the bandwidth consumed by non-business-related Internet traffic allows an organization to use its network more efficiently and effectively in performing important business tasks. In addition, by limiting access to these types of sites, organizations are able to save valuable network storage space from being cluttered with MP3s, images and other files. This avoids costs arising from the need to buy additional networking equipment and storage servers.

      Enhanced Network and Data Security. Websense Enterprise adds an additional layer of protection to an organization’s network and data security by blocking employee access to security-risk sites such as those containing malicious mobile code or spyware. This allows an organization to proactively reduce the risk of malicious mobile code attacks — such as Web-based worms, viruses, Visual Basic scripts and more — or the inadvertent downloading of spyware applications that send corporate data outside the organization.

      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.

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

      Access to a Comprehensive Database. We provide access to proprietary databases containing more than four million Web sites, representing more than one billion unique Web pages. Our databases are cataloged into more than 80 different categories to enable organizations to determine the types of Internet content that are appropriate for their workplace culture. We add approximately 5,000 newly categorized Web sites each business day to our databases and make these updates available to our customers for daily incremental downloads, including refreshing the databases to remove inactive links and irrelevant content and to identify changing content and newly emerging sites. To date, more than one million dead links have been eliminated.

      Ability to Customize Employee Internet Access. Websense Enterprise allows organizations to configure specific Internet access policies for various groups, user types or individuals. Through our easy-to-use browser interface, we allow managers to implement Internet access policies with limited investment of information technology resources and personnel. Organizations may choose Internet access options which include blocking Web sites, setting time periods for access, allowing access but generating an exception report, allowing users a specified amount of personal surfing, or deferring access until after work hours.

      Ability to Adapt to our Customers’ Employee Surfing Patterns. We utilize our relationship with our customers to help our software adapt to any company’s evolving employee surfing patterns. We accomplish this with WebCatcher™, a feature by which customers anonymously send uncategorized Web sites visited by their employees to us for review and categorization into the Websense Master Database.

      Premium Group Database Additions for Emerging Web Content. Websense has developed Premium Group database additions that encompass emerging Web content. Premium Group I focuses on productivity management by allowing administrators to manage message boards and clubs, advertisements, freeware/shareware, instant messaging, online brokerage and trading, and pay-to-surf sites. Premium Group II focuses on bandwidth management and features sites relating to Internet radio and TV, peer-to-peer file sharing, personal network storage/backup, Internet telephony and streaming media. Premium Group III focuses on network security by categorizing websites containing malicious mobile code and spyware.

      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, Cisco, Inktomi, Microsoft, Netscreen, Network Appliance, and SonicWALL.

5

Table of Contents

Products And Services

      We develop and market application software and databases for managing employee use of computing resources at work, including access to the Internet. Our products consist of customizable software that references our proprietary databases. Our databases of Web page addresses are organized into more than 80 categories, and are regularly updated and available for incremental daily downloads. In addition to our Web filtering offerings, in March 2003 we introduced two new products that will provide enterprises with additional flexibility in managing employee use of corporate computing resources: Client Application Manager (manages software applications at the desktop) and Bandwidth Optimizer (manages bandwidth consumption on the network). These new products rely on the application framework of the Websense Enterprise platform and additional databases, which categorize file types, applications, and protocols. We plan to continue to introduce and market new products and services based on our Websense Enterprise platform.

      Websense Enterprise. Websense Enterprise is the foundation of our software offerings and includes our proprietary central policy engine and central management console. 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. The table below describes the platforms for which we currently offer our Websense Enterprise product.

      We sell subscriptions to the Websense Enterprise platform and databases based on the number of users to be managed. Additional application modules and enhanced technical support are priced separately. Revenues from sales of subscriptions to Websense Enterprise accounted for 100% of total revenues in 2002, 99% of total revenues in 2001 and 96% of total revenues in 2000.

      Internet Content Management. Websense Enterprise enables employers to proactively analyze, report and manage employee Internet access based on the content of the requested Web site. Our software application gives managers the ability to customize, implement and modify Internet access policies for various groups, user types and individuals. An easy-to-use graphical interface enables business managers to define the categories of Web sites to which access will be managed. The filtering software examines each Internet access request, determines the category of the requested Web site 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 Web site.
	•	Block. The requested Web site 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.

6

Table of Contents

	•	Defer and Save. The user can bookmark the requested Web site to a personalized AfterWork.com Web page for access at a later time when the organization’s access policy is less restrictive. This Web page can also be accessed from alternative locations, such as from the employee’s home.
	•	Continue with Exception Report. The user is reminded about the organization’s Internet usage policy, but can choose to access the requested Web site. Alternatively, the user can save the Web site as described above.
	•	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 Websense Master and Premium Group Databases. We offer extensive and regularly updated databases of Web sites. Our Master and Premium Group databases currently catalog more than four million Web sites, representing approximately one billion Web pages in 44 languages, cataloged into more than 80 categories. Through proprietary techniques that create unique fingerprints of individual Web pages, as well as customer features such as WebCatcher, we add approximately 5,000 newly categorized Web sites, representing approximately 500,000 Web page addresses, per business day to our database and make these updates available for incremental daily downloads. In addition, our database is refreshed daily to remove dead links and irrelevant content and to identify changing content and newly emerging sites.

      The breadth and specificity of Web site categories we have defined provide flexibility in selecting which types of material should be allowed, blocked, deferred 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. Categories in our databases include the following:

7

Table of Contents

      Websense Reporter. Websense Reporter™ is a reporting application that is offered with Websense Enterprise. This application assists managers in analyzing Internet use within their organizations. Websense Reporter can generate more than 60 tabular and graphical reports based on an organization’s Internet use. It analyzes information from Internet monitoring logs and builds visual charts in a variety of formats for easy distribution to and interpretation by managers. Websense Reporter enables managers to identify useful information, including summaries of categories of Web sites visited, requests to all destinations and details regarding individual destination requests.

      Client Application Manager. Client Application Manager allows 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. Our Client Application Manager database currently consists of more than 70,000 software applications and other executables. We are expanding this database as well as adapting the database to actual employee computing patterns through the use of AppCatcher™, a feature by which customers anonymously send uncategorized applications and other executables launched by their employees to us for review and categorization into our Client Application Manager database.

      Bandwidth Optimizer. Bandwidth Optimizer allows customers to dynamically manage network traffic by prioritizing business and non-business related traffic flows. Customers can apply management policies based on content category, protocols, user, group or network segment. Bandwidth Optimizer relies on the central policy engine in the Websense Enterprise platform, a network agent that monitors network traffic and databases of protocols, file types and content categories.

      Websense Explorer. Expected to be released in the second quarter of 2003, Websense Explorer^TM will be a dynamic, Web-based reporting tool designed to provide non-technical users with easy access to trend and risk data associated with Internet access. Designed to provide more detail than traditional summary level metrics, such as usage by user, category, or time of day, Websense Explorer allows the user to drill down within the collected data to provide a multitude of user-defined information views.

Customers

      Our more than 18,100 customers range from companies with as few as 100 employees to members of the Global 1000 to government agencies and educational institutions. In total, these customers have subscribed to

8

Table of Contents

Sales, Marketing and Distribution

      Sales. We sell our products and services through both indirect and direct channels. For 2002, indirect channel sales comprised more than 75% of total revenues, while direct sales to customers accounted for the remainder of our revenues. In the United States, we typically sell our products through a network of more than 950 value added resellers. Internationally, we sell our products through a multi-tiered distribution network of more than 150 distributors and resellers in over 80 countries.

      Our channel sales efforts are coordinated worldwide through a sales team of approximately 80 individuals. Customers that buy direct from us are typically large organizations that prefer a direct relationship with us.

      In 2002, we generated approximately 32% of our total revenue from customers outside of the United States. Revenue generated in the United Kingdom represented approximately 8% of our total revenues and revenue generated in Japan represented approximately 5% of our total revenues. We expect international markets to provide increased opportunities for our products in the future. Our current international efforts are focused on expanding our indirect sales channels in Asia/ Pacific, Europe, Latin America and Australia. Our continuing reliance on sales in international markets exposes us to risks attendant to foreign sales. See “Item 7. Risks and Uncertainties — 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 problems associated with unmanaged employee use of corporate computing resources, generate qualified sales leads for our channel partners, build our brand awareness and increase recognition of Websense as a provider of employee Internet management solutions.

      Our marketing efforts are targeted toward operational executives and decision makers within businesses, 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 employee misuse of the Internet and other computing resources at work. We also provide free trials of Websense Enterprise to potential customers and channel partners, typically for 30-day periods. Our additional marketing initiatives include:

	•	advertising in high-technology trade magazines, management journals and other business oriented periodicals;
	•	participation in and sponsorship of trade shows and industry events;
	•	hosting regional and international seminars and training sessions for our reseller partners;
	•	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; and
	•	use of our Web site to communicate with our indirect sales channels and provide product and company information to interested parties.

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

9

Table of Contents

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 assurance and documentation. 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. Research and development expenses totaled $11.0 million in 2002, $7.6 million in 2001 and $6.3 million in 2000.

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 up to 50,000 users on a single server. 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. With the introduction of Websense Enterprise Version 5 in March 2003, the server-based platform has been augmented with agents at the desktop and on the network that now allow customers to manage applications, protocols, and network bandwidth, as well as Web site access.

      Database Content Analysis and Updating. We use a process of automated content assessment and classification with manual verification to gather and classify new Web sites for our database. Our automated search technology uses Java-based tools and proprietary pattern recognition systems to automatically search the Internet to identify and catalog Web sites into one of our more than 80 database categories. Additionally, the optional WebCatcher and AppCatcher features of Websense Enterprise collect unrecognized sites and desktop software applications from customers and returns 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 network filtering products, such as SurfControl plc, Secure Computing, Symantec Corporation, N2H2 Incorporated, 8e6 Technologies, Webwasher and Elron Software, Inc.; and
	•	companies offering network reporting products, such as NetIQ and Wavecrest Computing.

      We also face current and potential competition from vendors of Internet servers, operating systems and networking hardware, many of which now, or may in the future, develop and/or bundle employee Internet management 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. We may face new competition from companies offering quality of service solutions, such as Packeteer, and companies with a direct presence on computer desktops, such as Microsoft, as we introduce new products, such as the Client Application Manager and Bandwidth Optimizer. Many of

10

Table of Contents

      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;
	•	quality of a large and professionally maintained category database;
	•	breadth of product line, giving customers a number of implementation choices;
	•	depth of monitoring, reporting and analysis capabilities;
	•	capacity to integrate with key network providers;
	•	quality of customer support; and
	•	price and payment methods.

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 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 five patent applications pending in the United States and eight pending international patent applications that seek to protect our proprietary database and filtering technologies. We do not have any issued patents and our pending patent applications may not 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 28, 2003, we had 329 employees. None of our employees is represented by a labor union, and we have never experienced a work stoppage. We believe that our relations with our employees are good.

Web Site Access to SEC Filings

      We maintain an Internet website at www.websense.com. 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 Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

11

Table of Contents

Executive Officers

      Our executive officers and their ages as of February 28, 2003 are as follows:

      John B. Carrington has served as our Chief Executive Officer since May 1999 and has served as a Director and our Chairman since June 1999. Mr. Carrington also served as our President from May 1999 to January 2003. 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. From September 1991 to October 1995, Mr. Carrington was President and Chief Executive Officer of Digitalk, Inc., a software development tools company, which was merged to form ParcPlace-Digitalk, Inc. He received his B.S. in Business Administration from the University of Texas.

      Curtis H. Staker has served as our President since January 2003. Prior to that, he had served as our Executive Vice President of Worldwide Sales since February 2001. Prior to joining us, Mr. Staker was with Structural Dynamics Research Corporation (SDRC) from July 1989 to February 2001 serving in a variety of management positions, including Vice President and General Manager of Americas Operations (North and South America regions) and Vice President and General Manager of Asia-Pacific Operations. SDRC, a provider of e-business collaboration solutions, is now owned by Electronic Data Systems (EDS). Mr. Staker began his career as an engineer for Caterpillar Tractor Co. after receiving his B.S. in Mechanical Engineering from Bradley University.

      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. From February 1992 to January 1996, Mr. Wride was Chief Financial Officer at Digitalk, Inc. Mr. Wride has also held senior-level positions with SSD Management, Inc., a developer of network communications software for wide area networks and Accountants Overload Group, an accounting, finance and data processing job placement company, and spent 11 years in the entrepreneurial technology group at Price Waterhouse & Co. Mr. Wride is a C.P.A and received his B.S. in Business/ Accounting from the University of Southern California.

      Harold M. Kester has served as our Chief Technology Officer since June 1999. Prior to joining us, from August 1993 to June 1999, Mr. Kester served as Vice President of Encyclopedia Britannica, a provider of general reference materials on a multitude of subjects, and General Manager and Chief Scientist of its La Jolla Research Laboratory. Prior to his employment with Encyclopedia Britannica, Mr. Kester founded The Del Mar Group, a provider of information retrieval software products. Mr. Kester received his B.A. in Mathematics from California State University, Long Beach.

      Karen V. Goodrum has served as our Vice President of Finance and Administration since 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 previously served as Vice President of Finance and Administration for COMPS.Com, Inc. from September 1993 to January 1997. Ms. Goodrum

12

Table of Contents

      Ronald B. Hegli has served as our Vice President of Engineering since March 1999. Prior to joining us, from August 1998 to March 1999, Mr. Hegli served as Director of Product Development for Nuera Communications, an Internet protocol telephony vendor. From March 1994 to April 1998, Mr. Hegli served as Vice President of Engineering with TriTeal Corp., a graphical user interface software developer. TriTeal Corp. filed a bankruptcy petition in April 1999. Mr. Hegli received his B.S. in Nuclear Engineering from Oregon State University and an M.S. in Mechanical Engineering from the University of California, Berkeley.

      Andrew Meyer has served as our Vice President of Marketing since August 1999. From November 1997 to August 1999, Mr. Meyer served as Vice President of Marketing for Epicor Software (formerly Platinum Software), a provider of enterprise resource planning software. From September 1993 to November 1997, Mr. Meyer was Director of Marketing for Scientific-Atlanta, a cable television and telecommunications manufacturer. Mr. Meyer received his bachelor’s degree in Mechanical Engineering from Georgia Tech and an M.B.A. from the University of New Orleans.

      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 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. 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. From December 1995 to July 1997, he held key positions in marketing management with FileNET Corporation, a developer of software for e-process management. Mr. Saneii received his B.S. in Computer Science from New York University, and an M.S. in Computer Science from Rutgers University.

      Our corporate headquarters and principal offices are located in San Diego, California, where we lease approximately 65,000 square feet. This lease expires in December 2007, with an option to extend the lease for an additional five years. We believe that our current space is adequate for our current and identified future needs. We lease office space in the UK, Ireland, Japan and France in executive suite arrangements on an annual basis.

      We are not a party to any material legal proceedings.

      There were no matters submitted to a vote of the security holders during the fourth quarter of the fiscal year-ended December 31, 2002.

13

Table of Contents

PART II

      Our Common Stock is traded on the Nasdaq National Market under the symbol “WBSN.” The following table sets forth the range of high and low closing prices on the Nasdaq National Market 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.

      To date, we have neither declared nor paid any dividends on the Common Stock. We currently intend to retain all future earnings, if any, for use in the operation and development of our business and, therefore, do not expect to declare or pay any cash dividends on the Common Stock in the foreseeable future. As of February 28, 2003, there were approximately 5,500 holders of record of the Common Stock.

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.

      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 statement of operations data for the years ended December 31, 2002, 2001 and 2000 and the balance sheet data as of December 31, 2002 and 2001 from our financial statements audited by Ernst & Young LLP, which appear elsewhere in this report. We derived the statement of operations data for the years ended December 31, 1999 and 1998 and the balance sheet data as of December 31, 2000, 1999 and 1998 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.

14

Table of Contents