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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2003

OR

Commission File Number 000-30093

Websense, Inc.

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

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

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

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of April 30, 2003 was 21,884,155.

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Websense, Inc.
Form 10-Q
For the Period Ended March 31, 2003

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Part I – Financial Information

Item 1. Consolidated Financial Statements (Unaudited)

Websense, Inc.
Consolidated Balance Sheets
(In thousands)

See accompanying notes.

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

See accompanying notes.

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Websense, Inc.

Consolidated Statement of Stockholders’ Equity

(Unaudited and in thousands)

See accompanying notes.

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Websense, Inc.

Consolidated Statements of Cash Flows

(Unaudited and in thousands)

See accompanying notes.

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WEBSENSE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information or footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our financial position and of the results for the interim periods presented.

     These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2002, included in Websense, Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

2. Net Income Per Share

     Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share.

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2. Net Income Per Share (continued)

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

     For the three months ended March 31, 2003 and 2002, there were outstanding options to purchase 1,546,000 and 884,000 shares, respectively, that had an exercise price greater than the average market price of the common shares for the respective quarters. Therefore, these shares would have had an anti-dilutive effect on EPS.

3. Amortization of Stock-based Compensation

     For the three month periods ended March 31, 2003 and 2002, the Company recorded amortization of stock-based compensation. The allocation of the expense by operating expense category is as follows (in thousands):

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4. Comprehensive Income

     Components of comprehensive income were as follows (in thousands):

     Accumulated other comprehensive income totaled $342,000 and $476,000 at March 31, 2003 and December 31, 2002, respectively.

5. Stock Based Compensation

     The Company accounts for its stock-based compensation plans under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. The pro forma information below is based on provisions of Statement of Financial Accounting Standard (“FAS”) No. 123, Accounting for Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure, issued in December 2002. 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: risk free interest rates of 2.71%, dividend yields of 0%, expected volatility of 102%, and life of 5 years.

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