UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from      to

Commission File Number: 0-31613

WEBSIDESTORY, INC.

(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. þ Yes o No

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

     The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of March 31, 2005 was 15,638,279.

WEBSIDESTORY, INC.

FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

WEBSIDESTORY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

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

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WEBSIDESTORY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

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

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WEBSIDESTORY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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. The Company 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. 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).

2. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying condensed consolidated balance sheet as of March 31, 2005 and the condensed consolidated statement of operations and cash flows for the three months ended March 31, 2005 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 annual report on Form 10-K for the year ended December 31, 2004.

     The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“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 Company’s 2004 Annual Report on Form 10-K and include all adjustments necessary for the fair statement of the Company’s financial position as of March 31, 2005, its results of operations for the three months ended March 31, 2005 and 2004 and cash flows for the three months ended March 31, 2005 and 2004. The results for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the year ending December 31, 2005.

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.

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, certain long-term investments 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 revenue 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 March 31, 2005 and December 30, 2004, the allowance for potential credit losses was $395,000, and $407,000, respectively. The Company

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had no revenue generated from a single customer who accounted for more than 10% of revenue for the three months ended March 31, 2005 or 2004.

     As of March 31, 2005 and December 31, 2004, assets located outside the United States were 12% and 10% of total assets, respectively. Revenue for the three months ended March 31, 2005 and 2004, outside the United States were as follows (in thousands):

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 $337,000 and $0 during the three months ended March 31, 2005 and 2004, respectively. Capitalized software and website development costs are included in other assets in the accompanying condensed consolidated balance sheets. Amortization expense totaled $33,000 and $9,000 during the three months ended March 31, 2005 and 2004, respectively.

Comprehensive Income

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

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 (“FASB”) No. 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plan.

     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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     For purposes of the above pro forma calculation, the value of each option granted was estimated on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions:

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.

     Certain classes of preferred stock previously outstanding were entitled to participate in cash dividends in preference to common stock. For purposes of calculating basic earnings per share, undistributed earnings were 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 was 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 was anti-dilutive, the effect of such securities was 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 March 31, 2004 because such securities are anti-dilutive for that period. The total number of potential common shares excluded from the calculation of diluted loss per share is detailed in the table below:

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     Employee stock options to purchase approximately 66,354 shares of common stock during the three months ended March, 31, 2005 were outstanding but not included in the computation of diluted earnings per share because the option price was greater that than the average market price of the common stock, and therefore, the effect on diluted earnings per share would be anti-dilutive. The following table sets forth the computation of basic and diluted net income (loss) per share for the three months ended March 31, 2005 and 2004, respectively (in thousands, except share and per share data):

Income Taxes

     The Company has provided for income taxes using an estimated effective rate of approximately 5% for the quarter ended March 31, 2005. The Company has not provided for United States income taxes as it believes its deferred tax assets will be sufficient to cover all earnings for the three months ended March, 31, 2005; however, certain changes in ownership may limit the amount of net operating loss carryforwards that can be utilized in the future to offset taxable income. As of March 31, 2005, the Company had provided a valuation allowance on substantially all deferred tax assets. The Company has calculated its estimated effective tax rate based on certain estimated foreign taxes, state taxes and federal alternative minimum taxes.

3. Recently Issued Accounting Pronouncement

     In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25 (“ABP No. 25”), Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Such stock option expensing will require the Company to change its accounting policy. The Company currently accounts for stock-based awards to employees in accordance with APB No. 25. Under the Company’s current accounting policy, the Company records stock-based compensation based on the difference between the exercise price of the stock option and the fair market value at the time of grant. To arrive at the fair value for each option grant, SFAS No. 123R requires the use of an option pricing model to evaluate the Company’s stock by factoring in additional variables such as expected life of the option, risk-free interest rate, expected volatility of the stock and expected dividend yield. Subsequently, in May 2005, the Securities and Exchange Commission approved the rule delaying the effective date of SFAS No. 123R to the annual period beginning after June 15, 2005. SFAS No. 123R will be effective for the Company for the quarter ended March 31, 2006. The Company is evaluating the effect this rule will have on its consolidated financial statements and its future results.

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4. Composition of Certain Balance Sheet Captions

Property and Equipment

     The following table sets forth the components of property and equipment, net (in thousands):

     The Company leases certain computer and office equipment under capital leases. Included within property, plant and equipment was $121,000 of such equipments as of March 31, 2005 and December 31, 2004. Accumulated amortization relating to certain computer and office equipment under capital leases totaled $9,000 and $3,000 at March 31, 2005 and December 31, 2004, respectively.

Investments

     Short-term and long-term investments consist of the following (in thousands):

Accrued Liabilities

     The following table sets forth the components of accrued liabilities (in thousands):

5. Subsequent Event

     On May 4, 2005, pursuant to the Agreement and Plan of Merger (“Merger Agreement”), entered into by the Company on February 8, 2005, WSSI Acquisition Company, a California corporation and a direct, wholly-owned subsidiary of the Company (“Merger Sub”) merged with and into Avivo Corporation, a California corporation (“Avivo”). As a result of this transaction (the “Merger”), and

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pursuant to the terms of the Merger Agreement, Avivo is now a wholly-owned subsidiary of the Company and will be merged with and into a wholly-owned subsidiary of the Company within 30 days of the date of the Merger.

     Under the terms of the Merger Agreement, the Company issued 3,123,149 shares of common stock and options and paid $4,199,172 in cash, in exchange for the outstanding capital stock and options of Avivo. Avivo’s shareholders also have the right to receive an earn-out payment based on achievement of certain revenues by Avivo in the fifteen-month period following the closing, with such payment not to exceed $4.1 million.

     In addition, in accordance with the terms of the Merger Agreement and the Escrow Agreement (the “Escrow Agreement”), entered into by the Company on May 4, 2005, approximately nineteen percent of the common stock and cash will be held in escrow for a fifteen-month period (with a portion extended to up to twenty-four months) following closing of the Merger to satisfy possible indemnification claims made by the Company. The Company has also granted, pursuant to its existing equity incentive plan, options to purchase an aggregate of 447,000 shares of Parent common stock to the employees of the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption “Ri