UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

_______________

FORM 10-Q

Commission File Number: 0-31613

WEBSIDESTORY, INC.

(858) 546-0040
(Registrant’s telephone number, including area code)

     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. [  ] Yes [X] No

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

     The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of November 10, 2004 was 15,623,602.

WEBSIDESTORY, INC.

FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

WEBSIDESTORY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Note (a): See footnote 4 related to the pro forma effects of the initial public offering completed on October 1, 2004.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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WEBSIDESTORY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

The accompanying notes are an integral part of these condensed consolidated financial statements.

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WEBSIDESTORY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

The accompanying notes are an integral part of these condensed consolidated financial statements.

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WebSideStory, Inc.

Notes to Condensed Consolidated Financial Statements
(unaudited)

1. The Company

Nature of Business

     WebSideStory, Inc. (the “Company”) was founded and commenced operations in September 1996 and is a leading provider of on-demand web analytics services. The Company’s services, including its primary service, HBX, are used by customers to better understand how Internet users respond to website design and content, online marketing campaigns and e-commerce offerings. These services are provided to customers for a fee, which is either fixed or based on the actual number of web sites and total page views and transactions analyzed by the Company’s services. Contracts for subscription services typically range in duration from one to three years.

     The Company’s business consists of a single reportable segment. The Company’s operations were located solely in the United States through December 1999. In order to pursue the sale of its products and services in international markets, the Company established wholly owned subsidiaries in France (February 2000), the Netherlands (August 2000) and the United Kingdom (April 2003).

     The Company has generated substantial operating losses during the five years ended December 31, 2003. The Company generated net income of $940,000 for the nine months ended September 30, 2004 and completed its initial public offering on October 1, 2004 which resulted in the sale of 5,000,000 shares of the Company’s common stock at the initial offering price to the public of $8.50 per share. A total of $42,500,000 in gross proceeds was raised in the initial public offering. After deducting the underwriting discount of $2,975,000 and offering expenses of $1,411,000, net proceeds were $38,114,000. On October 26, 2004, in connection with the full exercise of the underwriters’ over-allotment option, 750,000 additional shares of common stock were sold on behalf of certain selling stockholders at the initial public offering price of $8.50 per share, for an aggregate offering price of $6.4 million. The Company did not receive any proceeds from the sale of these additional shares.

2. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying condensed consolidated balance sheet as of September 30, 2004 and the condensed consolidated statement of operations and cash flows for the three and nine months ended September 30, 2003 and 2004 and the related condensed footnote disclosures are unaudited. These condensed statements and the related condensed notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial position and results of operations, contained in the Company’s Prospectus (the “Prospectus”) filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, filed with the Securities and Exchange Commission on September 28, 2004.

     The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in the Prospectus and include all adjustments necessary for the fair presentation of the Company’s statement of financial position as of September 30, 2004, its results of operations for the three and nine months ended September 30, 2003 and 2004 and cash flows for the nine months ended September 30, 2003 and 2004. The results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004.

Stock Split

     In connection with its initial public offering, the Company effected a 3.5-for-1 reverse common stock split as approved by the Company’s board of directors on July 14, 2004 and by its stockholders on July 21, 2004. All per share and share amounts in the condensed consolidated financial statements have been retroactively restated to reflect the effect of this reverse stock split.

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Use of Estimates

     The condensed consolidated financial statements of the Company have been prepared using accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from those estimates.

Principles of Consolidation

     The Company’s condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries HitBox, Inc., WebSideStory SAS, WebSideStory Holding B.V., WebSideStory Call Center and Service B.V. and WebSideStory UK Limited. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

Foreign Currency

     The Company’s foreign subsidiaries use their local currency as their functional currency. The accounts of these foreign subsidiaries have been translated into U.S. dollars using the current exchange rate as of the balance sheet date for assets and liabilities and the average exchange rate for the period for revenues and expenses. Cumulative translation gains or losses are recorded as accumulated other comprehensive income in stockholders’ equity (deficit).

Concentration of Credit Risk and Significant Customers and Suppliers

     The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term marketable securities, and trade accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits.

     The Company’s accounts receivable and net revenues are derived from a large number of direct customers. Collateral is not required for accounts receivable. The Company maintains an allowance for potential credit losses as considered necessary. At December 31, 2003 and September 30, 2004, the allowance for potential credit losses was $553,000, and $585,000, respectively. The Company had revenues generated from a single customer who accounted for 14% and less than 10% for the three months ended September 30, 2003 and 2004 and 15% and 10% for the nine months ended September 30, 2003 and 2004, respectively.

     As of December 31, 2003 and September 30, 2004, assets located outside the United States were 13% and 18% of total assets, respectively. Revenues for the three and nine months ended September 30, 2003 and 2004, outside the United States were as follows (in thousands):

Revenue by Geography

     All of the Company’s servers related to its services and its customer data are located at a single third party co-location facility in San Diego, California. The Company does not control the operation of this facility, and it is vulnerable to damage or interruption in the event the third-party co-location facility fails.

Cash Equivalents

     The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. Cash and cash equivalents, which consist of cash on deposit with banks and money market funds, are stated at cost, which approximates fair value.

Marketable Securities

     Management determines the appropriate classification of investments in marketable securities at the time of purchase and re-evaluates such determination at each balance sheet date. The investments as of September 30, 2004 of $1,900,000 consisted of certificates of

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deposit with maturities ranging from six to nine months. The Company classified these investments as held-to-maturity as of September 30, 2004.

Property and Equipment

     Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of those assets as follows:

     When assets are retired, the cost and accumulated depreciation and amortization are removed from their respective accounts and any loss on such retirement is reflected in operating expenses. When assets are otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from their respective accounts and any gain or loss on such sale or disposal is reflected in other income (expense). The Company has not retired any fixed assets in the periods presented.

     Repair and maintenance costs are expensed in the period incurred.

Impairment of Long-Lived Assets

     The Company evaluates the recoverability of its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss would be recognized when undiscounted cash flows expected to be generated by an asset or group of assets are less than the carrying amount. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and a charge to operations. No impairment losses have been identified by the Company.

Software and Website Development Costs

     The Company capitalizes qualifying software and website development costs, which are incurred during the application development stage, and amortizes them over their estimated useful lives. The Company capitalized $0 and $58,000 during the three months ended September 30, 2003 and 2004 and $105,000 and $58,000 during the nine months ended September 30, 2003 and 2004, respectively. Capitalized software and website development costs are included in other assets in the accompanying condensed consolidated balance sheets. Amortization expense totaled $9,000 and $12,000 during the three months ended September 30, 2003 and 2004 and $15,000 and $30,000 during the nine months ended September 30, 2003 and 2004, respectively.

Comprehensive Income (Loss)

     Comprehensive income (loss) consists of accumulated other comprehensive income and net income (loss). Accumulated other comprehensive income includes certain changes in equity that are excluded from net income (loss). Specifically, cumulative foreign currency translation adjustments are included in accumulated other comprehensive income.

Accounting for Stock-Based Compensation

     The Company measures compensation expense for its employee and director stock-based compensation plans using the intrinsic value method and provides pro forma disclosures of net income (loss) as if a fair value method had been applied in measuring compensation expense. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair value of the Company’s common stock at the date of grant over the amount an employee must pay to acquire the stock. Stock-based compensation is amortized over the related service periods using an accelerated graded method in accordance with Financial Accounting Standards Board No. 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plan (“FIN 28”).

     Had compensation expense for employee stock options been determined based on the fair value of the options on the date of grant, the Company’s net income (loss) would have been as follows (in thousands, except per share data):

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Earnings (loss) per share

     In July 2004, the Company adopted Emerging Issues Task Force (EITF) No. 03-06, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share. The consensus required the use of the two-class method in the calculation and disclosure of basic earnings per share and provided guidance on the allocation of earnings and losses for purposes of calculating basic earnings per share. The Company presented losses attributable to common stockholders for all periods with the exception of the three months ended September 30, 2004. Accordingly, the earnings for the three months ended September 30, 2004 were allocated to the participating preferred stockholders, giving effect to such guidance.

     Certain classes of preferred stock are entitled to participate in cash dividends in preference to common stock. For purposes of calculating basic earnings per share, undistributed earnings are allocated first to participating preferred stock up to the stated preferential dividend and any excess dividend distribution is allocated to common and participating preferred shares on a pro rata basis. Basic earnings per share is determined by dividing net income available to common and participating stockholders by the weighted average number of common and participating shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if options to issue common stock or conversion rights of preferred stocks were exercised. In periods in which the inclusion of such instruments is anti-dilutive, the effect of such securities is not given consideration.

     The Company has excluded all convertible redeemable preferred stock, outstanding stock options and unvested common stock subject to repurchase from the calculation of diluted loss per share for the thee months ended September 30, 2003 and the nine months ended September 30, 2003 and 2004 because such securities are antidilutive for these periods. The total number of potential common shares excluded from the calculation of diluted loss per share for the following periods are detailed in the table below:

     The following table sets forth the computation of basic and diluted net income (loss) per share for the three months ended September 30, 2003 and 2004 and the nine months ended September 30, 2003 and 2004 (in thousands, except share and per share data):