WEBSENSE INC, S-1/A, 2000-03-23

WEBSENSE INC
S-1/A, 2000-03-23
BUSINESS SERVICES, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 2000

REGISTRATION NO. 333-95619
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 2 TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

WEBSENSE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 7373 51-0380839
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

10240 SORRENTO VALLEY ROAD
SAN DIEGO, CALIFORNIA 92121
(858) 320-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

JOHN B. CARRINGTON

PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
WEBSENSE, INC.
10240 SORRENTO VALLEY ROAD
SAN DIEGO, CALIFORNIA 92121
(858) 320-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
RICHARD A. FINK, ESQ. MARGARET H. KAVALARIS, ESQ.
MICHAEL S. KAGNOFF, ESQ. SCOTT M. STANTON, ESQ.
JEFFREY C. THACKER, ESQ. MARTY B. LORENZO, ESQ.
BROBECK, PHLEGER & HARRISON LLP GRAY CARY WARE FREIDENRICH LLP
38 TECHNOLOGY DRIVE 4365 EXECUTIVE DRIVE, SUITE 1600
IRVINE, CALIFORNIA 92618 SAN DIEGO, CALIFORNIA 92121
(949) 790-6408 (858) 677-1400
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF EACH CLASS NUMBER OF MAXIMUM PRICE MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED SHARES(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value.... 4,600,000 $16.00 $73,600,000 $19,431(3)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes 600,000 shares subject to an option in favor of the underwriters to
cover over allotment, if any.

(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933, as amended.

(3) Of this amount, $17,002 was previously paid.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION
8(a), MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

The information in this prospectus is not complete and may be changed.
Underwriters may not confirm sales of these securities until the
registration statement filed with the Securities and Exchange Commission
is effective. This prospectus is not an offer to sell these securities,
and we are not soliciting an offer to buy these securities, in any state
where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MARCH 23, 2000

PRELIMINARY PROSPECTUS

4,000,000 SHARES

WEBSENSE LOGO

COMMON STOCK

This is an initial public offering of common stock by Websense, Inc. We
estimate the initial public offering price will be between $14.00 and $16.00 per
share.

------------------

Prior to this offering, there has been no public market for our common
stock. Following this offering, our executive officers, directors and principal
stockholders, and their respective affiliates, will beneficially own
approximately 75% of our common stock. These stockholders, if acting together,
will be able to control substantially all matters requiring approval by our
stockholders. We have applied to have our common stock approved for quotation on
the Nasdaq National Market under the symbol WBSN.

------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Websense, Inc., before expenses................. $ $
</TABLE>

Two of our stockholders have granted the underwriters an option for a
period of 30 days to purchase up to 600,000 additional shares of common stock.
We will not receive any proceeds from the sale of common stock by the selling
stockholders.

------------------

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.

------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

CHASE H&Q
SG COWEN
WIT SOUNDVIEW
, 2000
<PAGE> 3

INSIDE FRONT COVER:

A circle divided into four sections with our logo in the center. The
sections are labelled "Markets," "Customers," "Channels" and "Network
Infrastructure," and respectively list the markets in which we sell our
products, a representative segment of our customers, the mediums through which
we sell our products and the infrastructure components with which our products
integrate.

FRONT GATEFOLD:

A pictorial chart depicting the applications of our main product. The chart
shows our product in the center and depicts links between our product and the
Internet, our database, our customers and our customers' employees.

INSIDE BACK COVER:

A circle with our logo in the center. Around the top of the circle is the
word "Problem," and around the bottom of the circle is the word "Opportunity."
Below the word "Problem," the following question is posed: "Are your employees
spending too much time using the Internet for non-business related activities?"
Above the word "Opportunity" is the following list of benefits of our product:
"Improve employee productivity; conserve corporate bandwidth; mitigate potential
legal liability."
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Special Note Regarding Forward-Looking Statements........... 21
Use of Proceeds............................................. 22
Dividend Policy............................................. 22
Capitalization.............................................. 23
Dilution.................................................... 24
Selected Financial Data..................................... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 34
Management.................................................. 46
Principal and Selling Stockholders.......................... 59
Transactions with Related Parties........................... 62
Description of Capital Stock................................ 64
Shares Eligible for Future Sale............................. 68
Underwriting................................................ 70
Legal Matters............................................... 73
Experts..................................................... 73
Where You Can Find More Information......................... 73
Index to Financial Statements............................... F-1
</TABLE>

------------------------

We own or have rights to trademarks on tradenames that we use in
conjunction with the sale of our products and services. Websense is a registered
trademark that we own. Websense Enterprise, AfterWork and AfterWork.com are
trademarks that we own. This prospectus also contains trademarks and tradenames
of other companies.

------------------------

We use market data and industry forecasts in this prospectus, which we have
obtained from internal surveys, market research, publicly available information
and industry publications.

3
<PAGE> 5

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the financial statements and
notes thereto, before making an investment decision.

WEBSENSE, INC.

We provide employee Internet management products that enable businesses to
monitor, report and manage how their employees use the Internet. We believe we
have the largest market share and revenues among providers of employee Internet
management products to large businesses. Our Websense Enterprise software and
database product gives managers the ability to implement Internet access
policies for different users and groups within their businesses, and supports
their efforts to improve employee productivity, conserve network bandwidth and
mitigate potential legal liability. Websense Enterprise is sold on a
subscription basis and consists of a software application that references our
proprietary database of Web site addresses. As of January 31, 2000, our products
were in use by more than 7,500 organizations in over 50 countries. The top ten
users of Websense Enterprise based on subscription fees since January 1999,
include American Express Company, AT&T Wireless Services, Compaq Computer
Corporation, Department of the Army, IBM Corp., J.C. Penney Company, Inc., Japan
Ministry of Education, Merrill Lynch & Co., Inc., Proctor & Gamble Co. and Saudi
Aramco.

Our business faces numerous risks. We operate in a highly competitive
market and have a history of significant net losses. We have incurred net losses
in each of the last 12 fiscal quarters. Our net losses totaled approximately
$1.5 million, $5.6 million and $9.3 million for the fiscal years 1997, 1998 and
1999, respectively. We anticipate that we will experience significant losses and
negative operating cash flow for the foreseeable future. As of December 31,
1999, we had an accumulated deficit of $14.9 million.

The Internet has emerged as an important communications and commerce
platform for enterprises around the world. Many companies are using the Internet
to streamline business processes and enable business applications that are
accessed over the corporate network. These companies are making substantial
investments to provide high-speed Internet access to large numbers of their
employees. The Internet has also become a highly popular consumer medium for
entertainment, information and commerce. International Data Corporation, a
market research firm, projects that the number of Internet users worldwide will
reach 316 million by 2002. Because Internet access in the workplace is fast,
convenient and essentially free to employees, employees tend to use their
employers' Internet connections for personal or recreational purposes during
work hours. We believe that a substantial amount of employee Internet activity
in the workplace is non-work-related, and that a significant portion of
non-business-related e-commerce is conducted through an Internet connection at
work. Employees' personal use of company Internet access during business hours
can result in lost employee productivity, increased network bandwidth
consumption and potential legal liability.

Given the Internet's increasingly important role as a business tool and its
continuing adoption as a consumer medium for entertainment, information and
commerce, management of employee Internet access is increasingly becoming a
priority for businesses worldwide. Our products enable businesses to rapidly
implement and configure Internet access policies for specific groups, user types
and individuals within an organization. Our flexible and easy-to-use software
applications operate in conjunction with our proprietary database, which
categorizes Web sites by their content. These software applications, which make
up our Websense Enterprise product, provide managers with various reporting
features and policy options such as blocking Web sites completely or

4
<PAGE> 6

partially, setting time periods for access, allowing access but generating an
exception report or postponing access until after work hours. Our software
enforces these management policies by comparing Web site requests with the Web
site addresses we have categorized in our database. Our database, which is
downloaded to a customer's network, is organized in 54 categories and
encompasses more than 900,000 Web sites representing approximately 95 million
Web page addresses. We add approximately 2,000 newly categorized Web sites to
our database each business day using a proprietary process of automated content
assessment and classification with manual verification, and we make these
updates available to our customers for incremental daily downloads. Websense
Enterprise is easy to deploy and use, and has minimal impact on an
organization's information technology department. In addition, our products
require no additional hardware, can grow with our customers as they expand and
support a broad range of network platforms, including proxy servers, firewalls
and other network appliances and software.

Our primary strategic objective is to maintain and strengthen our position
in the market for employee Internet management products. We plan to achieve this
objective by acquiring new customers and pursuing subscription renewals and
enterprise-wide deployment of our software within existing customers. We also
believe that our installed base of large, established companies provides our
software application with market credibility, and that our use of the names of
these customers and statements from their representatives in our marketing
materials will enable us to attract new customers and deepen our market
penetration. We also intend to expand our global network of more than 450
value-added resellers and distributors. We plan to leverage our relationships
with our original equipment manufacturers and technology providers, a complete
list of which includes CacheFlow Inc., Check Point Software Technologies Ltd.,
Cisco Systems, Inc., eSoft, Inc., Inktomi Corporation, Nokia Corporation,
SecurIt, Global Technology Associates, Inc., NetScreen Technologies, Inc., and
Netopia, Inc. We also plan to expand the functionality of Websense Enterprise,
further develop our database-building technologies and capitalize on incremental
revenue opportunities through the introduction of new products and databases.

Our business was founded in 1994 as NetPartners Internet Solutions, a
reseller of computer network security products. In 1996, we released Websense
Internet Screening System, our first product as a software developer, and, in
1999, we changed our name to Websense, Inc.

We maintain a Web site at www.websense.com. Information contained on our
Web site does not constitute part of this prospectus. Our principal executive
offices are located at 10240 Sorrento Valley Road, San Diego, California 92121,
and our telephone number is (858) 320-8000.

5
<PAGE> 7

THE OFFERING

Common stock offered by us ................. 4,000,000 shares

Common stock to be outstanding after this
offering.................................... 19,394,698 shares

Use of proceeds............................. Selling and marketing, research
and development, working capital
and general corporate purposes.
See "Use of Proceeds."

Proposed Nasdaq National Market Symbol...... WBSN
- -------------------------

This table is based upon shares outstanding as of December 31, 1999, and
excludes the following shares:

- 3,161,551 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price $0.83 per share;

- 112,500 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.69 per share; and

- 336,328 shares available for future grant as of December 31, 1999 under
our 1998 stock plan, and an additional approximately 1,000,000 shares
available for future grant under our stock plans to become effective at
the close of this offering.

Except as otherwise indicated, all information in this prospectus is based
on the following assumptions:

- the conversion of each outstanding share of preferred stock into one
share of common stock upon completion of this offering;

- no exercise of the underwriters' overallotment option; and

- amendments to our certificate of incorporation and bylaws to be effective
upon completion of this offering.

6
<PAGE> 8

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following table sets forth summary financial data for our company. You
should read this information together with the financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997 1998 1999
---- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Subscriptions...................................... $ -- $ 14 $ 637 $ 2,503 $ 7,141
Other products and services........................ 882 2,576 4,383 4,416 1,506
---- ------ ------- ------- -------
Total revenues................................ 882 2,590 5,020 6,919 8,647
---- ------ ------- ------- -------
Gross margin......................................... 403 1,021 1,588 2,459 6,372
Income (loss) from operations........................ 276 31 (1,427) (5,642) (9,479)
Net income (loss).................................... 276 27 (1,462) (5,609) (9,254)

Historical net income (loss) per share(1):
Basic and diluted.................................. -- $ 0.00 $ (0.21) $ (0.80) $ (1.25)
==== ====== ======= ======= =======
Weighted average shares -- basic and diluted....... -- 7,000 7,000 7,000 7,403
==== ====== ======= ======= =======
Pro forma net income (loss) per share(1):
Basic and diluted.................................. $ (0.71)
=======
Weighted average shares............................ 12,979
=======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $10,735 $ 65,580
Working capital............................................. 5,222 60,067
Total assets................................................ 16,756 71,601
Deferred revenue............................................ 11,593 11,593
Long-term debt.............................................. 1,497 1,497
Total stockholders' equity.................................. 1,642 56,487
</TABLE>

The pro forma as adjusted column in the balance sheet data reflects:

- the conversion of all of our outstanding preferred stock into common
stock upon completion of this offering; and

- our sale of 4,000,000 shares of common stock at an assumed initial public
offering price of $15.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
that we will pay.

- ---------------
(1) See Note 1 of "Notes to Financial Statements" for a description of the
computation of per share information. We have not presented share and per
share data for 1995 because we operated as a sole proprietorship during that
period.

7
<PAGE> 9

RISK FACTORS

You should carefully consider the following risk factors in addition to
other information in this prospectus before purchasing 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, our industry and this
offering. If any of these or other risks actually occur, the trading price of
our common stock could decline, and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

WE HAVE A HISTORY OF LOSSES AND, BECAUSE WE EXPECT OUR OPERATING EXPENSES TO
INCREASE IN THE FUTURE, WE MAY NEVER BECOME PROFITABLE.

We have experienced net losses in each of the last 12 fiscal quarters, and
as of December 31, 1999, we had an accumulated deficit of $14.9 million. We
incurred net losses of $1.5 million for the year ended December 31, 1997, $5.6
million for the year ended December 31, 1998 and $9.3 million for the year ended
December 31, 1999. We expect to continue to incur significant net losses for the
foreseeable future. While we are unable to predict accurately our future
operating expenses, we currently expect these expenses to increase
substantially, as we, among other things:

- expand our domestic and international selling and marketing activities;

- increase our research and development efforts to upgrade our existing
products and develop new products and technologies;

- develop and expand our proprietary database and systems;

- upgrade our operational and financial systems, procedures and controls;

- hire additional personnel, including additional engineers and other
technical staff; and

- assume the responsibilities of being a public company.

We will need to significantly increase our revenues to achieve and maintain
profitability. If we fail to increase revenues from subscription fees to
Websense Enterprise, we will continue to experience losses indefinitely. We may
not be able to achieve or maintain profitability. We also may fail to accurately
estimate and assess our increased operating expenses as we grow. If our
operating expenses exceed our expectations, our financial performance will be
adversely affected, which could cause the price of our common stock to decline.

WE ARE AN EARLY-STAGE COMPANY WITH AN UNPROVEN BUSINESS MODEL, WHICH MAKES IT
DIFFICULT TO EVALUATE OUR CURRENT BUSINESS AND FUTURE PROSPECTS.

We have only a limited operating history upon which to base an evaluation
of our current business and future prospects. We began offering our employee
Internet management software in September 1996, but only since May 1998, when we
released our first version of Websense Enterprise as a significant enhancement
to our original product, have we directed a majority of our focus on this
market. We introduced the most recent version of Websense Enterprise in December
1999. As a result, the revenue and income potential of our business and our
market are unproven. In addition, we have very limited historical data with
respect to subscription renewals because we sell subscriptions that range from
one to three years in length and have only been selling Websense Enterprise for
less than two years. Further, because of our limited operating history and
because the market for employee Internet management products is relatively new
and rapidly evolving, we have limited insight into trends that may emerge and
affect our business. We may make errors in predicting and reacting to relevant
business trends, which could harm our business.

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<PAGE> 10

Before investing, you should consider an investment in our stock in light
of the risks, uncertainties and difficulties frequently encountered by
early-stage companies in new and rapidly evolving markets such as ours. We may
not be able to successfully address any or all of these risks. Failure to
adequately do so could cause our business, results of operations and financial
condition to suffer.

BECAUSE WE EXPECT TO DERIVE SUBSTANTIALLY ALL OF OUR FUTURE REVENUE FROM
SUBSCRIPTION FEES FOR WEBSENSE ENTERPRISE, ANY FAILURE OF THIS PRODUCT TO
SATISFY CUSTOMER DEMANDS OR TO ACHIEVE MORE WIDESPREAD MARKET ACCEPTANCE WILL
SERIOUSLY HARM OUR BUSINESS.

Substantially all of our revenues come from subscriptions for Websense
Enterprise, and we expect this trend will continue for the foreseeable future.
Subscription revenues accounted for approximately 83% of our total revenues in
1999 and approximately 36% in 1998. As a result, if for any reason revenues from
Websense Enterprise decline or do not grow as rapidly as we anticipate, our
operating results and our business will be significantly impaired. If Websense
Enterprise fails to meet the needs of our target customers, or if it does not
compare favorably in price and performance to competing products, our growth
will be limited. We cannot assure you that Websense Enterprise will achieve
continued market acceptance. Our future financial performance also will depend,
in part, on our ability to diversify our offerings by successfully developing,
introducing and gaining customer acceptance of new products and enhanced
versions of Websense Enterprise. We cannot assure you, however, that we will be
successful in achieving market acceptance of any new products that we develop or
of enhanced versions of Websense Enterprise. Any failure or delay in
diversifying our existing offerings could harm our business, results of
operations and financial condition.

THE MARKET FOR EMPLOYEE INTERNET MANAGEMENT PRODUCTS IS EMERGING, AND IF WE ARE
NOT SUCCESSFUL IN PROMOTING AWARENESS OF THE NEED FOR WEBSENSE ENTERPRISE AND
OF OUR WEBSENSE BRAND, OUR GROWTH MAY BE LIMITED.

Based on our experience with potential customers, we believe that many
corporations are unaware of the existence or scope of problems caused by
employee misuse of the Internet. In addition, there may be a time-limited
opportunity to achieve and maintain a significant share of the market for
employee Internet management products due in part to the emerging nature of this
market and the substantial resources available to our existing and potential
competitors. We intend to commit approximately $3 million of our marketing
communications resources in 2000 to promote awareness of the problems caused by
employee misuse of Internet access in the workplace, but we cannot assure you
that we will be successful in this effort. If employers do not recognize or
acknowledge these problems, then the market for Websense Enterprise may develop
more slowly than we expect, which could adversely affect our operating results.
Developing and maintaining awareness of our Websense brand is critical to
achieving widespread acceptance of our existing and future employee Internet
management 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.

WE MUST DEVELOP AND EXPAND OUR INDIRECT SALES CHANNELS TO INCREASE REVENUE AND
IMPROVE OUR OPERATING RESULTS.

We currently sell our products both indirectly and directly; however, we intend
to rely increasingly on our indirect sales channels. We depend on our indirect
sales channels, including
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value-added resellers, distributors, original equipment manufacturers and
Internet service providers, to offer Websense Enterprise to a larger customer
base than we can reach through our direct sales efforts. We will need to expand
our existing relationships and enter into new relationships to increase our
current and future market share and revenue. We cannot assure you that we will
be able to maintain and expand our existing relationships or enter into new
relationships, or that any new relationships will be available on commercially
reasonable terms. 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 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.

Our indirect sales channels accounted for approximately 70% of our total
revenues in 1999. We anticipate that sales from our various indirect sales
channels, including value-added resellers, distributors, original equipment
manufacturers, Internet service providers and others, will account for an
increasing percentage of our total revenues 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 significantly upon
the ability and willingness of our indirect sales channels to market and sell
our products to organizations worldwide. If they are unsuccessful in their
efforts, 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. Many of our indirect sales
channels also market and sell products that compete with Websense Enterprise. We
may not be able to prevent these parties from devoting greater resources to
support our competitors' products.

WE FACE INCREASING COMPETITION FROM BETTER ESTABLISHED COMPANIES THAT MAY HAVE
SIGNIFICANTLY GREATER RESOURCES, WHICH COULD PREVENT US FROM INCREASING
REVENUE OR ACHIEVING PROFITABILITY.

The market for our products is intensely competitive and is likely to
become even more so in the future. Increased competition could result in pricing
pressures, reduced sales, reduced margins or the failure of Websense Enterprise
to achieve or maintain more widespread market acceptance, any of which would
have a material adverse effect on our business, results of operations and
financial condition. Our current principal competitors include:

- companies offering network filtering products, such as JSB Software
Technologies plc., N2H2 Incorporated, Secure Computing Corporation and
Symantec Corporation;

- companies offering network reporting products, such as Telemate Net
Software, Inc. and WebTrends Corporation; and

- companies offering client-based software filtering products, such as The
Learning Company and Log-On Data Corporation.

- 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.

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<PAGE> 12

As a result, they may be able to respond more quickly and effectively than we
can to new or changing opportunities, technologies, standards or customer
requirements. For all of the foregoing reasons, we may not be able to compete
successfully against our current and future competitors.

OUR FUTURE GROWTH DEPENDS ON OUR EXISTING CUSTOMERS RENEWING AND PURCHASING
ADDITIONAL SUBSCRIPTIONS TO WEBSENSE ENTERPRISE.

Our future success depends on achieving substantial revenue from customer
renewals for subscriptions to Websense Enterprise. Subscriptions for Websense
Enterprise typically have a duration of 12, 24 or 36 months. Our customers have
no obligation to renew their subscriptions upon expiration. We cannot assure you
that we will generate significant revenue from renewals. In order to maintain
our revenues we must continue to sell renewal subscriptions.

Our future success also depends on our ability to sell subscriptions to
existing customers for additional employees within their respective
organizations. We believe that approximately 14% of our customers' employees are
covered by Websense Enterprise. As a result, to increase our revenues we must
sell our existing customers additional subscriptions for Websense Enterprise to
get greater coverage of their workforces. This may require increasingly
sophisticated sales efforts targeting senior management and other management
personnel associated with our customers' Internet infrastructure.

OUR DATABASE CATEGORIES AND OUR PROCESS FOR CLASSIFYING WEB SITES WITHIN THOSE
CATEGORIES ARE SUBJECTIVE, AND WE MAY NOT BE ABLE TO CATEGORIZE WEB SITES IN
ACCORDANCE WITH OUR CUSTOMERS' EXPECTATIONS.

We may not succeed in accurately categorizing Internet content to meet our
customers' expectations. We rely upon a combination of automated filtering
technology and human review to categorize Web sites in our proprietary database.
Our customers may not agree with our determinations that particular Web sites
should be included or not included in specific categories of our database. In
addition, it is possible that our filtering processes may place objectionable
material in categories that are generally unrestricted by our users' Internet
access policies, which could result in employees having access to such material
in the workplace. Any miscategorization could result in customer dissatisfaction
and harm our reputation. Furthermore, we select our categories based on Web site
content we believe employers want to manage. We may not now, or in the future,
succeed in properly identifying the categories of Web site content that
employers want to manage. Any failure to effectively categorize and filter Web
sites according to our customers' expectations will impair the growth of our
business and our efforts to increase brand acceptance.

OUR DATABASE MAY FAIL TO KEEP PACE WITH THE RAPID GROWTH AND TECHNOLOGICAL
CHANGE OF THE INTERNET.

The success of Websense Enterprise depends on the breadth and accuracy of our
database. Although our database currently catalogs more than 900,000 Web sites,
it contains only a fraction of the material available on the Internet. In
addition, the total number of Web sites is growing rapidly, and we expect this
rapid growth rate to continue in the future. We cannot assure you that our
database and database technologies will be able to keep pace with the growth in
the number of Web sites, especially the growing number of Web sites containing
foreign languages. Further, the ongoing evolution of the Internet will require
us to continually improve the functionality, features and reliability of our
database. Because Websense Enterprise can only manage access to Web sites
included in our database, if our database does not contain a meaningful portion
of relevant Web sites, the effectiveness of Websense Enterprise will be
significantly diminished. Any failure of our

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database to keep pace with the rapid growth and technological change of the
Internet will impair the market acceptance of Websense Enterprise, which in turn
will harm our business, results of operations and financial condition.

OUR RECENT GROWTH HAS STRAINED OUR EXISTING 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 are currently experiencing a period of 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.

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.

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; and

- inability to generate sufficient revenues 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.

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 and development personnel. In particular, we
rely on John B. Carrington, our President, Chief Executive Officer and Chairman.
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. We cannot assure you that in such

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<PAGE> 14

an event we would be able to recruit personnel to replace these individuals in a
timely manner, or at all, on acceptable terms.

OUR MANAGEMENT TEAM WAS ONLY RECENTLY FORMED, AND OUR SUCCESS DEPENDS ON ITS
ABILITY TO WORK TOGETHER EFFECTIVELY.

We hired Mr. Carrington in May 1999 and Douglas C. Wride, our Chief
Financial Officer, in June 1999. In addition, a majority of our management team
has joined us in the last 18 months. Our future success depends on the
integration of this management team and its ability to work together
effectively. If our management team fails to work together effectively, our
business could be harmed.

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 cannot
assure you that we will 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.

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 21% of our revenue in the year ended 1999. As a key
component of our business strategy, we intend to expand our international sales.
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;

- the ability of our Websense Enterprise products to properly categorize
and filter Web sites containing foreign languages;

- laws and business practices favoring foreign competitors;

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

- 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

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<PAGE> 15

have a material adverse effect on our business, results of operations and
financial condition. Our international revenue is currently denominated in U.S.
dollars. As a result, fluctuations in the value of the U.S. dollar and foreign
currencies may make Websense Enterprise more expensive for international
customers, which could harm our business. We do not currently engage in currency
hedging activities to limit the risk of exchange rate fluctuation.

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 as the result of fluctuations in our operating
expenses. For example, our net loss decreased to $1.5 million for the quarter
ended March 31, 1999 from $1.9 million for the quarter ended December 31, 1998
and then increased to $2.4 million for the quarter ended June 30, 1999. 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
prospectus:

- a concentration of marketing expenses for activities such as trade shows
and advertising campaigns;

- a concentration of general and administrative expenses, such as
recruiting expenses and professional services fees; and

- a concentration of research and development costs.

As a result, it is possible that in some future periods, our results of
operations may be below the expectations of current or potential investors. If
this occurs, the price of our common stock may decline.

BECAUSE WE RECOGNIZE REVENUE FROM SUBSCRIPTIONS FOR WEBSENSE ENTERPRISE RATABLY
OVER THE TERM OF THE SUBSCRIPTION, DOWNTURNS IN SALES MAY NOT BE IMMEDIATELY
REFLECTED IN OUR REVENUES.

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

ANY FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD IMPAIR OUR ABILITY
TO PROTECT OUR PROPRIETARY TECHNOLOGY AND ESTABLISH OUR WEBSENSE BRAND.

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. Any of our trademarks may be
challenged by others or invalidated through administrative process or
litigation. We currently have no issued patents and may be unable to obtain
patent protection in the future. In addition, any issued patents may not provide
us with any competitive advantages, or may be

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<PAGE> 16

challenged by third parties. 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, we
cannot assure you that our means of protecting our proprietary technology and
brands will be adequate. Furthermore, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property. 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 the number of entrants into our market increases, the
possibility of an intellectual property claim against us grows. 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.

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
Websense Enterprise is designed to operate with a variety of network hardware
and software platforms, we will need to continuously modify and enhance Websense
Enterprise 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 timely introducing them to the market. In
addition, uncertainties about the timing and nature of new network platforms or
technologies, or modifications to existing platforms or technologies, 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.

OTHER VENDORS MAY DEVELOP PRODUCTS SIMILAR TO OURS FOR INCORPORATION INTO THEIR
HARDWARE OR SOFTWARE, AND THEREBY REDUCE DEMAND FOR WEBSENSE ENTERPRISE.

In the future, vendors of Internet-related hardware and software may
enhance their products or develop separate products that include functions that
are currently provided by Websense Enterprise. If employee Internet management
functions become standard features of Internet-related hardware or software, the
demand for Websense Enterprise will decrease. Furthermore, even if Websense
Enterprise provides greater functionality and is more effective than the
products offered by vendors of Internet-related hardware or software, potential
customers might accept this limited functionality in lieu of purchasing our
Websense Enterprise.

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OUR SYSTEMS MAY BE VULNERABLE TO SECURITY RISKS OR SERVICE DISRUPTIONS THAT
COULD HARM OUR BUSINESS.

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. We may experience break-ins in the future.
Any such events could substantially harm our business, results of operations and
financial condition.

BECAUSE OUR PRODUCTS ARE COMPLEX AND ARE DEPLOYED IN A WIDE VARIETY OF COMPLEX
NETWORK ENVIRONMENTS, THEY MAY HAVE ERRORS OR DEFECTS THAT USERS IDENTIFY
AFTER DEPLOYMENT, WHICH COULD HARM OUR REPUTATION AND OUR BUSINESS.

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 Websense Enterprise, and we may find such
errors in the future. 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 problems.

RISKS RELATED TO OUR INDUSTRY

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.

THE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH AND ACCEPTANCE OF
THE INTERNET AS A BUSINESS TOOL.

Expansion in the sales of Websense Enterprise depends on the continued
acceptance of the Internet as a communications and commerce platform for
enterprises. The Internet may not prove to be a viable commercial medium due to
inadequate development of the necessary infrastructure, such as a reliable
network backbone, or timely development of complementary products, such as
high-speed modems. Additionally, the Internet could lose its viability as a
business tool due to delays in the development or adoption of new standards and
protocols to handle increased demands of Internet activity, security,
reliability, cost, ease-of-use, accessibility, and quality-of-service. If the
Internet does not continue to become a widespread communications medium and
commercial platform, the demand for Websense Enterprise could be significantly
reduced, which could have a material adverse effect on our business, results of
operations and financial condition.

OUR PRODUCTS CREATE RISKS OF POTENTIAL NEGATIVE PUBLICITY AND LEGAL LIABILITY.

Because customers rely on Websense Enterprise to provide employee Internet
management, any significant defects or errors in our products may result in
negative publicity or legal claims.

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Negative publicity or legal claims could seriously harm our business, results of
operations and financial condition. In addition, Websense Enterprise's
capability to report Internet data retrieval requests and the workstations from
which they originated may result in negative publicity or legal claims based on
potential privacy violations.

WE OR OUR CUSTOMERS AND VENDORS MAY HAVE BEEN ADVERSELY AFFECTED BY THE
TRANSITION TO THE YEAR 2000 IN A MANNER THAT IS NOT YET APPARENT.

Although the date is now past January 1, 2000, and we have not experienced
immediate adverse impact from the transition to the Year 2000, we cannot provide
assurances that we, our customers or our vendors have not been affected in a
manner that is not yet apparent. As a result, we will continue to monitor our
Year 2000 compliance and the Year 2000 compliance of our customers and vendors.
Due to the general uncertainty inherent in the Year 2000 problem, especially the
uncertainty regarding the Year 2000 compliance of our customers and vendors, we
are unable to determine at this time whether the Year 2000 problem will have a
material adverse effect on our business, results of operations and financial
condition.

RISKS RELATED TO THIS OFFERING

OUR SENIOR MANAGEMENT TEAM HAS BROAD DISCRETION OVER THE USE OF THE PROCEEDS
FROM THIS OFFERING.

Our senior management team will have broad discretion with respect to the
use of the proceeds of this offering, and may use the proceeds for corporate
purposes that do not increase our profitability or our market value, or in ways
with which our stockholders may not agree. Presently, anticipated uses of the
proceeds of this offering and our existing cash balances include:

- domestic and international selling and marketing;

- research and development;

- development and expansion of our database technologies and systems;

- infrastructure and support improvements;

- development of new business and potential acquisitions; and

- operating losses and general working capital purposes.

We have not yet determined how we will use the proceeds of this offering or our
existing cash balance. Pending determination of how the proceeds and our
existing cash balance will be used, the proceeds of the offering will be
invested in short term, investment grade, interest-bearing securities that may
lose value. See "Use of Proceeds" for more information regarding our use of the
proceeds of this offering.

OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A LARGE
PERCENTAGE OF OUR VOTING STOCK AND COULD DELAY OR PREVENT A CHANGE IN OUR
CORPORATE CONTROL OR OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL, EVEN IF
FAVORED BY OUR OTHER STOCKHOLDERS.

Immediately after this offering, our executive officers, directors and
principal stockholders, and their respective affiliates, will beneficially own
approximately 75% of our outstanding common stock. These stockholders, if acting
together, would be able to control substantially all matters requiring approval
by our stockholders, including the election of all directors and approval of
significant corporate transactions.

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BECAUSE OUR OPERATING EXPENSES EXCEED OUR CASH FLOW FROM OPERATIONS, WE MAY NEED
TO RAISE ADDITIONAL FUNDS IN THE FUTURE, WHICH FUNDS MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS OR AT ALL.

We expect that our operating expenses will increase substantially over at
least the next 12 months. In addition, we may experience a material decrease in
liquidity due to unforeseen capital requirements or other events and
uncertainties. As a result, we may need to raise additional funds, and such
funds may not be available on favorable terms, if at all. If we cannot raise
funds on acceptable terms, we may not be able to develop or enhance our software
applications or database, execute on our business plan, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
This may seriously harm our business, results of operations and financial
condition.

WE MAY SEEK TO RAISE ADDITIONAL FUNDS, AND ADDITIONAL FUNDING MAY BE DILUTIVE TO
STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS.

An additional equity financing may be dilutive to our stockholders and debt
financing, if available, may involve restrictive covenants, which may limit our
operating flexibility. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our stockholders will be reduced.
These stockholders may experience additional dilution in net book value per
share and any additional equity securities may have rights, preferences and
privileges senior to those of the holders of our common stock.

NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE TANGIBLE NET
BOOK VALUE OF THEIR SHARES.

We expect that the initial public offering price of our common stock will
significantly exceed the net tangible book value of our common stock. The net
tangible book value of one share of our common stock purchased at the assumed
initial public offering price of $15.00 per share will be only $2.91. As a
result, investors purchasing common stock in this offering will incur dilution
of $12.09 per share. In addition, we have issued options and warrants to acquire
common stock at prices significantly below the assumed initial public offering
price, the exercise of which will likely result in additional dilution when and
if they are exercised.

THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND WE EXPECT THAT
ITS PRICE WILL BE VOLATILE.

Prior to this offering, there has been no public market for our common
stock, and we cannot assure you that an active public market for our common
stock will develop or be sustained after this offering. The initial public
offering price of our common stock will be determined by negotiation among us
and the representatives of the several underwriters based upon a number of
factors. As a result, the initial public offering price of our common stock may
not be indicative of the market price of our common stock following the
offering. The market price of our common stock is likely 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 Websense Enterprise, including fluctuations in subscription
renewals;

- fluctuations in revenues from our indirect sales channels;

- changes in the pricing policies of our competitors; and

- changes in government regulations.

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In addition, the market price of our common stock is likely to be highly
volatile and 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;

- quarterly variations in our operating expenses; and

- our technological capabilities to accommodate in future growth in our
operations or our customers.

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 was 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.

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 make it more
difficult for stockholders to obtain control of our board or initiate actions
that are opposed by the then current board. Additionally, we have authorized
preferred stock that is undesignated, making it possible for the board to issue
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. See "Description of Capital
Stock -- Anti-Takeover Effects of Certain Provisions of Delaware Law and Our
Certificate of Incorporation and Bylaws" for information regarding when and how
these provisions apply.

FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.

Sales of a large number of shares of our common stock in the market after
this offering, or the belief that these sales could occur, could cause a drop in
the market price of our common stock. Based on the 15,394,698 shares we had
outstanding as of December 31, 1999, and the 4,000,000 million shares to be sold
in this offering, we will have outstanding 19,394,698 shares of common stock
upon completion of this offering. Of these shares, the 4,000,000 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are purchased by our
"affiliates."

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The remaining 15,394,698 shares of common stock outstanding upon completion
of this offering will be "restricted securities," as that term is defined under
Rule 144 of the Securities Act. All of our directors, executive officers and
other stockholders are subject to lock-up agreements or market stand-off
provisions that limit their ability to sell common stock. These stockholders
have agreed not to sell or otherwise dispose of any shares of our common stock
prior to 180 days after the date of this offering. Chase Securities Inc. has the
sole discretion to determine the timing and extent of any release from the
lock-up agreements to which it is a party and may grant such release without
providing any prior notice. When the lock-up agreements or market stand-off
provisions expire, these shares and shares underlying outstanding stock options
and warrants will become eligible for sale, in some cases only subject to the
volume, manner of sale and notice requirements of Rule 144.

The 15,394,698 shares of our common stock will become eligible for public
sale as follows:

- 0 shares as of the effective date;

- 0 shares as of 90 days after the effective date;

- 14,154,698 shares as of 180 days after the effective date;

- 1,240,000 shares more than 181 days after the effective date.

WE DO NOT INTEND TO PAY DIVIDENDS.

Since we terminated our election to be treated as an "S" corporation in
January 1998, we have not declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings to fund growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy" for additional information regarding our dividend policy.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements we make in this prospectus are forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"intends," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or similar terminology. These statements involve known and unknown
risks and uncertainties that may cause our actual results, levels of activity,
performance or achievements to differ materially from any expected results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. These factors include, among other things, those
listed under "Risk Factors" and in other sections of this prospectus. We cannot
guarantee any future results, levels of activity, performance or achievements.

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USE OF PROCEEDS

We estimate that the net proceeds of this offering will be approximately
$54.8 million, based on an assumed initial public offering price of $15.00 per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us. We will not receive any proceeds from
the sale of common stock by the selling stockholders who have granted the
underwriters the option to purchase up to 600,000 shares of common stock to
cover over-allotments, if any.

We plan to use approximately $12.2 million of the net proceeds for domestic
selling and marketing, $2.0 million for international selling and marketing,
$6.8 million for research and development, $1.0 million for development and
expansion of our database technologies and systems, $4.8 million for
infrastructure and support improvements, and $1.8 million for capital
expenditures. We intend to use the remaining net proceeds for general corporate
purposes, including working capital. We may also use a portion of the net
proceeds for acquisitions of businesses, products and technologies, or the
establishment of new business opportunities that are complementary to our
current and future business. Although we have not identified any specific
businesses, products or technologies that we may acquire, and there are no
current agreements or understandings with respect to any such transactions, we
may from time to time evaluate such opportunities. The amounts actually used for
such purposes may vary significantly and will depend on a number of factors,
including the amount of our future revenue and the other factors described under
"Risk Factors." Pending the above described uses, we will invest the net
proceeds of this offering in interest-bearing, investment grade securities.

DIVIDEND POLICY

Since we terminated our election to be treated as an "S" corporation for
federal income tax purposes in January 1998, we have not declared or paid cash
dividends on shares of our capital stock. We currently intend to retain any
earnings to develop and expand our business, and do not anticipate paying cash
dividends in the foreseeable future. Any future determination with respect to
the payment of dividends will be at the discretion of our board of directors and
will depend upon, among other things, our operating results, financial condition
and capital requirements, the terms of then-existing indebtedness, general
business conditions and other factors our board of directors deems relevant.

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<PAGE> 24

CAPITALIZATION

The following table summarizes our capitalization as of December 31, 1999:

- on an actual basis, and

- on a pro forma as adjusted basis to reflect:

- the conversion of all of our outstanding preferred stock into common
stock upon completion of this offering;

- an amendment to our certificate of incorporation to be effective upon
completion of this offering, that will, among other things, increase our
authorized shares of common stock and authorize a class of undesignated
preferred stock; and

- our sale of 4,000,000 shares of common stock at an assumed initial
public offering price of $15.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
that we will pay.

You should read this table together with our financial statements and
related notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 1,497 $ 1,497
======== ========
Stockholders' equity:
Convertible preferred stock, par value $0.01: 7,038,340
shares authorized and 7,037,036 shares issued and
outstanding, actual; 5,000,000 shares authorized and no
shares issued and outstanding, pro forma as adjusted... 70 --
Common stock, $0.01 par value: 92,961,660 shares
authorized and 8,357,662 issued and outstanding,
actual; 100,000,000 shares authorized and 19,394,698
shares issued and outstanding, pro forma as adjusted... 84 194
Additional paid-in capital................................ 18,936 73,741
Deferred compensation..................................... (2,585) (2,585)
Accumulated deficit....................................... (14,863) (14,863)
-------- --------
Total stockholders' equity........................... 1,642 56,487
-------- --------
Total capitalization.............................. $ 3,139 $ 57,984
======== ========
</TABLE>

- -------------------------
This table is based upon shares outstanding as of December 31, 1999 and excludes
the following shares:

- 3,161,551 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price $0.83 per share;

- 112,500 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.69 per share; and

23
<PAGE> 25

DILUTION

Our pro forma net tangible book value as of December 31, 1999 was
approximately $1.6 million, or $0.11 per share of common stock. Pro forma net
tangible book value per share is determined by dividing the amount of our total
tangible assets less our total liabilities by the pro forma number of shares of
common stock outstanding, after giving effect to the conversion of our
outstanding preferred stock. After giving effect to our sale of shares of common
stock at an assumed initial public offering price of $15.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses that we will pay, our adjusted pro forma net tangible book
value as of December 31, 1999 would have been $56.5 million, or $2.91 per share.
This amount represents an immediate increase in pro forma net tangible book
value to our existing stockholders of $2.80 per share and an immediate dilution
to new investors of $12.09 per share. The following table illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $ 0.11
Increase per share attributable to new investors.......... 2.80
------
Adjusted pro forma net tangible book value per share after
this offering............................................. 2.91
------
Dilution per share to new investors......................... $12.09
======
</TABLE>

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 15,394,698 79.4% $16,685,674 21.8% $ 1.08
New investors................. 4,000,000 20.6 60,000,000 78.2 $15.00
----------- ----- ----------- -----
Total......................... 19,394,698 100.0% $76,685,674 100.0%
=========== ===== =========== =====
</TABLE>

The preceding discussion and tables assume no exercise of any stock options
or warrants outstanding as of December 31, 1999. As of December 31, 1999, there
were outstanding options to purchase a total of 3,161,551 shares of common stock
at a weighted average exercise price of $0.83 per share and outstanding warrants
to purchase a total of 112,500 shares of common stock at a weighted average
exercise price of $1.69 per share. To the extent any of these options or
warrants are exercised, there will be further dilution to our stockholders.

24
<PAGE> 26

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 prospectus. We derived the statement of operations data for the years
ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December
31, 1998 and 1999 from our financial statements audited by Ernst & Young LLP,
which appear elsewhere in this prospectus. We derived the balance sheet data as
of December 31, 1997 from our financial statements audited by Ernst & Young LLP,
which are not included in this prospectus. We derived the statement of
operations data for the years ended December 31, 1995 and 1996 and the balance
sheet data as of December 31, 1995 and 1996 from our unaudited financial
statements that are not included in this prospectus. We have prepared our
unaudited financial statements on the same basis as our audited financial
statements. In the opinion of our management, our unaudited financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information in those statements. Our
historical results are not necessarily indicative of operating results to be
expected in the future.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
---- ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Subscriptions............................................. $ -- $ 14 $ 637 $ 2,503 $ 7,141
Other products and services............................... 882 2,576 4,383 4,416 1,506
---- ------ ------- ------- -------
Total revenues..................................... 882 2,590 5,020 6,919 8,647
Cost of revenues:
Subscriptions............................................. -- 73 218 736 1,084
Other products and services............................... 479 1,496 3,214 3,724 1,191
---- ------ ------- ------- -------
Total cost of revenues............................. 479 1,569 3,432 4,460 2,275
---- ------ ------- ------- -------
Gross margin................................................ 403 1,021 1,588 2,459 6,372
Operating expenses:
Selling and marketing (exclusive of $230 reported below as
amortization of stock-based compensation)............... 64 438 1,720 4,597 6,311
Research and development (exclusive of $256 reported below
as amortization of stock-based compensation)............ 14 146 528 1,789 3,913
General and administrative (exclusive of $1,336 reported
below as amortization of stock-based compensation)...... 49 406 767 1,715 3,805
Amortization of stock-based compensation.................. -- -- -- -- 1,822
---- ------ ------- ------- -------
Total operating expenses........................... 127 990 3,015 8,101 15,851
---- ------ ------- ------- -------
Income (loss) from operations............................... 276 31 (1,427) (5,642) (9,479)
Interest income (expense)................................... -- (4) (35) 33 225
---- ------ ------- ------- -------
Net income (loss)........................................... $276 $ 27 $(1,462) $(5,609) $(9,254)
==== ====== ======= ======= =======
Historical net income (loss) per share(1):
Basic and diluted......................................... $ -- $ 0.00 $ (0.21) $ (0.80) $ (1.25)
==== ====== ======= ======= =======
Weighted average shares -- basic and diluted.............. -- 7,000 7,000 7,000 7,403
==== ====== ======= ======= =======
Pro Forma net income (loss) per share(1):
Basic and diluted......................................... $ (0.71)
=======
Weighted average shares................................... 12,999
=======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
---- ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $ 41 $ 123 $ 1,753 $10,735
Working capital (deficit)................................... 189 87 (1,350) (377) 5,222
Total assets................................................ 242 837 1,625 4,355 16,756
Deferred revenue............................................ -- 77 1,132 4,236 11,593
Long-term debt.............................................. -- -- -- 496 1,497
Total stockholders' equity (deficit)........................ 207 242 (1,340) (1,217) 1,642
</TABLE>

- ---------------

(1) See Note 1 of "Notes to Financial Statements" for a description of the
computation of per share information. We have not presented share and per
share data for 1995 because we operated as a sole proprietorship during that
period.

25
<PAGE> 27

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements due to
factors discussed in "Risk Factors," "Business" and elsewhere in this
prospectus.

OVERVIEW

We provide employee Internet management products that enable businesses to
monitor, report and manage how their employees use the Internet. Our primary
product is Websense Enterprise, a software application that operates in
conjunction with our proprietary database of Web sites categorized by their
content. This software and database package supports an organization's efforts
to improve employee productivity, conserve network bandwidth and mitigate
potential legal liability. Our business was founded in 1994 as NetPartners
Internet Solutions, a reseller of computer network security products and related
services. In 1996, we released our first software product, Websense Internet
Screening System. Since that time, we have refocused our business on developing
and selling employee Internet management products, and no longer focus on our
software reselling and services business. In 1999 we changed our name to
Websense, Inc. and completed our change in business strategy. In the same year,
we expanded our senior management team, raised approximately $9.8 million in a
private round of financing and further strengthened our indirect sales channels
and business relationships. In December 1999, we released an enhanced and
redesigned version of Websense Enterprise. We currently derive a substantial
majority of our revenues from subscriptions to this product and expect this
trend to continue for the foreseeable future.

Our business has grown since inception, with total revenues reaching $5.0
million in 1997, $6.9 million in 1998 and $8.6 million in 1999. During that
period, subscription revenue grew from 13% of total revenues in 1997, to 36% in
1998 and 83% in 1999 due to our change in strategy and investment in developing
and marketing Websense Enterprise. We have experienced net losses in each of the
last three fiscal years, and as of December 31, 1999, we had an accumulated
deficit of $14.9 million.

We offer Websense Enterprise on a subscription basis. When a purchase
decision is made, customers enter into a subscription agreement, which is
generally 12, 24 or 36 months in duration and for a fixed number of users. Upon
entering into the subscription agreement, we promptly invoice customers for
their subscriptions. Generally, payment is due for the full term of the
subscription within 30 days of invoice. We recognize revenue on a straight-line
basis over the term of the subscription agreement. We record amounts billed to
customers in excess of recognizable revenue as deferred revenue on our balance
sheet. As of December 31, 1999, we had $11.6 million of deferred revenue. Upon
expiration of the subscription, customers must resubscribe at our then current
rates to continue using Websense Enterprise. Our revenues are significantly
influenced by subscription renewals, and a decrease in subscription renewals
could negatively impact our revenues. To date, approximately 82% of our
customers whose subscriptions expired have renewed.

We also derive revenues from professional services and from resale of
computers and firewall software. We recognize revenues for these services and
products upon their completion or delivery. These revenues declined
significantly in 1999 due to our shift in business strategy. We expect these
revenues to remain relatively constant in dollar volume and to continue to
decline as a percent of total revenues for the foreseeable future.

26
<PAGE> 28

In 1999 we derived 21% of our revenues from international sales. We
currently employ two sales representatives in the United Kingdom and plan to
hire additional sales personnel in France and Germany during the second quarter
of 2000, and a limited number of additional sales personnel in Europe and Asia
Pacific over the next several years, because we believe international markets
represent a significant growth opportunity. We expect our international
operations to be limited to employing sales personnel in field offices in
countries within Europe and Asia Pacific. Although we have not identified
specific locations for these field offices, because of the limited scope of our
planned international operations, we do not anticipate having difficulties
obtaining suitable facilities. We also plan to expand our international indirect
distribution channels in response to perceived growth opportunities in
international markets. Our international revenues are denominated in U.S.
dollars. Fluctuation in the value of the U.S. dollar and foreign currencies may
make our products more expensive, and this could harm our business. We do not
currently engage in currency hedging activities to limit the risk of exchange
rate fluctuation.

We currently sell Websense Enterprise through indirect and direct channels;
however, our strategy is to increasingly rely on our indirect sales channels.
Our indirect sales channels accounted for approximately 70% of our subscription
revenue in 1999 and we expect that this percentage will increase in the future.
Domestically, we sell Websense Enterprise through more than 350 value-added
resellers and through our direct sales force. Internationally, we distribute
Websense Enterprise through more than 100 distributors and resellers in over 50
countries who resell Websense Enterprise through value-added resellers. In
addition, we leverage the sales and marketing capabilities of our original
equipment manufacturers and other key providers of complementary hardware and
software products.

Because we derive our revenues from subscription fees, we do not recognize
the entire amount of subscription fees received in the quarter the subscription
agreements are executed. However, we recognize our operating expenses as they
are incurred. Our operating expenses have increased more rapidly than our
revenues in recent periods due to expanded selling and marketing efforts and
investments in administrative infrastructure to support subscription sales that
we will recognize as revenue in subsequent periods. We anticipate that this
trend will continue and that our operating expenses, particularly selling and
marketing and general and administrative expenses, will grow at a faster rate
than our revenues in the near term.

In connection with the grant of stock options in 1999, we recorded an
aggregate of $4.4 million in deferred stock-based compensation within
stockholders' equity. These options were considered compensatory because the
deemed fair value was greater than the exercise prices determined by the board
of directors on the date of grant. As of December 31, 1999, we had an aggregate
of $2.6 million of deferred stock-based compensation remaining to be amortized.
This deferred compensation balance will be amortized as follows: $1.5 million
during 2000; $741,000 during 2001; $302,000 during 2002; and $33,000 during
2003. We anticipate that we will record additional stock-based compensation
expense related to options granted in the first quarter of 2000 of approximately
$800,000. We are amortizing the deferred compensation on an accelerated basis in
accordance with Financial Accounting Standards Board, or FASB, Interpretation
No. 28 over the vesting period of the related options, which is generally four
years. The amount of stock-based compensation amortization actually recognized
in future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.

27
<PAGE> 29

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Subscriptions............................................. 13% 36% 83%
Other products and services............................... 87 64 17
--- --- ----
Total revenues.................................... 100 100 100
Cost of revenues:
Subscriptions............................................. 4 11 13
Other products and services............................... 64 53 14
--- --- ----
Total cost of revenues............................ 68 64 27
Gross margin................................................ 32 36 73
Operating expenses:
Sales and marketing....................................... 34 66 73
Research and development.................................. 11 26 45
General and administrative................................ 15 25 44
Amortization of stock-based compensation.................. -- -- 21
--- --- ----
Total operating expenses.......................... 60 117 183
--- --- ----
Income (loss) from operations............................... (28) (81) (110)
Interest income (expense), net.............................. (1) -- 3
--- --- ----
Net income (loss)........................................... (29)% (81)% (107)%
=== === ====
</TABLE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

Revenues

Subscriptions. Subscription revenue increased $4.6 million, or 185%, to
$7.1 million in 1999 from $2.5 million in 1998. Subscription revenue increased
$1.9 million, or 293%, in 1998 from $637,000 in 1997. Subscription revenue
accounted for 83% of total revenues in 1999 compared to 36% in 1998 and 13% in
1997. The increases in our subscription revenue in 1999 and 1998 were due
primarily to subscriptions from new customers. In addition, we experienced
increased market acceptance of our Websense Enterprise products which
contributed to the increases in subscription revenues from new customers.

Other products and services. Other products and services revenue, which
include revenues from professional services and from resale of computers and
firewall software, decreased $2.9 million, or 66%, to $1.5 million in 1999 from
$4.4 million in 1998 representing a decrease as a percentage of total revenues
from 64% to 17%. Other products and services revenue increased by $33,000, or
1%, in 1998 as compared to 1997, but decreased as a percentage of total revenues
from 87% to 64%. For both years the decrease as a percentage of total revenues
was primarily due to our decision to transition from a services organization and
reseller of software to a provider of subscription-based employee Internet
management products.

Cost of Revenues

Cost of subscriptions. Cost of subscriptions consists of the costs of Web
site review, technical support and infrastructure associated with maintaining
our database. Cost of subscriptions increased $348,000, or 47%, to $1.1 million
in 1999 from $736,000 in 1998. Cost of subscriptions increased $519,000, or
238%, in 1998 from $218,000 in 1997 to support the growth in subscriptions. Cost
of

28
<PAGE> 30

subscriptions as a percentage of subscription revenue decreased to 15% in 1999
from 29% in 1998 and 34% in 1997. These decreases in costs of subscription
revenue as a percentage of subscription revenue for both years were due to
increased revenue.

Cost of other products and services. Cost of other products and services
consists primarily of the firewall software and computers that we resell and the
salaries and benefits of our professional services personnel. Cost of other
products and services decreased $2.5 million, or 68%, to $1.2 million in 1999
from $3.7 million in 1998 due to our shift in focus away from reselling hardware
and software. Cost of other products and services increased $509,000, or 16%, in
1998 from $3.2 million in 1997 due to increased costs of the firewall software
and computers that we resold. Cost of other products and services as a
percentage of products and services revenue decreased to 79% in 1999 from 84% in
1998 due to decreased sales of low-margin hardware products. Cost of other
products and services as a percentage of other products and services revenue
increased to 84% in 1998 from 73% in 1997 primarily due to higher acquisition
costs and increased pricing pressure on the firewall software and computers that
we resold.

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. Selling and marketing expenses
increased $1.7 million, or 37%, to $6.3 million in 1999 from $4.6 million in
1998. Selling and marketing expenses increased $2.9 million, or 167%, in 1998
from $1.7 million in 1997. The increase in selling and marketing expenses in
1999 was primarily due to increases in headcount of $1.3 million and promotional
expenses of $748,000, and were partially offset by a decrease in advertising
expenses of $483,000. The increase in selling and marketing expenses in 1998 was
primarily due to increased spending in advertising of $859,000 and headcount of
$1.5 million. We expect our selling and marketing expenses to increase as we add
personnel to support our expanding selling and marketing efforts.

Research and development. Research and development expenses consist
primarily of salaries and benefits for software developers, contract
programmers, facilities costs and equipment depreciation. Research and
development expenses increased $2.1 million, or 116%, to $3.9 million in 1999
from $1.8 million in 1998. Research and development expenses increased $1.3
million, or 239%, in 1998 from $528,000 in 1997. The increase in research and
development expenses in 1999 was primarily a result of increased development
efforts and enhancements to Websense Enterprise. The increase in research and
development expenses in 1998 was due to the expansion of our development efforts
beginning in May 1998 relating to the Websense Enterprise software application
and database.

General and administrative. General and administrative expenses consist
primarily of salaries, benefits and related expenses for our executive, finance,
human resources, information technology and administrative personnel, third
party professional service fees and allocated facilities and depreciation
expenses. General and administrative expenses increased $2.1 million, or 122%,
to $3.8 million in 1999 from $1.7 million in 1998. The increase in our general
and administrative expenses in 1999 was primarily due to significant investments
in increased headcount of $1.0 million, facilities of $268,000 and information
technology of $327,000 to support an expansion in the scope of our business.
General and administrative expenses increased $948,000, or 124%, in 1998 from
$767,000 in 1997. The increase in our general and administrative expenses in
1998 was primarily due to significant investments in increased headcount of
$640,000 and facilities of $211,000. We expect general and administrative
expenses to increase in the future, reflecting growth in our operations and
increased expenses associated with being a public company.

29
<PAGE> 31

Amortization of stock-based compensation. We recognized $1.8 million in
stock-based compensation expense for 1999 relating to the amortization of
deferred compensation. There was no amortization of stock-based compensation in
periods prior to 1999.

Interest Income (Expense), Net

Net interest income (expense) increased $192,000 to $225,000 in 1999 from
$33,000 in 1998. Net interest income (expense) increased $68,000 in 1998 from
$(35,000) in 1997. These increases are primarily due to interest income from the
investment of proceeds from our financings in 1999 and 1998.

Income Taxes

In January 1998, we terminated our election to be treated as an "S"
corporation for federal income tax purposes, and as a result we became subject
to income tax at the corporate level to the extent we generate taxable income.
We have not recorded an income tax benefit arising from our historical losses
because we have recorded a full valuation allowance against any deferred tax
assets available to us for use in future periods. Realization of these assets is
primarily dependent on generating taxable net income in the future.

QUARTERLY FINANCIAL DATA

The following tables set forth unaudited quarterly operating information
and financial data for each of the eight quarters in the period ending December
31, 1999. This data has been prepared on the same basis as the audited financial
statements contained elsewhere in this prospectus and, in the opinion of
management, includes all adjustments necessary for the fair presentation of the
information for the periods presented. This information should be read in
conjunction with the financial statements and notes thereto. The operating
results and financial data in any quarter are not necessarily indicative of the
results that may be expected for any future period.

During the first quarter of 1999, we sharply curtailed marketing activities
as part of a management transition in that quarter. This resulted in a
significant decrease in our selling and marketing expenses. We resumed our
selling and marketing activities in the second quarter of 1999, which led to a
significant increase in these expenses. Additionally, in the first quarter of
1999, we increased our reserves for doubtful accounts, which, together with
increased state franchise taxes and expenses recognized in connection with the
issuance of a warrant, resulted in a significant increase in our general and
administrative expenses for the period. We believe that future operating results
will be subject to quarterly fluctuations, and, as a result, we believe that
results of operations for interim periods should not be relied upon as any
indication of the results to be

30
<PAGE> 32

expected in any future period. We have incurred operating losses during 1999,
1998 and 1997, and we cannot be certain that we will achieve profitability on a
quarterly or annual basis in the future.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS)
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subscriptions........................ $ 471 $ 553 $ 689 $ 790 $ 1,198 $ 1,542 $ 1,987 $ 2,414
Other products and services.......... 1,293 1,633 893 597 469 392 343 302
------ ------- ------- ------- ------- ------- ------- -------
Total revenues..................... 1,764 2,186 1,582 1,387 1,667 1,934 2,330 2,716
Cost of revenues:
Subscriptions........................ 126 181 182 247 172 221 309 382
Other products and services.......... 1,044 1,325 775 580 351 306 258 275
------ ------- ------- ------- ------- ------- ------- -------
Total cost of revenues............. 1,170 1,506 957 827 523 527 567 657
------ ------- ------- ------- ------- ------- ------- -------
Gross margin........................... 594 680 625 560 1,144 1,407 1,763 2,059
Operating expenses:
Selling and marketing................ 712 1,458 1,164 1,263 933 1,614 1,574 2,190
Research and development............. 190 394 570 636 678 748 1,109 1,378
General and administrative........... 329 281 527 577 1,016 835 937 1,017
Amortization of stock-based
compensation....................... -- -- -- -- 43 523 647 609
------ ------- ------- ------- ------- ------- ------- -------
Total operating expenses........... 1,231 2,133 2,261 2,476 2,670 3,720 4,267 5,194
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.......... (637) (1,453) (1,636) (1,916) (1,526) (2,313) (2,504) (3,135)
Interest income (expense), net......... (12) (6) 37 14 16 (82) 174 117
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)...................... $ (649) $(1,459) $(1,599) $(1,902) $(1,510) $(2,395) $(2,330) $(3,018)
====== ======= ======= ======= ======= ======= ======= =======

FINANCIAL DATA:
Deferred revenue at end of period...... $1,968 $ 2,348 $ 3,092 $ 4,236 $ 6,169 $ 7,452 $ 9,157 $11,593
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
STATEMENT OF OPERATIONS DATA: -------- -------- --------- -------- -------- -------- --------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subscriptions........................ 27% 25% 44% 57% 72% 80% 85% 89%
Other products and services.......... 73 75 56 43 28 20 15 11
--- --- ---- ---- --- ---- ---- ----
Total revenues..................... 100 100 100 100 100 100 100 100
Cost of revenues:
Subscriptions........................ 7 8 11 18 10 11 13 14
Other products and services.......... 59 61 49 42 21 16 11 10
--- --- ---- ---- --- ---- ---- ----
Total cost of revenues............. 66 69 60 60 31 27 24 24
--- --- ---- ---- --- ---- ---- ----
Gross margin........................... 34 31 40 40 69 73 76 76
Operating expenses:
Selling and marketing................ 40 67 74 91 56 83 68 81
Research and development............. 11 18 36 46 41 39 47 50
General and administrative........... 19 13 33 41 61 43 40 37
Amortization of stock-based
compensation....................... 0 0 0 0 3 27 28 22
--- --- ---- ---- --- ---- ---- ----
Total operating expenses........... 70 98 143 178 161 192 183 190
--- --- ---- ---- --- ---- ---- ----
Income (loss) from operations.......... (36) (67) (103) (138) (92) (119) (107) (114)
Interest income (expense), net......... (1) 0 2 1 1 (4) 7 4
--- --- ---- ---- --- ---- ---- ----
Net income (loss)...................... (37)% (67)% (101)% (137)% (91)% (123)% (100)% (110)%
=== === ==== ==== === ==== ==== ====
</TABLE>

31
<PAGE> 33

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have funded our operations primarily through private
sales of equity securities and the use of short- and long-term debt. As of
December 31, 1999, we had cash and cash equivalents of $10.7 million, an
accumulated deficit of $14.9 million and $1.5 million of long-term debt, of
which $504,000 is current.

Net cash used in operating activities was $403,000 in 1999 as compared to
$3.1 million in 1998 and $129,000 in 1997. In 1999, the cash used in operations
reflects a net loss before depreciation and amortization of $6.8 million and an
increase in accounts receivable of $2.2 million attributable to the increase in
deferred revenue, partially offset by an increase in deferred revenue of $7.4
million, as well as increases in accounts payable and accrued liabilities. In
1998 and 1997, cash used in operations was primarily the result of our net
losses, partially offset by increases in deferred revenue.

Net cash used in investing activities was $1.7 million in 1999, $937,000 in
1998 and $179,000 in 1997. Net cash used in investing activities consisted
primarily of capital expenditures, related to our investments in computer
equipment and facilities, which were required to support our business expansion.

Net cash provided by financing activities was $11.1 million in 1999 as
compared to $5.6 million in 1998 and $352,000 in 1997. In 1999, cash provided by
financing activities consisted primarily of $9.8 million received from the sale
of Series B Convertible Preferred Stock, $360,000 received from the exercise of
stock options and $1.3 million in proceeds from borrowings, reduced by $297,000
of repayments of notes payable. In 1998, cash provided by financing activities
consisted primarily of $5.7 million received from the sale of Series A
Convertible Preferred Stock and $467,000 in proceeds from borrowings, reduced by
$558,000 of repayments of notes payable. For 1997, cash provided by financing
activities consisted primarily of $590,000 in proceeds from borrowings, reduced
by $114,000 of repayments of notes payable.

We have term notes to Silicon Valley Bank which accrue interest at the
bank's floating prime rate plus 0.5% (9.00% at December 31, 1999) and which had
$553,000 outstanding at December 31, 1999. We are required to make monthly
payments of principal and interest through February 2002. At the present
interest rate our monthly principal and interest payments are $28,000.

In May 1999, we established a line of credit with Silicon Valley Bank for
working capital advances, or borrowings, and stand-by letters of credit for up
to $1.0 million. Borrowings accrue interest at the bank's floating prime rate
plus 0.25% (8.75% at December 31, 1999). As of December 31, 1999, we had open
letters of credit under the line of $496,000. Any outstanding borrowings on the
line mature in May 2000. As of December 31, 1999, we had no borrowings
outstanding against the line.

In October 1999, we modified our May 1999 agreement to provide an
additional $1.0 million line of credit from Silicon Valley Bank to be used for
equipment and furniture purchases through April 2000. In October 1999, we drew
down $925,000 of the available line, which will be converted to a term note in
April 2000. There are no compensating cash requirements on the line, and
advances accrue interest at the bank's floating prime rate plus 1.0% (9.5% at
December 31, 1999). Currently we are required to make monthly interest payments
of $7,000. Beginning in April 2000, we are required to make monthly payments of
principal and interest through April 2003.

All borrowings under our agreements with Silicon Valley Bank are
collateralized by substantially all our assets, and are subject to financial and
restrictive covenants. Under the terms of the line of credit, we are required to
maintain specified financial ratios and meet pre-determined profitability
requirements. We also agreed not to enter into material business combinations or
to take actions that could diminish the value of our assets.

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<PAGE> 34

We believe that our existing cash and cash equivalents will be sufficient
to meet our anticipated cash needs through the next 12 months and that the net
proceeds from this offering may enable us to meet our anticipated cash needs
beyond that time. If cash generated from operations is insufficient to satisfy
our liquidity requirements, we may seek to sell additional equity or debt
securities or to obtain a larger credit facility. The sale of additional equity
or convertible debt securities would result in additional dilution to our
shareholders. Additional debt would result in increased expenses and could
result in covenants that would restrict our operations. We have not made
arrangements to obtain additional financing and there is no assurance that
financing, if required, will be available in amounts or on terms acceptable to
us, if at all.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs that are incurred
during the application development stage and amortize them over the software's
estimated useful life. We adopted SOP 98-1 effective January 1, 1999 with no
material effect on the financial statements.

In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative instruments
and hedging activities. The Statement will require the recognition of all
derivatives on our balance sheet at fair value. The FASB has subsequently
delayed implementation of the standard for the financial years beginning after
June 15, 2000. We expect to adopt the new Statement effective January 1, 2001.
The impact on our financial statements is not expected to be material.

In December 1999, the Securities and Exchange Commission Staff released
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. Effective January 1, 2000, we adopted SAB No. 101, which did not
have any impact on our revenue recognition.

INTEREST RATE RISK

We are exposed to changes in interest rates primarily from our long-term
debt arrangements and, secondarily, our investments in cash equivalents. 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, 1999.

YEAR 2000 IMPACT

The Year 2000 Issue

The year 2000 issue refers to the potential for disruption for business
activities caused by system failures or miscalculations which are triggered by
advancement of data records past the year 1999. Our business has not been
affected by year 2000 issues. However, we cannot assure you that we will not
experience any disruption related to year 2000 issues in the future. We are not
currently aware of any unresolved year 2000 problems relating to any of our
internal systems, nor do we believe that we have any significant systems that
are not year 2000 compliant. Based on our assessment to date, we do not expect
the total cost of year 2000 remediation to be material to our business. To date,
our preparation and remediation costs have been less than $100,000 and future
expenditures will not be significant.

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<PAGE> 35

BUSINESS

COMPANY OVERVIEW

We provide employee Internet management products that enable businesses to
monitor, report and manage how their employees use the Internet. 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 and mitigate potential legal
liability. Our flexible and easy-to-use software applications operate in
conjunction with our proprietary database, which is available for daily
incremental downloads. This database is organized into 54 categories and
encompasses more than 900,000 Web sites representing approximately 95 million
Web page addresses. Our database is updated with approximately 2,000 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 has minimal impact on an
organization's information technology department. Our products require no
additional hardware, can grow with our customers as they expand and support a
broad range of network platforms, including proxy servers, firewalls and other
network appliances and software.

INDUSTRY BACKGROUND

The Internet has emerged 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
spending aggressively to build out their computer networks and information
technology infrastructure. According to International Data Corporation business
spending on basic Internet access alone is expected to reach $12.2 billion by
2002. In order to accommodate a significant number of simultaneous users and the
increasing volume of data transfer associated with enterprise Internet use, many
organizations are making substantial investments in high bandwidth connections
such as dedicated T-1 lines, enabling high speed Internet access.

The Internet has also become a highly popular consumer medium for
entertainment, information and commerce. International Data Corporation has
projected that the number of Internet users worldwide will grow from 103 million
in 1998 to 316 million in 2002. 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 ever-expanding assortment of Web-based consumer
services. Internet users today have the ability to communicate through e-mail,
retrieve news and information from numerous Internet sources, make online
purchases of goods and services ranging from books to airline tickets to
groceries, and otherwise access a broad range of non-business-related 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 rich media, all of which consume large amounts of network
bandwidth. Similarly, online banner advertising and marketing campaigns
targeting consumer Internet users continue to evolve, consuming more bandwidth,
particularly as Web-based advertising increasingly incorporates multimedia and
streaming technologies.

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Internet access at work is fast, convenient and essentially free to
employees. In general, employees enjoy unsupervised and unrestricted Internet
access from their desktop computers. As a result, employees tend to use their
employers' Internet connections for recreational "surfing" or personal matters
during business hours. Non-business use of company Internet access by employees
can result in lost employee productivity, increased network bandwidth
consumption and potential legal liability. These factors in turn contribute to
higher costs for companies that use the Internet.

Recent research and news reports regularly document the hidden costs of
open Internet access in the workplace. We believe that a substantial amount of
employee Internet activity in the workplace is non-business-related, and that a
significant portion of non-business-related e-commerce is conducted through an
Internet connection at work. This non-business use of the Internet can consume
large portions of expensive network bandwidth. According to a Saratoga Institute
study that we commissioned, more than 60% of mid- to large-sized companies
surveyed had disciplined employees for Internet misuse, and more than 30% of
those companies had terminated employees for inappropriate Internet activity.
For example, in October 1999, Xerox Corporation fired 40 employees for
inappropriate use of the Internet in the workplace. In addition, a company may
be exposed to legal liability if online content accessed at the workplace is
deemed to have created a hostile work environment for other employees.

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 with policy, managers
may require their information technology professionals to review the log files
generated by company servers of Web pages visited. This method of employee
Internet management is generally cumbersome and time consuming, and often does
not provide the company with useful information regarding the actual content or
category of Web sites visited. Because this method does not proactively curtail
undesirable Internet activity, employers are forced to discipline employee
violations after the fact. As a result, some managers have lost a significant
level of control over both their employees' productivity and the use of their
information technology infrastructures.

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 to block content. These, 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 only a few
categories such as sex, violence and inappropriate language, and do not have
sufficiently broad coverage to address the wider range of non-business-related
content accessible through the Internet.

Workplace management of non-business-related Internet access is an
increasingly important priority because of its impact on employee productivity,
network bandwidth consumption and potential legal liability. Given the necessity
of corporate Internet access and consumers' continuing adoption of the Web as a
mass entertainment, information and commerce medium, we believe there is a
significant opportunity for an employee Internet management product that
effectively addresses the needs of businesses.

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SOLUTION

We provide employee Internet management products that enable businesses to
monitor, 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 and mitigate potential legal liability. The software 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 Web site 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 monitor, report and 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 and type of
content being accessed. Websense Enterprise may also be configured to defer
access until after work hours, limiting workplace distractions but allowing
appropriate use of the organization's high-speed Internet connection.

Reduced Bandwidth Consumption. 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 rich 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, and to
avoid costs arising from the need to buy additional telecommunications services
and networking equipment.

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 and racism.

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

Access to the Most Comprehensive Database. We provide access to a
proprietary database of over 900,000 Web sites, representing approximately 95
million unique Web page addresses. Our database is cataloged into 54 different
categories to enable organizations to determine the types of Internet content
that are appropriate for their workplace culture. We add approximately 2,000
newly categorized Web sites each business day to our database and make these
updates available to our customers for daily incremental downloads.

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 enable
managers to implement Internet access policy with limited impact on information
technology resources and personnel. Organizations may choose Internet access
options which include blocking Web sites completely or partially, setting time
periods for access, allowing access but generating an exception report, or
deferring access until after work hours.

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Ability to Scale and Operate on a Variety of Network Platforms. Our
software is designed to have minimal impact on network performance and can be
implemented without the purchase of additional hardware. Websense Enterprise is
available on a broad range of network platforms, and existing implementations
currently support up to 50,000 users on a single server. Our software works with
popular proxy servers, firewalls and cache engines offered by Internet
infrastructure providers such as CacheFlow, Check Point, Cisco, Inktomi,
Microsoft Corp., Nokia and others.

STRATEGY

Our objective is to maintain and strengthen our position in the market for
employee Internet management products. Key components of our strategy include:

Increase Sales to Existing Customers. Many of our customers are large
businesses that have thousands of Internet-enabled employees. In most cases,
these customers initially deploy the Websense Enterprise application in one or
two internal departments and pay subscription fees based only on the number of
Internet users in those departments. We believe that there is a large
opportunity to sell our existing customers subscriptions for additional Internet
users within their organizations. We intend to aggressively pursue renewals of
existing subscription agreements and enterprise-wide deployment of Websense
Enterprise within our existing customer base.

Aggressively Leverage Indirect Sales Channels. We currently have 350
value-added resellers that focus on the U.S. market and over 100 international
distributors and resellers primarily in Europe and Asia Pacific. Our indirect
sales channels accounted for approximately 70% of our subscription revenue in
1999. We intend to increase our resources focused on developing these channels
and, as a result, expect that the percentage of our total sales derived from our
indirect channels will increase in the future. In addition, we plan to improve
the productivity of our existing value-added resellers through lead development,
marketing support, sales assistance and training. We intend to aggressively
leverage and expand our indirect sales channels in both the domestic and
international markets through recruiting programs and an ongoing sharing of
subscription renewal fees.

Expand our Customer Base. Our products have been deployed in more than
7,500 organizations worldwide, including 4,600 businesses. We believe our large
installed base of customers provides our products with market credibility, and
we intend to leverage this credibility to further our market penetration. We
currently have over 100 international distributors and resellers covering more
than 50 countries. To address this growing opportunity, we will continue to
increase the number of international resellers and expand our database coverage
beyond the English, French, German, Japanese and Spanish Web sites currently
categorized. We believe that given the higher costs of Internet access in many
foreign markets, the need to manage employee Internet use will be cost-driven.
We also currently have 2,900 educational institutions with 590,000 workstations
using Websense Enterprise to manage student Internet access.

Expand the Websense Product Offering. We intend to continuously develop and
update our software and database in order to keep current with the evolution of
Internet content and technology. We plan to offer our customers enhanced
reporting and management applications for Websense Enterprise as an incremental
revenue opportunity. We also believe that our filtering and categorization of
Internet content will enable us to sell subscriptions to subsets of our database
on an incremental per-user basis. We also intend to provide additional software
features which address worker productivity and enterprise bandwidth consumption.
For example, we plan to offer our customers the ability to block all banner ads
from entering the network by dynamically stripping them from visited Web sites.
In addition, we recognize the need of many small businesses to manage employee
Internet access, and we are currently developing Websense for Small Businesses
to target this market.

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Work Closely with Leading Internet Infrastructure Providers. We intend to
continue to work closely with Internet infrastructure providers such as
CacheFlow, Check Point, Cisco, Inktomi and Nokia. We have modified our software
to integrate with each of these companies' products, and we intend to continue
to work with these companies to migrate our software applications deeper into
the network infrastructure, from proxy servers, firewalls and cache engines, to
network routers. In addition, we plan to continue to sponsor co-marketing
programs with these companies to associate our product with their established
brands and enhance our market position.

Develop and Maintain Leading Processes and Technologies. We intend to
continue developing proprietary processes and technologies that, we believe,
give us a distinct competitive advantage. In the development and maintenance of
our databases, we utilize a process of automated content assessment and
classification with manual verification which allows us to quickly and
accurately grow the size of our database. We believe that a larger and more
accurate database will increase the market for our products because it provides
our customers with a large number of categorized Web sites to use in developing
and implementing their Internet management policies. In addition, we intend to
continue to develop software and technology that will facilitate the integration
of our products with the systems of our customers and Internet infrastructure
providers in order to enable us to offer our products to a broader customer base
than our competitors.

Further Develop and Market AfterWork.com. We intend to leverage the large
and growing user base of Websense Enterprise to develop additional revenue
opportunities through AfterWork.com. Working in conjunction with Websense
Enterprise, this portal site provides employers with the option to defer
employee's non-business related Internet activities to specified non-working
hours. AfterWork.com features a repository for bookmarked Web sites which
employees can access after work through a personalized AfterWork.com Web page.
This allows employees to pursue personal activities such as e-commerce, research
and chat, and to access news and information using their employers' high-speed
Internet connections. Personalized AfterWork.com Web pages can also be accessed
from remote locations, such as the employee's home, to provide a gateway to
useful and often-visited Web sites. We believe that AfterWork.com may provide us
with revenue opportunities through Internet advertising, sponsorships and
e-commerce.

PRODUCTS AND SERVICES

We develop and market a software and database application for managing
employee access to the Internet. Our products consist of customizable software
that reference our proprietary database. Our database of Web page addresses is
organized into 54 categories which are regularly updated and available for
incremental daily downloads. In addition to our current offerings, we plan to
introduce and market new products and services, such as our new AfterWork.com
offering, that will provide enterprises with additional flexibility in managing
employee Internet access.

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WEBSENSE ARCHITECTURE

<TABLE>
<S> <C> <C> <C> <C> <C>
Advertising e-Commerce Monitoring Functions Router

High Legal 54 Categories Reporting Functions Appliance Afterwork.com
Bandwidth Liability Management Functions Proxy Server

Free e-Mail Others Firewall
- ----------- ---------- --------------- -------------------------- ----------------- -------------

Anticipated Websense Websense Websense Customer Websense
Database Offerings Master Database Core Software Applications Network Platforms e-Commerce
</TABLE>

[websense graphic]

Websense Enterprise. Websense Enterprise is the foundation of our software
offerings. Websense Enterprise integrates with an organization's network server,
proxy server or firewall and is designed to work in networks of virtually any
size and configuration without compromising security. The table below describes
the platforms for which we currently offer our Websense Enterprise product.

<TABLE>
<CAPTION>
PROXY SERVERS FIREWALLS CACHE ENGINES APPLIANCE/OTHER
------------- --------- ------------- ---------------
<S> <C> <C> <C>
- Microsoft Proxy - Check Point - Inktomi - Team Internet
- Netscape Proxy - Cisco - CacheFlow - Nokia
- Websense Proxy - Novell - OpenServer Partners
- MimeSweeper - SecurIT
- Netscreen-Conclave
- Netopia-Conclave
- GnatBox
</TABLE>

We sell Websense Enterprise as a subscription based on the number of
Internet users to be managed. Additional users, additional features and enhanced
technical support are priced separately.

Content Management. Websense Enterprise enables employers to proactively
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 during particular time
periods of the day. 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. There are several possible
results for each request:

- Allow. The request is allowed to proceed, because the organization has
chosen not to restrict access to the category applicable to the Web site
or because the requested Web site does not fall into any of our
categories.

- Block. The requested Web site is in a category that is not allowed to be
accessed according to the policy in effect.

- 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.

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- 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.

The Websense Database. We offer an extensive and regularly updated database
of Web sites. Our database currently catalogs more than 900,000 Web sites
representing approximately 95 million Web page addresses cataloged into 54
categories. We add approximately 2,000 newly categorized Web sites per business
day to our database and make these updates available for incremental daily
downloads.

The breadth and specificity of Web site categories we have defined provide
the enterprise flexibility in selecting which types of material should be
allowed, blocked, deferred or reported. We define the categories, based on input
we have received from our customers, to identify the types of materials that we
believe employers would deem to be unacceptable, inappropriate or undesirable in
a work environment. Categories in our database include the following:

<TABLE>
<S> <C> <C>
- Abortion Advocacy - Health - Sex
- Abused Medications - Illegal & Questionable - Shopping
- Activist Groups - Information Technology - Society & Lifestyles
- Adult Content - Job Search - Special Events
- Adult Entertainment - Militancy & Extremist - Sports
- Alcohol & Tobacco - Military - Streaming Media &
- Alternative Journals - MP3 Broadcasting Channels
- Arts & Humanities - News & Media - Supplements
- Business & Economy - Nudity - Tasteless
- Cult & New Age - Online Games - Traditional Religions
- Drugs - Personals & Dating - Travel
- Education - Political Groups - URL Translation Sites
- Entertainment - Prescribed Medications - Vehicles
- Financial Data & - Proxy Avoidance - Violence
Services - Racism & Hate - Weapons
- Gambling - Religion - Web Chat
- Games - Restaurants and Dining - Web Hosting
- Gay and Lesbian Issues - Search Engines & Portals - Web-Based Email
- Government
- Hacking
</TABLE>

Reporter. Websense Reporter is a software application that is offered with
Websense Enterprise. This application assists managers in analyzing Internet use
within their organizations. Websense Reporter generates a wide variety of
tabular and graphical reports on an organization's Internet usage. 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.

Professional Services. Our professional services group provides technical
support, training and consulting services. This group provides pre-sales and
technical support for Websense Enterprise, sells services and resells
third-party computers and firewall software.

Websense for Schools. Websense for Schools is a limited offering that is
tailored for use in the K-12 educational setting. This product has limited
functionality and is initially offered at no charge to qualifying schools. This
software application uses a subset of the Websense Enterprise database and
offers school administrators the ability to manage, monitor and report on
Internet usage in their schools. Websense for Schools is compatible with the
Microsoft Proxy Platform and has features specific to school implementation
requirements. We offer this limited-use product free of charge to

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provide us with an opportunity to sell our full feature Websense Enterprise
software to schools. Currently, approximately 99% of our school customers
subscribe as paying customers to Websense Enterprise.

AfterWork.com. AfterWork.com is our hosted Web site that allows employees
to bookmark and later access Web sites where management policies do not allow
access during work hours. After work hours, when the organization's Internet
access policies may be less restrictive, employees can use their employers'
Internet connection to return to AfterWork.com to access Web sites which they
previously bookmarked. In addition, because AfterWork.com resides on the
Internet, employees can access the site through any Internet connection without
restriction.

CUSTOMERS

We currently have over 4,600 subscription agreements covering approximately
3.8 million Internet-enabled employees and 2,900 subscription agreements with
schools covering 590,000 workstations. Our customers range from Fortune 500
companies to government and educational organizations. No customer accounted for
more than 5% of our total revenues in 1998 or 1999. The following is a list of
the top 100 users of Websense Enterprise based on subscription fees since
January 1, 1999:

BUSINESS -- NORTH AMERICA

ABB Business Services U.S.

Accudata Systems Inc.

Alcan Aluminum Limited
Alliance Data System Corporation
American Express Company

American Family Insurance

American Honda Motor Co., Inc.
Battelle Pacific Northwest Law
Bell Atlantic Yellow Pages Co.
Bergen Brunswig Corporation
Bowater Incorporated
Bristol-Myers Squibb Company
CB Richard Ellis

CCI Networks Incorporated

Central Design Systems

Chubb Corporation
Cigna Corporation
Compaq Computer Corporation
Conoco Inc.

Conquest Inc.

Credo Computer Systems

Datatran Network Systems

Electronic Data Systems Corp.

EnterpriseWise Consulting

Eveready Battery Company, Inc.

Ficomp, Inc.

FileNet Corporation
Freightliner Corporation
Gateway, Inc.

Global Technologies

Goodyear Tire & Rubber Company
IBM Corp.
IKON Office Solutions

Interactive Futures, Inc.

J.C. Penney Company, Inc.

J.D. Edwards

Jabil Circuit Inc.

Liberty Mutual

Marconi Communications North America
Marriott International, Inc.
Merrill Lynch & Co., Inc.
Metropolitan Life Insurance Company
Morgan Stanley Dean Witter & Co.
Navistar

Network Guys, Inc.

Niagara Mohawk Power Corporation
Paramount Pictures
PPG Industries, Inc.
Proctor & Gamble Co.
Public Service Electric & Gas Company
Reliant Energy
Royal Bank of Canada

Salinas Group Limited

Seagate Software

Secure Network Group

Shell Services International

Software House International

Staples, Inc.

The Root Group

Travelers Indemnity Company

Tri-Sage

Underwriter's Laboratories Inc.
Unigraphics Solutions Inc.
Unilever Technology Development
Specialists
Unocal Corporation

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VeriSign Secure IT

Western Digital Corporation
Weyerhaeuser Company

INTERNATIONAL

BP/Amoco
Frankfurter Sparkasse

ICON Systems

Internet Smartsec
Japan Ministry of Education
Norsk Hydro (Norway)
Norwegian State Railway

OpenSoft Communications

OTSU City Education
Royal Bank of Scotland
Saudi Aramco
Sheffield City Council

Sysware Corporation

Trygg Data AS

Unilan

EDUCATIONAL

Atlanta Public Schools
Austrian School System
Ball State University
Birdville Independent School
Multnomah ESD
Portland Public Schools
Santa Barbara County Education Office

GOVERNMENT

Centers for Disease Control
Contra Costa County
County of Riverside
Department of the Army
Department of Veteran Affairs
Washington State Department of
Transportation

INTERNET SERVICE PROVIDERS

AT&T Corporation
Internet Initiative Japan (IIJ)

MCI Worldcom Wireless

Sprint Communications Company, L.P.

SALES, MARKETING AND DISTRIBUTION

Sales. We sell our products and services through both indirect and direct
channels. For 1999, indirect channel sales comprised approximately 70% of total
revenues, while direct sales to end-users accounted for the remainder of our
revenues. We expect that indirect sales will account for an increased percentage
of our revenues over the next several years.

Our indirect channels include:

Value-Added Resellers. We currently have more than 350 domestic
value-added resellers that sell our products in the United States,
including AT&T Corporation and VeriSign, Inc.

Distributors. Internationally, we sell our products through a network
of more than 100 distributors and resellers in over 50 countries, including
distributors such as Alps System Information Co., Ltd. and Unipalm.

Original Equipment Manufacturers. Our product integrates into products
manufactured by original equipment manufacturers. A number of these
parties, including CacheFlow, eSoft, Inc. and Nokia, have provided us
worldwide access to customers through their existing sales channels.

Our direct sales efforts are coordinated worldwide through a sales team of
approximately 20 individuals. The typical end-users buying directly from us are
large organizations.

In 1999 we generated approximately 21% of our total revenue from customers
outside of North America. 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 France and Germany,
entering China, strengthening the Asia/Pacific channels and establishing a
presence in Latin America.

Marketing. Our marketing strategy is to generate qualified sales leads,
build our brand and raise corporate awareness of Websense as a provider of
employee Internet management products.

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<PAGE> 44

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, communicating directly with technology
professionals and the media, in an effort to promote greater awareness of the
growing problem caused by employee misuse of the Internet at work. 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;

- direct mail campaigns;

- cooperative marketing efforts with Internet infrastructure vendors,
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,
allow free trials and purchases of our products 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 customer
service team is responsible for handling general customer inquiries, answering
questions about the ordering process, investigating the status of orders and
payments, as well as processing customer orders. In addition, our customer
service team uses our e-mail system to proactively update 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. The 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. Our research and development expenses totaled
approximately $3.9 million for the year ended December 31, 1999, $1.8 million
for the year ended December 31, 1998 and $528,000 for the year ended December
31, 1997. We expect that we will continue to commit significant resources to
research and development in the future.

TECHNOLOGY

Software Architecture. Websense Enterprise is a server-based system
designed to function without compromising security in networks of virtually any
size and configuration. Websense Enterprise is composed of an integrated system
of monitoring, reporting and management applications. It is designed to
accommodate network growth without impairing performance or requiring major
overhauls and can scale to support networks of up to 50,000 users on a single
server. Websense integrates with major firewalls, proxy servers and caching
engines. We have designed our products to run on multiple network platforms and
in multiple locations.

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<PAGE> 45

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 54
database categories.

COMPETITION

The market for Internet-filtering software and related services is
immature, fragmented, highly competitive, quickly evolving and subject to rapid
technological change. We expect that competition will intensify. Increased
competition may result in reduced market acceptance of our products, price
reductions 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 JSB, N2H2, Secure
Computing and Symantec;

- companies offering network reporting products, such as WebTrends and
Telemate; and

- companies offering client-based software filtering products, such as The
Learning Company and Log-On Data.

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 products with
their offerings. We also compete against and expect increased competition from
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 than we do. They may have significantly greater name recognition,
established marketing relationship 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;

- use 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 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. We also have applied for
United States trademark registrations for AfterWork and AfterWork.com. Effective
trademark protection may not be available in every country where our products
are available.

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<PAGE> 46

We currently have two patent applications pending in the United States and
two 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 December 31, 1999, we had 119 employees, including 51 in research and
development, 31 in selling and marketing and 37 in general and administrative.
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.

FACILITIES

Our corporate headquarters and principal offices are located in San Diego,
California, where we lease approximately 47,000 square feet. This lease expires
in 2002, with an option to extend the lease for an additional three years. We
also have a right of first refusal to lease an additional 13,000 square feet at
our current location. We believe that our current space along with the
additional space we have a right to lease are adequate for our current and
identified future needs.

LEGAL PROCEEDINGS

We have no pending legal proceedings. We may, however, become subject to
lawsuits from time to time in the course of our business.

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<PAGE> 47

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors and their ages as of December 31, 1999
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
John B. Carrington........................ 55 Chairman of the Board, President and Chief
Executive Officer
Douglas C. Wride.......................... 46 Chief Financial Officer
Harold M. Kester.......................... 53 Chief Technology Officer
Ronald B. Hegli........................... 39 Vice President of Engineering
Carrie E. Carlander....................... 29 Vice President of Finance and
Administration
J. Cleve Adams............................ 44 Vice President of Sales
Andrew Meyer.............................. 41 Vice President of Marketing
Robert J. Loarie.......................... 57 Director
Bruce T. Coleman.......................... 59 Director
John C. Stiska............................ 57 Director
Donald B. Milder.......................... 47 Director
Gary E. Sutton............................ 57 Director
</TABLE>

John B. Carrington has served as our President and Chief Executive Officer
since May 1999 and has served as our Chairman since June 1999. 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 has since merged to form ParcPlace-Digitalk, Inc. Mr.
Carrington currently serves on the boards of directors for SalesLogix Corp, a
sales automation and e-commerce provider, and Digital Lava, Inc., a provider of
video publishing and management tools. He received his B.S. in Business
Administration from the University of Texas.

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, bookkeeping and data processing job placement company,
and spent 11 years in the entrepreneurial technology group at Price Waterhouse &
Co. Mr. Wride 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.

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

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<PAGE> 48

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. 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.

Carrie E. Carlander has served as our Vice President of Finance and
Administration since January 1999. Ms. Carlander previously served as our
Director of Finance and Human Resources from December 1996 to January 1999.
Previously, from November 1995 to November 1996, Ms. Carlander served as a
financial analyst at QUALCOMM Incorporated, a developer of digital wireless
communications products and services. From October 1993 to October 1995, she
served as an analyst at the San Diego Unified Port District. Ms. Carlander
received her B.A. in Political Science from the University of California, San
Diego, and an M.B.A. from San Diego State University.

J. Cleve Adams has served as our Vice President of Sales since September
1997. From January 1996 to August 1997, Mr. Adams served as Executive Vice
President of Sequel Technology, Inc., an Internet applications company. From
June 1994 to October 1995, Mr. Adams served as Vice President of Sales for
Acusoft, a client-server start-up. Mr. Adams has also held sales positions with
Novell and Texas Instruments. He received his B.S. in Education from the
University of LaVerne.

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.

Robert J. Loarie has served as a Director since May 1998. Since August
1992, Mr. Loarie has been a Principal of, and since December 1997, a Managing
Director of Morgan Stanley Dean Witter & Co. Incorporated, an investment banking
company. Mr. Loarie is currently a managing member of Morgan Stanley Venture
Partners III, L.L.C. and Morgan Stanley Dean Witter Venture Partners IV, L.L.C.
Mr. Loarie also serves as a director of Realnames Corporation, an Internet
addressing system developer; Adaptec, a computer peripherals company; and
Evolving Systems, a telecommunications software and services company. Mr. Loarie
received a B.S. in Electrical Engineering from the Illinois Institute of
Technology and an M.B.A. from Harvard Business School.

Bruce T. Coleman served as our interim Chief Executive Officer from
November 1998 to May 1999, and continues to be a Director. Mr. Coleman has
served as the Chief Executive Officer of El Salto Advisors, an executive
consulting firm, since November 1991. He is currently the interim Chief
Executive Officer of Rogue Wave Software, an enterprise systems software
provider. From July 1997 to June 1998, Mr. Coleman served as Chief Executive
Officer of Open Horizon, Inc., a provider of Java-based software, and from
December 1995 to July 1996, he served as Chief Executive Officer of Computer
Network Technology, Inc., a provider of networking hardware and software. From
September 1994 to May 1995, Mr. Coleman also served as Chief Executive officer
of Fischer International, a provider of e-mail and security software. He
received a B.A. in Economics from Trinity College and an M.B.A. from Harvard
Business School.

John C. Stiska has served as a Director since March 1999. Mr. Stiska
currently is Chairman of Commercial Bridge Capital, LLC., a venture capital
firm, and serves as of-counsel to the law firm of Latham & Watkins. From
February 1996 to February 1998, he served as Corporate Senior Vice President and
General Manager of the Technology Applications Division of QUALCOMM
Incorporated, a developer of digital wireless communications products and
services. From 1990 to 1996, Mr. Stiska was President and then Chairman and
Chief Executive Officer of Triton Group Ltd., now known as Alarmguard Holdings,
Inc., a seller and installer of burglar and fire alarms. During that time, he
also served on the board of directors of Triton's subsidiaries, two of which

47
<PAGE> 49

were publicly traded: Mission West Properties and Ridgewood Properties, Inc. Mr.
Stiska serves on the boards of directors of several private companies. In
addition, he is a Director of Laser Power Corporation, a producer of
microlasers, and FirstWorld Communications, Inc., a provider of Internet data
and communications services. Mr. Stiska received a B.B.A. and J.D. from the
University of Wisconsin.

Donald B. Milder has served as a Director since June 1999. Since 1989, Mr.
Milder has been a general partner with Crosspoint Venture Partners, a venture
capital investor in early-stage technology companies. Mr. Milder serves on the
boards of 10 privately held companies. Mr. Milder received a B.A. from Union
College and an M.B.A. from Harvard Business School.

Gary E. Sutton has served as a Director since June 1999. Since January
1996, Mr. Sutton has served as the President, Chief Executive Officer and
Chairman of Skydesk, Inc., an online data protection service. From 1990 to 1995,
Mr. Sutton was chairman of Knight Protective Industries, a security systems
provider. Mr. Sutton is also a co-founder of Teledesic, Inc., a low-earth orbit
telecommunications service. Mr. Sutton has authored the book "Profit Secrets of
a No-Nonsense CEO" and several other titles. He received his B.S. from Iowa
State University.

Our executive officers are appointed by the board of directors and serve
until their successors are elected or appointed.

There are no family relationships among any of our directors or executive
officers.

CLASSIFIED BOARD

Our board currently has six members. Under our bylaws, beginning at our
next annual meeting of stockholders, our board will be divided into three
classes of directors serving staggered three-year terms, with one class of
directors to be elected at each annual meeting of stockholders. The term of the
first class of directors will expire in 2002. The term of the second class of
directors will expire in 2003. The term of the third class of directors will
expire in 2004.

BOARD COMMITTEES

Audit Committee. The audit committee of the board of directors reviews,
acts on and reports to the board of directors with respect to various auditing
and accounting matters, including the recommendation of our auditors, the scope
of the annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. The members of the audit
committee are Mr. Loarie, Mr. Sutton and Mr. Milder.

Compensation Committee. The compensation committee of the board of
directors recommends, reviews and oversees the salaries, benefits and stock
option plans for our employees, consultants, directors and other individuals
compensated by us. The compensation committee also administers our compensation
plans. The members of the compensation committee are Mr. Loarie, Mr. Coleman,
Mr. Sutton and Mr. Stiska.

DIRECTOR COMPENSATION

Directors do not receive cash compensation for their service on our board
of directors. Non-employee directors are reimbursed for reasonable expenses
incurred in connection with serving as a director. Since November 1998, we have
granted non-qualified stock options to purchase an aggregate of 130,000 shares
of common stock to Bruce Coleman, a non-employee director, in part for his
services as interim Chief Executive Officer. In June 1999, we granted a
non-qualified stock option to purchase 50,000 shares of common stock to Mr.
Sutton, a non-employee director. Each individual who first becomes a
non-employee member of the board of directors at any time after

48
<PAGE> 50

the offering will receive an option to purchase 50,000 shares of common stock on
the date such individual joins the board of directors, provided such individual
has not previously been employed by us or any parent or subsidiary corporation.
In addition, on the date of each annual stockholders meeting beginning in 2001,
each non-employee member of the board of directors will automatically be granted
an option to purchase 2,500 shares of common stock provided such individual has
served as a non-employee member prior to such meeting.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our compensation committee currently consists of Mr. Loarie, Mr. Coleman,
Mr. Stiska and Mr. Sutton. Except for Mr. Coleman, who served as our interim
Chief Executive Officer from November 1998 to May 1999, no member of the
compensation committee has been an officer or employee of us at any time. Mr.
Stiska is a party to a business representation contract, pursuant to which he is
to serve on our Board of Directors on behalf of Philip G. Trubey and Janet A.
McVeigh, our founders. As compensation for entering into the business
representation contract with Mr. Trubey and Ms. McVeigh, each of Mr. Trubey and
Ms. McVeigh transferred 140,000 shares of our common stock to Mr. Stiska. The
fair market value of the shares of our common stock transferred by Mr. Trubey
and Ms. McVeigh to Mr. Stiska, assuming an initial public offering price of $15
per share, would be $4,200,000. None of our executive officers serves as a
member of the board of directors or compensation committee of any other company
that has one or more executive officers serving as a member of our board of
directors or compensation committee.

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<PAGE> 51

EXECUTIVE COMPENSATION

The following table sets forth all compensation received during fiscal 1999
by our Chief Executive Officer, our former Chief Executive Officer, and the
three other executive officers whose salary and bonus exceeded $100,000 in such
fiscal year. Perquisites and other personal benefits paid to officers are less
than the minimum reporting thresholds.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- -------- ------------
<S> <C> <C> <C>
John B. Carrington...................................... $130,771 $ 94,212 1,300,000
Chief Executive Officer, President and Director
Bruce T. Coleman(1)..................................... 67,500 -- 130,000
Former Chief Executive Officer and Director
J. Cleve Adams.......................................... 120,000 166,671 80,000
Vice President of Sales
Ronald B. Hegli......................................... 109,038 22,327 150,000
Vice President of Engineering
Carrie E. Carlander..................................... 92,308 20,000 40,000
Vice President of Finance
</TABLE>

- -------------------------
(1) Mr. Coleman served as our interim Chief Executive Officer from November 1998
to May 1999.

STOCK OPTION INFORMATION

The following table sets forth information regarding options granted to the
executive officers listed in the Summary Compensation Table during fiscal 1999.
We have not granted any stock appreciation rights.

Each option represents the right to purchase one share of common stock.
Except as set forth in the footnotes below, the options vest on the following
schedule: 25% of the options vest after the completion of one year of service
from the grant date and the remainder of the options vest in equal monthly
installments over the next 36 months of service. To the extent not already
exercisable, these options may also accelerate and become exercisable, in the
event of a merger in which we are not the surviving corporation or upon the sale
of substantially all of our assets. In the year ended December 31, 1999, we
granted options to purchase an aggregate of 3,060,500 shares of common stock.

50
<PAGE> 52

The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the SEC and do not represent our estimate or projection of
our future common stock prices. These amounts represent assumed rates of
appreciation in the value of our common stock from the fair market value on the
date of grant. Actual gains, if any, on stock option exercises are dependent on
the future performance of the common stock and overall stock market conditions.
The amounts in the table may not necessarily be achieved.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATE OF
-------------------------------------------- STOCK PRICE
NUMBER % OF TOTAL APPRECIATION FOR
OF SECURITIES OPTIONS GRANTED OPTION TERM(3)
UNDERLYING TO EMPLOYEES EXERCISE EXPIRATION ---------------------
NAME OPTIONS GRANTED IN 1999 PRICE DATE 5% 10%
---- --------------- --------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John B. Carrington.......... 975,000 31.8% $0.50 5/11/09 $306,586 $776,949
John B. Carrington(1)....... 325,000 10.6 0.50 5/11/09 102,195 258,983
Bruce T. Coleman(2)......... 15,000 0.5 0.20 11/30/08 1,887 4,781
Bruce T. Coleman(2)......... 15,000 0.5 0.20 12/31/08 1,887 4,781
Bruce T. Coleman(2)......... 15,000 0.5 0.20 1/29/09 1,887 4,781
Bruce T. Coleman(2)......... 15,000 0.5 0.20 2/26/09 1,887 4,781
Bruce T. Coleman............ 40,000 1.3 0.50 3/30/09 12,578 31,875
Bruce T. Coleman(2)......... 15,000 0.5 0.20 3/31/09 1,887 4,781
Bruce T. Coleman(2)......... 15,000 0.5 0.20 4/30/09 1,887 4,781
J. Cleve Adams.............. 80,000 2.6 0.50 3/30/09 25,155 63,750
Ronald B. Hegli............. 150,000 4.9 0.50 3/08/09 47,167 119,531
Carrie E. Carlander......... 40,000 1.3 0.20 1/22/09 5,031 12,750

VALUE BASED ON
THE ASSUMED INITIAL
PUBLIC OFFERING PRICE
NAME OF $15.00 PER SHARE
---- ---------------------
<S> <C>
John B. Carrington.......... 14,137,500
John B. Carrington(1)....... 4,712,500
Bruce T. Coleman(2)......... 222,000
Bruce T. Coleman(2)......... 222,000
Bruce T. Coleman(2)......... 222,000
Bruce T. Coleman(2)......... 222,000
Bruce T. Coleman............ 580,000
Bruce T. Coleman(2)......... 222,000
Bruce T. Coleman(2)......... 222,000
J. Cleve Adams.............. 1,160,000
Ronald B. Hegli............. 2,175,000
Carrie E. Carlander......... 592,000
</TABLE>

- -------------------------
(1) Such option vests in equal monthly installments over Mr. Carrington's first
12 months of service.

(2) Such options vested immediately upon grant.

(3) Potential Realizable Value is based upon fair market value of our common
stock on the grant date of the option, which is substantially less than the
initial public offering price. If the Potential Realizable Value were
calculated over the ten-year term of the options, based on the initial
public offering price, the resulting stock price at the end of the term
would be significantly higher.

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<PAGE> 53

AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1999 AND YEAR-END
OPTION VALUES

The following table sets forth information concerning the number and value
of unexercised options held by each of the executive officers listed in the
Summary Compensation Table at December 31, 1999.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL 1999 OPTIONS AT FISCAL 1999(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John B. Carrington........ 325,000 -- -- 975,000 -- $6,337,500
Bruce T. Coleman.......... 90,000 $27,000 -- 40,000 -- 260,000
J. Cleve Adams............ -- -- 95,625 154,375 $650,250 1,049,750
Ronald B. Hegli........... -- -- -- 150,000 -- 975,000
Carrie E. Carlander....... 41,250 55,505 -- 58,750 -- 399,500
</TABLE>

- -------------------------
(1) Amount based on the difference between the fair market value of our common
stock on the date of exercise, as determined by our board of directors, and
the exercise price of the option.

(2) Amount based on the fair market value of our common stock on December 31,
1999, as determined by our board of directors, less the exercise price of
the option.

EMPLOYMENT AGREEMENTS

Employment Agreement of John B. Carrington. In May 1999, upon his initial
employment with us, we entered into an employment agreement with Mr. Carrington
to serve as our President and Chief Executive Officer. This agreement provides
for an initial term of two years which term shall be automatically extended for
successive one-year periods unless terminated by us prior to April 30 of any
year. Under this agreement, Mr. Carrington was paid an annualized base salary of
$200,004 and a bonus of up to $100,000 in 1999. After 1999, the amount of his
salary and bonus will be determined by our Board of Directors; however, his
annual base salary will not be decreased. Under his employment agreement, Mr.
Carrington was granted an option to purchase 975,000 shares of our common stock,
which will vest over a four-year period, with 25% vesting upon the completion of
one year of service and the remainder vesting in equal monthly installments over
the next 36 months of service. Mr. Carrington was also granted an option to
purchase 325,000 shares of our common stock which will vest in equal monthly
installments over a one-year period. If Mr. Carrington's employment is
terminated before all of his options vest, we will have the right to repurchase
any unvested shares for which he may have exercised such options at cost. Upon a
change in control, all of Mr. Carrington's option shares that remain unvested
will vest in full.

If Mr. Carrington's employment is terminated by us other than for cause, or
is terminated by Mr. Carrington upon our breach of his employment agreement, he
is entitled to receive, as severance, a lump sum payment equal to 50% of his
base salary and 50% of his average annual bonus earned under this agreement.
Notwithstanding the foregoing, if within two years following a change of
control, Mr. Carrington's employment is terminated by us other than for cause,
is terminated by Mr. Carrington upon our breach of his employment agreement, or
is constructively terminated, he is entitled to receive, as severance, a lump
sum payment equal to 150% of his base salary and 150% of his average annual
bonus earned under this agreement.

Employment Agreement of Douglas C. Wride. In June 1999, we entered into an
employment agreement with Mr. Wride to serve as our Chief Financial Officer.
This agreement provides that Mr. Wride will be employed "at will" and paid an
annual base salary of at least $150,000. In addition, Mr. Wride will be eligible
to receive a bonus of up to 20% of his annual base salary. Under his employment
agreement, Mr. Wride was granted an option to purchase 300,000 shares of our
common stock, which will vest in equal monthly installments over a four-year
period. If
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<PAGE> 54

Mr. Wride's employment is terminated before all of his options vest, we will
have the right to repurchase any unvested shares for which he may have exercised
such options at cost.

If Mr. Wride's employment is terminated by us other than for cause he is
entitled to receive, as severance, six months of continuation of his base salary
and he will also be entitled to vest in the number of shares of our common stock
that would have become vested under his options if his employment had continued
for an additional six months. Notwithstanding the foregoing, if within one year
following a change of control, Mr. Wride is terminated other than for cause, he
is entitled to receive, as severance, one year of continuation of his base
salary and he will also be immediately vested in all of his option shares.

BENEFIT PLANS

2000 STOCK INCENTIVE PLAN

Introduction. Our 2000 Stock Incentive Plan is intended to serve as the
successor equity incentive program to our 1998 Equity Incentive Plan. Our 2000
plan was adopted by our board on February 11, 2000 and approved by the
stockholders in February 2000. Our 2000 plan will become effective on the date
the underwriting agreement for this offering stock is signed. At that time, all
outstanding options under the predecessor 1998 plan will be transferred to our
2000 plan, and no further option grants will be made under that predecessor
plan. The transferred options will continue to be governed by their existing
terms, unless our compensation committee elects to extend one or more features
of our 2000 plan to those options. Except as otherwise noted below, the
transferred options will have substantially the same terms as in effect for
grants made under the discretionary option grant program of our 2000 plan.

Share Reserve. 4,500,000 shares of common stock has been authorized for
issuance under our 2000 plan. Such share reserve consists of the number of
shares we estimate will be carried over from our 1998 plan, including the shares
subject to outstanding options thereunder, plus an additional increase of
approximately 1,000,000 shares. The number of shares of common stock reserved
for issuance under our 2000 plan will automatically increase on the first
trading day in January each calendar year, beginning in calendar year 2001, by
an amount equal to 4% of the total number of shares of common stock outstanding
on the last trading day in December of the preceding calendar year, but in no
event will any such annual increase exceed 1,500,000 shares. In addition, no
participant in our 2000 plan may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances for more than
750,000 shares of common stock per calendar year.

Equity Incentive Programs. Our 2000 plan is divided into five separate
components:

- the discretionary option grant program, under which eligible individuals
in our employ or service may be granted options to purchase shares of
common stock at an exercise price not less than 100% of the fair market
value of those shares on the grant date;

- the stock issuance program, under which such individuals may be issued
shares of common stock directly, through the purchase of such shares at a
price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the attainment of performance milestones
or the completion of a specified period of service;

- the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants;

- the automatic option grant program, under which option grants will
automatically be made at periodic intervals to our non-employee board
members to purchase shares of common stock

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<PAGE> 55

at an exercise price equal to 100% of the fair market value of those
shares on the grant date; and

- the director fee option grant program, under which our non-employee board
members may be given the opportunity to apply a portion of the annual
retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants.

Eligibility. The individuals eligible to participate in our 2000 plan
include our officers and other employees, our non-employee board members and any
consultants we hire.

Administration. The discretionary option grant program and the stock
issuance program will be administered by the compensation committee. This
committee will determine which eligible individuals are to receive option grants
or stock issuances under those programs, the time or times when such option
grants or stock issuances are to be made, the number of shares subject to each
such grant or issuance, the status of any granted option as either an incentive
stock option or a non-statutory stock option under the federal tax laws, the
vesting schedule to be in effect for the option grant or stock issuance and the
maximum term for which any granted option is to remain outstanding. The
compensation committee will also have the exclusive authority to select the
executive officers and other highly compensated employees who may participate in
the salary investment option grant program in the event that program is
activated for one or more calendar years.

Plan Features. Our 2000 plan will include the following features:

- The exercise price for the shares of common stock subject to option
grants made under our 2000 plan may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. The option
may also be exercised through a same-day sale program without any cash
outlay by the optionee. In addition, the plan administrator may provide
financial assistance to one or more optionees in the exercise of their
outstanding options or the purchase of their unvested shares by allowing
such individuals to deliver a full-recourse, interest-bearing promissory
note in payment of the exercise price and any associated withholding
taxes incurred in connection with such exercise or purchase.

- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including options
transferred from the 1998 plan, in return for the grant of new options
for the same or a different number of option shares with an exercise
price per share based upon the fair market value of our common stock on
the new grant date. We anticipate that a cancellation would only occur
when the compensation committee determines that the exercise price of the
outstanding options is so far above the then fair market value of the
underlying stock that retention of employees is in jeopardy. No
cancellation would occur without the consent of the affected employees,
and new replacement options for substantially the same number of shares
would be issued in replacement of the cancelled options.

- Stock appreciation rights are authorized for issuance under the
discretionary option grant program. Such rights will provide the holders
with the election to surrender their outstanding options for an
appreciation distribution from us equal to the fair market value of the
vested shares of common stock subject to the surrendered option, less the
aggregate exercise price payable for those shares. Such appreciation
distribution may be made in cash or in shares of common stock. None of
the outstanding options under our 1998 plan contain any stock
appreciation rights.

- In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will automatically
accelerate in full, and all unvested shares under the discretionary
option

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<PAGE> 56

grant and stock issuance programs will immediately vest, except to the
extent our repurchase rights with respect to those shares are to be
assigned to the successor corporation. The compensation committee will
have complete discretion to structure one or more options under the
discretionary option grant program so those options will vest as to all
the option shares in the event those options are assumed in the
acquisition but the optionee's service with us or the acquiring entity is
subsequently terminated. The vesting of outstanding shares under the
stock issuance program may be accelerated upon similar terms and
conditions. The compensation committee will also have the authority to
grant options which will immediately vest in the event we are acquired,
whether or not those options are assumed by the successor corporation.

- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the majority
of our board through one or more contested elections for board
membership. Such accelerated vesting may occur either at the time of such
transaction or upon the subsequent termination of the individual's
service.

- The options currently outstanding under our 1998 plan will immediately
vest in the event we are acquired by merger or sale of substantially all
our assets or more than 50% of our outstanding voting stock, unless those
options are assumed or continued in effect by the acquiring entity or our
repurchase rights with respect to any unvested shares subject to those
options are assigned to such entity. However, those options also contain
a special acceleration provision pursuant to which those options will
immediately vest upon an involuntary termination of the optionee's
employment within 24 months following an acquisition in which those
options are assumed, provided the optionee has been employed by us for at
least one year prior to the acquisition.

Salary Investment Option Grant Program. In the event the compensation
committee elects to activate the salary investment option grant program for one
or more calendar years, each of our executive officers and other highly
compensated employees selected for participation may elect, prior to the start
of the calendar year, to reduce his or her base salary for that calendar year by
a specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who files such a timely election will automatically be
granted, on the first trading day in January of the calendar year for which his
or her salary reduction is to be in effect, an option to purchase that number of
shares of common stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of our common stock on the grant
date. The option will be exercisable at a price per share equal to one-third of
the fair market value of the option shares on the grant date. As a result, the
option will be structured so that the fair market value of the option shares on
the grant date less the exercise price payable for those shares will be equal to
the amount by which the optionee's salary is reduced under the program. The
option will become exercisable in a series of 12 equal monthly installments over
the calendar year for which the salary reduction is to be in effect.

Automatic Option Grant Program. Under the automatic option grant program,
each individual who first becomes a non-employee board member at any time after
the completion of this offering will automatically receive an option grant for
50,000 shares on the date such individual joins the board, provided such
individual has not been in our prior employment. In addition, on the date of
each annual stockholders meeting held after the completion of this offering,
each non-employee board member who is to continue to serve as a non-employee
board member, including each of our current non-employee board members, will
automatically be granted an option to purchase 2,500 shares of common stock,
provided such individual has served on our board for at least six months.

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<PAGE> 57

Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option which are not vested at the time of
the optionee's cessation of board service. The shares subject to each initial
50,000-share automatic option grant will vest in a series of 4 successive annual
installments upon the optionee's completion of each year of board service over
the 4-year period measured from the grant date. The shares subject to each
annual 2,500-share automatic option grant will vest upon the optionee's
completion of one year of board service measured from the grant date. However,
the shares will immediately vest in full upon changes in control or ownership or
upon the optionee's death or disability of a board member.

Director Fee Option Grant Program. Should the director fee option grant
program be activated in the future, each non-employee board member will have the
opportunity to apply all or a portion of any cash retainer fee for the year to
the acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for which
the retainer fee would otherwise be payable in cash. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date, and the number of shares subject to the option
will be determined by dividing the amount of the retainer fee applied to the
program by two-thirds of the fair market value per share of our common stock on
the grant date. As a result, the option will be structured so that the fair
market value of the option shares on the grant date less the exercise price
payable for those shares will be equal to the portion of the retainer fee
applied to that option. The option will become exercisable in a series of 12
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable for all
the option shares upon the optionee's death or disability while serving as a
board member.

Our 2000 plan will also have the following features:

- Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.

- Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share based
upon the highest price per share of our common stock paid in that tender
offer.

- The board may amend or modify the 2000 plan at any time, subject to any
required stockholder approval. The 2000 plan will terminate no later than
January 31, 2010.

2000 EMPLOYEE STOCK PURCHASE PLAN.

Introduction. Our 2000 Employee Stock Purchase Plan was adopted by the
board on February 11, 2000 and approved by the stockholders in February 2000.
The plan will become effective immediately upon the signing of the underwriting
agreement for this offering. The plan is designed to allow our eligible
employees and the eligible employees of our participating subsidiaries to
purchase shares of common stock, at semi-annual intervals, with their
accumulated payroll deductions.

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<PAGE> 58

Share Reserve. 250,000 shares of our common stock will initially be
reserved for issuance. The reserve will automatically increase on the first
trading day in January each calendar year, beginning in calendar year 2001, by
an amount equal to 1% of the total number of outstanding shares of our common
stock on the last trading day in December in the prior calendar year. In no
event will any such annual increase exceed 375,000 shares.

Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period may have a duration in excess of 24 months and will start on the
date the underwriting agreement for the offering is signed, and will end on the
last business day in April 2002. The next offering period will start on the
first business day in May 2002, and subsequent offering periods will be set by
our compensation committee.

Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on the
start date or any semi-annual entry date within that period. Semi-annual entry
dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.

Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of April and October each
year. However, a participant may not purchase more than 1,250 shares on any
purchase date, and not more than 150,000 shares may be purchased in total by all
participants on any purchase date. Our compensation committee will have the
authority to change these limitations for any subsequent offering period.

Reset Feature. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start date
of the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.

Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of the acquisition. The purchase price will be equal to 85%
of the market value per share on the participant's entry date into the offering
period in which an acquisition occurs or, if lower, 85% of the fair market value
per share immediately prior to the acquisition.

Plan Provisions. The following provisions will also be in effect under the
plan:

- The plan will terminate no later than the last business day of April
2010.

- The board may at any time amend, suspend or discontinue the plan.
However, amendments may require stockholder approval.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be

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<PAGE> 59

personally liable for monetary damages for breach of their fiduciary duties as
directors, except liability for:

- any breach of their duty of loyalty to the corporation or its
stockholders;

- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or

- any transaction from which the director derived an improper personal
benefit.

Such limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission. Our certificate of
incorporation and bylaws provide that we shall indemnify our directors and
executive officers and may indemnify our other officers and employees and other
agents to the fullest extent permitted by law. We believe that indemnification
under our bylaws covers at least negligence and gross negligence on the part of
the indemnified parties. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.

We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding arising out of such person's services as a
director or executive officer of Websense, any subsidiary of Websense or any
other entity to which the person provides services at our request. In addition,
we maintain directors' and officers' insurance. We believe that these provisions
and agreements are necessary to attract and retain qualified persons as
directors and executive officers.

At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.

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<PAGE> 60

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of December 31, 1999, as adjusted to
reflect the sale of common stock offered in this offering, by:

- each person, or group of affiliated persons, known by us to own
beneficially more than 5% of our outstanding common stock;

- each director;

- each of our directors and our executive officers named in the Summary
Compensation Table; and

- all of our directors and executive officers as a group.

Except as otherwise noted, the address of each person listed in the table
is c/o Websense, Inc., 10240 Sorrento Valley Road, San Diego, California 92121.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to shares. To our knowledge, except under applicable community property
laws or as otherwise indicated, the persons named in the table have sole voting
and sole investment control with respect to all shares shown as beneficially
owned. The applicable percentage of ownership for each stockholder is based on
15,394,698 shares of common stock outstanding as of December 31, 1999 and
19,394,698 shares outstanding after the completion of this offering, in each
case together with applicable options for that stockholder. Shares of common
stock issuable upon exercise of options and other rights beneficially owned that
are exercisable on or before February 29, 2000 are deemed outstanding for the
purpose of computing the percentage ownership of the person holding those
options and other rights but are not deemed outstanding for computing the
percentage ownership of any other person. A portion of the shares issued to
officers or issuable upon exercise of options by officers is subject to
repurchase by us at the original exercise price in the event of termination of
that officers' employment, which repurchase right lapses over time. Philip G.
Trubey and Janet A. McVeigh, two of our principal stockholders, have granted the
underwriters an option to purchase up to 600,000 shares of our common stock in
this offering to cover over-allotments, if any.

<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
--------------------
TOTAL NUMBER BEFORE AFTER
NAME AND ADDRESS OF SHARES OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS:
John B. Carrington(1)...................................... 315,000 2.0% 1.6%
Bruce T. Coleman........................................... 90,000 0.6 0.5
J. Cleve Adams(2).......................................... 102,708 0.7 0.5
Ronald B. Hegli............................................ -- * *
Carrie E. Carlander(3)..................................... 54,583 0.3 0.3
Robert J. Loarie(4)........................................ 3,753,088 24.4 19.4
c/o Morgan Stanley Dean Witter Venture Partners
3000 Sand Hill Road
Building Four, Suite 250
Menlo Park, California 94025
John C. Stiska............................................. 240,000 1.6 1.2
Donald B. Milder(5)........................................ 2,287,398 14.9 11.8
18552 MacArthur Blvd., Suite 400
Irvine, California 92612
Gary E. Sutton............................................. -- * *
</TABLE>

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<PAGE> 61

<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
--------------------
TOTAL NUMBER BEFORE AFTER
NAME AND ADDRESS OF SHARES OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
OTHER 5% STOCKHOLDERS:
Entities affiliated with Morgan Stanley Venture
Partners III, LLC(6)..................................... 3,753,088 24.4 19.4
3000 Sand Hill Road
Building Four, Suite 250
Menlo Park, California 94025
Crosspoint Venture Partners 1999, L.P...................... 2,287,398 14.9 11.8
18552 MacArthur Blvd., Suite 400
Irvine, California 92612
Edelson IV, L.P. .......................................... 1,053,950 6.8 5.4
Persons and entities affiliated with Nippon Investment &
Finance Co., Ltd.(7)..................................... 806,377 5.2 4.2
Philip G. Trubey(8)........................................ 5,760,000 37.4 29.7
3272 Lahitte Court
San Diego, California 92122
Janet A. McVeigh(9)........................................ 5,760,000 37.4 29.7
3272 Lahitte Court
San Diego, California 92122
All of our officers and directors as a group (12
persons)(10)............................................. 887,291 5.8 4.6
</TABLE>

- -------------------------
* Represents beneficial ownership of less than one percent of the outstanding
shares of our common stock.

(1) Upon exercise of stock options, Mr. Carrington acquired 325,000 shares of
common stock, 10,000 shares of which he subsequently transferred. Mr.
Carrington disclaims beneficial ownership of these 10,000 shares.

(2) Consists of 102,708 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of December 31, 1999.

(3) Includes 13,333 shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999.

(4) Includes 3,293,356 shares held by Morgan Stanley Venture Partners III,
L.P.; 316,209 shares held by Morgan Stanley Venture Investors III, L.P. and
143,523 shares held by The Morgan Stanley Venture Partners Entrepreneur
Fund, L.P. Morgan Stanley Venture Partners III, LLC is the general partner
of each of these entities and is therefore deemed to exercise voting and
investment power over all of the shares. Mr. Loarie, a managing member of
each of these entities, disclaims beneficial ownership in such shares,
except to the extent of his pecuniary interest in each of the limited
partnerships.

(5) Consists of 2,287,398 shares held by Crosspoint Venture Partners 1999, L.P.
Mr. Milder, as a general partner of this limited partnership, may be deemed
to have voting and investment power over these shares. Mr. Milder disclaims
beneficial ownership in such shares, except to the extent of his pecuniary
interest in the limited partnership.

(6) Includes 3,293,356 shares held by Morgan Stanley Venture Partners III,
L.P.; 316,209 shares held by Morgan Stanley Venture Investors III, L.P. and
143,523 shares held by The Morgan Stanley Venture Partners Entrepreneur
Fund, L.P.

(7) Includes 392,500 shares held by Investment Enterprise Partnership "New
Technology Fund 98;" 140,500 shares held by Investment Enterprises
Partnership "NIF 11;" 174,239 shares held by Nippon Investment & Finance
Co., Ltd.; 45,577 shares held by Investment Enterprise Partnership New
Technology Fund 99-A; 45,577 shares held by Investment Enterprise
Partnership New Technology Fund 99-B; and 7,984 shares held by Jim Timmins,
a partner of NIF Ventures USA, Inc.

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<PAGE> 62

(8) Includes 2,880,000 shares held by Mr. Trubey and 2,880,000 shares held by
Janet A. McVeigh, Mr. Trubey's spouse. Mr. Trubey has granted to the
underwriters an option to purchase up to 300,000 shares of common stock
solely to cover over-allotments, if any. In the event that the underwriters
exercise their over-allotment option in full, Mr. Trubey would hold
2,580,000 shares, which would represent approximately 13% of the common
stock outstanding immediately following the offering.

(9) Includes 2,880,000 shares held by Ms. McVeigh and 2,880,000 shares held by
Philip G. Trubey, Ms. McVeigh's spouse. Ms. McVeigh has granted to the
underwriters an option to purchase up to 300,000 shares of common stock
solely to cover over-allotments, if any. In the event that the underwriters
exercise their over-allotment option in full, Ms. McVeigh would hold
2,580,000 shares, which would represent approximately 13% of the common
stock outstanding immediately following the offering.

(10) Includes 116,041 shares issuable upon exercise of stock options exercisable
within 60 days of December 31, 1999.

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<PAGE> 63

TRANSACTIONS WITH RELATED PARTIES

Since inception we have issued shares of our convertible preferred stock to
investors in private placement transactions as follows: a total of 3,703,704
shares of Series A preferred stock at a price of $1.62 per share in May 1998,
and a total of 3,333,332 shares of Series B preferred stock at a price of $3.00
per share between June and September 1999. The following table summarizes the
shares of preferred stock purchased by our executive officers, directors, and 5%
stockholders and persons and entities associated with them in these private
placement transactions. All shares of our preferred stock will convert into
common stock on a 1-for-1 basis upon completion of this offering. Shares held by
affiliated persons and entities have been aggregated. See "Principal
Stockholders." In connection with the above transactions, we entered into an
agreement with the investors providing for registration rights with respect to
these shares.

<TABLE>
<CAPTION>
SERIES A SERIES B TOTAL
PREFERRED STOCK PREFERRED STOCK CONSIDERATION
--------------- --------------- -------------
<S> <C> <C> <C>
Entities affiliated with Morgan Stanley Venture
Partners III LLC(1)............................ 3,086,420 333,334 $6,000,000
Entities affiliated with Crosspoint Venture
Partners....................................... -- 1,910,000 5,730,000
Edelson IV, L.P.................................. 617,284 66,667 1,201,001
A person and entities affiliated with Nippon
Finance & Investment Co., Ltd.(2).............. -- 673,333 2,019,999
</TABLE>

- -------------------------

(1) Morgan Stanley Venture Partners III, LLC is the general partner of Morgan
Stanley Venture Partners III, L.P.; Morgan Stanley Venture Investors III,
L.P.; and Morgan Stanley Venture Partners Entrepreneur Fund, L.P.; and
therefore is deemed to exercise voting and investment power over all shares
owned by such entities.

(2) Nippon Investment & Finance Co., Ltd. is the general partner of Investment
Enterprise Partnership "New Technology Fund 98," Investment Enterprise
Partnership "NIF 11," Investment Enterprise Partnership New Technology Fund
99-A, and Investment Enterprise Partnership New Technology Fund 99-B, and
therefore is deemed to exercise voting and investment power over all shares
owned by such entities.

In May 1999, John B. Carrington acquired 325,000 shares upon exercise of an
option at an exercise price of $0.50 per share for an aggregate purchase price
of $162,500 and Bruce T. Coleman acquired 90,000 shares upon exercise of options
at an exercise price of $0.20 per share for an aggregate purchase price of
$18,000. In September 1999, Douglas C. Wride acquired 75,000 shares upon
exercise of an option at an exercise price of $0.75 per share for an aggregate
purchase price of $56,250. In July and December 1999, Carrie E. Carlander
acquired a total of 41,250 shares upon exercise of options at $0.20 per share
for an aggregate purchase price of $8,250.

Stock option grants to our directors are described under the caption
"Management -- Board Compensation."

On March 29, 1999, Philip G. Trubey and Janet A. McVeigh, our founders, and
each a greater than 5% stockholder, entered into an agreement with John Stiska
pursuant to which Mr. Stiska agreed to serve as a member of our Board of
Directors elected by Mr. Trubey and Ms. McVeigh. Under this agreement, Mr.
Stiska agreed to represent the interests of Mr. Trubey and Ms. McVeigh as they
relate to us. In exchange, Mr. Trubey and Ms. McVeigh each transferred to Mr.
Stiska 140,000 shares of our common stock held by them. The fair market value of
the shares of common stock transferred by Mr. Trubey and Ms. McVeigh to Mr.
Stiska, assuming an initial public offering price of $15 per share, would be
$4,200,000. On August 25, 1999, we entered into a Transfer Agreement with Mr.
Trubey, Ms. McVeigh and Mr. Stiska in order to effect the transfer of our shares
described above. Although Mr. Stiska has been compensated by Mr. Trubey and

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<PAGE> 64

Ms. McVeigh for his agreement to serve as a director, we do not believe that Mr.
Stiska's ability to perform his duties as a director of the Company has been
compromised.

We believe that all of our transactions with affiliates were entered into
on terms and conditions no less favorable to us than those that could have been
obtained from unaffiliated third parties. In addition, transactions with our
affiliates are approved by a majority of our board of directors, including a
majority of our independent and disinterested directors.

We have entered into indemnification agreements with all of our officers
and directors. Some of our stockholders are entitled to have their shares
registered by us for resale.

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<PAGE> 65

DESCRIPTION OF CAPITAL STOCK

The following information describes our common stock and preferred stock
and provisions of our certificate of incorporation and our bylaws as in effect
upon the closing of this offering. This description is only a summary. You
should also refer to the certificate of incorporation and bylaws which have been
filed with the SEC as exhibits to our registration statement, of which this
prospectus forms a part. The descriptions of the common stock and preferred
stock reflect changes to our capital structure that will occur upon the receipt
of the requisite board and stockholder approvals and upon the closing of this
offering in accordance with the terms of the certificate of incorporation.

Upon the completion of the offering our authorized capital stock will
consist of 100,000,000 shares of common stock, par value $0.01 per share, and 5
million shares of preferred stock, par value $0.01 per share.

COMMON STOCK

Assuming conversion of the convertible preferred stock as described below,
as of December 31, 1999, there were 15,394,698 shares of common stock
outstanding and held of record by 54 stockholders. Based upon the number of
shares outstanding as of December 31, 1999 and giving effect to (1) the
automatic conversion of each share of our preferred stock into one share of our
common stock upon the closing of this offering and (2) the issuance of the
4,000,000 shares of common stock offered hereby, there will be 19,394,698 shares
of common stock outstanding upon the closing of this offering.

Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available for that purpose, subject to any preferential dividend
rights of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of common stock are, and the shares offered by us in this offering will
be, when issued in consideration for payment thereof, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate and issue in the
future. Upon the closing of this offering, there will be no shares of preferred
stock outstanding.

PREFERRED STOCK

As of December 31, 1999, there were 7,037,036 shares of convertible
preferred stock outstanding. All outstanding shares of convertible preferred
stock will be converted into an aggregate of 7,037,036 shares of common stock
upon the closing of this offering and such shares of convertible preferred stock
will no longer be authorized, issued or outstanding.

Upon the closing of this offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 5 million shares of preferred stock in one or more series and
to fix or alter the designations, powers, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. We have no present plans
to issue any shares of preferred stock.

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<PAGE> 66

OPTIONS

As of December 31, 1999, options to purchase a total of 3,161,551 shares of
common stock were outstanding, all of which are subject to market stand-off
provisions under the terms of the option agreements governing such options.
Options to purchase a total of 1,338,449 shares of common stock remain available
for grant under the 2000 Stock Incentive Plan.

COMMON STOCK WARRANTS

As of December 31, 1999, we had outstanding warrants to purchase an
aggregate of 112,500 shares of common stock, at a weighted average exercise
price of $1.69 per share. These warrants were issued to Alps System Integration
Co., Ltd.; Adam Button, Inc.; Paul Hardy; Pan Pacific Partners; and Global
Alliance, Ltd. The warrants issued to Alps System Integration Co., Ltd. expire
on April 15, 2004. The remaining warrants expire on July 30, 2004.

REGISTRATION RIGHTS

Stockholders holding approximately 7,037,036 shares of common stock have
the right, subject to various conditions and limitations, to include their
shares in registration statements relating to our securities. The holders of 50%
of the aggregate number of shares issued on conversion of our Series A and
Series B preferred securities have the right to demand that we register their
shares under the Securities Act of 1933 subject to limitations. We are not
required to effect more than 2 registrations pursuant to such demand
registration rights. In addition, after the closing of this offering these
holders will be entitled to piggyback registration rights with respect to the
registration of such shares of common stock under the Securities Act of 1933. In
the event that we propose to register any shares of common stock under the
Securities Act of 1933 either for our account or for the account of other
security holders, the holders of shares having piggyback registration rights are
entitled to receive notice of such registration and to include their shares in
any such registration, subject to limitations. Further, at any time after we
become eligible to file a registration statement on Form S-3, the holders of
registration rights may require us to file registration statements under the
Securities Act on Form S-3 with respect to their shares of common stock having
an aggregate offering price of at least $500,000. These registration rights are
subject to conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares of common stock held by such
security holders to be included in such registration. We are generally required
to bear all of the expenses of all such registrations, including the reasonable
fees of a single counsel acting on behalf of all selling holders, except
underwriting discounts and selling commissions. Registration of any of the
shares of common stock held by security holders with registration rights would
result in such shares becoming freely tradable without restriction under the
Securities Act immediately upon effectiveness of such registration.

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND
BYLAWS

General. Provisions of Delaware law and our certificate of incorporation
and bylaws could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of us. Such
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. These provisions of Delaware law and the
certificate of incorporation and bylaws may also have the effect of discouraging
or preventing transactions involving an actual or threatened change of control
of us, including unsolicited takeover attempts, even though such a transaction
may offer our stockholders the opportunity to sell their stock at a price above
the prevailing market price.

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<PAGE> 67

Delaware Takeover Statute. We are subject to the "business combination"
provisions of Section 203 of the Delaware General Corporation Law. Subject to
exceptions, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:

- the transaction is approved by the board of directors prior to the date
the interested stockholder obtained interested stockholder status;

- upon consummation of the transaction that resulted in the stockholders
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and also
officers and(b) employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer; or

- on or subsequent to the date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.

A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to exceptions, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or more
of the corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to us and, accordingly, may discourage attempts to acquire us.

Charter and Bylaw Provisions. In addition, our certificate of incorporation
and bylaws summarized in the following paragraphs may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in its best interest, including those
attempts that might result in a premium over the market price for the shares
held by stockholders.

Classified Board of Directors; Removal; Filling Vacancies and
Amendment. The certificate of incorporation and bylaws provide that the board
shall be divided into three classes of directors serving staggered, three-year
terms. The classification of the board has the effect of requiring at least two
annual stockholder meetings, instead of one, to replace a majority of members of
the board. Subject to the rights of the holders of any outstanding series of
preferred stock, the certificate of incorporation authorizes only the board to
fill vacancies, including newly created directorships. Accordingly, this
provision could prevent a stockholder from obtaining majority representation on
the board by enlarging the board of directors and filling the new directorships
with its own nominees. The certificate of incorporation also provides that
directors may be removed by stockholders only for cause and only by the
affirmative vote of holders of two-thirds of the outstanding shares of voting
stock.

Stockholder Action; Special Meeting of Stockholders. The certificate of
incorporation provides that stockholders may not take action by written consent,
but may only take action at duly called annual or special meetings of
stockholders. The certificate of incorporation further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors or a majority of the board of directors. This limitation on the right
of stockholders to call a special meeting could make it more difficult for
stockholders to initiate actions that are opposed by the board of directors.
These actions could include the removal of an incumbent director or the election
of a stockholder nominee as a director. They could also include the
implementation of a

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<PAGE> 68

rule requiring stockholder ratification of specific defensive strategies that
have been adopted by the board of directors with respect to unsolicited takeover
bids. In addition, the limited ability of the stockholders to call a special
meeting of stockholders may make it more difficult to change the existing board
and management.

Advance Notice Requirements for Stockholder Proposals and Director
Nomination. The bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at our principal executive offices not less than 120 days
prior to the date of our annual meeting. The bylaws also specify requirements as
to the form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.

Authorized but Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could render
more difficult or discourage an attempt to obtain control of us by means of a
proxy contest, tender offer, merger or otherwise.

Supermajority Vote to Amend Charter and Bylaws. The Delaware General
Corporation Law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage.
Following the completion of this offering, our present directors, and executive
officers and principal stockholders will beneficially own approximately 75% of
our common stock. This gives them veto power with respect to any stockholder
action or approval requiring either a two-thirds vote or a simple majority.

NASDAQ NATIONAL MARKET

We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "WBSN."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation, Glendale, California.

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<PAGE> 69

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.

Based upon the 15,394,698 shares we had outstanding as of December 31,
1999, and the 4,000,000 shares to be sold pursuant to this offering, we will
have outstanding 19,394,698 shares of our common stock upon completion of this
offering, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the 4,000,000 shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining shares of common
stock held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which rules are
summarized below.

The following table shows approximately when the shares of our common stock
that are not being sold in this offering but which will be outstanding when this
offering is complete will be eligible for sale in the public market:

ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET

<TABLE>
<CAPTION>
NUMBER OF
SHARES ELIGIBLE
FOR FUTURE
RELEVANT DATES SALE COMMENT
-------------- --------------- --------------------------------------
<S> <C> <C>
On effective date..................... -- Shares eligible for sale under Rule
144(k)
90 days after effective date.......... -- Additional shares eligible for sale
under Rules 144 and 701
180 days after effective date......... 14,154,698 All shares subject to lock-up
agreements and market standoff
provisions released; additional shares
eligible for sale under Rules 144 and
701.
More than 181 days after effective 1,240,000 Additional shares becoming eligible
date................................ for sale under Rule 144 more than 180
days after the effective date
</TABLE>

Resale of most of the restricted shares that will become available for sale
in the public market starting 180 days after the effective date will be limited
by volume and other resale restrictions under Rule 144 because the holders are
our affiliates.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:

- 1% of the number of shares of common stock then outstanding, which will
equal approximately 194,000 shares immediately after this offering; or

- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.

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<PAGE> 70

Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and are subject to the availability of current public
information about us.

Rule 144(k)

Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.

Rule 701

In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us under
a stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions, including the holding period, contained
in Rule 144.

LOCK-UP AGREEMENTS AND MARKET STAND-OFF PROVISIONS

All of our executive officers, directors and security holders are subject
to lock-up agreements or market stand-off provisions under which they have
agreed not to transfer or dispose of, directly or indirectly, any shares of
common stock or any securities convertible into or exercisable or exchangeable
for shares of common stock, for a period of 180 days after the date of this
prospectus. Chase Securities Inc. may, however, in its sole discretion, at any
time, without notice, release all or any portion of the shares subject to
lock-up agreements to which it is a party.

STOCK PLANS

Following 90 days after the date of this prospectus, shares issued upon
exercise of options that we granted prior to the date of this offering will also
be available for sale in the public market pursuant to Rule 701 under the
Securities Act of 1933. Rule 701 permits resales of such shares in reliance upon
Rule 144 under the Securities Act of 1933 but without compliance with the
restrictions, including the holding-period requirement, imposed under Rule 144.
As of December 31, 1999, options to purchase a total of 3,161,551 shares of
common stock were outstanding. Each option grant is subject to a market
stand-off provision, which allows the Company to restrict the sale of shares
obtained through the exercise of options for up to 180 days from the date of
this offering. Of these 3,161,551 shares, 1,790,012 shares may be eligible for
sale in the public market beginning 180 days from the date of this prospectus.

We intend to file a registration statement to register for resale the
5,000,000 shares of common stock reserved for issuance under our stock option
plans. This registration statement will become effective immediately upon
filing. Shares issued upon the exercise of stock options granted under our stock
option plans will be eligible for resale in the public market from time to time
subject to vesting and the expiration of the market stand-off provisions
referred to above.

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<PAGE> 71

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Chase Securities Inc.,
SG Cowen Securities Corporation and SoundView Technology Group, Inc., have
severally agreed to purchase from us the following numbers of shares of common
stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Chase Securities Inc. ......................................
SG Cowen Securities Corporation.............................
SoundView Technology Group, Inc. ...........................
--------
Total.............................................
========
</TABLE>

The underwriting agreement provides that the obligations of the
underwriters are conditioned on the absence of any material adverse change in
our business and the receipt of certificates, opinions and letters from us, the
selling stockholders, our counsel and our independent auditors. The underwriters
are committed to purchase all shares of common stock offered in this prospectus
if any shares are purchased.

The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ per share to other dealers. After
the public offering of the shares, the underwriters may change the offering
price and other selling terms. The representatives of the underwriters have
informed us that the underwriters do not intend to confirm discretionary sales
in excess of 5% of the shares of common stock offered by this prospectus.

Two of our stockholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to purchase
up to 600,000 additional shares of common stock at the public offering price,
less the underwriting discount set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, each underwriter will
have a firm commitment to purchase a number of shares that approximately
reflects the same percentage of total shares the underwriter purchased in the
above table. The selling stockholders will be obligated to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of common stock offered in this prospectus.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us and the selling
stockholders. The underwriting discount, which we currently estimate will be
seven percent of the public offering price, will be determined based on an arms'
length negotiation between the representatives of the underwriters, Websense and
the

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<PAGE> 72

selling stockholders. These amounts are shown assuming both no exercise and full
exercise of the underwriters' over-allotment option to purchase additional
shares.

<TABLE>
<CAPTION>
PER WITHOUT WITH
SHARE OPTION OPTION
------ ------- ------
<S> <C> <C> <C>
Public offering price.................................... $ $ $
Underwriting discounts & commissions
- paid by Websense..................................... $ $ $
- paid by selling stockholders......................... $ $0 $
Proceeds, before expenses
- to Websense.......................................... $ $ $
- to selling stockholders.............................. $ $0 $
</TABLE>

We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $955,000. The
offering of the shares is made for delivery when, as and if accepted by the
underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

We and the selling stockholders have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect of
those liabilities.

All of our stockholders, including the selling stockholders, all of our
executive officers and directors have agreed, pursuant to lock-up agreements or
market stand-off provisions to which they are subject, that they will not,
offer, sell or otherwise dispose of any shares of common stock, options or
warrants to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock owned by them during the 180-day period
following the date of this prospectus. Chase Securities Inc. has the sole
discretion to determine the timing and extent of any release from the lock-up
agreements to which it is a party and may grant such release without providing
any prior notice. We have agreed that we will not, without the prior written
consent of Chase Securities Inc., offer, sell or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options granted prior to the date of this
prospectus and may grant additional options under our stock plans.

At our request, the underwriters have reserved up to 200,000 shares of
common stock to be sold in the offering and offered for sale, at the public
offering price, to our customers and other persons with whom we have business
relationships, and associates and family members of our officers and directors.
The number of shares available for sale to the general public in the offering
will be reduced to the extent these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered to the general public on the
same basis as other shares offered by this prospectus.

Persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
the common stock at levels above those that might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or the effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. These transactions

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<PAGE> 73

may be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise. Stabilizing, if commenced, may be discontinued at any time.

Before this offering, there was no public market for the common stock. The
initial public offering price for the common stock will be determined by
negotiations between ourselves, the selling stockholders and the
representatives. Among the factors to be considered in determining the initial
public offering price will be prevailing market and economic conditions, our
revenues and earnings, market valuations of other companies engaged in
activities similar to ours, estimates of our business potential and prospects,
the present state of our business operations, our management and other factors
deemed relevant.

A prospectus in electronic format is being made available on an Internet
Web site maintained by Wit SoundView's affiliate, Wit Capital Corporation. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on Web sites
maintained by each of these dealers. Other than the prospectus in electronic
format, the information on any Web site maintained by Wit SoundView or any of
its affiliates is not part of the prospectus or the registration statement of
which this prospectus forms a part, has not been approved and/or endorsed by
Websense or any underwriter in its capacity as underwriter and should not be
relied upon by investors.

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<PAGE> 74

LEGAL MATTERS

The validity of the common stock offered in this offering will be passed
upon for us by Brobeck, Phleger & Harrison LLP, San Diego, California. As of the
date of this prospectus, members of that firm own 19,959 shares of our common
stock. Legal matters will be passed upon for the underwriters by Gray Cary Ware
& Freidenrich LLP, San Diego, California.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 with the SEC for our
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement. You should refer to the
registration statement and its exhibits for additional information. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you should refer to
the exhibits attached to the registration statement for the copies of the actual
contract, agreement or other document. When we complete this offering, we will
also be required to file annual, quarterly and special reports, proxy statements
and other information with the SEC.

You can read our SEC filings, including the registration statement, over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade
Center, Thirteenth Floor, New York, New York 10048. You may also obtain copies
of the documents at prescribed rates by writing to the Public Reference Section
of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.

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<PAGE> 75

WEBSENSE, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1998 and 1999............. F-3
Statements of Operations for the years ended December 31,
1997, 1998 and 1999....................................... F-4
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999.................... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 76

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Websense, Inc.

We have audited the accompanying balance sheets of Websense, Inc. (the
"Company") as of December 31, 1998 and 1999 and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the 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 financial statements referred to above present fairly,
in all material respects, the financial position of Websense, Inc. at December
31, 1998 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.

ERNST & YOUNG LLP

San Diego, California
January 14, 2000

F-2
<PAGE> 77

WEBSENSE, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
--------------------------- EQUITY AT DECEMBER 31,
1998 1999 1999
----------- ------------ ----------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,753,405 $ 10,734,601
Accounts receivable, net of allowance for
doubtful accounts of $27,154 at December 31,
1998 and $252,880 at December 31, 1999............... 1,551,235 3,448,878
Accounts receivable from a related party............... 39,158 126,772
Other current assets................................... 57,461 328,990
----------- ------------
Total current assets............................ 3,401,259 14,639,241
Property and equipment, net.............................. 781,269 1,947,032
Deposits and other assets................................ 172,400 87,256
Accrued offering costs................................... -- 82,574
----------- ------------
Total Assets............................................. $ 4,354,928 $ 16,756,103
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $ 328,406 $ 566,972
Accounts payable to a related party.................... 8,575 6,327
Accrued payroll and related benefits................... 308,728 894,457
Other accrued expenses................................. 194,015 556,767
Current portion of deferred revenue.................... 2,755,964 6,888,562
Long-term debt, current portion........................ 182,359 503,795
----------- ------------
Total current liabilities....................... 3,778,047 9,416,880
Long-term debt, less current portion..................... 313,963 993,103
Deferred revenue, less current portion................... 1,480,378 4,703,960
Commitments
Stockholders' equity (deficit):
Convertible preferred Series A -- par value $0.01;
3,705,000 shares authorized at December 31, 1998 and
1999, 3,703,704 shares issued and outstanding at
December 31, 1998 and 1999, liquidation preference of
$6,000,000 at December 31, 1998 and 1999. None
outstanding pro forma................................ 37,037 37,037 $ --
Convertible preferred Series B -- par value $0.01; none
and 3,333,340 shares authorized at December 31, 1998
and 1999, respectively, none and 3,333,332 issued and
outstanding at December 31, 1998 and 1999,
respectively, liquidation preference of $0 and
$9,999,996 at December 31, 1998 and 1999,
respectively. None outstanding pro forma............. -- 33,333 --
Common stock -- par value of $0.01; 92,961,660 shares
authorized, 7,000,000 and 8,357,662 shares issued and
outstanding at December 31, 1998 and 1999,
respectively, 15,394,698 shares outstanding pro
forma................................................ 70,000 83,577 153,947
Additional paid in capital............................. 4,284,381 18,936,165 18,936,165
Deferred compensation.................................. -- (2,585,372) (2,585,372)
Accumulated deficit.................................... (5,608,878) (14,862,580) (14,862,580)
----------- ------------ ------------
Total stockholders' equity (deficit)..................... (1,217,460) 1,642,160 $ 1,642,160
----------- ------------ ============
Total liabilities and stockholders' equity (deficit)..... $ 4,354,928 $ 16,756,103
=========== ============
</TABLE>

See accompanying notes.

F-3
<PAGE> 78

WEBSENSE, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Subscriptions..................................... $ 637,292 $ 2,503,057 $ 7,140,645
Other products and services....................... 4,382,571 4,415,979 1,506,056
----------- ----------- -----------
Total revenues................................. 5,019,863 6,919,036 8,646,701
Cost of revenues:
Subscriptions..................................... 217,697 736,471 1,083,932
Other products and services....................... 3,213,667 3,723,098 1,190,346
----------- ----------- -----------
Total cost of revenues......................... 3,431,364 4,459,569 2,274,278
----------- ----------- -----------
Gross margin........................................ 1,588,499 2,459,467 6,372,423
Operating expenses:
Selling and marketing (exclusive of $229,791
reported below as amortization of stock-based
compensation).................................. 1,720,564 4,597,274 6,311,131
Research and development (exclusive of $255,962
reported below as amortization of stock-based
compensation).................................. 527,666 1,789,499 3,912,712
General and administrative (exclusive of
$1,335,885 reported below as amortization of
stock-based compensation)...................... 767,385 1,714,572 3,805,344
Amortization of stock-based compensation.......... -- -- 1,821,638
----------- ----------- -----------
Total operating expenses....................... 3,015,615 8,101,345 15,850,825
----------- ----------- -----------
Loss from operations................................ (1,427,116) (5,641,878) (9,478,402)
Interest income (expense), net...................... (35,165) 33,000 224,700
----------- ----------- -----------
Net loss.......................................... $(1,462,281) $(5,608,878) $(9,253,702)
=========== =========== ===========
Historical net loss per share:
Basic and diluted................................. $ (0.21) $ (0.80) $ (1.25)
=========== =========== ===========
Weighted average shares -- basic and diluted...... 7,000,000 7,000,000 7,403,000
=========== =========== ===========
Pro forma net loss per share:
Basic and diluted................................. $ (0.71)
===========
Weighted average shares -- basic and diluted...... 12,979,000
===========
</TABLE>

See accompanying notes.

F-4
<PAGE> 79

WEBSENSE, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED
SERIES A SERIES B COMMON STOCK
------------------- ------------------- ------------------- DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION
--------- ------- --------- ------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.............. -- $ -- -- $ -- 7,000,000 $70,000 $ --

Distribution paid to shareholders....... -- -- -- -- -- -- --

Net loss................................ -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- -----------
Balance at December 31, 1997.............. -- -- -- -- 7,000,000 70,000 --

Transfer of accumulated deficit to
additional paid-in capital upon
conversion from S corporation to C
corporation........................... -- -- -- -- -- -- --

Preferred stock issued for cash, net of
offering costs of $269,072............ 3,703,704 37,037 -- -- -- -- --

Net loss................................ -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- -----------
Balance at December 31, 1998.............. 3,703,704 37,037 -- -- 7,000,000 70,000 --

Preferred stock issued for cash, net of
offering costs of $185,065............ -- -- 3,333,332 33,333 --

Issuance of common stock upon exercise
of options............................ -- -- -- -- 1,090,455 10,905 --

Issuance of common stock upon exercise
of warrant............................ -- -- -- -- 250,000 2,500 --

Issuance of warrant in connection with
the termination of an exclusive
distributor agreement................. -- -- -- -- -- -- --

Issuance of common stock for services... -- -- -- -- 17,207 172 --
Issuance of common stock options for
services.............................. -- -- -- -- -- -- --

Deferred compensation................... -- -- -- -- -- (4,407,010)

Amortization of deferred compensation... -- -- -- -- -- -- 1,821,638

Net loss................................ -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- -----------
Balance at December 31, 1999.............. 3,703,704 $37,037 3,333,332 $33,333 8,357,662 $83,577 $(2,585,372)
========= ======= ========= ======= ========= ======= ===========

RETAINED
EARNINGS TOTAL
ADDITIONAL (ACCUMULATED STOCKHOLDERS'
PAID-IN CAPITAL DEFICIT) EQUITY (DEFICIT)
--------------- ------------ ----------------
<S> <C> <C> <C>
Balance at December 31, 1996.............. $ 138,925 $ 38,160 $ 247,085
Distribution paid to shareholders....... -- (124,314) (124,314)
Net loss................................ -- (1,462,281) (1,462,281)
----------- ------------ -----------
Balance at December 31, 1997.............. 138,925 (1,548,435) (1,339,510)
Transfer of accumulated deficit to
additional paid-in capital upon
conversion from S corporation to C
corporation........................... (1,548,435) 1,548,435 --
Preferred stock issued for cash, net of
offering costs of $269,072............ 5,693,891 -- 5,730,928
Net loss................................ -- (5,608,878) (5,608,878)
----------- ------------ -----------
Balance at December 31, 1998.............. 4,284,381 (5,608,878) (1,217,460)
Preferred stock issued for cash, net of
offering costs of $185,065............ 9,781,598 -- 9,814,931
Issuance of common stock upon exercise
of options............................ 349,223 -- 360,128
Issuance of common stock upon exercise
of warrant............................ -- -- 2,500
Issuance of warrant in connection with
the termination of an exclusive
distributor agreement................. 37,500 -- 37,500
Issuance of common stock for services... 27,703 -- 27,875
Issuance of common stock options for
services.............................. 48,750 -- 48,750
Deferred compensation................... 4,407,010 -- --
Amortization of deferred compensation... -- -- 1,821,638
Net loss................................ -- (9,253,702) (9,253,702)
----------- ------------ -----------
Balance at December 31, 1999.............. $18,936,165 $(14,862,580) $ 1,642,160
=========== ============ ===========
</TABLE>

See accompanying notes.

F-5
<PAGE> 80

WEBSENSE, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $(1,462,281) $(5,608,878) $(9,253,702)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation...................................... 77,154 350,835 601,030
Issuance of common stock options and warrant for
services....................................... -- -- 114,125
Loss on disposal of fixed assets.................. 29,979 -- 21,330
Deferred revenue.................................. 1,053,985 3,105,109 7,356,180
Provision for doubtful accounts................... 25,000 72,274 235,924
Amortization of deferred compensation............. -- -- 1,821,638
Changes in operating assets and liabilities:
Accounts receivable............................ (697,329) (570,481) (2,213,137)
Other current assets........................... 4,365 32,652 (271,529)
Accounts payable............................... 371,749 (446,648) 236,318
Accrued payroll and related benefits........... 225,305 41,767 585,729
Other accrued expenses......................... 242,580 (49,899) 362,752
----------- ----------- -----------
Cash used in operating activities................... (129,493) (3,073,269) (403,342)

INVESTING ACTIVITIES:
Purchase of equipment............................... (178,611) (801,860) (1,779,349)
Proceeds from sale of equipment..................... -- -- 16,050
Deposits............................................ -- (134,833) 85,144
----------- ----------- -----------
Cash used in investing activities................... (178,611) (936,693) (1,678,155)

FINANCING ACTIVITIES:
Repayments on notes payable......................... (113,694) (557,546) (296,526)
Proceeds from issuance of note payable.............. 589,592 467,111 1,264,234
Proceeds from issuance of Series B preferred
stock............................................. -- -- 9,814,931
Proceeds from issuance of Series A preferred
stock............................................. -- 5,730,928 --
Proceeds from exercise of stock options............. -- -- 360,128
Proceeds from exercise of warrant................... -- -- 2,500
Accrued offering costs.............................. -- -- (82,574)
Distributions paid to shareholders.................. (124,314) -- --
----------- ----------- -----------
Net cash provided by financing activities........... 351,584 5,640,493 11,062,693
----------- ----------- -----------
Increase in cash and cash equivalents............... 43,480 1,630,531 8,981,196
Cash and cash equivalents at beginning of year...... 79,394 122,874 1,753,405
----------- ----------- -----------
Cash and cash equivalents at end of year............ $ 122,874 $ 1,753,405 $10,734,601
=========== =========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid....................................... $ 31,109 $ 30,126 $ 66,839
=========== =========== ===========
Income taxes paid................................... $ 800 $ 800 $ 29,446
=========== =========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 81

WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Websense, Inc. ("Websense" or the "Company") was founded in 1994 as
NetPartners Internet Solutions, a reseller of computer network security
solutions and related services. Today the Company provides employee Internet
management products that enable businesses to monitor, report and manage how
their employees use the Internet. The Company's Websense Enterprise solution
supports an organization's efforts to improve employee productivity, conserve
network bandwidth and mitigate potential legal liability.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

PRO FORMA STOCKHOLDERS' EQUITY

If an initial public offering contemplated by this Prospectus is
consummated under the terms presently anticipated, all outstanding shares of
convertible preferred stock at December 31, 1999 will automatically convert into
7,037,036 common shares. Unaudited pro forma stockholders' equity at December
31, 1999, adjusted for the conversion of the convertible preferred stock is
disclosed in the accompanying balance sheet.

REVENUE RECOGNITION

In January 1998, the Company adopted American Institute of Certified Public
Accountants Statement of Position No. 97-2, Software Revenue Recognition (SOP
97-2). This statement provides guidance for recognizing revenue related to sales
by software vendors. The adoption of SOP 97-2 did not have a significant impact
on the Company's revenue recognition policies or practices.

The Company sells Websense Enterprise on a subscription basis. A
subscription agreement is generally 12, 24 or 36 months in duration and for a
fixed number of users. Upon entering into the subscription agreement, the
Company invoices customers. Generally, payment is due for the full term of the
subscription within 30 days of invoicing. The Company recognizes revenue on a
straight-line basis over the term of the subscription agreement. The Company
records amounts billed to customers in excess of recognizable revenue as
deferred revenue in the accompanying balance sheets.

The Company also derives revenue from professional services and from resale
of software and hardware. The Company recognizes revenue for these services and
products upon their completion or delivery.

F-7
<PAGE> 82
WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.

CONCENTRATION OF CREDIT RISK

The Company sells its products to customers primarily in the United States,
Canada, Europe and Asia. 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, which range from three
to five years.

COMPUTER SOFTWARE COSTS

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, when significant the Company capitalizes costs incurred 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.

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs, which are incurred
during the application development stage and amortize them over the software's
estimated useful life. The Company adopted SOP 98-1 effective January 1, 1999
with no material effect on the financial statements.

ADVERTISING EXPENSES

Advertising costs are expensed as incurred. Total advertising costs for the
years ended December 31, 1997, 1998 and 1999 were $628,831, $1,481,063 and
$998,324, respectively.

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), 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, requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25, when
the exercise price of the Company's employee stock options, is not less than the
deemed 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

F-8
<PAGE> 83
WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the underlying common stock. In conjunction with the Company's initial public
offering contemplated by this prospectus and other events which occurred in
1999, the Company reviewed its exercise prices and arrived at the deemed fair
value for each option grant during 1999. With respect to the 2,891,000 options
granted during 1999, the Company has recorded deferred compensation of
$4,407,010 for the difference between the exercise price per share determined by
the board of directors 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 2,891,000 options was $0.89
and $2.42, respectively. Deferred stock compensation is recognized and amortized
on an accelerated basis in accordance with Financial Accounting Standards Board
Interpretation No. 28 over the vesting period of the related options, generally
four years.

Deferred compensation for options and warrants granted to non-employees has
been determined at the grant date in accordance with SFAS No. 123 and EITF No.
96-18, Accounting for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods or Services, and has been
recorded at the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measured. Such
deferred compensation is recognized over the period the related services are
rendered.

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 (loss) and other comprehensive income, including foreign currency
translation adjustments, and unrealized gains and losses on investments, shall
be reported, net of their related tax effect, to arrive at comprehensive income
(loss). Comprehensive income (loss) for the years ended December 31, 1997, 1998
and 1999 did not differ from reported net income (loss).

NET LOSS PER SHARE

Websense computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share, and SEC Staff Accounting Bulletin (or SAB) No. 98. Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period.

Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.

PRO FORMA NET LOSS PER SHARE

Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock that will
automatically convert upon the

F-9
<PAGE> 84
WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
closing of the initial public offering contemplated by this prospectus (using
the as-if converted method as of January 1, 1999 or the date of issuance, if
later).

A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share for the year ended December 31, 1999
is as follows:

<TABLE>
<S> <C>
Weighted average shares outstanding......................... 7,403,000
Adjustment to reflect the assumed conversion of outstanding
preferred stock........................................... 5,576,000
----------
Shares used in computing pro forma basic and diluted net
loss per common share..................................... 12,979,000
==========
</TABLE>

Dilutive securities include options, warrants, preferred stock as if
converted and restricted stock subject to vesting. Potentially dilutive
securities totaling 864,000, 3,392,000 and 4,908,000 for the years ended
December 31, 1997, 1998 and 1999, respectively, were excluded from historical
basic and diluted earnings per share because of their anti-dilutive effect.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on the Company's balance sheet at
fair value. The Financing Accounting Standards Board has subsequently delayed
implementation of the standard for the financial years beginning after June 15,
2000. The Company expects to adopt the new Statement effective January 1, 2001.
The impact on the Company's financial statements is not expected to be material.

2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL -------------------------
LIVES 1998 1999
--------- ---------- -----------
<S> <C> <C> <C>
Computer hardware and software............... 3 years $ 964,110 $ 2,147,308
Office furniture and equipment............... 5 years 255,934 781,257
Vehicles and other equipment................. 5 years 45,506 60,036
---------- -----------
1,265,550 2,988,601
Accumulated depreciation................................ (484,281) (1,041,569)
---------- -----------
$ 781,269 $ 1,947,032
========== ===========
</TABLE>

3. DEBT

In June 1998, the Company entered into a loan and security agreement with
Silicon Valley Bank for a $1,000,000 line of credit. Borrowings under the line
accrue interest at the bank's floating prime rate plus 0.50% (9.00% at December
31, 1999). At December 31, 1999, $552,758 is outstanding, and the Company is
required to make monthly payments of principal and interest through February
2002.

F-10
<PAGE> 85
WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

3. DEBT (CONTINUED)
In May 1999, the Company established a line of credit with the same bank
for working capital advances ("borrowings") and stand-by letters of credit up to
$1,000,000. As of December 31, 1999, the Company had open letters of credit
under the line of $496,465 leaving available $503,535 for additional letters of
credit or borrowings. Borrowings accrue interest at the bank's floating prime
rate plus .25% (8.75% at December 31, 1999). Any outstanding balances on the
line mature in May 2000 and, at December 31, 1999, the Company had no borrowings
outstanding against the line.

In October 1999, the Company modified its May 1999 agreement to provide an
additional $1,000,000 line of credit from the same bank to be used for equipment
and furniture purchases through April 2000. In October 1999, the Company drew
down $924,967 of the available line, which will be converted to a term note in
April 2000. There are no compensating cash requirements and advances accrue
interest at the bank's floating prime rate plus 1.0% (9.5% at December 31,
1999). Through December 31, 1999, the Company has made interest-only payments
related to this note. Beginning in April 2000, the Company will be required to
make monthly payments of principal and interest through April 2003. Principal
maturities on the above notes are as follows for the years ended December 31:

All borrowings under the agreements with Silicon Valley Bank are
cross-collateralized by substantially all of the Company's assets, and are
subject to financial and restrictive covenants.

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:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
United States............................................... $6,398,581 $6,833,521
Europe...................................................... 275,722 1,155,942
Asia/Pacific................................................ 200,278 493,502
Latin America............................................... 44,455 163,736
---------- ----------
$6,919,036 $8,646,701
========== ==========
</TABLE>

Revenues attributed to foreign customers were not significant for the year
ended December 31, 1997.

F-11
<PAGE> 86
WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

5. DEFERRED REVENUE

The Company records deferred revenue for contracts with terms greater than
one year. The Company will recognize revenues related to contracts in existence
as of December 31, 1999 as follows:

6. LEASE COMMITMENTS

The Company leases its facilities and certain equipment under
non-cancellable operating leases, expiring at various dates through March 2002.

Future minimum annual lease payments under non-cancellable operating leases
at December 31, 1999 are as follows:

Rent expense totaled $132,524, $516,265 and $689,750 for the years ended
December 31, 1997, 1998 and 1999, respectively.

7. STOCKHOLDERS' EQUITY (DEFICIT)

In May 1998, the Company reincorporated in Delaware which was accomplished
through a merger of the existing California corporation into a new Delaware
corporation. The ratio of exchange was one share of the California corporation
to one share of the Delaware corporation. In October 1999, the Company increased
the number of authorized shares to 100,000,000 consisting of 92,961,660 shares
of common stock and 7,038,340 shares of preferred stock.

CONVERTIBLE PREFERRED STOCK

In May 1998, the Company issued 3,703,704 shares of Series A convertible
preferred stock at $1.62 per share for total consideration of $5,730,928, net of
offering costs. In June and September of 1999, the Company completed a Series B
convertible preferred stock offering. A total of 3,333,332 shares were issued at
$3.00 per share, for net proceeds of $9,814,931.

Holders of Series A and Series B convertible preferred shares are entitled
to noncumulative cash dividends at a rate to be determined by the board of
directors, if and when such dividends are declared by the board of directors. No
dividends have been declared to date. The liquidation

F-12
<PAGE> 87
WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
preference for the Series A and Series B convertible preferred shares is $1.62
and $3.00 per share, respectively.

At the option of the holder, the Series A and Series B preferred shares are
convertible into common stock on a one-for-one basis, subject to adjustment for
antidilution, and will automatically convert into common stock concurrent with
the closing of an underwritten public offering of common stock under the
Securities Act of 1933 in which the Company receives at least $20,000,000 in
gross proceeds and the price per share is at least $6.00 (subject to adjustment
for antidilution).

The preferred stockholders have voting rights equal to the number of common
shares they would own upon conversion.

The Company reserved 7,037,036 shares of common stock for issuance upon
conversion of Series A and Series B convertible preferred stock.

WARRANTS

The Company issued a warrant to purchase 250,000 shares of common stock at
$0.01 per share in conjunction with bridge note financing consummated in March
1998. The warrant was exercised in June 1999.

In connection with the termination of an exclusive distributor agreement,
the Company issued a warrant to a distributor to purchase up to 50,000 shares of
common stock for $.05 per share in March 1999. The warrants are exercisable in
whole or in part at any time prior to the earlier of the consummation of a
public offering by the Company or March 2009. The Company has reserved 50,000
shares of common stock for issuance upon exercise of the warrant. The Company
recorded expense of $37,500 related to this issuance based on the estimated fair
value of the warrant. This distributor accounted for $170,914 and $417,870 of
the Company's revenues for the years ended December 31, 1998 and 1999,
respectively.

In connection with the Series B convertible preferred stock offering, the
Company issued a warrant to purchase 62,500 shares of common stock for $3.00 per
share to financial consultants. The warrants are exercisable in whole or in part
at any time and from time to time until their expiration in June 2004. The
Company has reserved 62,500 shares of common stock for issuance upon exercise of
the warrant.

STOCK OPTION PLAN

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

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. The options
are exercisable for a period of up to ten years after the date of grant and
F-13
<PAGE> 88
WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
generally vest over four years. Unvested common shares obtained through early
exercise of options are subject to repurchase by the Company at the original
issue price.

The following table summarizes stock option activity under the 1998 Stock
Plan and related information through December 31, 1999:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Granted and outstanding January 1, 1996................ -- --
Granted.............................................. 1,381,000 $.20
Exercised............................................ (11,666) $.20
Repurchased.......................................... (11,666) $.20
Cancelled............................................ (518,334) $.20
---------- ----
Balance at December 31, 1997........................... 839,334 $.20
Granted.............................................. 976,435 $.20
Cancelled............................................ (124,334) $.20
---------- ----
Balance at December 31, 1998........................... 1,691,435 $.20
Granted.............................................. 3,060,500 $.91
Exercised............................................ (1,090,455) $.33
Cancelled............................................ (499,929) $.25
---------- ----
Balance at December 31, 1999........................... 3,161,551 $.83
========== ====
</TABLE>

As of December 31, 1997, 1998 and 1999 there were 87,205, 561,473, and
331,326 options exercisable, respectively, at weighted average prices of $.20
per share. As of December 31, 1999 there were 172,919 shares subject to
repurchase.

The following table summarizes all options outstanding and exercisable by
price range as of December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .20 - $ .50..................... 2,143,551 8.84 $ .40 331,326 $.20
$ .75............................. 468,000 9.46 $ .75 -- --
$1.50 - $3.00..................... 496,000 9.75 $2.22 -- --
$6.00 - $7.00..................... 54,000 9.97 $6.09 -- --
--------- ----- ------- ----
3,161,551 $0.83 331,326 $.20
========= ===== ======= ====
</TABLE>

The Company has repurchased 11,666 shares exercised under the 1998 Stock
Plan through December 31, 1999 and recognized $1,750 of related expense for the
difference between the fair value and the price paid on the date repurchased.

Pro forma information regarding net loss is required by SFAS 123 and has
been determined as if the Company has accounted for its employee stock options
and stock purchase plan under the

F-14
<PAGE> 89
WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

7. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
fair value method of SFAS 123. The fair value for these options was estimated at
the date of grant using the "Minimum Value" option pricing model with the
following weighted-average assumptions for 1997, 1998 and 1999: risk-free
interest rate of 6.0%; dividend yield of 0%; and a weighted average expected
life of the options of five years. For purposes of pro forma disclosures, the
estimated fair value of the options are amortized to expense over the vesting
period. The Company's adjusted pro forma information is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net loss.................................. $(1,466,399) $(5,633,842) $(9,467,044)
Pro forma basic and diluted net loss per share...... $ (.21) $ (.80) $ (1.28)
</TABLE>

The weighted average fair value of options granted during 1997, 1998 and
1999 was $.04, $.04 and $1.20 per share, respectively.

The pro forma effect on net loss for 1997, 1998 and 1999 is not likely to
be representative of the pro forma effect on reported net income or loss in
future years because these amounts reflect less than four years of vesting.

SHARES RESERVED FOR FUTURE ISSUANCE

The following shares of common stock are reserved for future issuance:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Stock options:
Granted and outstanding................................... 1,691,435 3,161,551
Reserved for future grants................................ 308,565 336,328
--------- ---------
2,000,000 3,497,879
Warrants.................................................. 250,000 112,500
--------- ---------
2,250,000 3,610,379
========= =========
</TABLE>

8. INCOME TAXES

The Company changed its previous "S" corporation status to a "C"
corporation as of January 1, 1998. With the change in status, the Company became
responsible for income tax liabilities, if any. Previously, income taxes were
the responsibility of the shareholders.

At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $5,183,000 and $2,818,000, respectively. The
federal and California net operating loss carryforwards will begin to expire in
2018 and 2003, respectively, unless previously utilized. At December 31, 1999,
the Company had federal and California research and development credit
carryforwards of approximately $397,000 and $225,000, respectively, which will
begin to expire in 2013 unless previously utilized.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use
of the Company's net operating loss and credit carryforwards may be limited in
the event of a cumulative change in ownership of more than 50% occurs within a
three year testing period.

F-15
<PAGE> 90
WEBSENSE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999

8. INCOME TAXES (CONTINUED)
The components of the Company's deferred tax assets as of December 31, 1998
and 1999 are shown below. A valuation allowance has been recognized to offset
the deferred tax assets as realization of such assets is uncertain.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 887,000 $ 1,976,000
Research tax credit carryforwards......................... 156,000 543,000
Capitalized research and development...................... 368,000 576,000
Deferred revenue.......................................... 640,000 2,786,000
Deferred compensation..................................... -- 352,000
Other..................................................... 758,000 272,000
----------- -----------
Total deferred tax assets............................... 2,809,000 6,505,000
Valuation allowance for deferred tax assets............... (2,809,000) (6,505,000)
----------- -----------
Net deferred tax assets................................. $ -- $ --
=========== ===========
</TABLE>

9. EMPLOYEE RETIREMENT PLAN

Effective May 1, 1997, the Company established a 401(k) defined
contribution retirement plan (the "401(k) Plan") covering substantially all
employees. The 401(k) Plan provides for voluntary employee contributions from 1%
to 20% of annual compensation, as defined, and does not currently provide for
matching contributions from the Company.

F-16
<PAGE> 91

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

4,000,000 SHARES

[WEBSENSE LOGO]

COMMON STOCK

----------------------

PROSPECTUS
----------------------

CHASE H&Q
SG COWEN
WIT SOUNDVIEW
----------------------

, 2000

----------------------

YOU SHOULD RELY ONLY UPON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.

NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF OUR COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.

UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 92

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts, payable by the Registrant in connection with the offer
and sale of the common stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market entry
fee.

<TABLE>
<S> <C>
SEC Registration fee........................................ $ 19,431
NASD filing fee............................................. 6,940
Blue Sky fees and expenses (including legal fees)........... 5,000
Nasdaq National Market entry fee............................ 95,000
Accounting fees and expenses................................ 200,000
Other legal fees and expenses............................... 400,000
Transfer agent and registrar fee............................ 10,850
Printing and engraving...................................... 125,000
Miscellaneous............................................... 95,208
--------
Total............................................. $957,429
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Securities Act"). As permitted by the
Delaware General Corporation Law, the Registrant's Amended and Restated
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) under section 174 of the Delaware General Corporation Law (regarding
unlawful dividends and stock purchases) or (iv) for any transaction from which
the director derived an improper personal benefit. As permitted by the Delaware
General Corporation Law, the Bylaws of the Registrant provide that (i) the
Registrant is required to indemnify its directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to very
limited exceptions, (ii) the Registrant may indemnify its other employees and
agents as set forth in the Delaware General Corporation Law, (iii) the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers in connection with a legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law, subject to very limited
exceptions and (iv) the rights conferred in the Bylaws are not exclusive. At
present, there is no pending litigation or proceeding involving a director,
officer or employee of the Registrant regarding which indemnification is sought,
nor is the Registrant aware of any threatened litigation that may result in
claims for indemnification. Reference is also made to Section 7 of the
Underwriting Agreement, which provides for the indemnification of officers,
directors and controlling persons of the Registrant against liabilities. In
addition, intercompany agreements provide for the indemnification of officers,
directors and controlling persons of the Registrant against liabilities. The
indemnification provisions in the Registrant's Restated Certificate of
Incorporation and in its Bylaws may be sufficiently broad to permit
indemnification of the Registrant's directors and executive officers for
liabilities arising under the Securities Act. The Registrant, with approval by
the Registrant's Board of Directors, expects to obtain directors' and officers'
liability insurance. Reference is made to the following documents filed as
exhibits to this

II-1
<PAGE> 93

registration statement regarding relevant indemnification provisions described
above and elsewhere herein:

<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Form of Underwriting Agreement.............................. 1.1
Form of Restated Certificate of Incorporation of
Registrant................................................ 3.2
Form of Bylaws of Registrant................................ 3.3
Form of Indemnification Agreement between Websense, Inc. and
its directors............................................. 10.14
Form of Indemnification Agreement between Websense, Inc. and
its officers.............................................. 10.15
</TABLE>

The Company has entered into indemnification agreements with each of the
Company's directors, a form of which is attached as an exhibit hereto and is
incorporated herein by reference.

The Registrant may obtain insurance for the protection of its directors and
officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of stockholders or directors or
otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since December 31, 1996, we have issued unregistered securities to a
limited number of persons as described below:

(a) From December 23, 1997 through December 31, 1999, we sold an
aggregate of 1,102,121 shares of our common stock at exercise prices
ranging from $0.20 to $0.75 per share to employees, consultants, directors
and other service providers pursuant to our 1998 Equity Incentive Plan.

(b) On May 20, 1998, we sold 3,703,704 shares of Series A preferred
stock at a price of $1.62 per share, to a group of private investors for an
aggregate purchase price of $6,000,000. These investors were Edelson IV,
L.P. and entities affiliated with Morgan Stanley Dean Witter Venture
Partners.

(c) On June 11, June 14, July 26 and September 20, 1999, we sold an
aggregate of 3,333,332 shares of Series B preferred stock at a price of
$3.00 per share to a group of private investors for an aggregate purchase
price of $9,999,996. These investors were Edelson IV, L.P.; Crosspoint
Venture Partners; entities affiliated with Morgan Stanley Dean Witter
Venture Partners; entities affiliated with Nippon Investment & Finance Co.,
Ltd.; Alps System Integration Co., Ltd.; Forval Creative; and Brobeck &
Phleger Harrison, LLP.

(d) On April 15, 1999 we issued a warrant to purchase 50,000 shares of
common stock to Alps System Integration Co., Ltd. On July 30, 1999 we
issued warrants to purchase 62,500 shares of common stock to entities
affiliated with Global Alliance, Ltd.

For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Transactions
with Related Parties" in the form of prospectus included herein. The sales of
securities described in subsection (a) above were deemed to be exempt from
registration in reliance on Rule 701 promulgated under Section 3(b) under the
Securities Act as transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation. The sales of securities described in
subsections (b), (c) and (d) above were deemed to be exempt from registration in
reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about Websense or had access,
through employment or other relationships, to such information.

II-2
<PAGE> 94

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

a. EXHIBITS

<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as
amended.
3.2 Form of Amended and Restated Certificate of Incorporation to
be filed and become effective upon the closing of this
offering.
3.3 Bylaws.
3.4 Form of Bylaws to become effective prior to effectiveness of
this Registration Statement.
*4.1 Specimen Stock Certificate of Websense, Inc.
5.1 Opinion of Brobeck Phleger & Harrison, LLP.
10.1 Amended and Restated Registration Rights Agreement dated
June 9, 1999.
10.2 Form of Subscription Agreement regarding Series B Preferred
Stock.
10.3 Warrant to Purchase Common Stock between Websense, Inc. and
Alps System Integration Co., Ltd, dated April 15, 1999.
10.4 Form of Warrant to Purchase Common Stock between Websense,
Inc. and entities listed on Schedule A attached thereto,
dated July 30, 1999.
10.5 Employment Agreement by and between Websense, Inc. and John
B. Carrington, dated May 10, 1999.
10.6 Employment Agreement by and between Websense, Inc. and
Douglas C. Wride, dated June 11, 1999.
10.7 Lease Agreement between Websense, Inc. and Legacy-RECP
Sorrento OPCO, LLC, dated June 21, 1999, as amended.
10.8 1998 Equity Incentive Plan.
10.9 Standard Terms and Conditions Relating to Incentive Stock
Option Under the 1998 Equity Incentive Plan.
10.10 2000 Stock Incentive Plan.
10.11 2000 Stock Incentive Plan, Notice of Grant of Stock Option.
10.12 2000 Stock Incentive Plan, Form of Incentive Stock Option
Agreement.
*10.13 2000 Employee Stock Purchase Plan.
10.14 Form of Indemnification Agreement between Websense, Inc. and
its directors.
10.15 Form of Indemnification Agreement between Websense, Inc. and
its officers.
*23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
99.1 Business Representation Contract between Janet A. McVeigh,
Philip G. Trubey and John C. Stiska, dated March 29, 1999.
99.2 Consent of Saratoga Institute.
</TABLE>

- -------------------------

* Filed with this Amendment.

b. FINANCIAL STATEMENT SCHEDULES

Schedule II -- Valuation and Qualifying Accounts

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

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in

II-3
<PAGE> 95

Item 14, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 96

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on March 23, 2000.

WEBSENSE, INC.

By: /s/ DOUGLAS C. WRIDE
------------------------------------
Douglas C. Wride
Chief Financial Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board, President March 23, 2000
- --------------------------------------------- and Chief Executive Officer
John B. Carrington (principal executive officer)

/s/ DOUGLAS C. WRIDE Chief Financial Officer (principal March 23, 2000
- --------------------------------------------- financial and accounting officer)
Douglas Wride

* Director March 23, 2000
- ---------------------------------------------
Robert J. Loarie

* Director March 23, 2000
- ---------------------------------------------
Bruce T. Coleman

* Director March 23, 2000
- ---------------------------------------------
John C. Stiska

* Director March 23, 2000
- ---------------------------------------------
Donald B. Milder

* Director March 23, 2000
- ---------------------------------------------
Gary E. Sutton

*By: /s/ DOUGLAS C. WRIDE
- --------------------------------------------
Douglas Wride
Attorney in fact
</TABLE>

II-5
<PAGE> 97

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

WEBSENSE, INC.

<TABLE>
<CAPTION>
A B C D E
BALANCE AT CHARGED TO COSTS CHARGED TO OTHER DEDUCTION -- BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES ACCOUNTS DESCRIBE OF PERIOD
----------- ------------------- ---------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts................... $ -- $ 25,000 $ -- $ -- $ 25,000
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts................... $25,000 $ 72,274 $ -- $70,120(1) $ 27,154
YEAR ENDED DECEMBER 31, 1999
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts................... $27,154 $235,924 $ -- $10,198(1) $252,880
</TABLE>

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

S-1
<PAGE> 98

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as
amended.
3.2 Form of Amended and Restated Certificate of Incorporation to
be filed and become effective upon the closing of this
offering.
3.3 Bylaws.
3.4 Form of Bylaws to become effective prior to effectiveness of
this Registration Statement.
*4.1 Specimen Stock Certificate of Websense, Inc.
5.1 Opinion of Brobeck Phleger & Harrison, LLP.
10.1 Amended and Restated Registration Rights Agreement dated
June 9, 1999.
10.2 Form of Subscription Agreement regarding Series B Preferred
Stock.
10.3 Warrant to Purchase Common Stock between Websense, Inc. and
Alps System Integration Co., Ltd, dated April 15, 1999.
10.4 Form of Warrant to Purchase Common Stock between Websense,
Inc. and entities listed on Schedule A attached thereto,
dated July 30, 1999.
10.5 Employment Agreement by and between Websense, Inc. and John
B. Carrington, dated May 10, 1999.
10.6 Employment Agreement by and between Websense, Inc. and
Douglas C. Wride, dated June 11, 1999.
10.7 Lease Agreement between Websense, Inc. and Legacy-RECP
Sorrento OPCO, LLC, dated June 21, 1999, as amended.
10.8 1998 Equity Incentive Plan.
10.9 Standard Terms and Conditions Relating to Incentive Stock
Option Under the 1998 Equity Incentive Plan.
10.10 2000 Stock Incentive Plan.
10.11 2000 Stock Incentive Plan, Notice of Grant of Stock Option.
10.12 2000 Stock Incentive Plan, Form of Incentive Stock Option
Agreement.
*10.13 2000 Employee Stock Purchase Plan.
10.14 Form of Indemnification Agreement between Websense, Inc. and
its directors.
10.15 Form of Indemnification Agreement between Websense, Inc. and
its officers.
*23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
99.1 Business Representation Contract between Janet A. McVeigh,
Philip G. Trubey and John C. Stiska, dated March 29, 1999.
99.2 Consent of Saratoga Institute.
</TABLE>

- -------------------------
* Filed with this Amendment.

<PAGE> 1
EXHIBIT 4.1

NUMBER SHARES

[WEBSENSE LOGO]

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

CUSIP 947684 10 6
SEE REVERSE FOR CERTAIN DEFINITIONS

THIS CERTIFIES THAT

WEBSENSE

is the record holder of

FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$0.01 PAR VALUE PER SHARE, OF

WEBSENSE, INC.

transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized Attorney upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned by the
Transfer Agent and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.

Dated:

[WEBSENSE, INC. CORPORATE SEAL]

[Signature Illegible] [Signature Illegible]

CORPORATE SECRETARY CHIEF EXECUTIVE OFFICER

COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRANT

BY:

AUTHORIZED SIGNATURE
<PAGE> 2
WEBSENSE, INC.

THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS. SUCH REQUEST MUST BE MADE TO THE CORPORATION'S SECRETARY AT THE
PRINCIPAL EXECUTIVE OFFICE OF THE CORPORATION.
Keep this Certificate in a safe place. If it is lost, stolen or destroyed,
the Corporation will require a bond of indemnity as a condition to the issuance
of a replacement certificate.

The following abbreviations, when used in the inscription on the
face of this certificate, shall be construed as though they were written
out in full according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- _______________ Custodian ________________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as
tenants in common Act _______________________________________
(State)

UNIF TRF MIN ACT- _______________ Custodian (until age ______)
(Cust)

_______________ under Uniform Transfers
(Minor)

to Minors Act _____________________________
(State)

Additional abbreviations may also be used though not in the above list.

For Value Received, _________________________________________________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________

______________________________________

_________________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE(S)
_________________________________________________________________________________________________________________________

_________________________________________________________________________________________________________________________

_________________________________________________________________________________________________________________________
Shares represented by the within Certificate, and do hereby irrevocably constitute and

appoint ________________________________________________________________________________________________________ Attorney
to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises.

Dated ___________________________________________________________ __________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
In presence of CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
_________________________________________________________________ ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.

_________________________________________________________________

Signature(s) Guaranteed

By _______________________________________________________________________________
THE SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>

<PAGE> 1
EXHIBIT 10.13

WEBSENSE, INC.

2000 EMPLOYEE STOCK PURCHASE PLAN

I. PURPOSE OF THE PLAN

This Employee Stock Purchase Plan is intended to promote the interests
of Websense, Inc., a Delaware corporation, by providing eligible employees with
the opportunity to acquire a proprietary interest in the Corporation through
participation in a payroll deduction-based employee stock purchase plan designed
to qualify under Section 423 of the Code.

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

II. ADMINISTRATION OF THE PLAN

The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.

III. STOCK SUBJECT TO PLAN

A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall be limited to 250,000
shares.

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 one percent (1%) 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
375,000 shares.

C. 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 maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date, (iii) the maximum number and class of
securities purchasable in total by all Participants on any one Purchase Date,
(iv) the maximum number

<PAGE> 2

and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B of
this Article One and (v) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.

IV. OFFERING PERIODS

A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of overlapping offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.

B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period may
have a duration in excess of 24 months and will start on the date the
underwriting agreement for the initial public offering of Websense, Inc. is
signed, and will end on the last business day in April 2002. Offering periods
shall commence at semi-annual intervals on the first business day of May and
November each year over the term of the Plan. Accordingly, two (2) separate
offering periods shall commence in each calendar year the Plan remains in
existence. However, the initial offering period shall commence at the Effective
Time and terminate on the last business day in April 2002.

C. Each offering period shall consist of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May to the last business day in October each year and from the
first business day in November each year to the last business day in April in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in October 2000.

D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period. All individuals participating in the
terminated offering period shall automatically be transferred to the new
offering period.

V. ELIGIBILITY

A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date. However, an Eligible Employee may participate in only one offering period
at a time.

2.
<PAGE> 3

B. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before the start date of that offering period.

VI. PAYROLL DEDUCTIONS

A. The payroll deduction authorized by the Participant for purposes of
acquiring shares of Common Stock during an offering period may be any multiple
of one percent (1%) of the Cash Earnings paid to the Participant during each
Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:

(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become effective as
soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one
(1) such reduction per Purchase Interval.

(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his
or her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent
(15%) maximum) shall become effective on the start date of the first
Purchase Interval following the filing of such form.

B. Payroll deductions shall begin on the first pay day
administratively feasible following the start of the offering period in which
the Participant in enrolled and shall (unless sooner terminated by the
Participant) continue through the pay day ending with or immediately prior to
the last day of that offering period. The amounts so collected shall be credited
to the Participant's book account under the Plan, but no interest shall be paid
on the balance from time to time outstanding in such account. The amounts
collected from the Participant shall not be required to be held in any
segregated account or trust fund and may be commingled with the general assets
of the Corporation and used for general corporate purposes.

C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.

D. The Participant's acquisition of Common Stock under the Plan on any
Purchase Date shall neither limit nor require the Participant's acquisition of
Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.

3.
<PAGE> 4

VII. PURCHASE RIGHTS

A. GRANT OF PURCHASE RIGHTS. A Participant shall be granted a separate
purchase right for each offering period in which he or she participates. The
purchase right shall be granted on the start date of the offering period and
shall provide the Participant with the right to purchase shares of Common Stock,
in a series of successive installments during that offering period, upon the
terms set forth below. The Participant shall execute a stock purchase agreement
embodying such terms and such other provisions (not inconsistent with the Plan)
as the Plan Administrator may deem advisable.

Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.

B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.

C. PURCHASE PRICE. The purchase price per share at which Common Stock
will be purchased on the Participant's behalf on each Purchase Date within the
particular offering period in which he or she is participating shall be equal to
eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of
Common Stock on the start date of that offering period or (ii) the Fair Market
Value per share of Common Stock on that Purchase Date.

D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common Stock
purchasable by a Participant on each Purchase Date during the offering period
shall be the number of whole shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Interval
ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed 1,250 shares, subject to periodic adjustments in the event of certain
changes in the Corporation's capitalization. In addition, the maximum number of
shares of Common Stock purchasable in total by all Participants in the Plan on
any one Purchase Date shall not exceed 150,000 shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.
However, the Plan Administrator shall have the discretionary authority,
exercisable prior to the start of any offering period under the Plan, to
increase or decrease the limitations to be in effect for the number of shares
purchasable per Participant and in total by all Participants in that particular
offering period on each Purchase Date which occurs during that offering period.

4.
<PAGE> 5

E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in
total by all Participants on the Purchase Date shall be promptly refunded.

F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding purchase rights:

(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further payroll deductions
shall be collected from the Participant with respect to the terminated
purchase right. Any payroll deductions collected during the Purchase
Interval in which such termination occurs shall, at the Participant's
election, be immediately refunded or held for the purchase of shares
on the next Purchase Date. If no such election is made at the time
such purchase right is terminated, then the payroll deductions
collected with respect to the terminated right shall be refunded as
soon as possible.

(ii) The termination of such purchase right shall be irrevocable,
and the Participant may not subsequently rejoin the offering period
for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such
individual must re-enroll in the Plan (by making a timely filing of
the prescribed enrollment forms) on or before the start date of that
offering period.

(iii) Should the Participant cease to remain an Eligible Employee
for any reason (including death, disability or change in status) while
his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's
payroll deductions for the Purchase Interval in which the purchase
right so terminates shall be immediately refunded. However, should the
Participant cease to remain in active service by reason of an approved
unpaid leave of absence, then the Participant shall have the right,
exercisable up until the last business day of the Purchase Interval in
which such leave commences, to (a) withdraw all the payroll deductions
collected to date on his or her behalf for that Purchase Interval or
(b) have such funds held for the purchase of shares on his or her
behalf on the next scheduled Purchase Date. In no event, however,
shall any further payroll deductions be collected on the Participant's
behalf during such leave. Upon the Participant's return to active
service (x) within ninety (90) days following the commencement of such
leave or (y) prior to the expiration of any longer period for which
such Participant's right to reemployment with the Corporation is
guaranteed by statute or contract, his or her payroll deductions under
the Plan shall automatically resume at the rate in

5.
<PAGE> 6

effect at the time the leave began, unless the Participant withdraws
from the Plan prior to his or her return. An individual who returns to
active employment following a leave of absence that exceeds in
duration the applicable (x) or (y) time period will be treated as a
new Employee for purposes of subsequent participation in the Plan and
must accordingly re-enroll in the Plan (by making a timely filing of
the prescribed enrollment forms) on or before the start date of any
subsequent offering period in which he or she wishes to participate.

G. CHANGE IN CONTROL. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the start date of the offering period in which the Participant is
enrolled at the time of such Change in Control (ii) the Fair Market Value per
share of Common Stock immediately prior to the effective date of such Change in
Control. However, the applicable limitation on the number of shares of Common
Stock purchasable per Participant shall continue to apply to any such purchase,
but not the limitation applicable to the maximum number of shares of Common
Stock purchasable in total by all Participants in the Plan on any one Purchase
Date.

The Corporation shall use its best efforts to provide at least ten
(10) days' prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.

H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares of
Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.

I. ASSIGNABILITY. The purchase right shall be exercisable only by the
Participant and shall not be assignable or transferable by the Participant.

J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder rights
with respect to the shares subject to his or her outstanding purchase right
until the shares are purchased on the Participant's behalf in accordance with
the provisions of the Plan and the Participant has become a holder of record of
the purchased shares.

VIII. ACCRUAL LIMITATIONS

A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (i) rights to purchase Common Stock
accrued under any other purchase right granted under this Plan and (ii) similar
rights accrued under other employee stock purchase plans

6.
<PAGE> 7

(within the meaning of Code Section 423)) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than
Twenty-Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or
any Corporate Affiliate (determined on the basis of the Fair Market Value per
share on the date or dates such rights are granted) for each calendar year such
rights are at any time outstanding.

B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:

(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each
successive Purchase Date during the offering period on which such
right remains outstanding.

(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock
under one or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000.00) worth of Common Stock (determined on the
basis of the Fair Market Value per share on the date or dates of
grant) for each calendar year such rights were at any time
outstanding.

C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions that the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.

D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.

IX. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan was adopted by the Board on February 11, 2000, and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.

7.
<PAGE> 8

B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in April 2010, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Change in Control. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.

X. AMENDMENT OF THE PLAN

A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the Corporation to recognize
compensation expense in the absence of such amendment or termination.

B. In no event may the Board effect any of the following amendments or
revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.

XI. GENERAL PROVISIONS

A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.

B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.

C. The provisions of the Plan shall be governed by the laws of the
State of New York without resort to that State's conflict-of-laws rules.

8.
<PAGE> 9

SCHEDULE A

CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME

Websense, Inc.

<PAGE> 10

APPENDIX

The following definitions shall be in effect under the Plan:

A. BOARD shall mean the Corporation's Board of Directors.

B. CASH EARNINGS shall mean (i) the regular base salary paid to a
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, profit-sharing distributions and
other incentive-type payments received during such period. Such Cash Earnings
shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any contributions made by the Participant to any Code
Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit
program now or hereafter established by the Corporation or any Corporate
Affiliate. However, Cash Earnings shall NOT include any contributions made by
the Corporation or any Corporate Affiliate on the Participant's behalf to any
employee benefit or welfare plan now or hereafter established (other than Code
Section 401(k) or Code Section 125 contributions deducted from such Cash
Earnings).

C. CHANGE IN CONTROL shall mean a change in ownership of the Corporation
pursuant to any of the following transactions:

(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 assets of the Corporation in complete liquidation or dissolution
of the Corporation, or

(iii) the acquisition, directly or indirectly, by a 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.

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

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

A-1
<PAGE> 11

F. CORPORATE AFFILIATE shall mean any parent or subsidiary corporation of
the Corporation (as determined in accordance with Code Section 424), whether now
existing or subsequently established.

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. that shall by appropriate action adopt the Plan.

H. EFFECTIVE TIME shall mean the time at which the Underwriting Agreement
is executed and the Common Stock priced for the initial public offering of such
Common Stock. Any Corporate Affiliate that becomes a Participating Corporation
after such Effective Time shall designate a subsequent Effective Time with
respect to its employee-Participants.

I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section 3401
(a).

J. 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 the initial offering period that begins at the
Effective Time, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.

K. 1933 ACT shall mean the Securities Act of 1933, as amended.

A-2.
<PAGE> 12

L. PARTICIPANT shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.

M. PARTICIPATING CORPORATION shall mean the Corporation and such Corporate
Affiliate or Affiliates as may be authorized from time to time by the Board to
extend the benefits of the Plan to their Eligible Employees. The Participating
Corporations in the Plan are listed in attached Schedule A.

N. PLAN shall mean the Corporation's 2000 Employee Stock Purchase Plan, as
set forth in this document.

O. PLAN ADMINISTRATOR shall mean the committee of two (2) or more Board
members appointed by the Board to administer the Plan.

P. PURCHASE DATE shall mean the last business day of each Purchase
Interval. The initial Purchase Date shall be October 31, 2000.

Q. PURCHASE INTERVAL shall mean each successive six (6)-month period within
the offering period at the end of which there shall be purchased shares of
Common Stock on behalf of each Participant.

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

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

A-3.

<PAGE> 1
EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 14, 2000, in the Registration Statement
(Amendment No. 2 to Form S-1 No. 333-95619) and related Prospectus of Websense,
Inc. for the registration of shares of its common stock.

Our audits also included the financial statement schedule of Websense, Inc.
listed in Item 16(b). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

/s/ Ernst & Young LLP

San Diego, California
March 23, 2000