Websense (WBSN) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

OR

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

For the Transition Period from                    to                    

Commission File Number 000-30093

Websense, Inc.

(Exact name of registrant as specified in its charter)

Delaware	51-0380839
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10240 Sorrento Valley Road

San Diego, California 92121

858-320-8000

(Address of principal executive offices, zip code and telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x	Accelerated Filer  ¨	Non-Accelerated Filer  ¨	Smaller reporting company  ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of July 31, 2009 was 44,192,210.

Websense, Inc.

Form 10-Q

For the Period Ended June 30, 2009

TABLE OF CONTENTS

			Page
Part I.	Financial Information
	Item 1.	Consolidated Financial Statements (Unaudited)
		Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	3
		Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008	4
		Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2009	5
		Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
	Item 4.	Controls and Procedures	28
Part II.	Other Information
	Item 1.	Legal Proceedings	29
	Item 1A.	Risk Factors	29
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
	Item 3.	Defaults upon Senior Securities	41
	Item 4.	Submission of Matters to a Vote of Security Holders	41
	Item 5.	Other Information	42
	Item 6.	Exhibits	43
Signatures			44

2

Part I – Financial Information

Item 1. Consolidated Financial Statements (Unaudited)

Websense, Inc.

Consolidated Balance Sheets

(Unaudited and in thousands)

	June 30, 2009			December 31, 2008
				(See Note 1)
Assets
Current assets:
Cash and cash equivalents	$	75,764		$	64,310
Cash and cash equivalents—restricted		1,803			2,673
Accounts receivable, net		59,928			82,032
Prepaid income taxes		3,973			3,723
Current portion of deferred income taxes		32,608			33,125
Other current assets		10,409			9,029
Total current assets		184,485			194,892
Property and equipment, net		16,232			14,312
Intangible assets, net		86,810			106,493
Goodwill		374,232			374,410
Deferred income taxes, less current portion		24,436			21,092
Deposits and other assets		3,319			3,933
Total assets	$	689,514		$	715,132
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	5,121		$	2,719
Accrued compensation and related benefits		18,662			19,087
Other accrued expenses		25,883			28,440
Current portion of income taxes payable		9,743			8,010
Current portion of senior secured term loan		11,217			4,112
Current portion of deferred tax liability		315			1,053
Current portion of deferred revenue		212,466			220,607
Total current liabilities		283,407			284,028
Income taxes payable, less current portion		12,846			10,098
Senior secured term loan, less current portion		98,783			120,888
Deferred tax liability, less current portion		8,658			10,523
Deferred revenue, less current portion		109,097			112,157
Other long term liabilities		1,513			2,617
Total liabilities		514,304			540,311
Stockholders’ equity:
Common stock		527			522
Additional paid-in capital		315,576			299,657
Treasury stock, at cost		(174,935	)		(159,842	)
Retained earnings		36,763			37,937
Accumulated other comprehensive loss		(2,721	)		(3,453	)
Total stockholders’ equity		175,210			174,821
Total liabilities and stockholders’ equity	$	689,514		$	715,132

See accompanying notes.

3

Websense, Inc.

Consolidated Statements of Operations

(Unaudited) (in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
Revenue	$	79,464		$	72,958		$	160,444		$	139,942
Cost of revenues:
Cost of revenues		9,166			8,587			17,742			17,454
Amortization of acquired technology		3,257			3,081			6,513			6,153
Total cost of revenues		12,423			11,668			24,255			23,607
Gross margin		67,041			61,290			136,189			116,335
Operating expenses:
Selling and marketing		41,614			44,338			81,446			87,159
Research and development		12,690			13,198			25,533			26,658
General and administrative		10,037			11,836			21,038			24,689
Total operating expenses		64,341			69,372			128,017			138,506
Income (loss) from operations		2,700			(8,082	)		8,172			(22,171	)
Interest expense		(1,747	)		(2,941	)		(3,959	)		(7,373	)
Other (expense) income, net		(3	)		1,113			355			1,004
Income (loss) before income taxes		950			(9,910	)		4,568			(28,540	)
(Benefit) provision for income taxes		(2,171	)		(1,716	)		5,742			(14,109	)
Net income (loss)	$	3,121		$	(8,194	)	$	(1,174	)	$	(14,431	)
Net income (loss) per share:
Basic net income (loss) per share	$	0.07		$	(0.18	)	$	(0.03	)	$	(0.32	)
Diluted net income (loss) per share	$	0.07		$	(0.18	)	$	(0.03	)	$	(0.32	)
Weighted average shares – basic		44,384			45,208			44,603			45,299
Weighted average shares – diluted		44,857			45,208			44,603			45,299

See accompanying notes.

4

Websense, Inc.

Consolidated Statement of Stockholders’ Equity

(Unaudited and in thousands)

	Common stock				Additional paid-in			Treasury			Retained			Accumulated other comprehensive			Total stockholders’
	Shares		Amount		capital			stock			earnings			loss			equity
Balance at December 31, 2008	45,048		$	522	$	299,657		$	(159,842	)	$	37,937		$	(3,453	)	$	174,821
Issuance of common stock upon exercise of options	175			2		2,192			—			—			—			2,194
Issuance of common stock for ESPP purchase	184			2		2,785			—			—			—			2,787
Issuance of common stock from restricted stock units, net	33			1		—			(93	)		—			—			(92	)
Share-based compensation expense	—			—		12,563			—			—			—			12,563
Tax shortfall from stock option exercises	—			—		(1,621	)		—			—			—			(1,621	)
Purchase of treasury stock	(1,097	)		—		—			(15,000	)		—			—			(15,000	)
Other comprehensive loss:
Net loss	—			—		—			—			(1,174	)		—			(1,174	)
Net change in unrealized gain on derivative contracts, net of tax	—			—		—			—			—			732			732
Comprehensive loss																		(442	)
Balance at June 30, 2009	44,343		$	527	$	315,576		$	(174,935	)	$	36,763		$	(2,721	)	$	175,210

See accompanying notes.

5

Websense, Inc.

Consolidated Statements of Cash Flows

(Unaudited and in thousands)

	Six Months Ended
	June 30, 2009			June 30, 2008
Operating activities:
Net loss	$	(1,174	)	$	(14,431	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		25,495			31,490
Share-based compensation		12,563			12,175
Deferred income taxes		(5,904	)		(30,964	)
Unrealized loss (gain) on foreign exchange		189			(71	)
Tax shortfall from stock option exercises		1,621			678
Changes in operating assets and liabilities:
Accounts receivable		20,962			14,817
Other assets		(2,062	)		(1,761	)
Accounts payable		1,815			(1,660	)
Accrued compensation and related benefits		(492	)		(8,772	)
Other liabilities		(1,599	)		(5,293	)
Deferred revenue		(11,200	)		16,582
Income taxes payable		2,629			11,119
Net cash provided by operating activities		42,843			23,909
Investing activities:
Change in restricted cash and cash equivalents		913			(1,240	)
Purchase of property and equipment		(6,137	)		(4,109	)
Purchase of intangible assets		—			(940	)
Cash refunded from PortAuthority acquisition		—			147
Cash received from sale of CyberPatrol assets		—			1,400
Purchases of marketable securities		—			(20,160	)
Maturities of marketable securities		—			39,963
Net cash (used in) provided by investing activities		(5,224	)		15,061
Financing activities:
Principal payments on senior secured term loan		(15,000	)		(35,000	)
Proceeds from exercise of stock options		2,194			720
Proceeds from issuance of common stock for stock purchase plan		2,787			2,903
Tax shortfall from stock option exercises		(1,621	)		(678	)
Purchase of treasury stock		(14,648	)		(9,998	)
Net cash used in financing activities		(26,288	)		(42,053	)
Effect of exchange rate changes on cash and cash equivalents		123			512
Increase (decrease) in cash and cash equivalents		11,454			(2,571	)
Cash and cash equivalents at beginning of period		64,310			66,163
Cash and cash equivalents at end of period	$	75,764		$	63,592
Supplemental disclosures of cash flow information:
Income taxes paid	$	10,121		$	3,945
Interest paid	$	3,370		$	6,006
Increase in other accrued expenses for purchase of treasury stock	$	352		$	—

See accompanying notes.

6

Websense, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1.Basis of Presentation

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

These financial statements should be read in conjunction with the audited consolidated financial statements and notes for the fiscal year ended December 31, 2008, included in Websense’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2009. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain prior period amounts have been reclassified to conform to the current period presentation.

2.Net Income (Loss) Per Share

Websense computes net income (loss) per share (“EPS”) as permitted by the Financial Accounting Standards Board (“FASB”) with Statement of Financial Accounting Standards (“SFAS”) No. 128,Earnings Per Share (“SFAS 128”). Under the provisions of SFAS 128, basic EPS is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of dilutive stock options and restricted stock units. Dilutive stock options and dilutive restricted stock units are calculated based on the average share price for each fiscal period using the treasury stock method. In accordance with SFAS 128, if, however, the Company reports a net loss, the diluted EPS is computed in the same manner as the basic EPS.

As the Company reported a net loss for the three months ended June 30, 2008 and for the six months ended June 30, 2009 and 2008, basic and diluted EPS were the same. Potentially dilutive securities totaling approximately 9,167,000 and 8,784,000 shares for the three months ended June 30, 2009 and 2008, respectively, were excluded from the diluted EPS calculation because of their anti-dilutive effect. Potentially dilutive securities totaling 9,600,000 and 8,529,000 shares for the six months ended June 30, 2009 and 2008, respectively, were excluded from the diluted EPS calculation because of their anti-dilutive effect.

3.Comprehensive Loss

The components of comprehensive income (loss), as required to be reported by SFAS No. 130,Reporting Comprehensive Income, were as follows (in thousands):

	Three Months Ended					Six Months Ended
	June 30, 2009		June 30, 2008			June 30, 2009			June 30, 2008
Net income (loss)	$	3,121	$	(8,194	)	$	(1,174	)	$	(14,431	)
Net change in unrealized gain (loss) on derivative contracts, net of tax of $218, $677, $475 and $46, respectively		426		1,016			732			(68	)
Translation adjustment		—		(169	)		—			(645	)
Comprehensive income (loss)	$	3,547	$	(7,347	)	$	(442	)	$	(15,144	)

7

The accumulated derivative loss, net of tax, on the Company’s derivative contracts included in “Accumulated other comprehensive loss” were as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
Beginning balance	$	(1,253	)	$	(2,082	)	$	(1,559	)	$	(998	)
Net change during the period		426			1,016			732			(68	)
Ending balance	$	(827	)	$	(1,066	)	$	(827	)	$	(1,066	)

4.Acquisitions

In October 2007, the Company completed the acquisition of SurfControl plc (“SurfControl”), a U.K. based provider of Web and email security solutions for approximately $460.9 million. The purchase price was allocated as follows: $157.8 million to amortizable intangible assets, $1.0 million to net tangible liabilities assumed and the remaining $304.1 million to goodwill. In connection with the acquisition, the Company’s management approved plans to exit certain SurfControl facilities. During the quarter ended June 30, 2009, the Company made a lease termination payment to exit the last remaining vacated SurfControl facility. As a result, the Company has no remaining accrued facility exit costs as of June 30, 2009 as shown below (in thousands):

	Balance at December 31, 2008		Cash Payments			Charged to Expense		Adjustments			Balance at June 30, 2009
Facility exit costs	$	2,243	$	(2,097	)	$	32	$	(178	)	$	—

In accordance with Emerging Issues Task Force No. 95-3,Recognition of Liabilities in Connection with a Purchase Business Combination, an adjustment of $178,000 to eliminate the unused accrued facility exit costs was recorded as a reduction to goodwill.

5.Intangible Assets and Goodwill

Intangible assets subject to amortization consisted of the following as of June 30, 2009 (in thousands):

	Remaining Weighted Average Life (years)	Cost		Accumulated Amortization			Net
Technology	2.0	$	45,278	$	(24,319	)	$	20,959
Customer relationships	5.1		129,200		(63,604	)		65,596
Trade name	2.5		510		(255	)		255
Total		$	174,988	$	(88,178	)	$	86,810

As of June 30, 2009, remaining amortization expense is expected to be as follows (in thousands):

Years Ending December 31,
2009	$	19,561
2010		26,446
2011		15,511
2012		8,290
2013		5,538
Thereafter		11,464
Total	$	86,810

8

6. Senior Secured Credit Facility

In connection with the acquisition of SurfControl in October 2007, the Company entered into an amended and restated senior secured credit agreement (the “Senior Credit Agreement”). The $225 million senior secured credit facility consists of a five year $210 million senior secured term loan and a $15 million revolving credit facility. The senior secured term loan was fully funded on October 11, 2007, and the revolving line of credit remains unused. At June 30, 2009, the outstanding balance under the senior secured term loan was $110 million as a result of the Company making optional prepayments totaling $15 million in the first three months of 2009. The Company made no voluntary prepayments under the senior secured term loan during the second quarter of 2009. The senior secured credit facility is secured by substantially all of the assets of the Company, including pledges of stock of some of its subsidiaries (subject to limitations in the case of foreign subsidiaries) and by secured guarantees by the Company’s domestic subsidiaries. The senior secured term loan bears interest at a spread above LIBOR with the spread determined based upon the Company’s total leverage ratio, as defined in the Senior Credit Agreement. Based on the total leverage ratio as of March 31, 2009, the spread on the senior secured term loan was LIBOR plus 225 basis points per annum and the fee for the unused portion of the revolving credit facility was 25 basis points per annum. The weighted average interest rate on the senior secured term loan at June 30, 2009 was 4.9%. In conjunction with the Company’s optional $20 million prepayment on December 31, 2007, the Company amended its Senior Credit Agreement to eliminate any additional mandatory payments until September 30, 2009. The Senior Credit Agreement contains financial covenants, including a consolidated leverage ratio and a consolidated interest coverage ratio, as well as affirmative and negative covenants. Among the negative covenants are restrictions on the Company’s ability to borrow money, including restrictions on (a) the incurrence of more than $15 million of new debt, including capital leases (subject to certain exceptions), (b) the incurrence of more than $7.5 million in letters of credit, (c) the incurrence of more than $50 to $75 million of new debt, depending on the Company’s leverage ratio, to finance future acquisitions or (d) the assumption of more than $15 million of new debt in connection with acquisitions.

As of June 30, 2009, future remaining minimum principal payments under the senior secured term loan will be as follows (in thousands):

Years Ending December 31,
2009	$	3,618
2010		15,197
2011		18,237
2012		72,948
Total	$	110,000

7.Derivative Financial Instruments

The Company adopted FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133(“SFAS 161”). The adoption of SFAS 161 had no financial impact on the Company’s consolidated financial statements and only required additional financial statement disclosures. The Company applied the requirements of SFAS 161 on a prospective basis. Accordingly, disclosures related to interim periods prior to the adoption have not been presented.

The Company uses derivative financial instruments to manage foreign currency risk relating to foreign exchange rates, and to manage interest rate risk relating to the Company’s variable rate senior secured term loan. The Company does not use these instruments for speculative or trading purposes. The Company’s objective is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates and changes in interest rates. Derivative instruments are recognized as either assets or liabilities in the accompanying financial statements and are measured at fair value. Gains and losses resulting from changes in the fair values of those derivative instruments are recorded to earnings or other comprehensive income (loss) depending on the use of the derivative instrument and whether it qualifies for hedge accounting.

The Senior Credit Agreement provides that the Company must maintain hedge agreements so that at least 50% of the aggregate principal amount of the senior secured credit facility is subject to fixed interest rate protection for a period of not less than 2.5 years from the initial funding date of October 11, 2007. On the initial funding date, the Company entered into an interest rate swap agreement to pay a fixed rate of interest (4.85% per annum) and receive a floating rate interest payment (based on three month LIBOR) on an equivalent amount. The notional amount of the swap agreement was $69 million during the quarter ended June 30, 2009 and it amortizes each quarter down to $11 million on June 30, 2010. In addition, on October 11, 2007 the Company entered into an interest rate cap agreement to limit the maximum interest rate on a portion of its senior secured term loan to 6.5% per annum. The amount of principal protected by this agreement was $30.8 million during the quarter ended June 30, 2009 and increases up to $74.3 million on June 30, 2010. Both the interest rate swap and cap expire on September 30, 2010.

9

During the six months ended June 30, 2009 and 2008, the Company utilized Euro foreign currency forward contracts to hedge anticipated Euro denominated net monetary assets. All such contracts entered into were designated as fair value hedges and were not required to be tested for effectiveness as hedge accounting was not elected. The losses related to the Euro contracts designated as fair value hedges are included in other (expense) income, net, in the accompanying consolidated statements of operations and amounted to approximately $(366,000) and $(375,000) for the three months ended June 30, 2009 and 2008, respectively, and $(524,000) and $(1,032,000) for the six months ended June 30, 2009 and 2008, respectively. All of the Euro hedging contracts in place as of June 30, 2009 will be settled before October 31, 2009.

During the six months ended June 30, 2009, the Company utilized British Pound foreign currency forward contracts to hedge anticipated British Pound denominated net monetary assets. All such contracts entered into were designated as fair value hedges and were not required to be tested for effectiveness as hedge accounting was not elected. The net (losses) gains related to the British Pound contracts designated as fair value hedges are included in other (expense) income, net, in the accompanying consolidated statements of operations and amounted to approximately $(289,000) for the three months ended June 30, 2009 and $38,000 for the six months ended June 30, 2009. All of the British Pound contracts outstanding as of June 30, 2009 will be settled before September 30, 2009. There were no British Pound contracts outstanding during the six months ended June 30, 2008.

During the six months ended June 30, 2009, the Company utilized an Australian dollar foreign currency forward contract to hedge anticipated Australian dollar denominated net monetary assets. The contract entered into was designated as a fair value hedge and was not required to be tested for effectiveness as hedge accounting was not elected. The losses related to this contract designated as a fair value hedge is included in other (expense) income, net, in the accompanying consolidated statements of operations and amounted to approximately $(128,000) for the three months ended June 30, 2009 and $(144,000) for the six months ended June 30, 2009. The Australian dollar hedging contract settled during the quarter ended June 30, 2009. There were no Australian dollar contracts outstanding as of June 30, 2009 and 2008.

During the six months ended June 30, 2009, the Company utilized Israeli Shekel zero-cost collar and forward contracts to hedge anticipated operating expenses. All such contracts entered into were designated as cash flow hedges and were considered effective as defined by SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as amended. None of the contracts were terminated prior to settlement. Net realized gains (losses) of approximately $11,000 and $(8,000) related to the contracts designated as cash flow hedges during the three months and six months ended June 30, 2009, respectively are included in the respective operating categories for which the Company hedges its Israeli Shekel expenditures. All of the Israeli Shekel hedging contracts in place as of June 30, 2009 will be settled before December 31, 2009. There were no Israeli Shekel contracts outstanding during the six months ended June 30, 2008.

Notional and fair values of the Company’s foreign currency hedging positions at June 30, 2009 and 2008 are presented in the table below (in thousands):

	June 30, 2009								June 30, 2008
	Notional Value Local Currency	Notional Value USD		Fair Value USD		Fair Value Gain (Loss) USD			Notional Value Local Currency	Notional Value USD		Fair Value USD		Fair Value Gain (Loss) USD
Euro	6,500	$	8,994	$	8,861	$	(133	)	2,850	$	4,325	$	4,171	$	(154	)
British Pound	2,000		3,284		3,277		(7	)	—		—		—		—
Israeli Shekel	7,500		1,801		1,906		105		—		—		—		—
Total		$	14,079	$	14,044	$	(35	)		$	4,325	$	4,171	$	(154	)

10

The effects of derivative instruments on the Company’s financial statements were as follows as of June 30, 2009 and for the three and six months then ended (in thousands):

	Fair Value of Derivative Instruments
	June 30, 2009
	Balance Sheet Location	Fair Value
Interest rate cap contract designated as cash flow hedge	Other assets	$	5
Foreign exchange contracts designated as cash flow hedges	Other assets		105
Interest rate swap contracts designated as cash flow hedges	Other accrued expenses		(1,505	)
Total derivatives designated as hedges		$	(1,395	)
Foreign currency forward contracts not designated as hedges	Other accrued expenses	$	(140	)
Total derivatives		$	(1,535	)

Effects of Derivative Instruments on Income and Other Comprehensive Income (OCI) (in thousands):

	Amount of Gain (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)		Amount and Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Amount and Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in SFAS 133 Cash Flow Hedging Relationships	Three Months Ended June 30, 2009		Three Months Ended June 30, 2009				Three Months Ended June 30, 2009
Interest rate cap contract	$	4	$	—		Interest expense	$	—	Interest expense
Interest rate swap contracts		494		(633	)	Interest expense		—	Interest expense
Foreign exchange contracts		146		11		Research and development		—	Research and development
Total	$	644	$	(622	)		$	—

	Amount and Location of Gain (Loss) Recognized in Income on Derivatives
Derivatives Not Designated as Hedges	Three Months Ended June 30, 2009
Foreign currency forward contracts	$	(783	)	Other (expense) income, net

	Amount of Gain (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)		Amount and Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Amount and Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in SFAS 133 Cash Flow Hedging Relationships	Six Months Ended June 30, 2009		Six Months Ended June 30, 2009				Six Months Ended June 30, 2009
Interest rate cap contract	$	3	$	—		Interest expense	$	—	Interest expense
Interest rate swap contracts		1,103		(1,277	)	Interest expense		—	Interest expense
Foreign exchange contracts		101		(8	)	Research and development		—	Research and development
Total	$	1,207	$	(1,285	)		$	—

	Amount and Location of Gain (Loss) Recognized in Income on Derivatives
Derivatives Not Designated as Hedges	Six Months Ended June 30, 2009
Foreign currency forward contracts	$	(630	)	Other (expense) income, net

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8. Fair Value Measurements

SFAS No. 157

SFAS No. 157,Fair Value Measurements (“SFAS 157”) defines fair value, establishes a framework for measuring fair value and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. SFAS 157 also expands financial statement disclosures about fair value measurements.

Fair Value Measurements on a Recurring Basis

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 (in thousands):

	Level 1 (1)		Level 2 (2)		Level 3 (3)		Total
Assets:
Interest rate cap designated as cash flow hedge	$	—	$	5	$	—	$	5
Israeli Shekel contracts designated as cash flow hedges		—		105		—		105
Liabilities:
Interest rate swaps designated as cash flow hedges	$	—	$	1,505	$	—	$	1,505
Foreign currency forward contracts not designated as hedges		—		140		—		140

⁽¹⁾ – quoted prices in active markets for identical assets or liabilities

⁽²⁾ – observable inputs other than quoted prices in active markets for identical assets and liabilities

⁽³⁾ – no observable pricing inputs in the market

Included in Other assets and in Other accrued expenses are derivative contracts, comprised of interest rate swaps and an interest rate cap as well as foreign currency forward contracts and zero-cost collar contracts, that are valued using models based on readily observable market parameters for all substantial terms of the Company’s derivative contracts and thus are classified within Level 2.

Fair Value Measurements on a Nonrecurring Basis

During the three and six months ended June 30, 2009, the Company did not re-measure any nonfinancial assets and liabilities measured at fair value on a nonrecurring basis (e.g., goodwill, intangible assets, property and equipment and nonfinancial assets and liabilities initially measured at fair value in a business combination). As of June 30, 2009, the Company’s senior secured term loan, with a carrying value of $110.0 million, had an estimated fair value of $96.9 million which the Company determined using a discounted cash flow model with a discount rate of 8.0% which represents the Company’s estimated incremental borrowing rate.

9. Stockholders’ Equity

Share-Based Compensation

Employee Stock Plans

In June 2009, the stockholders of the Company approved the Company’s 2009 Equity Incentive Plan (the “2009 Plan”) as a successor to and continuation of the Company’s Amended and Restated 2000 Stock Incentive Plan and the Company’s 2007 Stock Incentive Assumption Plan. The 2009 Plan provides for the grant or award of various equity incentives to the Company’s employees, directors and consultants. The equity incentives include the following: stock options, restricted stock units, stock options and restricted stock units granted to the Company’s directors under the Company’s non-discretionary grant program and the early exercise of awards granted to the Company’s directors under the Company’s non-discretionary stock option grant program.

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The following table summarizes the Company’s restricted stock unit activity since December 31, 2008:

	Number of Shares
Balance at December 31, 2008	335,687
Granted	782,753
Vested	(40,583	)
Cancelled	(60,830	)
Balance at June 30, 2009	1,017,027

The following table summarizes the Company’s stock option activity since December 31, 2008:

	Number of Shares		Weighted Average Exercise Price
Balance at December 31, 2008	10,431,100		$	22.08
Granted	652,259			14.66
Exercised	(175,289	)		12.52
Cancelled	(777,701	)		20.75
Balance at June 30, 2009	10,130,369			21.87

The results of operations for the three and six months ended June 30, 2009 and 2008 include share-based compensation expense in the following expense categories of the consolidated statements of operations (in thousands):

	Three Months Ended						Six Months Ended
	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
Share-based compensation in:
Cost of revenues	$	392		$	316		$	691		$	677
Total share-based compensation in cost of revenues		392			316			691			677
Selling and marketing		2,234			2,249			4,147			4,566
Research and development		1,414			1,199			2,509			2,323
General and administrative		2,379			2,241			5,216			4,609
Total share-based compensation in operating expenses		6,027			5,689			11,872			11,498
Total share-based compensation	$	6,419		$	6,005		$	12,563		$	12,175
The Company used the following assumptions to estimate the fair value of the stock options granted:
	Three Months Ended						Six Months Ended
	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
Average expected life (years)		3.3			3.0			3.1			3.0
Average expected volatility factor		46.2	%		34.8	%		45.3	%		34.8	%
Average risk-free interest rate		1.4	%		2.7	%		1.4	%		2.6	%
Average expected dividend yield		—			—			—			—

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Treasury Stock

The Company repurchased shares of its common stock during the first six months of 2009 as follows:

	Shares	Average Price Per Share
Shares repurchased through December 31, 2008	9,249,109	$	20.59
Shares repurchased during the six months ended June 30, 2009	1,096,937		13.65
Total shares repurchased through June 30, 2009	10,346,046		19.85

The remaining number of shares authorized for repurchase under the Company’s stock repurchase program as of June 30, 2009 was 1,653,954 shares. Under the terms of the Senior Credit Agreement, the Company is restricted from repurchasing its common stock for an aggregate purchase price that exceeds the sum of $25 million plus 50% of the aggregate amount of its consolidated net income, as defined in the Senior Credit Agreement, during the period from the effective date of the facility through the most recent quarter end for which quarterly financial statements have been filed. As of June 30, 2009, $26.0 million remained authorized for repurchase under the Company’s Senior Credit Agreement.

10.Tax Matters

For the six months ended June 30, 2009 the Company recognized an income tax expense of $5.7 million which represented an effective tax rate of 125.7%. The effective tax rate variance from the statutory rate was primarily related to non-deductible items, including share-based payments and an increase in the valuation allowance related to net operating losses of one of the Company’s subsidiaries in the United Kingdom, which offset the benefit of income taxed at lower rates in foreign jurisdictions and the favorable settlement of foreign withholding taxes accrued from prior years.

In accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”), the Company had approximately $11.3 million of total gross unrecognized tax benefits at June 30, 2009. Included in this balance are $7.9 million of unrecognized tax benefits that, if recognized, would reduce the Company’s annual effective tax rate. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of provision for income taxes in the consolidated statements of operations. The Company accrued potential penalties and interest of $0.4 million related to these unrecognized tax benefits during the six months ended June 30, 2009, and in total, as of June 30, 2009, the Company has recorded a liability for potential penalties and interest of $1.5 million.

The Company and its subsidiaries file tax returns which are routinely examined by tax authorities in the U.S. and in various state and foreign jurisdictions. The Company is currently under examination by the respective tax authorities for tax years 2005 to 2007 in the United States, for 2002 to 2006 in the United Kingdom and for 2005 to 2007 in France. The Company has various other on-going audits in various stages of completion. In general, the tax years 2005 through 2008 could be subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, tax years 2002 through 2008 could be subject to examination by the respective tax authorities.

In connection with the Company’s current audit examination by the U.S. federal tax authorities, several items are under review, including the cost sharing buy-in arrangement between the Company’s U.S. parent company and its Irish subsidiary. The U.S. federal tax authorities have identified cost sharing buy-in arrangements between domestic and international subsidiaries as a potential area for audit exposure for many companies. While the Company believes its cost sharing buy-in arrangement complies with all applicable laws and regulations, the Company cannot assure that U.S. federal tax authorities will not challenge this structure or propose an assessment against the Company. If U.S. federal tax authorities were to issue an assessment or other unfavorable ruling, the Company expects to continue to vigorously defend its positions, including as necessary and appropriate, utilizing its rights to appeal as well as other legal remedies. Because the audit examination by the U.S. federal tax authorities is ongoing and a proposed assessment has not been issued pertaining to the Company’s cost share buy-in arrangement with its Irish subsidiary, it is not possible to estimate the potential impact on the Company’s financial statements or cash flows from this uncertainty at this time.

Notwithstanding the current audit examination by the U.S. federal tax authorities described above, due to the potential resolution of federal, state and foreign tax examinations, and the expiration of various statutes of limitations, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $1.5 million.

11.Litigation

The Company is involved in various legal actions in the normal course of business. Based on current information, including consultation with the Company’s attorneys, the Company believes that it has adequately reserved for any ultimate liability that may result from these actions such that any liability would not materially affect the Company’s consolidated financial position, results of operations or cash flows. The Company’s evaluation of the likely impact of these actions could change in the future and unfavorable outcomes and/or defense costs, depending upon the amount and timing, could have a material adverse effect on the Company’s results of operations or cash flows in a future period.

12. Recently Issued Accounting Standards

In May 2009 the FASB issued and the Company adopted SFAS No. 165,Subsequent Events (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were

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available to be issued. SFAS 165 is effective in the first interim period ending after June 15, 2009. In accordance with SFAS 165, the Company has evaluated subsequent events through August 6, 2009, the date of issuance of the unaudited consolidated financial statements. During this period the Company did not have any material subsequent events.

In June 2009 the FASB issued SFAS No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting (“SFAS 168”). SFAS 168 represents the last numbered standard to be issued by the FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy established under SFAS 162. On July 1, 2009 the FASB launched FASB’s new Codification entitledThe FASB Accounting Standards Codification. The Codification will supersede all existing non-SEC accounting and reporting standards. SFAS 168 is effective in the first interim and annual periods ending after September 15, 2009. This pronouncement will have no effect on the Company’s unaudited consolidated financial statements upon adoption other than current references to GAAP which will be replaced with references to the applicable codification paragraphs.

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

The following discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report. See “Risk Factors” under Part II, Item 1A below regarding certain factors known to us that could cause reported financial information not to be necessarily indicative of future results.

Forward-Looking Statements

This report on Form 10-Q may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” or other words indicating future results. Such statements may include but are not limited to statements concerning the following:

• anticipated trends in revenue;

• plans, strategies and objectives of management for future operations;

• growth opportunities in domestic and international markets;

• new and enhanced reliance on channels of distribution;

• customer acceptance and satisfaction with our products, services and fee structures;

• changes in domestic and international market conditions;

• risks associated with fluctuations in foreign currency exchange rates;

• the impact of macro-economic conditions on our customers;

• expected trends in operating and other expenses;

• anticipated cash and intentions regarding usage of cash, including risks related to the required use of cash for debt servicing;

• risks related to compliance with the covenants in our senior secured credit facility;

• risks associated with integrating acquired businesses and launching new product offerings;

• changes in effective tax rates, tax laws and tax interpretations;

• risks related to changes in accounting interpretations;

• anticipated product enhancements or releases;

• the volatile and competitive nature of the Internet and security industries; and

• the success of our brand development efforts.

These forward-looking statements are subject to risks and uncertainties, including those risks and uncertainties described herein under Part II, Item 1A “Risk Factors,” that could cause actual results to differ materially from those anticipated as of

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the date of this report. We assume no obligation to update any forward-looking statements to reflect events or circumstances arising after the date of this report.

Overview

We are a leading provider of solutions for Web filtering and Web security, data loss prevention (“DLP”), and email security. Our products and services prevent malicious applications and inappropriate content from accessing our customers’ networks and prevent critical business data from improperly leaving the network, allowing organizations to provide a secure and productive computing environment for employees, business partners and customers. Our portfolio of Web filtering, Web security, DLP and email anti-spam and messaging security software allows organizations to:

• prevent access to undesirable and dangerous elements on the Web, such as Web sites that contain inappropriate content or sites that download viruses, spyware, keyloggers, and an ever-increasing variety of malicious code, spam and malware, including Web sites with dynamic or user-generated content (Web 2.0 sites);

• identify and remove malicious applications from incoming Web traffic;

• prevent the unauthorized use and loss of sensitive data, such as customer or employee information;

• filter “spam” out of incoming email traffic;

• filter viruses and other malicious attachments from email and instant messages;

• manage the use of non-Web Internet traffic, such as peer-to-peer communications and instant messaging; and

• control misuse of an organization’s valuable computing resources, including unauthorized downloading of high-bandwidth content and sites that employees can otherwise access to utilize hacking tools.

Since we commenced operations in 1994, Websense has evolved from a reseller of computer security products to a leading provider of content security software solutions, including Web filtering and security, DLP, email and messaging security solutions. Our first Web filtering software product was released in 1996 and prevented access to inappropriate Web content. Since then, we have focused on adapting our Web filtering capabilities to address changing Internet use patterns and the growing incidence of Web-based criminal activity. Our current solutions share our Threatseeker^™ security intelligence and offer integrated policy enforcement options to protect against Web and email attacks and prevent the inappropriate or malicious transmission of data.

Additionally, our Web Security Gateway (“WSG”) product provides real time classification of dynamic end user generated content embedded in Web 2.0 Web sites, providing organizations with the same policy management options available with traditional static content Web sites, while still enabling the latest Web-based tools and applications. In April 2009, we launched a new hardware appliance platform for our software products, consisting of a Websense-branded server with Websense software pre-installed on the server. This new Websense appliance product, named our V10000 appliance, offers our customers another alternative for implementing our software products by providing centralized management of Web security, proxy and cache, and application controls to manage and secure our customers in Web 2.0 environments. We expect the availability of the V10000 appliance to help generate additional new and upgraded subscriptions to our software, particularly our WSG product.

During the three and six months ended June 30, 2009, we derived approximately 50% and 49%, respectively of our revenue from international sales, compared with approximately 41% for both the three and six months ended June 30, 2008. The United Kingdom comprised approximately 14% and 12% of our total revenue for the three months ended June 30, 2009 and 2008, respectively, and 15% and 11% for the six months ended June 30, 2009 and 2008, respectively. We believe international markets continue to represent a significant growth opportunity and we are continuing to expand our international operations, particularly in selected countries in the European, Asia/Pacific and Latin American markets.

We distribute our products through a global network of distributors and value-added resellers to leverage our internal sales and marketing resources. Sales through indirect channels currently account for more than 90% of our revenue. We utilize a two-tier distribution strategy in North America to sell our products, with an objective of increasing the number of value-added resellers selling our products and further extending our reach into the small and medium sized business market segment. Our distribution strategy outside North America also relies on a multi-tiered system of distributors and value-added resellers.

As described elsewhere in this report, we recognize revenue from subscriptions to our products on a daily straight-line basis over the term of the subscription agreement, commencing on the first day of the subscription term. We recognize the operating expenses related to these sales as they are incurred. These operating expenses include sales commissions, which are based on the total amount

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of the subscription contract, and are fully expensed in the period the subscription term begins. We sell our appliances pre-loaded with our software on a subscription basis and recognize revenue from the appliance and the software as well as the cost of revenue on the appliance on a daily straight line basis over the term of the subscription.

Operating expenses for 2009 have declined compared with 2008 primarily as a result of the substantial completion of the SurfControl integration activities during 2008, a reduction in amortization of intangibles and the favorable impact of a stronger U.S. dollar. However, certain of our operating expenses are expected to increase in absolute dollars on a comparative quarter over quarter basis due to continued product research and development and investments in administrative infrastructure (such as headcount, facilities, equipment and software) to support subscription sales that we will recognize as revenue in subsequent periods. In light of the impact of the global recession on our business and the expected increase in certain of our operating expenses, we continue to engage in various cost containment initiatives to minimize the expected increase in certain expenses. As part of these initiatives, we expect to incur severance charges of approximately $2 million in the third quarter of 2009 which will offset some of our cost containment in that quarter.

In October 2007, we completed our acquisition of SurfControl. As a result of expenses related to the combination and certain purchase accounting adjustments, we incurred operating losses under GAAP from the fourth quarter of 2007 through the fourth quarter of 2008. Similar to Websense, SurfControl sold products primarily under subscriptions whereby revenues were initially recorded as deferred revenue and recognized ratably over the term of the agreement. Under GAAP purchase accounting, we wrote off $97.4 million of SurfControl’s deferred revenue, leaving a balance of $19.7 million as the fair value of the obligation. This adjustment reflects the fair value of the post-contract technical support services that will be recognized daily in accordance with our revenue recognition policy. In connection with the acquisition, we incurred restructuring costs primarily in connection with reducing SurfControl headcount and eliminating redundant facilities. We also incurred the expenses of managing the SurfControl operations as well as recording the amortization of the acquired intangibles. Given the average remaining term of the SurfControl subscriptions we acquired, the renewal revenue from the SurfControl customers and the elimination of many of the non-recurring acquisition related expenses, we currently expect to report income from operations for fiscal 2009. Our ability to retain SurfControl customers when their existing product subscriptions expire and maintain our overall pricing levels for our products will impact our results of operations and the timing of our return to profitability.

Critical Accounting Policies and Estimates

Critical accounting policies are those that may have a material impact on our financial statements and also require management to exercise significant judgment due to a high degree of uncertainty at the time the estimate is made. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and disclosures with the Audit Committee of our Board of Directors. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition. When a purchase decision is made for our products, including our new appliance product, customers enter into a subscription agreement, which is generally 12, 24 or 36 months in duration and for a fixed number of users. Other services such as upgrades/enhancements and standard post-contract technical support services are sold together with our product subscription and provided throughout the subscription term. We recognize revenue on a daily straight-line basis, including our new appliance product revenue, commencing on the date the term of the subscription begins, and continuing over the term of the subscription agreement, provided the fee is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred and collectability is reasonably assured. Upon entering into a subscription arrangement for a fixed or determinable fee, we electronically deliver access codes to users, and in the case of our appliance product we ship the product with our software pre-installed on the product, and then promptly invoice customers for the full amount of their subscriptions. Payment is due for the full term of the subscription, generally within 30 to 60 days of the invoice. We record amounts billed to customers in excess of recognizable revenue as deferred revenue on our balance sheet. When we enter into a subscription agreement that is denominated and paid in a currency other than U.S. dollars, we record the subscription billing and deferred revenue in U.S. dollars based upon the currency exchange rate in effect on the last day of the previous month before the subscription agreement is effective. Changes in currency rates relative to the U.S. dollar may have a significant impact on the revenue that we will recognize under future contracts that are denominated in currencies other than U.S. dollars.

We record distributor marketing payments and channel rebates as an offset to revenue. We recognize distributor marketing payments as an offset to revenue as the marketing service is provided. We recognize channel rebates as an offset to revenue on a straight-line basis over the term of the subscription agreement.

Acquisitions, Goodwill and Other Intangible Assets. We account for acquired businesses using the acquisition method of accounting in accordance with SFAS No. 141(R),Business Combinations, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of net assets acquired is recorded as goodwill. The fair value of intangible assets, including acquired technology and customer

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relationships, is based on significant judgments made by management. The valuations and useful life assumptions are based on information available near the acquisition date and are based on expectations and assumptions that are considered reasonable by management. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.

In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, we review goodwill that has an indefinite useful life for impairment at least annually in our fourth fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. We amortize the cost of identified intangible assets using amortization methods that reflect the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), we review intangible assets that have finite useful lives when an event occurs indicating the potential for impairment. We review for impairment by facts or circumstances, either external or internal, indicating that we may not recover the carrying value of the asset. We measure impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. We measure fair value under SFAS 144, which is generally based on the estimated future cash flows. Our analysis is based on available information and on assumptions and projections that we consider to be reasonable and supportable. If necessary, we perform subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Share-Based Compensation.We account for share-based compensation in accordance with the provisions of SFAS No. 123(R),Share-Based Payment (“SFAS 123R”) and Staff Accounting Bulletin No. 107 (“SAB 107”) requiring the measurement and recognition of all share-based compensation under the fair value method. Share-based compensation expense related to stock options is recorded based on the fair value of the award on its grant date which we estimate using the Black-Scholes valuation model in accordance with the provisions prescribed under SFAS 123R and SAB 107. Share-based compensation expense related to restricted stock unit awards is calculated based on the market price of our common stock on the date of grant.

At June 30, 2009, there was $54.0 million of total unrecognized compensation costs related to share-based compensation arrangements granted under all equity compensation plans (excluding tax effects). The total unrecognized compensation costs will be adjusted for estimated forfeitures as well as for future changes in estimated forfeitures. We expect to recognize those costs over a weighted average period of approximately 2.5 years.

We estimate the fair value of options granted using the Black-Scholes option valuation model and the assumptions described below. We estimate the expected term of options granted based on the history of grants and exercises in our options database. We estimate the volatility of our common stock at the date of grant based on both the historical volatility as well as the implied volatility of publicly traded options on our common stock, consistent with SFAS 123R and SAB 107. We base the risk-free interest rate that is used in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with equivalent remaining terms. We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. We amortize the fair value ratably over the vesting period of the awards, which is typically four years. We use historical data to estimate pre-vesting option forfeitures and record share-based expense only for those awards that are expected to vest. We may elect to use different assumptions under the Black-Scholes option valuation model in the future or select a different option valuation model altogether, which could materially affect our results of operations in the future.

We determine the fair value of share-based payment awards on the date of grant using an option-pricing model that is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS 123R and SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Income Tax Provision and Uncertain Tax Positions. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be

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due. These reserves for tax contingencies are established, to the extent that we believe that certain positions might be challenged successfully in whole or in part on audit, despite our belief that our tax return positions are consistent with prevailing law and practice. We adjust these reserves in light of changing facts and circumstances, such as the development of positions and outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes(“SFAS 109”), requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors.

We account for uncertainty in income taxes in accordance with the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which require periodic adjustments and which may not accurately anticipate actual outcomes.

In connection with our current audit examination by the U.S. federal tax authorities, several items are under review, including the cost sharing buy-in arrangement between our U.S. parent company and our Irish subsidiary. The U.S. federal tax authorities have identified cost sharing buy-in arrangements between domestic and international subsidiaries as a potential area for audit exposure for many companies. While we believe our cost sharing buy-in arrangement complies with all applicable laws and regulations, we cannot assure that U.S. federal tax authorities will not challenge this structure or propose an assessment against us. If U.S. federal tax authorities were to issue an assessment or other unfavorable ruling, we expect to continue to vigorously defend our positions, including as necessary and appropriate, utilizing our rights to appeal as well as other legal remedies. Because the audit examination by the U.S. federal tax authorities is ongoing and a proposed assessment has not been issued pertaining to our cost share buy-in arrangement with our Irish subsidiary, it is not possible to estimate the potential impact on our financial statements or cash flows from this uncertainty at this time.

Allowance for Doubtful Accounts and Other Loss Contingencies. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to pay their invoices. Our allowance for doubtful accounts is based on a formula derived from our historical experience as well as our judgmental assessment based on the facts and circumstances of our existing customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires significant judgment by management based on the facts and circumstances of each matter.

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Results of Operations

Three months ended June 30, 2009 compared with the three months ended June 30, 2008

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

	Three Months Ended
	June 30, 2009		June 30, 2008
	(Unaudited)
Revenue	100	%	100	%
Cost of revenues:
Cost of revenues	12		12
Amortization of acquired technology	4		4
Total cost of revenues	16		16
Gross margin	84		84
Operating expenses:
Selling and marketing	52		61
Research and development	16		18
General and administrative	13		16
Total operating expenses	81		95
Income (loss) from operations	3		(11	)
Interest expense	(2	)	(4	)
Other income, net	—		2
Income (loss) before income taxes	1		(13	)
Benefit for income taxes	(3	)	(2	)
Net income (loss)	4	%	(11	)%

Revenue

Revenue increased to $79.5 million in the second quarter of 2009 from $73.0 million in the second quarter of 2008, but decreased on a consecutive quarter basis from $81.0 million for the first quarter of 2009. The increase was primarily a result of additional customer seats in new, renewed and upgraded subscriptions from the second quarter of 2008 to the second quarter of 2009. The number of product seats under subscription increased from 42.1 million as of June 30, 2008 to 43.6 million as of June 30, 2009, but decreased on a consecutive quarter basis from 44.4 million as of March 31, 2009. Revenue from products sold in the United States accounted for $40.1 million or 50% of second quarter 2009 revenue compared to $43.3 million or 59% in the second quarter of 2008. Revenue from products sold internationally accounted for $39.4 million or 50% of second quarter 2009 revenue compared to $29.7 million or 41% in the second quarter of 2008. We had current deferred revenue of $212.5 million as of June 30, 2009, compared to $204.7 million as of June 30, 2008, and $213.0 million as of March 31, 2009. For the remainder of 2009, we expect our revenue to increase slightly over 2008 revenue levels due to the amount of current deferred revenue that will be recognized as revenue during 2009, subscriptions that are scheduled for renewal that are expected to be renewed and expected new business for which some revenue will be recognized during 2009. We expect our deferred revenue balances in future periods to be negatively affected by the impact of the worldwide recession on our subscription renewals for web filtering and email security products, which have resulted in a shortening of duration of contracts, a slight reduction in the number of seats under subscription and delayed or non-renewal of contracts for these products. Generally our revenue in subsequent periods may be impacted by our deferred revenue balance entering the period, the number of product seats under subscription, the duration of contracts for renewal and new subscriptions, the timing of sales of renewal and new subscriptions, the average annual contract value and per seat price, and currency exchange rates impacting new and renewal subscriptions in international markets.

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Cost of Revenues

Cost of revenues. Cost of revenues consists of the costs of content review, technical support and infrastructure costs associated with maintaining our databases and costs associated with providing our hosted security services. Cost of revenue also includes our amortized costs of acquiring and configuring our V10000 appliance. Cost of revenues increased to $9.2 million in the second quarter of 2009 from $8.6 million in the second quarter of 2008. The $0.6 million increase was primarily due to increased personnel costs in our technical support and database groups in 2009 from 2008 as our full-time employee headcount in cost of revenue departments increased from an average of 209 employees during the second quarter of 2008 to an average of 254 employees during the second quarter of 2009. We allocate the costs for human resources, employee benefits, payroll taxes, information technology, facilities and fixed asset depreciation to each of our functional areas based on headcount data. As a percentage of revenue, cost of revenues remained the same at 12% during the second quarter of 2009 compared to 2008. For the remainder of 2009, we expect cost of revenue will increase in absolute dollars due to the higher headcount and expected increases in appliance sales as compared to 2008 but as a percentage of revenue will remain approximately the same as compared to 2008.

Amortization of acquired technology. Amortization of acquired technology, which primarily relates to the developed technology acquired from the PortAuthority and SurfControl acquisitions in 2007, was $3.3 million in the second quarter of 2009 compared to $3.1 million in the second quarter of 2008. The increase of $0.2 million in amortization of acquired technology from the second quarter of 2008 to the second quarter of 2009 was primarily due to the acquisition of additional acquired technology in the second half of 2008. As of June 30, 2009, the acquired technology is being amortized over a remaining weighted average period of 2.0 years. We expect to incur $6.4 million in amortization expense of acquired technology during the remainder of 2009 and that 2009 levels will be slightly higher than 2008 in absolute dollars.

Gross Margin

Gross margin increased to $67.0 million in the second quarter of 2009 from $61.3 million in the second quarter of 2008. As a percentage of revenue, gross margin remained the same at 84% in the second quarter of 2009 compared to the second quarter of 2008. We expect that gross margin as a percentage of revenue will remain in excess of 80% for the remainder of 2009.

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, including costs related to public relations, advertising, promotions and travel, amortization of acquired customer relationships as well as allocated costs. Selling and marketing expenses do not include payments to channel partners for marketing services and rebates. Selling and marketing expenses decreased to $41.6 million, or 52% of revenue, in the second quarter of 2009, from $44.3 million, or 61% of revenue, in the second quarter of 2008. The $2.7 million decrease was primarily due to a reduction in the amortization of acquired intangibles (customer relationships) of approximately $2.8 million and reduced discretionary costs and allocations of $0.8 million relating to the substantial completion of SurfControl integration activities during 2008 offset by increased personnel costs of $0.9 million. As of June 30, 2009, the acquired customer relationships intangible assets are being amortized over a remaining weighted average period of approximately 5.1 years. Although our headcount in sales and marketing increased from an average of 518 employees during the second quarter of 2008 to 613 employees for the second quarter of 2009, the impact was partially offset by the favorable movement in currency exchange rates in the second quarter of 2009 compared to the second quarter of 2008. We expect overall selling and marketing expenses to be approximately the same in absolute dollars for the remainder of 2009 as compared to 2008 primarily due to a reduction of amortization of acquired intangibles from the SurfControl acquisition due to the accelerated nature of the amortization and the elimination of the non-recurring acquisition related expenses associated with PortAuthority and SurfControl, offset by having additional sales and marketing personnel to support our expanding selling and marketing efforts worldwide. We also expect that selling and marketing expenses as a percentage of revenue will decrease in 2009 compared to 2008 due to the expected increase in revenue. We expect amortization of acquired intangibles of $13.2 million for the remainder of 2009 as a result of the amortization of acquired intangibles from the SurfControl and PortAuthority acquisitions.

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Research and development.Research and development expenses consist primarily of salaries and benefits for software developers and allocated costs. Research and development expenses decreased to $12.7 million, or 16% of revenue, in the second quarter of 2009 from $13.2 million, or 18% of revenue, in the second quarter of 2008. The decrease of $0.5 million in research and development expenses was primarily due to a reduction in contractor services relating to our DLP product of $0.5 million and a reduction in allocated costs of $0.4 million relating to the substantial completion of SurfControl integration activities during 2008 offset by increased personnel costs of $0.4 million. Although our headcount increased in research and development from an average of 342 employees for the second quarter of 2008 to 398 employees for the second quarter of 2009, the impact was partially offset by the favorable movement in currency exchange rates in the second quarter of 2009 compared to the second quarter of 2008. For the remainder of 2009, we expect research and development expenses to increase in absolute dollars as compared to 2008 due to having an expanded base of product offerings and the hiring of personnel to support our continued enhancements and new products. We are managing the increase in our absolute research and development expenses by operating research and development facilities in multiple international locations, including a facility in Beijing, China, that have lower costs than our operations in the United States. During the first quarter of 2009, we relocated our research and development facility in Sydney, Australia to our Beijing, China facility. We also have research and development facilities in Ra’anana, Israel, Los Gatos and San Diego, California and Reading, England. While we expect research and development expenses to increase in absolute dollars for the remainder of 2009, we expect that research and development expenses as a percentage of revenue will decrease in 2009 compared to 2008 due to the expected increase in revenue.

General and administrative. General and administrative expenses consist primarily of salaries, benefits and related expenses for our executive, finance and administrative personnel, third party professional service fees and allocated costs. General and administrative expenses decreased to $10.0 million, or 13% of revenue, in the second quarter of 2009 from $11.8 million, or 16% of revenue, in the second quarter of 2008. The $1.8 million decrease in general and administrative expenses was primarily due to a reduction in personnel costs of $0.7 million and professional service fees of $1.0 million primarily related to a reduction in SurfControl integration activities in 2009 compared to 2008. Although our headcount increased in general and administrative departments from an average of 107 employees during the second quarter of 2008 to 128 employees for the second quarter of 2009, our personnel costs declined because the headcount mix in 2009 included more lower compensated employees. For the remainder of 2009, we expect general and administrative expenses to be approximately the same in absolute dollars as compared to 2008 but decline as a percentage of revenue as compared to 2008 due to the expected increase in revenue.

Interest Expense

Interest expense decreased to $1.7 million in the second quarter of 2009 from $2.9 million in the second quarter of 2008. The decrease was primarily due to a lower average outstanding loan balance on our senior secured term loan of $110 million during the second quarter of 2009 compared to an average loan balance of $158 million during the second quarter of 2008. In addition, the marginal interest rates were lower in the second quarter of 2009 compared to 2008. Included in the interest expense for the second quarter of 2009 and 2008 is $0.2 million and $0.3 million, respectively, of amortization of deferred financing fees that were capitalized as part of the senior secured credit facility. We made prepayments on the senior secured term loan totaling zero and $5 million during the second quarter of 2009 and 2008, respectively. As a result of reductions in the LIBOR interest rate and improvements in our leverage ratio, our weighted average interest rate decreased from 6.5% at June 30, 2008 to 4.9% at June 30, 2009. The amount of interest expense will fluctuate due to changes in the outstanding principal balance, changes in LIBOR and changes in our applicable spread to LIBOR based upon improvements in our leverage ratio in accordance with our senior secured credit facility agreement. Interest expense should decline in the remaining quarters of 2009 as compared to 2008 due to the lower outstanding principal amount and the expected lower marginal interest rate on the non-fixed rate component of our senior secured credit facility.

Other (Expense) Income, Net

Other (expense) income, net decreased to a net expense of $3,000 in the second quarter of 2009 from a net other income of $1.1 million in the second quarter of 2008. The decrease was due primarily to increased foreign exchange related losses of $0.7 million in the second quarter of 2009 compared to the second quarter of 2008 due to the movements in foreign exchange rates during the second quarter of 2009 and reduced interest income of $0.4 million as a result of lower interest rates realized on our balances of cash and cash equivalents. Due to a lower interest rate environment, we expect our net other income for the remainder of 2009 will be less than 2008 levels.

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Provision for Income Taxes

For the three months ended June 30, 2009 we recognized an income tax benefit of $2.2 million compared to an income tax benefit of $1.7 million for the three months ended June 30, 2008. The effective tax rates reflect a tax benefit of 228.5% for the three months ended June 30, 2009 and a tax benefit of 17.3% for the three months ended June 30, 2008. For the second quarter of 2009, the effective tax rate variance from the statutory rate was primarily related to the favorable settlement of $1.2 million of foreign withholding taxes accrued from prior years and the benefit of income taxed at lower rates in foreign jurisdictions which offset the impact of non-deductible items, including share-based payments and a forecasted increase in the valuation allowance related to net operating losses of one of our subsidiaries in the United Kingdom. For the second quarter of 2008, the effective tax rate variance from the statutory rate was primarily attributed to significant book losses in foreign jurisdictions with lower statutory rates, an increase in foreign withholding taxes and the impact that non-deductible items, primarily share-based compensation, had on the amount of tax benefit recorded on our loss before income taxes.

Our effective tax rate may change in future periods due to differences in the composition of taxable income between domestic and international operations along with the potential changes or interpretations in tax rules and legislation, or corresponding accounting rules.

In accordance with the provisions of SFAS 109, we assess, on a quarterly basis, the realizability of our deferred income tax assets. Realization of deferred income tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. Based on our assessment of these items at the end of the second quarter of 2009, it is more likely than not, subject to valuation allowances established, that we will be able to fully realize our deferred tax assets except as it relates to a portion of the potential tax deduction for stock based compensation which would pursuant to SFAS 123R result in a charge to additional paid-in capital based on the current fair value of our common stock.

Six months ended June 30, 2009 compared with the six months ended June 30, 2008

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

	Six Months Ended
	June 30, 2009		June 30, 2008
	(Unaudited)
Revenue	100	%	100	%
Cost of revenues:
Cost of revenues	11		13
Amortization of acquired technology	4		4
Total cost of revenues	15		17
Gross margin	85		83
Operating expenses:
Selling and marketing	51		62
Research and development	16		19
General and administrative	13		18
Total operating expenses	80		99
Income (loss) from operations	5		(16	)
Interest expense	(2	)	(5	)
Other income, net	—		1
Income (loss) before income taxes	3		(20	)
Provision (benefit) for income taxes	4		(10	)
Net loss	(1	)%	(10	)%

Revenue

Revenue increased to $160.4 million in the first six months of 2009 from $139.9 million in the first six months of 2008. The increase was a result primarily of additional customer seats in new, renewed and upgraded subscriptions. The number of product seats under subscription increased from 42.1 million as of June 30, 2008 to 43.6 million as of June 30, 2009, but decreased on a consecutive quarter basis from 44.4 million as of March 31, 2009. Revenue from products sold in the United States accounted for $81.2 million or 51% of the first six months of 2009 revenue compared to $83.1 million or 59% of the first six months of 2008. Revenue from products sold internationally accounted for $79.2 million or 49% of the first six months of 2009 revenue compared to $56.9 million or 41% in the first six months of 2008.

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Cost of Revenues

Cost of revenues. Cost of revenues increased to $17.7 million in the first six months of 2009 from $17.5 million in the first six months of 2008. The $0.2 million increase primarily related to increased personnel costs in our technical support and database groups and increased hosted services and allocated costs offset by reduced temporary contractor costs due to the substantial completion of SurfControl integration activities during 2008. Our headcount in cost of revenue departments increased from an average of 217 employees during the first six months of 2008 to an average of 248 employees during the first six months of 2009.

Amortization of acquired technology. Amortization of acquired technology was $6.5 million during the first six months of 2009 compared to $6.2 million during the first six months of 2008. The increase of $0.3 million in amortization of acquired technology from the first six months of 2008 to the first six months of 2009 was primarily due to the acquisition of additional acquired technology in the second half of 2008.

Gross Margin

Gross margin increased to $136.2 million in the first six months of 2009 from $116.3 million in the first six months of 2008. As a percentage of revenue, gross margin increased to 85% in the first six months of 2009 from 83% in the first six months of 2008 due to the increased revenue described in the above Revenue section.

Operating Expenses

Selling and marketing. Selling and marketing expenses decreased to $81.4 million, or 51% of revenue, in the first six months of 2009, from $87.2 million, or 62% of revenue, in the first six months of 2008. The $5.8 million decrease was primarily due to a reduction in the amortization of acquired intangibles (customer relationships) of approximately $5.5 million and reduced discretionary costs and allocations of $2.7 million relating to the substantial completion of SurfControl integration activities during 2008 offset by increased personnel costs of $2.5 million. Although our headcount in sales and marketing increased from an average of 527 employees during the first six months of 2008 to an average of 592 employees during the first six months of 2009, the impact was partially offset by the favorable movement in currency exchange rates in the first half of 2009 compared to the first half of 2008.

Research and development.Research and development expenses decreased to $25.5 million, or 16% of revenue, in the first six months of 2009 from $26.7 million, or 19% of revenue, in the first six months of 2008. The decrease of $1.2 million in research and development expenses was primarily due to a reduction in contractor services relating to our DLP product of $0.9 million and a reduction in allocated and other costs of $1.0 million relating to the substantial completion of SurfControl integration activities during 2008 offset by increased personnel costs of $0.7 million. Although our headcount increased in research and development from an average of 343 employees during the first six months of 2008 to an average of 394 employees during the first six months of 2009, the impact was partially offset by the favorable movement in currency exchange rates in the first half of 2009 compared to the first half of 2008.

General and administrative. General and administrative expenses decreased to $21.0 million, or 13% of revenue, in the first six months of 2009 from $24.7 million, or 18% of revenue, in the first six months of 2008. The $3.7 million decrease in general and administrative expenses was primarily due to reductions in personnel costs of $1.0 million, professional service fees of $1.1 million and allocations and other costs of $1.5 million relating to the substantial completion of SurfControl integration activities during 2008. Although our headcount increased in general and administrative departments from an average of 109 employees during the first six months of 2008 to an average of 124 employees during the first six months of 2009, our personnel costs declined because the headcount mix in 2009 included more lower compensated employees.

Interest Expense

Interest expense decreased to $4.0 million in the first six months of 2009 from $7.4 million in the first six months of 2008. The decrease was primarily due to a lower average outstanding balance on our senior secured term loan of $115 million during the first six months of 2009 compared to an average loan balance of $168 million during the first six months of 2008. Included in the interest expense for the first six months of 2009 and 2008 is $0.6 million and $1.4 million, respectively, of amortization of deferred financing fees that were capitalized as part of the senior secured credit facility. We made prepayments on the senior secured term loan totaling $15 million and $35 million during the first six months of 2009 and 2008, respectively. All of the prepayments in 2009 were made during the first quarter.

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Other Income, Net

Other income, net decreased to $0.4 million in the first six months of 2009 from $1.0 million in the first six months of 2008. The decrease was due primarily to reduced interest income of approximately $0.9 million in the first six months of 2009 compared to the first six months of 2008 as a result of lower interest rates realized on our balances of cash and cash equivalents, partially offset by increased net foreign exchange related gains of $0.2 million in the first six months of 2009 compared to the first six months of 2008 due to the movements in foreign exchange rates during the first six months of 2009.

Provision for Income Taxes

We recognized an income tax expense of $5.7 million and an income tax benefit of $14.1 million for the six months ended June 30, 2009 and 2008, respectively. Our effective tax rates were a tax provision of 125.7% and a tax benefit of 49.4% for the six months ended June 30, 2009 and June 30, 2008, respectively. For the first six months of 2009, the effective tax rate variance from the statutory rate was primarily related to non-deductible items, including share-based payments and a forecasted increase in the valuation allowance related to net operating losses of one of our subsidiaries in the United Kingdom, which offset the benefit of income taxed at lower rates in foreign jurisdictions and the favorable settlement of $1.2 million of foreign withholding taxes accrued from prior years. For the first six months of 2008, the effective tax rate variance from the statutory rate was primarily related to the favorable impact of a ruling regarding unrecognized state income taxes of $2.7 million, the release of a valuation allowance of $4.3 million, the unfavorable impact of less tax exempt interest income and a higher effective state income tax rate.

In accordance with the provisions of SFAS 109, we assess, on a quarterly basis, the realizability of our deferred income tax assets. Realization of deferred income tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. Based on our assessment of these items at the end of the second quarter of 2009, it is more likely than not, subject to valuation allowances established, that we will be able to fully utilize our deferred tax assets except as it relates to a portion of the potential tax deduction for stock based compensation which would pursuant to SFAS 123R result in a charge to additional paid-in capital based on the current fair value of our common stock.

Liquidity and Capital Resources

As of June 30, 2009, we had cash and cash equivalents (including restricted cash and cash equivalents) of $77.6 million, net accounts receivable balance of $59.9 million and retained earnings of $36.8 million. During the first three months of 2009, we used our cash and cash equivalents primarily to pay down $15 million on our senior secured term loan as optional prepayments. We made no voluntary prepayments on our senior secured term loan during the second quarter of 2009. During the first six months of 2009, we also used our cash and cash equivalents for stock repurchases of approximately $14.6 million. Of the $15.0 million stock repurchases recorded during the first six months of 2009, $14.6 million was paid during the first six months and the remaining $0.4 million was paid in July 2009.

Net cash provided by operating activities was $42.8 million in the first six months of 2009 compared with $23.9 million in the first six months of 2008. The increase in cash provided by operating activities was primarily a result of our increasing cash collections by approximately $1.8 million in the first six months of 2009, decreasing cash expenses by approximately $7.3 million primarily due to the elimination of many of the SurfControl integration activities, as well as a decrease of settlement of liabilities of approximately $15.4 million in the first six months of 2009 compared to the first six months of 2008 which included many non-recurring SurfControl related obligations and a litigation settlement offset by increased cash tax payments of approximately $6.2 million. Our operating cash flow is significantly influenced by new and renewal subscriptions, accounts receivable collections and cash expenses. A decrease in sales of new and/or renewal subscriptions or accounts receivable collections, or an increase in our cash expenses, would negatively impact our operating cash flow.

Net cash used in investing activities was $5.2 million in the first six months of 2009 compared with net cash provided by investing activities of $15.1 million in the first six months of 2008. The $20.3 million change in net cash used in investing activities was primarily due to $19.8 million of net increases in maturities over purchases of marketable securities in the first six months of 2008 for which we discontinued investing in marketable securities in early 2008 due to our use of excess cash to prepay our senior secured term loan and to repurchase our stock.

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Net cash used in financing activities was $26.3 million in the first six months of 2009 compared with $42.1 million in the first six months of 2008. The $15.8 million decrease of net cash used in financing activities was primarily due to a decrease in optional principal prepayments of $20.0 million on our senior secured term loan offset by an increase in stock repurchases of $4.7 million in the first six months of 2009 compared to the first six months of 2008.

In connection with the acquisition of SurfControl in October 2007, we entered into the Senior Credit Agreement. The $225 million senior secured credit facility consists of a five year $210 million senior secured term loan and a $15 million revolving credit facility. The senior secured term loan was fully funded on October 11, 2007, and the revolving line of credit remains unused. At June 30, 2009, the outstanding balance under our senior secured term loan was $110 million as a result of making optional prepayments totaling $15 million during the first three months of 2009. We made no voluntary prepayments on our senior secured term loan during the second quarter of 2009. In conjunction with our optional $20 million prepayment on December 31, 2007, we amended our Senior Credit Agreement to eliminate any additional mandatory payments until September 30, 2009. The senior secured credit facility is secured by substantially all of our assets, including pledges of stock of some of our subsidiaries (subject to limitations in the case of foreign subsidiaries) and by secured guarantees by our domestic subsidiaries. The senior secured term loan bears interest at a spread above LIBOR with the spread determined based upon our total leverage ratio, as defined in the Senior Credit Agreement. Based on the total leverage ratio as of March 31, 2009, the spread on the senior secured term loan was LIBOR plus 225 basis points per annum and the fee for the unused portion of the revolving credit facility was 25 basis points per annum. The weighted average interest rate on the senior secured term loan at June 30, 2009 was 4.9%. The Senior Credit Agreement contains financial covenants, including a consolidated leverage ratio and a consolidated interest coverage ratio, as well as affirmative and negative covenants. Among the negative covenants are restrictions on our ability to borrow money, including restrictions on (a) the incurrence of more than $15 million of new debt, including capital leases (subject to certain exceptions), (b) the incurrence of more than $7.5 million in letters of credit, (c) the incurrence of more than $50 to $75 million of new debt, depending on our leverage ratio, to finance future acquisitions or (d) the assumption of more than $15 million of new debt in connection with acquisitions.

The Senior Credit Agreement provides that we must maintain hedge agreements so that at least 50% of the aggregate principal amount of the senior secured credit facility is subject to fixed interest rate protection for a period of not less than 2.5 years from the initial funding date of October 11, 2007. On the initial funding date, we entered into an interest rate swap agreement to pay a fixed rate of interest (4.85% per annum) and receive a floating rate interest payment (based on three month LIBOR) on an equivalent amount. The notional amount of the swap agreement was $69 million during the quarter ended June 30, 2009 and it amortizes each quarter down to $11 million on June 30, 2010. In addition, on October 11, 2007 we entered into an interest rate cap agreement to limit the maximum interest rate on a portion of our senior secured term loan to 6.5% per annum. The amount of principal protected by this agreement was $30.8 million during the quarter ended June 30, 2009 and increases up to $74.3 million on June 30, 2010. Both the interest rate swap and cap expire on September 30, 2010.

Obligations and commitments. The following table summarizes our contractual payment obligations and commitments as of June 30, 2009 (in thousands):

	Payment Obligation by Year
	2009		2010		2011		2012		2013		Thereafter		Total
Senior credit agreement:
Scheduled principal payments	$	3,618	$	15,197	$	18,237	$	72,948	$	—	$	—	$	110,000
Estimated interest and fees		2,617		3,558		2,497		1,395		—		—		10,067
Operating leases		3,332		6,003		4,908		4,625		4,502		1,369		24,739
Software licenses		292		97		—		—		—		—		389
Total	$	9,859	$	24,855	$	25,642	$	78,968	$	4,502	$	1,369	$	145,195

Obligations under our Senior Credit Agreement represent the future minimum principal debt payments due under the senior secured term loan. Estimated interest and fees represent interest and fees expected to be incurred under the Senior Credit Agreement based on known rates as of June 30, 2009 (see Note 6 to the financial statements).

We lease our facilities under operating lease agreements that expire at various dates through 2015. Over 40% of our operating lease commitments are related to our corporate headquarters lease, which extends through December 2013 and has escalating rent payments from 2009 to 2013.

Software license obligations represent purchase commitments for software licenses made in the ordinary course of business.

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In addition, due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at June 30, 2009, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $11.3 million of unrecognized tax benefits have been excluded from the contractual payment obligations table above.

In 2003, we announced that our Board of Directors authorized a stock repurchase program of up to 4 million shares of our common stock. In 2005, we announced that our Board of Directors increased the size of the stock repurchase program by an additional 4 million shares, for a total program size of up to 8 million shares. In 2006, we announced that our Board of Directors increased the size of the stock repurchase program by an additional 4 million shares, for a total program size of up to 12 million shares. Repurchases may be made from time to time on the open market at prevailing market prices or in privately negotiated transactions. In January 2008, we adopted a 10b5-1 plan that provides for quarterly purchases of our common stock in open market transactions. Depending on market conditions and other factors, purchases by our agent under this program may be commenced or suspended at any time, or from time to time, without prior notice to us. During the six months ended June 30, 2009, we repurchased 1,096,937 shares of our common stock for an aggregate of approximately $15.0 million at an average price of $13.65 per share. As of June 30, 2009, we have repurchased a total of 10,346,046 shares of our common stock under this program, for an aggregate of $205.4 million at an average price of $19.85 per share. Under the terms of the Senior Credit Agreement, we are restricted from repurchasing our common stock for an aggregate purchase price that exceeds the sum of $25 million plus 50% of the aggregate amount of our consolidated net income, as defined in our Senior Credit Agreement, during the period from the effective date of the facility through the most recent quarter end for which we have filed quarterly financial statements. As of June 30, 2009, we can repurchase up to $26.0 million of our common stock under our Senior Credit Agreement. We intend to repurchase shares during the remainder of 2009.

We believe that our cash and cash equivalents balances, accounts receivable balances, revolving credit balances and our ongoing cash flow from operations will be sufficient to satisfy our cash requirements, including our capital expenditures, debt repayment obligations and stock repurchases, if any, for at least the next 12 months. During the first three months of 2009, we made voluntary prepayments on our senior secured term loan of $15 million. We made no voluntary prepayments on our senior secured term loan during the second quarter of 2009. During the first six months of 2009, we repurchased approximately $15 million of our common stock. Our cash requirements may increase for reasons we do not currently foresee or we may make acquisitions as part of our growth strategy that increase our cash requirements. We may elect to raise funds for these purposes or to reduce our cost of capital through capital markets transactions or debt or private equity transactions as appropriate. We intend to continue to invest our cash in excess of current operating and capital requirements in interest-bearing, investment-grade securities.

Off-Balance Sheet Arrangements

As of June 30, 2009, we did not have any material off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risk exposures are related to our cash and cash equivalents and senior secured term loan. We currently invest our excess cash in highly liquid short-term investments such as money market funds. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and the interest expense incurred on our senior secured term loan and therefore impact our cash flows and results of operations.

We are exposed to changes in interest rates primarily from our money market funds and from our borrowings under our variable rate senior secured term loan. Our Senior Credit Agreement provides that we must maintain hedge agreements so that at least 50% of the aggregate principal amount of the senior secured term loan is subject to fixed interest rate protection for a period of not less than 2.5 years from the date of the initial funding of the loan.

A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would materially affect our interest expense. Based on our outstanding senior secured term loan balance at June 30, 2009 and taking into consideration our interest rate swap and cap, our interest expense would increase on a pre-tax basis by approximately $619,000 during the next 12 months if there were a 100 basis point adverse move in the interest rate yield curve.

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 investments at June 30, 2009. Changes in interest rates over time will, however, affect our interest income.

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We utilize foreign currency forward and zero-cost collar contracts to hedge foreign currency market exposures of underlying assets, liabilities and expenses. We bill certain international customers in Euros, British Pounds, Australian Dollars, Chinese Renminbi and Japanese Yen. We also keep working funds necessary to facilitate the short-term operations of our subsidiaries in the local currencies in which they do business. Our objective is to reduce the risk to earnings and cash flows associated with changes in currency exchange rates. We do not use foreign currency contracts for speculative or trading purposes.

Notional and fair values of our hedging positions at June 30, 2009 and 2008 are presented in the table below (in thousands):

	June 30, 2009					June 30, 2008
	Notional Value Local Currency	Notional Value USD		Fair Value USD		Notional Value Local Currency	Notional Value USD		Fair Value USD
Euro	6,500	$	8,994	$	8,861	2,850	$	4,325	$	4,171
British Pound	2,000		3,284		3,277	—		—		—
Israeli Shekel	7,500		1,801		1,906	—		—		—
Total		$	14,079	$	14,044		$	4,325	$	4,171

The $4.7 million notional increase in our Euro hedged position at June 30, 2009 compared to June 30, 2008 was primarily due to the increase in Euro denominated accounts receivable in 2009 and a reduction in Euro denominated acquisition related obligations from 2008. All of the Euro hedging contracts in place as of June 30, 2009 will be settled before October 31, 2009. For the six months ended June 30, 2009, less than 15% of our total billings were denominated in the Euro. We do not expect Euro billings to represent more than 20% of our total billings during 2009.

The $3.3 million notional increase in our British Pound hedge position at June 30, 2009 compared to June 30, 2008 was primarily due to a reduction in British Pound denominated acquisition related obligations from 2008. All of the British Pound hedging contracts in place as of June 30, 2009 will be settled before September 30, 2009. For the six months ended June 30, 2009, less than 15% of our total billings were denominated in the British Pound. We do not expect British Pound billings to represent more than 15% of our total billings during 2009.

We began hedging our Israeli Shekel denominated operating expenses during the third quarter of 2008 primarily due to our increased Israeli Shekel operating expenses and increased volatility of the Israeli Shekel. All of the Israeli Shekel hedging contracts in place as of June 30, 2009 will be settled before December 31, 2009.

Given our foreign exchange position at June 30, 2009, a 10% change in foreign exchange rates upon which these foreign exchange contracts are based would result in exchange gains and losses. In all material aspects, these exchange gains and losses would be fully offset by exchange gains and losses on the underlying net monetary exposures for which the contracts are designated as hedges. We do not expect material exchange rate gains and losses from un-hedged foreign currency exposures.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to ensure that the information required to be disclosed in the reports we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (b) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our Chief Executive Officer and Chief Financial Officer evaluated our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective as of the end of the period covered by this Quarterly Report.

Changes In Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses, during the period covered by this Quarterly Report.

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Part II - Other Information

Item 1. Legal Proceedings

We are involved in various legal actions in the normal course of business. Based on current information, including consultation with our lawyers, we believe we have adequately reserved for any ultimate liability that may result from these actions such that any liability would not materially affect our consolidated financial position, results of operations or cash flows. Our evaluation of the likely impact of these actions could change in the future and unfavorable outcomes and/or defense costs, depending upon the amount and timing, could have a material adverse effect on our results of operations or cash flows in a future period.

Item 1A. Risk Factors

In addition to the other information in this report, including the important information in “Forward-Looking Statements,” you should carefully consider the following information in evaluating our business and our prospects. The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our company and our industry. In addition to these risks, our business may be subject to risks currently unknown to us. If any of these or other risks actually occur, our business may be adversely affected, the trading price of our common stock could decline, and you may lose all or part of your investment in Websense.

We have marked with an asterisk (*) those risk factors that reflect material changes from the risk factors included in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2009.

Recent volatility in the global economy may adversely impact our business, results of operations, financial condition or liquidity.*

The global economy has been experiencing a period of unprecedented volatility characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from governments and regulatory agencies worldwide. We believe that financial distress and associated headcount reductions implemented by certain of our end user customers have caused these customers to choose shorter contract durations and/or reduce the number of seats under subscription and in some cases, have caused customers not to renew contracts at all, reducing our cash flow and negatively impacting the revenue we will recognize in subsequent periods under these contracts. These trends are expected to continue to negatively impact our contract renewals, customer seats, cash flow and revenue until the recession ends and in the case of the number of customer seats, until job creation begins. Credit markets may also adversely affect our resellers through whom our distributors distribute products and limit the credit value-added resellers may extend to their customers. The volatility of currency exchange rates can also significantly affect sales of our products denominated in foreign currencies. In addition, recent events in the global financial markets may make it difficult for us to access the credit markets or to obtain financing or refinancing, if needed, on satisfactory terms or at all.

Our future success depends on our ability to sell new, renewal and upgraded Web filtering and Web security subscriptions.

Substantially all of our revenue for the quarter ended June 30, 2009 was derived from new and renewal subscriptions to our Web filtering and Web security products, and we expect that a significant majority of our sales for 2009 will continue to be derived from our Web filtering and Web security products. We expect sales of our Web Security Gateway (“WSG”), data loss prevention (“DLP”) products, hosted security services, our appliance product and other products under development to comprise a relatively small portion of our overall sales in 2009. If our Web filtering and Web security products fail to meet the needs of our existing and target customers, or if they do not compare favorably in price, features and performance to competing products, our operating results and our business will be significantly impaired. If we cannot sufficiently increase our customer base with the addition of new customers, particularly in the small to medium sized business (“SMB”) segment, increase seats under subscriptions from existing customers or renew a sufficient number of SurfControl’s Web filtering customers or migrate them to our Web filtering product, we will not be able to grow our business to meet expectations.

Subscriptions for our Web filtering and security products typically have durations of 12, 24 or 36 months. Our revenue depends upon maintaining a high rate of sales of renewal subscriptions and upon adding additional seats or product offerings to existing customers. Our customers have no obligation to renew their subscriptions upon expiration, and if they renew, they may elect to renew for a shorter duration than the previous subscription period. As a result of macroeconomic conditions, our Websense and SurfControl customers may elect to renew subscriptions for shorter durations and may not add seats or product offerings due to contractions of work forces of their respective organizations. This may require increasingly costly sales efforts targeting senior management and other management personnel associated with our customers’ Internet and security infrastructure. We may not be able to maintain or continue to generate increasing revenue from existing customers.

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Failure of our security products, including our DLP products, hosted security solutions and our new appliance platform, to achieve more widespread market acceptance will seriously harm our business.

Our future financial performance depends on our ability to diversify our offerings by successfully developing, introducing and gaining customer acceptance of our new products and services, particularly our security offerings. We now sell the Websense Data Security Suite, our DLP offering for the data security market, Websense Hosted Web Security and Websense Hosted Email Security, our hosted security services, and Websense Email Security, our email filtering solution. In addition, we recently released our next generation Web content gateway to address emerging Web 2.0 threats, Websense WSG, as well as our V10000 appliance pre-loaded with our software. We continue to develop and release products in accordance with our announced product roadmap. We may not be successful in achieving market acceptance of these or any new products that we develop. Moreover, our recent increased emphasis on the development, marketing and sale of our security offerings and DLP products could distract us from sales of our core Web filtering and Web security offerings, negatively impacting our overall sales. Any failure or delay in diversifying our existing offerings, or diversification at the detriment to our core Web filtering and Web security offerings, could harm our business, results of operations and financial condition and our growth.

The launch of our V10000 appliance exposes us to risks inherent with the sale of hardware, to which we were not previously exposed as a software company.

With the launch of our V10000 appliance in April 2009, we are now selling a product that is hardware-based and not solely software-based. Our V10000 appliance is manufactured by a third-party contract manufacturer, and a third-party logistics company is providing logistical services, including product configuration and shipping. Our ability to deliver the V10000 appliance to our customers could be delayed if we fail to effectively manage our third-party relationships or if our contract manufacturer or logistics provider experience delays, disruptions or quality control problems in manufacturing, configuring or shipping the appliance. If our third-party providers fail for any reason to manufacture and deliver the V10000 appliance with acceptable quality, in the required volumes, and in a cost-effective and timely manner, it could be costly to us, as well as disruptive to product shipments. In addition, supply disruptions or cost increases could increase our cost of goods sold and negatively impact our financial performance. Our V10000 appliance platform may also face greater obsolescence risks than our pure software products.

Our revenue is derived almost entirely from sales through indirect channels and we depend upon these channels to create demand for our products.*

Our revenue has been derived almost entirely from sales through indirect channels, including value-added resellers, distributors that sell our products to end-users, providers of managed Internet services and other resellers. Although we rely upon these indirect channels of distribution, we also depend upon our internal sales force to generate sales leads and sell products through the reseller network. Ingram Micro, one of our broad-line distributors in North America, accounted for approximately 29% of our revenue during the quarter ended June 30, 2009. Should Ingram Micro experience financial difficulties, difficulties in collecting their accounts receivable or otherwise delay or prevent our collection of accounts receivable from them, our revenue and cash flow would be adversely affected. Also, should our resellers be subject to credit limits or have financial difficulties that limit financing terms available to them, our revenue and cash flow could be significantly adversely affected. Our indirect sales model involves a number of additional risks, including:

• our resellers and distributors, including Ingram Micro, are not subject to minimum sales requirements or any obligation to market our products to their customers;

• we cannot control the level of effort our resellers and distributors expend or the extent to which any of them will be successful in marketing and selling our products;

• we cannot assure that our channel partners will market and sell our newer product offerings such as our security-oriented offerings, our WSG, our DLP offerings or our hosted security services;

• our reseller and distributor agreements are generally nonexclusive and may be terminated at any time without cause; and

• our resellers and distributors frequently market and distribute competing products and may, from time to time, place greater emphasis on the sale of these products due to pricing, promotions and other terms offered by our competitors.

Our ability to meaningfully increase the amount of our products sold through our sales channels also depends on our ability to adequately and efficiently support these channel partners with, among other things, appropriate financial incentives to encourage pre-sales investment and sales tools, such as sales training, technical training and product materials needed to support their customers and prospects. The diversity and sophistication of our product offerings have required us to focus on additional sales and technical training, and we are making increased investments in this area. Additionally, we are continually evaluating the changes to our internal ordering and partner management systems in order to effectively execute our two-tier distribution strategy. Any failure to properly and efficiently support our sales channels will result in lost sales opportunities.

We face increasing competition from much larger software and hardware companies, which places pressure on our pricing and which could prevent us from increasing revenue or returning to profitability. In addition, as we increase our emphasis on our security-oriented products, we face competition from better-established security companies that have significantly greater resources.

The market for our products is intensely competitive and is likely to become even more so in the future. Our current principal Web filtering competitors frequently offer their products at a significantly lower price than our products, which has resulted in pricing pressures on sales of our products and potentially could result in the commoditization of products in our space. 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 Web filtering or other competitive products with their current products with no price increase to these current products. Increased competition may cause price reductions or a loss of market share, either of which could have a material adverse effect on our business, results of operations and financial condition. If we are unable to maintain the current

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pricing on sales of our products or increase our pricing in the future, our results of operations could be negatively impacted. Even if our products provide greater functionality and are more effective than certain other competitive products, potential customers might accept this limited functionality. In addition, our own indirect sales channels may decide to develop or sell competing products instead of our products. Pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our products to achieve or maintain widespread market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.

Our current principal competitors include:

• companies offering Web filtering and Web security solutions, such as Microsoft, Symantec/Message Labs, McAfee, Cisco Systems, Juniper Networks, Trend Micro, Google, BrightCloud, ScanSafe, Blue Coat Systems, Aladdin, Finjan, FaceTime, St. Bernard Software, Marshal8e6, Clearswift, Sophos, Barracuda, Digital Arts and Computer Associates;

• companies integrating Web filtering into specialized security appliances, such as Blue Coat Systems, Cisco Systems, McAfee, WatchGuard, Check Point Software, St. Bernard Software, Barracuda, Juniper Networks, Trend Micro, SonicWALL, Sophos, Network Box and Marshal8e6;

• companies offering DLP solutions, such as Symantec, Verdasys, Vericept, EMC, McAfee, IBM, Trend Micro, Proofpoint, Palisade Systems, Computer Associates, Raytheon, Intrusion, Fidelis, GTB Technologies, Workshare, Check Point Software and Code Green Networks;

• companies offering messaging security, such as McAfee, Symantec/Message Labs, Google, Cisco Systems, Barracuda, SonicWALL, Trend Micro, Axway/Tumbleweed, MX Logic (acquisition by McAfee pending), Sophos, Microsoft, Proofpoint, Clearswift and BorderWare;

• companies offering on-demand email and Web security services, such as Google, Symantec/Message Labs, McAfee, MX Logic (acquisition by McAfee pending), Webroot, St. Bernard Software, Purewire, BrightCloud, Zscaler, Trend Micro and ScanSafe;

• companies offering desktop security solutions such as Check Point Software, Cisco Systems, McAfee, Microsoft, Symantec, Computer Associates, Sophos, Webroot, IBM and Trend Micro; and

• companies offering Web gateway solutions such as Microsoft, Blue Coat Systems, Cisco Systems, Trend Micro, Check Point Software, McAfee and Juniper Networks.

As we develop and market our products with an increasing security-oriented emphasis, we also face growing competition from security solutions providers. Many of our competitors within the Web security market, such as Symantec, McAfee, Trend Micro, Cisco Systems, Google and Microsoft enjoy substantial competitive advantages, including:

• 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.

As a result, we may be unable to gain sufficient traction as a provider of Web security solutions, and our competitors may be able to respond more quickly and effectively than we can to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, marketing, promotion and sale of their products than we can. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the functionality and market acceptance of their products. In addition, our competitors may be able to replicate our products, make more attractive offers to existing and potential employees and strategic partners, develop new products or enhance existing products and services more quickly. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition, many of our competitors made recent acquisitions in some of our product areas, and, we expect competition to increase as a result of this industry consolidation. Through an acquisition, a competitor could bundle separate products to include functions that are currently provided primarily by our Web and data security solutions and sell the combined product at a lower cost than our stand-alone solutions. For all of the foregoing reasons, we may not be able to compete successfully against our current and future competitors.

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The covenants in our senior secured credit facility restrict our financial and operational flexibility, including our ability to complete additional acquisitions and invest in new business opportunities.

In connection with our acquisition of SurfControl in October 2007, we entered into an amended and restated senior secured credit facility to provide financing for a substantial portion of the acquisition purchase price. Our senior secured credit facility contains covenants that restrict, among other things, our ability to borrow money, make particular types of investments, including investments in our subsidiaries, make other restricted payments, pay down subordinated debt, swap or sell assets, merge or consolidate or make acquisitions. An event of default under our senior secured credit facility could allow the lenders to declare all amounts outstanding with respect to the senior secured credit facility to be immediately due and payable. As collateral for the loan, we pledged substantially all of our consolidated assets and the stock of some of our subsidiaries (subject to limitations with respect to foreign subsidiaries) to secure the debt under our senior secured credit facility. If the amounts outstanding under the senior secured credit facility were accelerated, the lenders could proceed against those consolidated assets and the stock of our subsidiaries. Any event of default, therefore, could have a material adverse effect on our business. Our senior secured credit facility also requires us to maintain specified financial ratios. Our ability to meet these financial ratios can be affected by events beyond our control, and we cannot assure that we will meet those ratios.

The amount of our debt outstanding may prevent us from taking actions we would otherwise consider in our best interest.

In October 2007, we borrowed $210 million under the senior credit agreement and $110 million remained outstanding as of June 30, 2009. As a result, we are incurring interest expense for the amounts we borrowed under the senior secured term loan, and our income from our cash, cash equivalents and marketable securities has declined as we used a significant portion of our cash and marketable securities to fund a portion of the acquisition cost. This debt and the limitations our senior secured credit facility impose on us could have important consequences, including:

• it may be difficult for us to satisfy our obligations under the senior secured credit facility;

• we will have to use much of our cash flow for scheduled debt service rather than for potential investments;

• we may be less able to obtain other debt financing in the future;

• we could be less able to take advantage of significant business opportunities, including acquisitions or divestitures, as a result of debt covenants;

• our vulnerability to general adverse economic and industry conditions could be increased; and

• we could be at a competitive disadvantage to competitors with less debt.

We have experienced declining growth rates, particularly for Web filtering sales to large enterprises in North America and Western Europe.

Our growth plans for new sales in North America and Western Europe are largely dependent on our ability to increase sales in the SMB segment and maintain our subscription base in the large enterprise market through subscription renewals and product upgrades. We need to increase sales through our two-tier distribution channel in North America and in Western Europe. We sell products specifically targeted at the SMB segment, Websense Express and Websense Hosted Security, though we cannot assure that these products will ultimately increase sales to the SMB segment. Numerous competitors target the SMB segment for Web filtering

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and security sales, many of whom are different competitors from our primary competitors in the large enterprise market segment. If Websense Express and Websense Hosted Security do not meet our customers’ expectations in the SMB segment or if we fail to compete effectively for volume business through our two-tier distribution model, our financial results and growth will be negatively affected.

Our international operations involve risks that could increase our expenses, adversely affect our operating results and require increased time and attention of our management.*

We have significant operations outside of the United States, including research and development, sales and customer support. We have engineering operations in Reading, England; Beijing, China and Ra’anana, Israel.

We plan to continue to expand our international operations, but such expansion is contingent upon the financial performance of our existing international operations as well as our identification of growth opportunities. Our international operations are subject to risks in addition to those faced by our domestic operations, including:

• difficulties associated with managing a distributed organization located on multiple continents in greatly varying time zones;

• potential loss of proprietary information due to misappropriation or laws that may be less protective of our intellectual property rights;

• requirements of foreign laws and other governmental controls, including trade and labor restrictions and related laws that reduce the flexibility of our business operations;

• political unrest, war or terrorism, particularly in areas in which we have facilities;

• difficulties in staffing, managing, and operating our international operations, including difficulties related to administering our stock plans in some foreign countries;

• difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations;

• seasonal reductions in business activity in the summer months in Europe and in other periods in other countries;

• restrictions on our ability to repatriate cash from our international subsidiaries or to exchange cash in international subsidiaries into cash available for use in the United States;

• costs and delays associated with developing software in multiple languages; and

• currency exchange risks.

A significant portion of our foreign subsidiaries’ operating expenses are incurred in foreign currencies so if the U.S. dollar weakens, our consolidated operating expenses would increase. Should the U.S. dollar strengthen, our products may become more expensive for our international customers with subscription contracts denominated in U.S. dollars, and as a result, our results of operations and net cash flows from international operations may be adversely affected, especially if the trend continues of international sales growing as a percentage of our total sales. Changes in currency rates also impact our future revenue under subscription contracts that are not denominated in U.S. dollars. Our revenue and deferred revenue for these currencies are recorded in U.S. dollars when the subscription is signed based upon currency exchange rates in effect on the last day of the previous month before the subscription agreement is signed. During the first six months of 2009, due to the strengthening of the U.S. dollar, we have experienced a reduction in the subscription amounts as recorded in U.S. dollars relative to the dollar amount that the same subscriptions would have yielded based upon currency exchanges rates that prevailed during the first six months of 2008. As a result, the strengthening of the U.S. dollar for current sales has reduced our future revenue from these contracts, even though these foreign currencies may strengthen during the term of these contracts.

Sales to customers outside the United States have accounted for a significant portion of our revenue, 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 50% of our total revenue generated during the quarter ended June 30, 2009 compared with

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41% of our total revenue during the quarter ended June 30, 2008. As a key component of our business strategy to generate new business sales, we intend to continue to expand our international sales, but success cannot be assured. In addition to the risks associated with our domestic sales, our international sales are subject to the following risks:

• our ability to adapt to sales and marketing practices and customer requirements in different cultures;

• our ability to successfully localize software products for a significant number of international markets;

• the significant presence of some of our competitors in some international markets;

• laws and business practices favoring local competitors;

• dependence on foreign distributors and their sales channels;

• longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable;

• compliance with multiple, conflicting and changing governmental laws and regulations, including tax laws and regulations and consumer protection and privacy laws; and

• regional economic and political conditions, including adverse economic conditions in emerging markets with significant growth potential.

These factors could have a material adverse effect on our international sales. Any reduction in international sales, or our failure to further develop our international distribution channels, could have a material adverse effect on our business, results of operations and financial condition.

Some of our international revenue is denominated in U.S. dollars. In these markets, fluctuations in the value of the U.S. dollar and foreign currencies may make our products more expensive for international customers, which could harm our business. We also currently bill certain international customers in Euros, British Pounds, Australian Dollars, Chinese Renminbi and Japanese Yen. This increases our risks associated with fluctuations in currency exchange rates since we cannot be assured of receiving the same U.S. dollar equivalent as when we bill exclusively in U.S. dollars. We engage in currency hedging activities with the intent of limiting the risk of exchange rate fluctuations, but our foreign exchange hedging activities also involve inherent risks that could result in an unforeseen loss. If we fail to properly forecast rate fluctuations these activities could have a negative impact.

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 our products are designed to operate with a variety of network hardware and software platforms, we will need to continuously modify and enhance our products 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 introducing them to the market in a timely fashion. 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.

Because our products primarily manage access to URLs and executable files included in our databases, if our databases do not contain a meaningful portion of relevant content, the effectiveness of our Web filtering products will be significantly diminished. Any failure of our databases to keep pace with the rapid growth and technological change of the Internet, such as the increasing amount of multimedia content on the Internet that is not easily classified, will impair the market acceptance of our products.

We rely upon a combination of automated filtering technology and human review to categorize URLs and executable files in our proprietary databases. Our customers may not agree with our determinations that particular URLs and executable files should be included or not included in specific categories of our databases. In addition, it is possible that our filtering processes may place objectionable or security risk material in categories that are generally unrestricted by our users’ Internet and computer access policies, which could result in such material not being blocked from the network. Any errors in categorization could result in customer dissatisfaction and harm our reputation. Any failure to effectively categorize and filter URLs and executable files according to our customers’ expectations could impair the growth of our business. Our databases and database technologies may not be able to keep pace with the growth in the number of URLs and executable files, especially the growing amount of content utilizing foreign languages and the increasing sophistication of malicious code and the delivery mechanisms associated with spyware, phishing and other hazards associated with the Internet. The success of our dynamic Web categorization capabilities may be critical to our customers’ long term acceptance of our products.

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We may spend significant time and money on research and development to design and develop our DLP products, our hosted security services and our content gateway products. If these products fail to achieve broad market acceptance in our target markets, we may be unable to generate significant revenue from our research and development efforts. As a result, our business, results of operations and financial condition would be adversely impacted.

If we fail to maintain adequate operations infrastructure, we may experience disruptions of our hosted services.

Any disruption to our technology infrastructure or the Internet could harm our operations and our reputation among our customers. Our technology and network infrastructure is extensive and complex, and could result in inefficiencies or operational failures. These potential inefficiencies or operational failures could diminish the quality of our products, services, and user experience, resulting in damage to our reputation and loss of current and potential subscribers, and could harm our operating results and financial condition. Any disruption to our computer systems could adversely impact the performance of our hosted service offerings, our customer service, our delivery of products or our operations and result in increased costs and lost opportunities for business.

Failure of our products to work properly or misuse of our products could impact sales, increase costs, and create risks of potential negative publicity and legal liability.

Our products are complex, are deployed in a wide variety of network environments and manage content in a dramatically changing Web 2.0 world. Our products may have errors or defects that users identify after deployment, which could harm our reputation and our business. In addition, 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 our products, and we expect to find such errors in the future. Because customers rely on our products to manage employee behavior to protect against security risks and prevent the loss of sensitive data, any significant defects or errors in our products may result in negative publicity or legal claims. For example, an actual or perceived breach of network or computer security at one of our customers, regardless of whether the breach is attributable to our products, could adversely affect the market’s perception of our security products. Moreover, parties whose Web sites or executable files are placed in security-risk categories or other categories with negative connotations may seek redress against us for falsely labeling them or for interfering with their business. 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 or legal problems.

Our products may also be misused or abused by customers or non-customer third parties who obtain access to our products. These situations may arise where an organization uses our products in a manner that impacts their end users’ or employees’ privacy or where our products are misappropriated to censor private access to the Internet. Any of these situations could result in negative press coverage and negatively affect our reputation.

We face risks related to customer outsourcing to system integrators.

Some of our customers have outsourced the management of their information technology departments to large system integrators. If this trend continues, our established customer relationships could be disrupted and our products could be displaced by alternative system and network protection solutions offered by system integrators. Significant product displacements could impact our revenue and have a material adverse effect on our business.

Other vendors may include products similar to ours in their hardware or software and render our products obsolete.

In the future, vendors of hardware and of operating system software or other software may continue to enhance their products or bundle separate products to include functions that are currently provided primarily by network security software. If network security functions become standard features of computer hardware or of operating system software or other software, our products may become obsolete and unmarketable, particularly if the quality of these network security features is comparable to that of our products. Furthermore, even if the network security and/or management functions provided as standard features by hardware providers or operating systems or other software is more limited than that of our products, our customers might accept this limited functionality in lieu of purchasing additional software. Sales of our products would suffer materially if we were then unable to develop new Web filtering, security and DLP products to further enhance operating systems or other software and to replace any obsolete products.

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Our worldwide income tax provisions and other tax accruals may be insufficient if any taxing authorities assume taxing positions that are contrary to our positions.*

Significant judgment is required in determining our worldwide provision for income taxes and for our accruals for state, federal and international taxes together with transaction taxes such as sales tax, VAT and GST. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of intercompany arrangements to share revenue and costs. In such arrangements there are uncertainties about the amount and manner of such sharing, which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although we believe that our approach to determining the amount of such arrangements is consistent with prevailing legislative interpretation, no assurance can be given that the final tax authority review of these matters will agree with our historical income tax provisions and other tax accruals. Such differences could have a material effect on our income tax provisions or benefits, or other tax accruals, in the period in which such determination is made, and consequently, on our results of operations for such period.

From time to time, we are also audited by various state, federal and tax authorities of other countries in which we operate. Generally, the tax years 2005 through 2008 could be subject to examination by U.S. federal and most state tax authorities. In significant foreign jurisdictions, tax years 2002 through 2008 could be subject to examination by the respective tax authorities. We are currently under examination by the respective tax authorities for tax years 2005 to 2007 in the United States, for 2002 to 2006 in the United Kingdom, for 2005 to 2007 in France, and by other tax authorities in other jurisdictions. Our audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit and any appeals process. As each audit progresses and is ultimately concluded, adjustments, if any, are appropriately recorded in our financial statements from time to time in light of prevailing facts based on our and the taxing authority’s respective positions on any disputed matters. We provide for potential tax exposures by accruing for uncertain tax positions based on judgment and estimates including historical audit activity. If the reserves are insufficient or we are not able to establish a reserve under GAAP prior to completion or during the progression of any audits, there could be an adverse impact on our financial position and results of operations when an audit assessment is made. In addition, our external costs of contesting and settling any dispute with the tax authorities could be substantial and adversely impact our financial position and results of operation.

In connection with our current audit examination by the U.S. federal tax authorities, several items are under review, including the cost sharing buy-in arrangement between our U.S. parent company and our Irish subsidiary. The U.S. federal tax authorities have identified cost sharing buy-in arrangements between domestic and international subsidiaries as a potential area for audit exposure for many companies. While we believe our cost sharing buy-in arrangement complies with all applicable laws and regulations, we cannot assure that U.S. federal tax authorities will not challenge this structure or propose an assessment against us. If U.S. federal tax authorities were to issue an assessment or other unfavorable ruling, we expect to continue to vigorously defend our positions, including as necessary and appropriate, utilizing our rights to appeal as well as other legal remedies. Because the audit examination by the U.S. federal tax authorities is ongoing and a proposed assessment has not been issued pertaining to our cost share buy-in arrangement with our Irish subsidiary, it is not possible to estimate the potential impact on our financial statements or cash flows from this uncertainty at this time.

Any failure to protect our proprietary technology would negatively impact our business.

Intellectual property is critical to our success, and we rely upon patent, 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 brands. We rely on trade secrets to protect technology where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, collaborators and consultants to enter into confidentiality agreements, we cannot assure that these agreements will not be breached or that we will have adequate remedies for any breach. We may not be able to adequately protect our trade secrets or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information.

We have registered our Websense and Websense Enterprise trademarks in several countries and have registrations for the Websense trademark pending in several other countries. Effective trademark protection may not be available in every country where our products are available. Furthermore, any of our trademarks may be challenged by others or invalidated through administrative process or litigation.

We currently have thirteen patents issued in the United States and 23 patents issued internationally, and we may be unable to obtain further patent protection in the future. We have other pending patent applications in the United States and in other countries. We cannot ensure that:

• we were the first to make the inventions covered by each of our pending patent applications;

• we were the first to file patent applications for these inventions;

• any of our pending patent applications are not obvious or anticipated such that they will not result in issued patents;

• others will not independently develop similar or alternative technologies or duplicate any of our technologies;

• any patents issued to us will provide us with any competitive advantages or will not be challenged by third parties;

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• we will develop additional proprietary technologies that are patentable; or

• the patents of others will not have a negative effect on our ability to do business.

Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and can change over time. 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 U.S. laws, and mechanisms for enforcement of intellectual property rights may be inadequate. As a result our means of protecting our proprietary technology and brands may not be adequate. Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property, including the misappropriation or misuse of the content of our proprietary databases of URLs and executable files, and our ability to police that misappropriation or infringement is uncertain, particularly in countries outside of the United States. Any such infringement or misappropriation could have a material adverse effect on our business, results of operations and financial condition.

Third parties claiming that we infringe their proprietary rights could cause us to incur significant legal expenses that reduce our operating margins and/or prevent us from selling our products.

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 we expand our product offerings in the data loss and security area where larger companies with large patent portfolios compete, the possibility of an intellectual property claim against us grows. We may receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights and trademarks. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are not successful in defending such claims, we could be required to stop selling or redesign our products, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our customers. Such arrangements may cause operating margins to decline.

Because we recognize revenue from subscriptions for our products ratably over the term of the subscription, downturns in sales may not be immediately reflected in our revenue.

Substantially all of our revenue comes from the sale of subscriptions to our products, including our hosted services. Upon execution of a subscription agreement, we invoice our customers for the full term of the subscription agreement. We then recognize revenue from customers daily over the terms of their subscription agreements, which typically have durations of 12, 24 or 36 months. As a result, a majority of the revenue we report in each quarter is derived from deferred revenue from subscription agreements entered into and paid for during previous quarters. Because of this financial model, the revenue we report in any quarter or series of quarters may mask significant downturns in sales and the market acceptance of our products, before these downturns are reflected by declining revenues.

Acquired companies or technologies can be difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.

In October 2007 we acquired SurfControl and, as a result of the acquisition, Websense reported losses from operations under generally accepted accounting principles (“GAAP”) from the fourth quarter of 2007 through the fourth quarter of 2008 after more than five years of reporting income from operations under GAAP. Given our subscription model and the elimination of many of the non-recurring acquisition related expenses, we expect to operate at a profit under GAAP during 2009. Although we expect to continue to compete effectively for subscription renewals from the SurfControl customers when their contracts are up for renewal, we face substantial competition and may not retain as high a percentage of the SurfControl customer base as we expect, which could negatively impact our results of operations.

Acquisitions involve numerous risks, including:

• difficulties in integrating operations, technologies, services and personnel of the acquired company;

• potential loss of customers and original equipment manufacturing relationships of the acquired company;

• diversion of financial and management resources from existing operations and core businesses;

• risk of entering new markets;

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• potential loss of key employees of the acquired company;

• integrating personnel with diverse business and cultural backgrounds;

• preserving the development, distribution, marketing and other important relationships of the companies;

• assumption of liabilities of the acquired company, including debt and litigation; and

• inability to generate sufficient revenue from newly acquired products and/or cost savings needed to offset acquisition related costs.

Acquisitions may also cause us to:

• issue equity securities that would dilute our current stockholders’ percentage ownership;

• assume certain liabilities;

• incur additional debt, such as the debt we incurred to partially fund the acquisition of SurfControl;

• make large and immediate one-time write-offs for restructuring and other related expenses;

• become subject to intellectual property or other litigation; and

• create goodwill and other intangible assets that could result in significant impairment charges and/or amortization expense.

We may acquire additional companies, services and technologies in the future as part of our efforts to expand and diversify our business. Although we review the records of companies or businesses we are interested in acquiring, even an in-depth review may not reveal existing or potential problems or permit us to become familiar enough with a business to assess fully its capabilities and deficiencies. Integration of acquired companies may disrupt or slow the momentum of the activities of our business. As a result, if we fail to properly evaluate, execute and integrate future acquisitions, our business and prospects may be seriously harmed.

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 primarily as the result of fluctuations in our billings, operating expenses and tax provisions. Although a significant portion of our revenue in any quarter comes from previously deferred revenue, a meaningful portion of our revenue in any quarter depends on the number, size and length of subscriptions to our products that are sold in that quarter. The unpredictability of quarterly fluctuations is increased by the fact that a significant portion of our quarterly sales have historically been generated during the last month of each fiscal quarter, with many of the largest enterprise customers purchasing subscriptions to our products nearer to the end of the last month of each quarter.

We expect that our operating expenses will increase in the future as we expand our selling and marketing activities, increase our research and development efforts and potentially hire additional personnel which could impact our margins. 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 quarterly report:

• changes in currency exchange rates impacting our international operating expenses;

• timing of marketing expenses for activities such as trade shows and advertising campaigns;

• quarterly variations in general and administrative expenses, such as recruiting expenses and professional services fees;

• increased research and development costs prior to new or enhanced product launches;

• timing of expenses associated with commissions paid on sales of subscriptions to our products; and

• amortization of acquired intangible assets associated with our PortAuthority and SurfControl acquisitions in 2007.

Consequently, our results of operations may not meet the expectations of current or potential investors. If this occurs, the price of our common stock may decline.

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The market price of our common stock is likely to be highly volatile and subject to wide fluctuations.

The market price of our common stock has been and likely will continue to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:

• deteriorating or fluctuating world economic conditions;

• announcements of technological innovations or new products or services by our competitors;

• demand for our products, including fluctuations in subscription renewals;

• changes in the pricing policies of our competitors; and

• changes in government regulations.

In addition, the market price of our common stock 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; and

• quarterly variations in our revenues and operating expenses.

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 were 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.

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 personnel and our ability to recruit new personnel to executive and key management positions. 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. In such an event we may be unable to recruit personnel to replace these individuals in a timely manner, or at all, on acceptable terms.

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. Competition for these personnel is intense, especially for engineers with high levels of experience in designing and developing software and Internet-related products. We may not 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. In order to attract and retain personnel in a competitive marketplace, we believe that we must provide a competitive compensation package, including cash and equity-based compensation. The volatility of our stock price and our results of operations may from time to time adversely affect our ability to recruit or retain employees. 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.

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Compliance with regulation of corporate governance, accounting principles and public disclosure may result in additional expenses.

Compliance with laws, regulations and standards relating to corporate governance, accounting principles and public disclosure, including the Sarbanes-Oxley Act of 2002 regulations and NASDAQ listing rules, have caused us to incur higher compliance costs and we expect to continue to incur higher compliance costs as a result of our increased global reach and obligation to ensure compliance with these laws as well as local laws in the jurisdictions where we do business. These laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time. Further guidance by regulatory and governing bodies can result in continuing uncertainty regarding compliance matters and higher costs related to the ongoing revisions to accounting, disclosure and governance practices. Our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

If we cannot effectively manage our internal growth, our business revenues, results of operations and prospects may suffer.

If we fail to manage our internal growth in a manner that minimizes strains on our resources, we could experience disruptions in our operations that could negatively affect our revenue, billings and results of operations. We are pursuing a strategy of organic growth through implementation of two-tier distribution, international expansion, introduction of new products and expansion of our product sales to the SMB segment. Each of these initiatives requires an investment of our financial and employee resources and involves risks that may result in a lower return on our investments than we expect. These initiatives also may limit the opportunities we pursue or investments we would otherwise make, which may in turn impact our prospects.

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 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 makes 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 up to 5,000,000 shares of 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 has 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.

Our senior secured credit facility also accelerates and becomes payable in full upon a change of control, which is defined generally as a person or group acquiring 35% of our voting securities or a proxy contest that results in changing a majority of our Board of Directors. These consequences may discourage third parties from attempting to acquire us.

We do not intend to pay dividends.

We have not declared or paid any cash dividends on our common stock since we have been a publicly traded company. We currently intend to retain any future cash flows from operations to fund growth, pay down our senior secured term loan and repurchase shares of our common stock, and therefore do not expect to pay any cash dividends in the foreseeable future. Moreover, we are not permitted to pay cash dividends under the terms of our senior secured credit facility.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

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(c) Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Be Yet Purchased Under the Plans or Programs
April 1, 2009 to April 30, 2009	178,000	$	15.20	10,076,587	1,923,413
May 1, 2009 to May 31, 2009	139,500	$	17.06	10,216,087	1,783,913
June 1, 2009 to June 30, 2009	129,959	$	18.52	10,346,046	1,653,954
Total	447,459	$	16.74	10,346,046	1,653,954

1. The purchases were made in open-market transactions.

2. On April 3, 2003, we announced that our Board of Directors authorized a stock repurchase program of up to 4 million shares of our common stock. On August 15, 2005, we announced that our Board of Directors increased the size of the stock repurchase program by an additional 4 million shares, for a total program size of up to 8 million shares. On July 25, 2006, we announced that our Board of Directors increased the size of the stock repurchase program by an additional 4 million shares, for a total program size of up to 12 million shares. In January 2008, we adopted a 10b5-1 plan that provides for quarterly purchases of our common stock in open market transactions. The remaining shares authorized for repurchase under our stock repurchase program as of June 30, 2009 was 1,653,954 shares.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

Our Annual Meeting of Stockholders was held on Tuesday, June 16, 2009. The following matters were voted upon at the meeting and were adopted as indicated:

1. Our stockholders elected three directors to hold office for a one-year term expiring upon the 2010 Annual Meeting of Stockholders.

	Number of Shares
Name of Directors Elected	For	Withheld
Bruce T. Coleman	22,211,777	19,435,181
Gene Hodges	40,496,357	1,150,601
John F. Schaefer	35,443,501	6,203,457

The following individuals are continuing directors with terms expiring upon the 2010 Annual Meeting of Stockholders: John B. Carrington and Gary E. Sutton.

The following individuals are continuing directors with terms expiring upon the 2011 Annual Meeting of Stockholders: Mark S. St.Clare and Peter C. Waller.

2. The stockholders ratified the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009.

For	41,345,723
Against	289,535
Abstain	11,700

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3. The stockholders approved amendments to our Amended and Restated Certificate of Incorporation to eliminate the classification of our Board of Directors.

For	41,543,033
Against	89,264
Abstain	14,661

4. The stockholders approved amendments to our Amended and Restated Bylaws to eliminate all supermajority votes for stockholders to amend the Bylaws.

For	37,326,301
Against	292,995
Abstain	17,198

5. The stockholders approved the 2009 Equity Incentive Plan.

For	28,690,065
Against	8,765,911
Abstain	180,518

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibits

3.1(1)	Amended and Restated Certificate of Incorporation.
3.2(1)	Amended and Restated Bylaws.
4.1(2)	Specimen Stock Certificate of Websense, Inc.
10.1(1)	2009 Equity Incentive Plan.
10.2(1)	Form of Stock Option Agreement under the 2009 Equity Incentive Plan.
10.3(1)	Form of Restricted Stock Unit Award Agreement under the 2009 Equity Incentive Plan.
10.4(1)	Form of Non-Discretionary Stock Option Agreement under the 2009 Equity Incentive Plan and Form of Early Exercise Stock Purchase Agreement under the 2009 Equity Incentive Plan.
10.5(1)	Form of Non-Discretionary Restricted Stock Unit Award Agreement under the 2009 Equity Incentive Plan.
31.1	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a).
31.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a).
32.1	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
32.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

(1) Filed as an Exhibit to our Current Report on Form 8-K (No 000-30093) filed on June 19, 2009.

(2) Filed as an Exhibit to our Registration Statement on Form S-1/A (No 333-95619) filed on March 23, 2000.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	WEBSENSE, INC.
Date: August 6, 2009		By:	/s/ GENE HODGES
			Gene Hodges
			Chief Executive Officer
Date: August 6, 2009		By:	/s/ ARTHUR S. LOCKE III
			Arthur S. Locke III
			Chief Financial Officer

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EXHIBIT INDEX

3.1(1)	Amended and Restated Certificate of Incorporation.
3.2(1)	Amended and Restated Bylaws.
4.1(2)	Specimen Stock Certificate of Websense, Inc.
10.1(1)	2009 Equity Incentive Plan.
10.2(1)	Form of Stock Option Agreement under the 2009 Equity Incentive Plan.
10.3(1)	Form of Restricted Stock Unit Award Agreement under the 2009 Equity Incentive Plan.
10.4(1)	Form of Non-Discretionary Stock Option Agreement under the 2009 Equity Incentive Plan and Form of Early Exercise Stock Purchase Agreement under the 2009 Equity Incentive Plan.
10.5(1)	Form of Non-Discretionary Restricted Stock Unit Award Agreement under the 2009 Equity Incentive Plan.
31.1	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a).
31.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a).
32.1	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
32.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

(1) Filed as an Exhibit to our Current Report on Form 8-K (No 000-30093) filed on June 19, 2009.

(2) Filed as an Exhibit to our Registration Statement on Form S-1/A (No 333-95619) filed on March 23, 2000.

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