Websense (WBSN)

Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, established accounting and reporting standards requiring recognition of all derivatives as assets or liabilities in the consolidated balance sheets and measurement of those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivative instruments will be recorded to earnings or other comprehensive income depending on the use of the derivative instrument and whether it qualifies for hedge accounting. The Company uses derivatives to manage foreign currency risk and not 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.

Beginning in 2004, the Company has utilized foreign currency forward contracts. Beginning in 2005, the Company also started to utilize zero-cost collar contracts to hedge anticipated British Pound expenses. All such contracts entered into were designated as either fair value hedges or cash flow hedges and were considered effective, where desired, as defined by SFAS No. 133, as amended. None of the contracts were terminated prior to settlement. Net realized losses related to these contracts settled during the year are included in other income, net in the accompanying consolidated income statements and amounted to $195,000 and $186,000 in 2005 and 2004, respectively.

As of December 31, 2005 and 2004, the Company had committed to foreign currency forward contracts in the Euro, with a notional amount of $4.0 and $0.4 million, respectively. The Company’s Euro commitment represents 3.4 and 0.3 million Euros at a weighted average forward rate of 1.184 and 1.329, respectively. Euro commitments at December 31, 2005 were designated as fair value hedges and were not required to be tested for effectiveness as hedge accounting was not desired. Euro commitments at December 31, 2004 were designated as cash flow hedges and determined effective. The fair value of these forward contracts was $4.0 and $0.4 million at December 31, 2005 and 2004. All of the foreign currency forward contracts will be settled before March 31, 2006. Realized gains or losses related to the settlements, if any, will be recorded in other income, net at the time of settlement.

As of December 31, 2005, the Company had committed to zero-cost collar contracts in the British Pound, with a notional amount of $4.3 million. As of December 31, 2004, the Company had committed to foreign currency forward contracts in the British Pound, with a notional amount of $0.6 million. All of these contracts were designated as cash flow hedges and were determined effective as of December 31, 2005 and 2004. The fair value of these zero-cost collar and foreign currency forward contracts was $4.2 and $0.6 million at December 31, 2005 and 2004, respectively. All of the zero-cost collar contracts will be settled before June 30, 2006. Realized gains and losses related to the settlements, if any, will be recorded in all operating categories the Company hedges its British Pound expenditures against.

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Websense, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2005

1.   Summary of Significant Accounting Policies (Continued)