##### 









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

Form 10-K/ A

|                                                |  |                                                                                                 
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|þ                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                               
|For the fiscal year ended December 31,
    2001
|or                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|                                               
|For the transition period
    from          to 

Commission file number: 0-20558

Networks Associates, Inc.


(Exact name of registrant as specified in its
charter)


|                                                                                            |  |                                            
|------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Delaware                                                                                    |  | 77-0316593                                 
|(State or other jurisdiction of
    incorporation or organization)                          |  | (I.R.S. Employer
    Identification Number)
|                                                                                           
|3965 Freedom Circle
    Santa Clara, California(Address of principal executive
    offices) |  | 95054(Zip Code)                            

Registrants telephone number, including
area code: (408) 988-3832

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $0.01 Par
Value

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 þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K/ A or any
amendment to this Form 10-K/
A.     o

The aggregate market value of the voting stock
held by non-affiliates of the issuer as of December 31,
2001 was approximately $3,582,411,290. The number of shares
outstanding of the issuers common stock as of
December 31, 2001 was 140,699,222.



---

EXPLANATORY NOTE

THIS 10-K/ A IS BEING FILED FOR THE PURPOSE OF
AMENDING AND RESTATING ITEMS 1, 6, 7, 8 AND 14 TO REFLECT
THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 AND THE EFFECT
OF THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 AND THE
EFFECT OF THE RESTATEMENT OF OUR CONSOLIDATED BALANCE SHEET FOR
DECEMBER 31, 2001. WE HAVE MADE NO FURTHER CHANGES TO THE
PREVIOUSLY FILED FORM 10-K. ALL INFORMATION IN THIS
FORM 10-K/ A IS AS OF DECEMBER 31, 2001 AND DOES NOT
REFLECT ANY SUBSEQUENT INFORMATION OR EVENTS OTHER THAN THE
RESTATEMENT.



---

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, and 13 of Part III
are incorporated by reference from the Registrants Proxy
Statement for the Annual Meeting of Stockholders to be held
May 15, 2002.



---






---



##### 



PART I

Item 1.     Business

General

This 10-K/ A is being filed for the purpose of
amending and restating Items 1, 6, 7, 8 and 14 to reflect
the restatement of our Consolidated Financial Statements for the
years ended December 31, 2001, 2000, 1999 and 1998 and a
reclassification in our statements of operations for these years
to reflect the retroactive adoption of a new accounting
principle. We have made no further changes to the previously
filed Form 10-K. All information in this Form 10-K/ A
is as of December 31, 2001 and does not reflect any
subsequent information or events other than the restatement.

Some of the statements contained in this Annual
Report on Form 10-K/ A are forward-looking statements,
including but not limited to those specifically identified as
such, that involve risks and uncertainties. The statements
contained in the Report on Form 10-K/ A that are not purely
historical are forward looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act, including, without limitation, statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward looking statements included in
this Report on Form 10-K/ A are based on information
available to us on the date hereof, and we assume no obligation
to update any such forward-looking statements. These statements
involve known and unknown risks, uncertainties and other
factors, which may cause our actual results to differ materially
from those implied by the forward-looking statements. In some
cases, you can identify forward-looking statements by
terminology such as may, will,
should, expects, plans,
anticipates, believes,
estimates, predicts,
potential, or continue or the negative
of these terms or other comparable terminology. In some
instances, we have also indicated forward looking statements
with an asterisk (*). Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither any
other person nor we assume responsibility for the accuracy and
completeness of such statements. Important factors that may
cause actual results to differ from expectations include those
discussed in Risk Factors beginning on page 11
in this document.

Networks Associates, Inc. was formed in December
1997, by the combination of McAfee Associates, Inc. and Network
General Corporation. Following the combination, McAfee changed
its legal name to Networks Associates, Inc. and we do business
under the name Network Associates. In 1999, our subsidiary
McAfee.com sold to the public its Class A common stock as a
part of its initial public offering.

OVERVIEW

We are a leading supplier of network security and
network management solutions. We operate through two businesses
consisting of our infrastructure business and McAfee.com, our
publicly traded subsidiary. Our infrastructure business is
operated in six geographic regions: the United States, Europe,
Japan, Canada, Asia-Pacific and Latin America. McAfee.com is an
application service provider, or ASP, targeted at consumers and
small to medium-sized businesses.

The majority of our net revenue has historically
been derived from our McAfee anti-virus products and our Sniffer
Technologies network fault and performance products. In addition
to these two flagship products, we have focused our efforts on
building a full line of complementary network security and
network management solutions. On the network security side, we
strengthened our anti-virus lineup by adding complementary
products in the firewall, intrusion detection, encryption, and
virtual private networking categories. On the network management
side, we built upon our Sniffer Technologies line by adding
products in the help desk, asset management, network monitoring,
and network reporting categories. We continuously seek to expand
our product lines.

1



---



##### 



To more effectively market our infrastructure
products in our various geographic regions, we have combined
complementary products into separate product groups, as follows:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | McAfee, which delivers world-class anti-virus and
    security products and services;                
|
| |  | Sniffer Technologies, which is a leader in
    network availability and system security products; and
|
| |  | Magic Solutions, which is a leading provider of
    web-based service desk solutions.                

In the fourth quarter of 2001, we substantially
completed integrating the activities of our PGP product group
into our McAfee and Sniffer product groups. The PGP product
group accounted for approximately 6% of our net revenue in 2001.
Former PGP products now marketed and sold as McAfee products
include the McAfee VPN, McAfee Desktop Firewall (our distributed
firewall) for corporate users and the McAfee E-Business Server.
The CyberCop vulnerability assessment technology was integrated
into the Sniffer product line. We are seeking buyers for the PGP
desktop encryption and Gauntlet firewall products.

In 2001, our infrastructure business, including
the recently integrated PGP product group, accounted for
approximately $749.0 million in net revenue and a net
operating loss of $81.8 million. In 2001, McAfee.com
accounted for approximately $62.0 million in net revenue
and a net operating loss of approximately $192,000.

McAfee Product Group

McAfees products and services provide
solutions designed to enforce anti-virus policies and measure
the performance of anti-virus activities and deliver network
security. The McAfee product group includes products and
services that provide multi-layer anti-virus protection,
management and reporting for desktops, servers, GroupWare,
Internet technologies, and wireless technologies. The McAfee
product group also includes distributed firewalls and virtual
private network products for corporate users. McAfees
services are provided by McAfees Anti-Virus Emergency
Response Team (AVERT). AVERT augments McAfees product
offerings by identifying new viruses and deploying anti-virus
solutions to our customers. McAfee customers are primarily
corporate customers, including customers in the managed service
market (such as, ASPs, and managed service providers, or MSPs).

Sniffer Technologies Product Group

Sniffer Technologies products and services
provide customers with network and application management
solutions designed to maximize network availability and
performance and system security. Sniffer Technologies
products capture data, monitor network traffic and collect key
network statistics. Sniffer Technologies products are also
designed to optimize network and application performance and
increase network reliability by uncovering and analyzing network
problems and system vulnerabilities and recommending solutions
to such problems, automatically and in real-time for mid-level
and high-speed networks. Sniffer Technologies products
also proactively monitor and diagnose network and
application-level problems on complex, multi-segment networks
from centralized locations as well as troubleshooting high-speed
telecommunications and Internet service provider networks.
Sniffer Technologies customers are primarily corporate
customers, including customers in the managed service market.

Magic Solutions Product Group

Magic Solutions products provide customers
with a web-based set of tools to manage their customer support
and problem management needs. Magic Solutions product
group consists of products that promote information sharing,
facilitate workflow, and improve service delivery. Magic
Solutions products include the Magic Total Service Desk
Suite, a 100% browser-based service desk and problem management
solution. In addition, Magic Solutions stand-alone
products include Magic HelpDesk, Self Service Desk, Remote
Desktop and Event Management. Magic Solutions customers
are primarily corporations.

2



---



##### 



McAfee.com  Our Publicly Traded
Subsidiary

McAfee.com is a security ASP delivering security
applications software and related services through an Internet
browser. The McAfee.com applications allow users to detect and
eliminate viruses on their PCs, repair their PCs from damage
caused by viruses, optimize their hard drives and update their
PCs virus protection system with current software patches
and upgrades. McAfee.com also offers customers access to
McAfee.com Personal Firewall, McAfee.com Wireless Security
Center and McAfee.com Internet Privacy Service.

Under the terms of our licensing agreement with
McAfee.com, McAfee.coms business has historically been
targeted exclusively at consumers. In March 2001, we entered
into a reseller agreement with McAfee.com allowing it to expand
its product offerings with McAfee.com for Business. McAfee.com
for Business is a website serving the security needs for small
and medium-sized businesses delivering managed applications
services that allow businesses to provide anti-virus and
firewall security for their desktop PCs.

As of December 31, 2001, we owned
36.0 million shares of McAfee.com Class B common
stock, entitled to three votes per share and representing
approximately 76% of McAfee.coms outstanding common stock
and 90% of its total voting power.

Professional Services & Technical
Support

As our products and computer networks become more
complex, customers increasingly require greater professional
assistance in the design, installation, configuration and
implementation of their networks and acquired products. To meet
these evolving customer needs, we have established Professional
Services and Technical Support. Professional Services is focused
on two service segments: Consulting Services and Education
Services. Technical Support consists primarily of one program
called PrimeSupport.

Consulting Services supports product integrations
and deployment with an array of standardized and custom
offerings. Consulting Services also offers other services
ranging from proactive and emergency troubleshooting to network
design, planning and simulation. We supplement our consulting
service capabilities through the use of outside professional
service providers, including system integrators. Our consulting
services organization is organized around our three product
groups.

Education Services represents the combined
training organizations of Sniffer University, McAfee University
and Magic University. Together, these training organizations
offer customers an extensive curriculum of computer network
technology courses, including protocol analysis and
troubleshooting, security, help-desk and network management
tools. Education Services provides public classes and customized
on-site training at customer locations.

The PrimeSupport program provides our customers
online and telephone-based technical support in an effort to
ensure that our products are installed and working properly. To
meet customers varying needs, PrimeSupport offers a choice
of the online KnowledgeCenter or the telephone-based Connect,
Priority and Enterprise. All PrimeSupport programs include
software updates and upgrades. PrimeSupport is available to all
customers on a worldwide basis from various regional support
centers.



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PrimeSupport KnowledgeCenter  Consists
    of a searchable, knowledge base of technical solutions and links
    to a variety of technical documents such as product FAQs and
    technical notes.                            
|
| |  | PrimeSupport Connect  Provides
    toll-free telephone access to technical support during regular
    business hours and access to the online KnowledgeCenter.                                                               
|
| |  | PrimeSupport Priority  Provides
    support for critical operations with priority, unlimited,
    toll-free telephone access to technical support 24 hours a
    day, 7 days a week and access to the online KnowledgeCenter.
|
| |  | PrimeSupport Enterprise  Offers
    proactive, personalized service for the most business critical
    operations and includes an assigned technical support engineer
    from our elite Enterprise support team,            

3



---



##### 



| |  |                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | proactive support contact (telephone or email)
    with customer-defined frequency, election of five designated
    customer contacts and access to the online KnowledgeCenter.

NAI Labs

NAI Labs is our research and development
organization dedicated to advanced network and information
systems security technology. NAI Labs is actively conducting
research in the areas of network security, cryptography,
security infrastructure and other network security and network
defense projects. NAI Labs has ongoing projects funded through
DARPA (the U.S. Defense Advanced Research Projects Agency),
Air Force, Navy, Army, NSA and other Department of Defense and
U.S. government agencies. NAI Labs makes a number of its
research prototypes available as open source software and
support several open source community initiatives.

Product Licensing Model

We typically license our products to corporate
and government customers on a subscription basis, for a period
of two years or on a perpetual basis. Beginning in October 2000,
we began selling our two-year subscription licenses with
one-year (first year) of maintenance. Previously, our two-year
subscription licenses included two years of maintenance. During
the first year of the two-year subscription license, the
customer has the option to purchase the second year of
maintenance. The purchase price for the second year of
maintenance is set at the time of purchase of the two-year
subscription license. As the software licenses or maintenance
contracts near expiration, we contact customers to renew their
licenses or maintenance contracts, as applicable. We believe
that providing the customer the option to purchase the second
year of maintenance provides the customer greater flexibility in
selecting the appropriate level of maintenance support.
Electronic distribution of our products and upgrades allows us
to offer upgrades and updates on a more regular basis than
companies using traditional distribution methods.

Our licensing model also creates the opportunity
for recurring revenue for us through the renewal of existing
licenses. By offering two-year licenses as opposed to
traditional perpetual licenses, we are also able to meet a lower
initial cost threshold for customers with annual budgetary
constraints. The renewal process also provides an opportunity to
cross-sell new products and product lines to existing customers.

We also provide single user and corporate user
licenses for our products under traditional perpetual licenses
with product updates, upgrades and support available to
customers under separate maintenance contracts. As compared to
subscription licenses, sales of perpetual licenses typically
result in significantly higher up-front revenue and lower
recurring and future revenues as the sales price for upgrades
and updates tends to be significantly lower than that of a
perpetual license. We typically sell perpetual licenses in
connection with sales of our hardware-based Sniffer and
E-ppliance products where software is bundled with the hardware
platform.

Hosted Applications Subscription
Model

For our ASP or hosted products and services,
customers essentially rent the use of our software.
Because our ASP services are version-less, or self
updating, customers using these services are assured of using
the most recent version of the software application, eliminating
the need to purchase product updates or upgrades. McAfee.com
provides software using a related subscription model. Paid
McAfee Clinic subscribers receive a time-based subscription to
the service.

In 2001, the McAfee Product Group introduced its
ASaP offerings. These are hosted products and services which
provide the most up-to-date anti-virus software to corporate
customers. These offerings include VirusScan ASaP, which
provides anti-virus protection to desktops and file servers,
VirusScreen ASaP, which screens e-mails to detect and quarantine
viruses and infected attachments, and WebShield e500 ASaP,
which combines a McAfee WebShield e-ppliance with hosted
monitoring services that keep the e-ppliance continuously up to
date to stop viruses at the Internet gateway before they enter
an organization.

4



---



##### 



Sales and Marketing

To augment and capitalize upon our marketing
efforts, our sales and marketing activities are directed
primarily at large corporate and government customers, as well
as to resellers, distributors and system integrators worldwide
through the channels listed below.



| |                           
| | --------------------------
| | United States Direct Sales

Our United States direct sales force,
constituting the majority of our sales force, is organized by
product group, with three separately focused sales organizations
selling by product group. Each of these sales organizations
consists of field sales representatives who are located
regionally and outbound telesales representatives who actively
market our individual product groups, focusing on small
customers and transactions. Our corporate telesales
representatives also respond to prospective customers who
contact us as a result of a particular marketing program or
after electronically evaluating one of our products. To augment
our sales organization, our executives are involved with sales
to many major accounts.

All of our United States sales representatives
are responsible for developing new business as well as the
renewal of our existing licenses. Prior to expiration of a
license, a sales representative contacts the customer and
encourages the customer to renew the expiring license and
determines if the number of computers licensed needs adjustment
and, additionally, markets new products and product groups to
this existing customer.



| |                    
| | -------------------
| | International Sales

We have sales and support operations in Europe,
Japan, Canada, Asia-Pacific and Latin America. In 2001,
international revenues accounted for approximately 35% of our
net revenues. In 2001, we announced our intention to
significantly expand our international sales activities, and we
hired new heads of our Asia-Pacific, European and Latin American
operations.

We recently organized our international sales
forces by region. In addition to the United States, the
principal geographic regions are Europe, Japan, Canada,
Asia-Pacific, and Latin America. Within these regions, sales
forces are organized by country where appropriate. Our
international direct sales force is organized by our three
product groups when and where local demand and sales force
considerations make this action advisable. Outside of the United
States, each product groups sales force reports to the
regional sales head.



| |                           
| | --------------------------
| | Resellers and Distributors

To complement our direct sales efforts, we market
many of our products through corporate resellers and
distributors, and indirectly through retailers. We currently
utilize corporate resellers, including ASAP Software, Corporate
Software & Technology, Softmart, Software House
International and Software Spectrum, which focus primarily on
selling site licenses of our software to corporate customers.

Independent software distributors who currently
market our products include Ingram Micro, Merisel America, MOCA
and Tech Data. These distributors market our products primarily
to large retailers, value added resellers, or VARs, and mail
order companies. Through our authorized distributors, we sell
our retail packaged products to several of the larger computer
and software retailers in the United States, including Best Buy,
Comp USA, Frys, Office Depot, Office Max and Staples.
Several members of our channel sales force work closely with our
major reseller and distributor accounts to manage orders,
promotions and selling activities.

Our top ten distributors in the United States
typically account for between 38% and 43% of our net revenue
each quarter. Our agreements with our distributors are not
exclusive and may be terminated by either party without cause.
Terminated distributors may not continue to represent our
products. If one of our significant distributors terminated its
relationship with us, we could experience a significant
interruption in the distribution of our products.

5



---



##### 



Commencing January 1, 2001, we implemented a
sell-through business model for distributors under which we
recognize revenue on products sold through distributors at the
time our distributors resell the products to their customers.
Under this business model, our distributors are permitted to
purchase software licenses at the same time they fill customer
orders and to pay for hardware and retail products only when
these products are resold to the distributors customers.
In addition, prior to the resale of our products, our
distributors are permitted unlimited unconditional rights of
return. After sale by the distributor to its customer, there is
no right of return from the distributor to us with respect to
such product, unless we approve the return from the final
customer to the distributor.



| |                                     
| | ------------------------------------
| | Original Equipment
    Manufacturers

Original Equipment Manufacturers, or OEMs,
license our products and bundle them with PC hardware or
software. OEMs typically sublicense a single version of our
products to end users who must contact us in order to receive
their updates. We typically receive a per-copy royalty from our
OEMs. Subject to limited exceptions, our OEM activities are
conducted through McAfee.com.



| |                           
| | --------------------------
| | Other Marketing Activities

Our principal means of marketing our products and
services is through the Internet. In addition to the NAI.com
website, each of our product groups and McAfee.com have their
own individual websites. A number of these websites are
localized to serve the various geographic regions in which we
operate. Not only do each of these websites contain various
marketing materials and information about our products, but
website visitors may download and purchase products or obtain
free trials of our products or trial subscriptions for hosted
products and services. We also promote our products and services
through advertising activities in trade publications and direct
mail campaigns and strategic arrangements. In addition, we
attend trade shows, sponsor conferences and publish a quarterly
newsletter, which is mailed to existing and prospective
customers.

Customers

We primarily market our products to large
corporate and government customers directly through our direct
sales organization and indirectly through resellers and
distributors. A majority of our products are distributed
indirectly through resellers and distributors. In the U.S.,
substantially all our indirect sales are through four major
distributors. In Europe, substantially all indirect sales are
made through five major distributors. During 2001, one customer,
Ingram Micro, accounted for approximately 28% of our net revenue.

We primarily market our products directly to
individual consumers through online distribution channels and
indirectly through traditional distribution channels, such as
retail stores. McAfee.com is responsible for online distribution
of our products sold to individual consumers over the Internet
or for Internet-based products and for the licensing of
technology to OEMs for sale to individual consumers, subject to
certain exceptions.

Product Development and Acquisition

We believe that our ability to maintain our
competitiveness will depend in large part upon our ability to
successfully enhance existing products, develop and acquire new
products and develop and integrate acquired products. The market
for computer software includes low barriers to entry, rapid
technological change, and is highly competitive with respect to
timely product introductions. As part of our growth strategy, we
have made and expect to continue to make investments in
complementary businesses, products and technologies.

In addition to developing new products, our
internal development staff is also focused on developing
upgrades and updates to existing products and modifying and
enhancing any acquired products. Future upgrades and updates may
include additional functionality, respond to user problems or
address compatibility problems with new or changing operating
systems and environments.

Excluding stock-based compensation charges, we
expended $142.1 million, $171.1 million and
$148.2 million in 2001, 2000 and 1999, respectively, on
research and development.

6



---



##### 



Manufacturing and Suppliers

Our manufacturing operations consist primarily of
assembly, testing and quality control of materials, components,
subassemblies and systems for our Sniffer hardware-based and
E-ppliance products. We use a limited number of third-party
manufacturers for these manufacturing operations. Reliance on
third-party manufacturers involves a number of risks, including
the lack of control over the manufacturing process and the
potential absence or unavailability of adequate capacity. The
loss of one of our third-party manufacturers could disrupt our
business. Hardware-based products entail other risks, such as
the unavailability of critical components which are supplied by
a limited number of parties and greater obsolescence risks.

We have developed software-only versions of some
of our Sniffer products. Purchasers of these Sniffer software
products are required to already own, or purchase directly from
the manufacturer or other vendors, the necessary hardware
products, such as computer platforms and components. Customers
may require that we continue to provide the necessary hardware
products.

Competition

The markets for our products are intensely
competitive and we expect competition to increase in the
near-term. We believe that the principal competitive factors
affecting the markets for our products include:



| |   |                                   
| | - | ----------------------------------
| |  | performance;                      
|
| |  | functionality;                    
|
| |  | quality;                          
|
| |  | customer support;                 
|
| |  | breadth of product group;         
|
| |  | frequency of upgrades and updates;
|
| |  | integration of products;          
|
| |  | manageability of products;        
|
| |  | brand name recognition;           
|
| |  | reputation; and                   
|
| |  | price.                            

We believe that we compete favorably against our
competitors in each of these areas. However, some of our
competitors have longer operating histories, greater name
recognition, larger technical staffs, established relationships
with hardware vendors and/or greater financial, technical and
marketing resources. These factors may provide our competitors
with an advantage in penetrating the market with their network
security and management products.

Anti-Virus.Our
principal competitor in the anti-virus market is the Norton
Product Group of Symantec. Trend Micro remains the strongest
competitor in the Asian anti-virus market, with
Dr. Ahns making recent inroads, particularly in Japan
and Korea.

Network Security.Our principal competitors in the
security market vary by product type. For firewalls, our
principal competitors include CheckPoint, Symantec, and larger
companies such as Cisco Systems and Microsoft. For intrusion
detection products, we compete with Cisco Systems, Internet
Security Systems and Symantec. The markets for encryption and
virtual private network, or VPN, products are highly fragmented
with numerous small and large vendors. VPN competitors include
hardware and software vendors, including telecommunications
companies and traditional networking suppliers.

Network Management.Our principal competitor in the
network management market is Agilent. Other competitors include
Acterna Corporation, Cisco Systems, Computer Associates,
Compuware, Concord

7



---



##### 



Communications, DeskTalk Systems, GN Nettest,
Network Instruments, Radcom Technologies, Shomiti Systems and
WildPackets.


Help Desk.Our
principal competitors in the help desk market are Computer
Associates, FrontRange Solutions and Peregrine Systems.

Other Competitors.We also face competition from large
software companies such as HP, Intel, Microsoft and Novell,
which may offer network security and management products as
enhancements to their operating systems.

Proprietary Technology

Our success depends significantly upon
proprietary software technology. We rely on a combination of
contractual rights, trademarks, trade secrets and copyrights to
establish and protect proprietary rights to our software.
However, these protections may be inadequate or competitors may
independently develop technologies or products that are
substantially equivalent or superior to our products. We do not
typically obtain signed license agreements from customers who
license products directly from us. Rather we include an
electronic version of a shrink-wrap license in all
of our electronically distributed software and a printed license
in the box for our products. Since none of these licenses are
signed by the licensee, many legal authorities believe that such
licenses may not be enforceable under the laws of many states
and foreign jurisdictions. In addition, the laws of some foreign
countries either do not protect these rights at all or offer
only limited protection for these rights. The steps taken by us
to protect our proprietary software technology may be inadequate
to deter misuse or theft of this technology. For example, we are
aware that a substantial number of users of our anti-virus
products have not paid any registration or license fees to us.

Network Associates/ McAfee.com Intercompany
Agreements

For the purposes of defining our ongoing
relationship with McAfee.com, our publicly traded subsidiary, we
have entered into a number of ongoing agreements. These
agreements are filed as exhibits to the public disclosure
documents that we file with the Securities and Exchange
Commission and are described briefly below. The description is
subject in all respects to the terms of the actual agreements.

License Agreement.Under the terms of our license
agreement:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Licensed Technology.Network Associates and McAfee.com
    granted to each other limited rights to each others
    patents, copyrights, trademarks and trade secrets for use in
    defined markets. McAfee.com granted us worldwide, non-exclusive
    rights to McAfee.coms patents and exclusive rights to use
    McAfee.coms copyrights, trademarks and trade secrets to
    deliver products and services to enterprise customers and
    individual consumers by any means other than the Internet. Under
    the agreement, McAfee.com was granted worldwide, non-exclusive
    rights to our patents and exclusive rights to use our copyright,
    trademark and trade secret rights to create and deliver products
    and services directly or indirectly to individual consumers over
    the Internet or for Internet-based products. Each party is also
    permitted to create products derived from the technology
    licensed to it by the other. The creating party retains
    ownership of their newly derived products but these derived
    products are licensed to the other party subject to the terms of
    the license agreement.
|
| | Royalty Payments.In
    consideration for the rights granted under the license
    agreement, we are required to pay McAfee.com a flat quarterly
    royalty of $250,000. In consideration for the rights granted by
    us to McAfee.com under the license agreement, McAfee.com is
    required to pay us a 7% royalty on revenues recognized from
    product and subscription sales that include our technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Limitations on Offered Products.During the term of the agreement, each
    party has agreed that it will not offer products incorporating
    third-party technology if those products are competitive with
    the products offered by the other party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Indemnification.Under the agreement, each party has
    agreed to indemnify, defend and hold harmless the other for any
    losses incurred in connection with claims arising in the covered
    countries if the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

8



---



##### 



| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | technology licensed under the agreement violates
    the patent, copyright, trademark or trade secrets or other
    proprietary rights of a third party. Covered countries are those
    countries that are party to the Berne Convention for the
    Protection of Literary and Artistic Works, which include the
    U.S. and substantially all U.N. member nations.                                    
|
| | Term and Termination.The license agreement will remain in
    effect perpetually, but may be terminated, among other
    circumstances, by the non-defaulting party, in the event of a
    material breach by the other party that remains uncured for
    30 days following notice of the breach, subject to
    mandatory dispute resolution prior to the effectiveness of any
    proposed termination.

Reseller Agreements.In March 2001, we entered into
reseller agreements with McAfee.com. Under these agreements,
McAfee.com may resell our products to business customers, except
in Japan, and in certain countries, we may resell McAfee.com
products to OEMs and end-users directly or through ASPs.

Services Agreement.Under this agreement, we provide
services relating to tax, insurance, employee benefits and
administration, corporate record keeping and information
technology. For these services, we charge a portion of the cost
of our provision of the services to McAfee.com, including all
related expenses, which is allocated based on headcount, plus a
ten percent mark-up. In addition, from time to time, we may
provide additional services, including legal and accounting
services. The services agreement may be terminated either by
McAfee.com on 30 days notice or by us when we cease to own
a majority of the outstanding voting stock of McAfee.com.

Registration Rights Agreement.Under this agreement, we, or any
transferee of at least 10% of our McAfee.com shares, can include
such shares of McAfee.com common stock in any future
registration of common stock made by McAfee.com, other than any
registration statement relating to an acquisition or stock
option plan. In addition, we or any transferee of at least 10%
of our McAfee.com shares can request that McAfee.com file a
registration statement for the public sale of such shares of
McAfee.com stock.

Joint Cooperation Agreement.The joint cooperation and master
services agreement with McAfee.com governs the provision of
technology services among the parties. Under this agreement, our
anti-virus emergency response team, or AVERT, will provide
McAfee.com with research and solutions for virus events. The
agreement also contains standard terms and conditions governing
the provision of technology services from one party to the other
under statements of work that may be negotiated from time to
time. We pay McAfee.com a fee for these services in an amount
equal to 10% of McAfee.coms total quarterly technology
costs plus a 10% service charge.

Tax Sharing Agreement.Under this agreement, McAfee.com pays
federal, state and local income tax liability amounts to us,
determined on a pro forma basis as if McAfee.com filed its own
separate income tax returns for each year. We will not reimburse
McAfee.com for McAfee.coms or any other group
members use of their net operating loss or other tax
benefits in any consolidated or combined return. However,
McAfee.com will be able, during the term of the agreement, to
take into account its past and future net operating loss and
other tax attributes for purposes of computing its hypothetical
separate income tax return liability payment to, or refund from,
us.

The tax sharing agreement will terminate if
McAfee.com is no longer eligible to join us in the filing of a
consolidated federal income tax return. In the event of such
termination, any net operating losses or other carryforward
amounts would not be available to McAfee.com upon departure from
the group. Under the agreement, McAfee.com will not be
reimbursed for any such loss of tax benefits.

Indemnification and Voting Agreement.Under this agreement, except as
contemplated below, we will indemnify and defend McAfee.com
harmless for all losses related to any third party claims
relating to events or circumstances arising out of any action or
inaction of us, including our subsidiaries and officers and
directors, on or prior to December 2, 1999, the date on
which McAfee.com completed its initial public offering. Matters
for which we are not obligated to indemnify McAfee.com include:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | any obligations assumed by McAfee.com, or
    payments required to be made by McAfee.com, under its agreements
    with us;

9



---



##### 





| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any losses resulting from third party claims that
    are related to intellectual property developed by McAfee.com
    between August 20, 1999 and December 2, 2000;                                                                       
|
| |  | any obligations incurred by McAfee.com in the
    ordinary course of business;                                                                                                                                                             
|
| |  | any losses resulting from third parties claims
    made against McAfee.com alleging infringement of intellectual
    property rights unknown as of the closing of McAfee.coms
    initial public offering; and                            
|
| |  | any losses resulting from third parties claims
    related to or arising from a material misstatement contained in
    or material omission from the prospectus or the registration
    statement for McAfee.coms initial public offering.

In the event of a claim relating to a product
that includes components supplied by McAfee.com and components
supplied by us, we have the right to determine whether and to
what extent McAfee.com is entitled to indemnification, after
reasonable consultation with McAfee.com.

For so long as we own at least 20% of
McAfee.coms outstanding voting power, we must vote our
shares of McAfee.coms capital stock in favor of the
election of two independent directors. Additionally, if, as
described below under the stockholders agreement, we have a
change of control which is not approved by our continuing
directors, we have agreed to vote to elect a majority of
independent directors to McAfee.coms board.

Stockholders Agreement.Under this agreement, we have agreed
that if (1) without the prior approval of our continuing
directors, as defined below, any person acquires or agrees to
acquire 15% or more of our outstanding common stock or
(2) our continuing directors cease to constitute a majority
of serving directors, then for so long but only for so long as
that condition exists:



| |   |                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our shares of McAfee.com Class B common
    stock are entitled to only one vote per share instead of three
    votes per share; and                                                                                                                                                                          
|
| |  | we are obligated to vote our McAfee.com shares to
    cause, and to take such actions reasonably within our control to
    cause, and to seek to cause the McAfee.com directors appointed
    by us to cause, McAfee.coms board of directors to consist
    of at least a majority of independent directors.

Our continuing directors will consist of our
current directors and any subsequent directors approved or not
objected to by a majority of our then-continuing directors.

Employees

As of December 31, 2001, we employed 3,659
individuals worldwide. Competition for qualified management and
technical personnel is intense in the software industry. Our
continued success depends in part upon our ability to attract
and retain qualified personnel. With limited exceptions, none of
our employees are represented by a labor union and we believe
that our employee relations are good.

10



---



##### 



RISK FACTORS

Investing in our common stock involves a high
degree of risk. The risks described below are not the only ones
facing our company. Additional risks not presently known to us
or that we deem immaterial may also impair our business
operations. Any of the following risks could materially
adversely affect our business, operating results and financial
condition and could result in a complete loss of your investment.

Our Financial Results Will Likely
Fluctuate.

We were not profitable in 2001, 2000 and 1999. In
2001, we had a net loss of $100.7 million on net revenues
of $811.0 million compared to a net loss of
$123.9 million on net revenues of $697.7 million in
2000 and a net loss of $156.9 million on net revenues of
$611.0 million in 1999.

Our revenues and operating results have varied
significantly in the past. We expect fluctuations in our
operating results to continue. As a result, we believe that
period-to-period comparisons of our financial results should not
be relied on as an indicator of our future results. Our expense
levels are based in part on our expectations regarding future
revenues and in the short term are relatively fixed. We may be
unable to adjust our expenses in time to compensate for any
unexpected revenue shortfall.

Operational
Factors.

Operational factors that may cause our revenues,
gross margins and operating results to fluctuate significantly
from quarter to quarter include:



| |   |                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | volume, size and timing of new licenses and
    renewals of existing licenses;                                                                                                                                                                           
|
| |  | introduction of new products, product upgrades or
    updates by us or our competitors;                                                                                                                                                                  
|
| |  | the mix of products we sell and whether those
    products are sold directly by us or indirectly through
    distributors and whether, in the case of software licenses, the
    licenses are time-based subscription licenses or perpetual
    licenses;
|
| |  | costs or charges related to our acquisitions or
    dispositions, including our planned disposition of the Gauntlet
    firewall and our PGP desktop and wireless encryption product
    lines;                                                          
|
| |  | the components of our revenue, particularly that
    portion attributable to our ASP/ MSP subscription model, that
    are deferred; and                                                                                                                 
|
| |  | stock-based compensation charges and costs
    related to extraordinary events, including litigation and any
    reductions in forces.                                                                                                                   

Seasonal and
Macroeconomic Factors.

Our net revenue is typically higher in the fourth
quarter, as many customers complete annual budgetary cycles, and
lower in the summer months when many businesses experience lower
sales, particularly in the European market. In recent periods,
poor economic conditions in Asia, particularly Japan, and Latin
America have hurt our business. Customer concerns about
weakening U.S. and global economic conditions and the
uncertainties following the terrorist attacks of
September 11, 2001 could also harm our business.

It Is Difficult For Us To Estimate Operating
Results Prior To The End Of A Quarter.

Because we do not maintain a significant level of
backlog, product revenues in any quarter are dependent on
contracts entered into or orders booked and shipped in that
quarter. Historically, we have experienced a trend toward more
product orders, and therefore, a higher percentage of revenue
shipments, in the last month of a quarter. Some customers
believe they can enhance their bargaining power by waiting until
the end of a quarter to place their order.

11



---



##### 





| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | We Face Risks Associated With The Integration
    Of Our PGP Product Group Into Our McAfee And Sniffer Product
    Groups.

We recently integrated most of the PGP products
into our McAfee and Sniffer product groups and are seeking
buyers for the remaining assets. Risks related to the
integration and possible sales include:



| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may not realize our estimated expense
    reductions of approximately $50 million in 2002 in full or
    on a timely basis;                                                                                                 
|
| |  | we may experience increased customer
    dissatisfaction or customer losses, particularly from customers
    licensing the Gauntlet firewall and PGP desktop and wireless
    encryption technologies that we plan to sell; and
|
| |  | we may be unable to sell the Gauntlet firewall
    and PGP desktop and wireless encryption technologies on
    favorable terms, on a timely basis, or at all.                                                                  



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | We Have Recently Experienced Significant
    Changes In Senior Management And Plan To Add New Members Of
    Senior Management.

On January 3, 2001, our board of directors
appointed George Samenuk as our chief executive officer and
president. In April 2001, Stephen C. Richards was appointed as
our executive vice president and chief financial officer and was
recently named our chief operating officer. In October 2001,
Zachary Nelson, who was recently named our chief strategy
officer, left that position. We have also recently hired new
heads of our Asia-Pacific, European and Latin American
operations. In December 2001, Gene Hodges, the president of our
McAfee product group, was appointed president of Network
Associates and we hired Art Matin to replace Gene Hodges as the
president of the McAfee product group. We intend to continue to
add new members to senior management. Changes in management may
be disruptive to our business and may result in the departure of
existing employees and/or customers. It may take significant
time to locate, retain and integrate qualified management
personnel.

Critical Personnel May Be Difficult To
Attract, Assimilate And Retain.

Our success depends in large part on our ability
to attract and retain technically qualified and highly skilled
sales, consulting, technical, marketing and management
employees. Competition for qualified employees is intense,
resulting in upward pressure on wages. In addition to our recent
management additions, we hired a significant number of new
employees in 2000 and 2001. We may continue to add new employees
to fill positions vacated by departing employees and to expand
our business. There may be reduced levels of productivity as
recent hires are trained and otherwise assimilate and adapt to
our organization.

Other than executive management who have at
will employment agreements, our employees are not
typically subject to an employment agreement or non-competition
agreement. We may be unsuccessful in retaining key personnel.
For example, after April 22, 2000, the end of the 12-month
lock-up period for options repriced in April 1999, we
experienced a larger than normal level of employee departures as
many of these employees elected to terminate their employment
with us. We may also have difficulties in retaining employees
because many of our employees hold options to purchase our stock
at prices significantly above the current market price for our
stock.

We Face Risks Related To Our International
Operations.

For 2001 and 2000, net revenue from international
sales represented approximately 35% and 38%, respectively, of
our net revenue. We intend to focus on international growth and
expect international revenue to account for a significant
percentage of our net revenue. Related risks include:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | longer payment cycles and greater difficulty in
    collecting accounts receivable;                                             
|
| |  | increased costs and management difficulties
    related to the building of our international sales and support
    organization;

12



---



##### 





| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | the acceptance of the reorganization of our
    international sales forces by regions;                                               
|
| |  | the need to train and integrate the new heads of
    Asia-Pacific, Europe and Latin America;                                         
|
| |  | uncertainties relative to regional economic
    circumstances, including the continued economic weakness in Asia
    and a weak Euro;
|
| |  | currency fluctuations and risks related to
    hedging strategies;                                                                   
|
| |  | political instability in emerging markets;                                                                                           
|
| |  | tariffs, trade barriers and export restrictions;
    and                                                                             
|
| |  | a high incidence of software piracy in some
    countries.                                                                           

We Depend On Revenue From Our Flagship
Anti-Virus And Sniffer Products.

We have historically derived a majority of our
net revenues from our flagship McAfee anti-virus software
products and Sniffer network fault and performance management
products. These products are expected to continue to account for
a significant portion of our net revenues for the foreseeable
future. Because of this revenue concentration, our business
could be harmed by a decline in demand for, or in the prices of,
these products as a result of, among other factors, any change
in our pricing model, a maturation in the markets for these
products or other risks described in this document.

Customers May Cancel Or Delay Product
Purchases.

Weakening economic conditions, new product
introductions and expansions of our business may increase the
time necessary to sell our products and require us to spend more
on our sales efforts. Our products may be considered to be
capital purchases by our current or prospective customers.
Capital purchases are often discretionary and, therefore, are
canceled or delayed if the customer experiences a downturn in
its business prospects or as a result of economic conditions in
general.

We Face A Number Of Risks Related To Our
Product Sales Through Distributors.

We sell a significant amount of our products
through intermediaries such as distributors. Our top ten
distributors in the United States typically represent
approximately 38% to 43% of our net revenue in any quarter. Our
largest distributor, Ingram Micro, accounted for approximately
28% of net revenue during 2001.

Loss of a
Distributor.

Our distributor agreements may be terminated by
either party without cause. If one of our significant
distributors terminates its distribution agreement, we could
experience a significant interruption in the distribution of our
products.

Need for
Accurate Distributor Information.

We recognize revenue on products sold by our
distributors when distributors sell our products to their
customers. To determine our business performance at any point in
time or for any given period, we must timely and accurately
gather sales information from our distributors information
systems, at an increased cost to us. Our distributors
information systems may be less accurate or reliable than our
internal systems.

Sale of
Competing Products.

Our distributors may sell other vendors
products that are complementary to, or compete with, our
products. While we encourage our distributors to focus on our
products through market and support programs, these distributors
may give greater priority to products of other suppliers,
including competitors.

13



---



##### 



Payment
Difficulties.

Some of our distributors may experience financial
difficulties, which could adversely impact our collection of
accounts receivable. Our allowance for doubtful accounts was
approximately $8.4 million at December 31, 2001 and
$15.3 million at December 31, 2000. In 1999, one of
our large European distributors, CHS, entered bankruptcy
requiring us to record a related accounts receivable write-off
of approximately $28.7 million. Also in 1999, Pinacor, a
U.S. distributor, entered bankruptcy requiring us to record a
related accounts receivable write-off of approximately
$6.0 million. We regularly review the collectibility and
credit-worthiness of our distributors to determine an
appropriate allowance for doubtful accounts. Our uncollectable
accounts could exceed our current or future allowances.

We Expect Significant Stock-Based Compensation
Charges.

We expect to incur stock-based compensation
charges related to employee options repriced in April 1999. The
size of these charges could be significant depending on
movements in the market value of our common stock and, in some
cases, the market value of McAfee.com common stock. On
December 31, 2001, the market value of our common stock and
McAfee.coms common stock was $25.85 and $33.91,
respectively. Subject to a number of assumptions and
limitations, including the timing and number of option
exercises, for each $1.00 increase in the price of our common
stock or McAfee.coms common stock, at March 31, 2002
we could expect a stock-based compensation charge of
approximately $2.3 million and $235,000, respectively. We
may also incur additional stock-based compensation charges
related to executive compensation arrangements.

We Face The Risk Of Future Non-Recurring
Charges In The Event Of Impairment And Will Experience
Significant Amortization Charges Related to Purchased
Technology.

We adopted SFAS 142 beginning in 2002 and,
as a result, we no longer amortize goodwill. However, we will
continue to have significant amortization related to purchased
technology, trademarks, patents and other intangibles, and we
must evaluate our intangible assets, including goodwill and
purchased technology, at least annually for impairment. For
2001, our amortization charge for purchased technology and other
intangibles was $13.0 million, and our amortization charge
for goodwill was $51.1 million. If we determine that these
items are impaired, we will be required to take a related
non-recurring charge to earnings.

We May Need To Use A Large Portion Of Our Cash
Balances, Issue A Significant Amount Of Our Common Stock Or
Incur Additional Indebtedness To Repurchase Our Outstanding
Debentures.

On February 13, 1998, we issued zero coupon
debentures having an aggregate face amount at maturity of
$885.5 million and generating net proceeds (after deducting
fees and expenses) to us of approximately $337.6 million.
The initial price for the debentures was $391.06 per $1,000 of
principal amount at maturity. At the option of the holder, we
are required to repurchase the debentures as of
February 13, 2003 at a repurchase price equal to the
initial issue price plus the accretion of original issue
discount on the debentures to such date (or $494.52 per $1,000
of principal amount at maturity). In the case of such a required
repurchase, at our option, we may pay the aggregate repurchase
price in cash, shares of our common stock or a combination of
cash and common stock. The number of shares of common stock so
issued by us would be based on the fair value of our common
stock at the time of any required repurchase. On the same date
and at the same repurchase price, we may at our option redeem
the outstanding debentures for cash.

As of December 31, 2001, we had used
$173.7 million of our cash to repurchase zero coupon
debentures having an aggregate face amount at maturity of
$387.0 million. Assuming that as of February 13, 2003,
all zero coupon debentures outstanding as of December 31,
2001 are redeemed, the aggregate redemption price would equal
approximately $246.5 million. As of December 31, 2001,
our aggregate cash, cash equivalents and marketable securities
were approximately $943.0 million, including
$102.5 million held by McAfee.com.

In anticipation of any repurchase or optional
redemption of the debentures, we may issue additional
indebtedness to pay all or a portion of the repurchase or
redemption price. This indebtedness may be issued in a greater
amount than, or on terms less favorable than, the outstanding
debentures or notes.

14



---



##### 



We Face Risks Related To The Organization Of
Our U.S. Professional Services Organization And Sales Efforts By
Product Groups.

Our U.S. sales force and related professional
service organization are organized by product group: McAfee,
Sniffer Technologies and Magic Solutions. Risks related to this
structure include:



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | customer confusion or irritation related to
    multiple sales calls from different members of our sales forces;                                                      
|
| |  | potential losses of cross-selling opportunities
    and lead sharing between the separate product groups sales
    representatives;                                  
|
| |  | possible failures by our centralized general and
    administrative group to meet each product groups
    individualized infrastructure and support requirements; and
|
| |  | one or more of our product groups lacking
    sufficient qualified professional services personnel to support
    its products.                                       

We Face Risks Associated With Past And Future
Transactions.

Acquisitions.

We may buy or make investments in complementary
companies, products and technologies. Since 1995, we have
completed a large number of significant acquisitions involving
both public and private companies including the acquisition of
CyberMedia and Dr. Solomons in 1998 and Network
General in 1997. We and McAfee.com have also completed a number
of smaller acquisitions and we have acquired a number of our
international distributors.

Integration of an acquired company or technology
involves a complex, time consuming and expensive process. The
successful integration of an acquisition requires, among other
things, that we:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | integrate and retain key management, sales and
    other personnel;                                                             
|
| |  | integrate the acquired products into our product
    offerings both from an engineering and sales and marketing
    perspective;
|
| |  | integrate and support preexisting supplier,
    distribution and customer relationships;                                        
|
| |  | coordinate research and development efforts; and                                                                                
|
| |  | consolidate duplicate facilities and functions.                                                                                 

The geographic distance between the companies,
the complexity of the technologies and operations being
integrated, and the disparate corporate cultures being combined
may increase the difficulties of integrating an acquired company
or technology. Managements focus on the integration of
operations may distract attention from our day-to-day business
and may disrupt key research and development, marketing or sales
efforts. In addition, it is common in the technology industry
for aggressive competitors to attract customers and recruit key
employees away from companies during the integration phase of an
acquisition.

Our available cash and securities may be used to
buy or invest in companies or products, possibly resulting in
significant acquisition-related charges to earnings and dilution
to our stockholders. Moreover, if we buy a company, we may have
to incur or assume that companys liabilities, including
liabilities that are unknown at the time of acquisition.

Investments.

We have made a number of venture and minority
investments in private and publicly-traded companies with
complementary products, services and technologies. As of
December 31, 2001, the minority venture investments we
continue to hold totaled $2.4 million consisting of
investments in public and private companies, amounting to
$2.2 million and $200,000, respectively. During 2001, we
recorded a $20.6 million impairment charge in connection
with these investments. We may make additional strategic
investments.

15



---



##### 



We Could Experience Customer And Market
Confusion Due To Similarities In The Names Used By Our Different
Product Groups And Subsidiaries.

Network Associates, our product groups and our
subsidiaries, often have similar and potentially confusing
names, products and Web addresses. For example, our online
consumer anti-virus products are sold by our publicly traded
McAfee.com subsidiary, our retail and large corporate anti-virus
products are sold by our retail division, which is called McAfee
Retail, and our hosted anti-virus products are marketed and sold
by our McAfee product group. Customers of our McAfee product
group are frequently confused by the need to access information
regarding our products and services at www.mcafeeb2b.com. The
web address www.mcafee.com is utilized by our publicly traded
subsidiary McAfee.com.

We Face Risks Related To Our Application
Service Provider Strategy.

Customers of our ASP or hosted products and
services essentially rent the use our software. For
example, McAfee ASaP offers hosted services to corporate
customers and McAfee.com is dedicated to updating, upgrading and
managing PCs over the Internet for consumers and small to
medium-sized businesses. This web-based model is a relatively
new concept, and our ASP products and services may fail to
maintain or increase market acceptance. The growth, market
acceptance and ultimate profitability of our ASP services is
highly uncertain and subject to a number of factors, including:



| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to successfully adapt existing
    products or develop new or enhanced products that operate in a
    fast, secure and reliable manner over the Internet;               
|
| |  | increased expenditures associated with the
    creation of a new business or delivery platform, such as product
    development, marketing and technical and administrative support;
|
| |  | the introduction of new products by third-party
    competitors; and                                                                                                                
|
| |  | our ability to properly price our products and
    services to generate the greatest revenue opportunities.                                                                         

Our Managed Service Provider Strategy Exposes
Us To Risks In Addition To Those Generally Experienced As An
ASP.

We also make our hosted products and services
available over the Internet in what we refer to as a managed
environment. Unlike our ASP solutions, these managed service
provider, or MSP, solutions are customized, monitored and
updated by networking professionals for a specific customer. To
successfully offer MSP services we must:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | effectively monitor and customize each
    customers managed services;                                                      
|
| |  | attract and retain qualified networking
    professionals to manage customer accounts; and                                   
|
| |  | effectively price our products and services to
    account for the higher costs associated with selling managed
    services.

We also allow intermediaries, such as Internet
Service Providers, to sell and host our products and services in
a managed environment. This MSP reseller strategy exposes us to
additional risks:



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we must select, train and maintain qualified and
    financially stable MSP resellers;                                                                                                                                   
|
| |  | it is more difficult for us to ensure customer
    satisfaction as we do not have direct customer contact and we
    rely on our resellers to timely and properly customize and
    administer our products and services;
|
| |  | we must develop and maintain mutually
    satisfactory revenue sharing arrangements with our MSP
    resellers; and                                                                                                      
|
| |  | our MSP resellers may compete with our own MSP
    efforts.                                                                                                                                                              

16



---



##### 



We Face Risks Related To Our Relationship With
McAfee.com.

We have entered into various inter-company
arrangements with McAfee.com, our publicly traded subsidiary.
Pursuant to our cross license agreement with McAfee.com, we have
licensed all our technology to McAfee.com for use in the markets
specified below and McAfee.com has licensed its technology to us
for our use outside of McAfee.coms markets. Our license
and other agreements with McAfee.com expose us to risks,
including:



| |   |                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | subject to the reseller agreement described
    below, McAfee.com has the exclusive right to use the licensed
    technology for providing single-user consumer licenses for our
    products and services sold over the Internet or for
    Internet-based products and licensing the technology to original
    equipment manufacturers for sale to individual consumers;
|
| |  | we may not offer a product incorporating
    third-party technology if those products are competitive with
    products offered by McAfee.com;                                                                                                                                                                                                                             
|
| |  | the license agreement is perpetual and may only
    be terminated by us if McAfee.com fails to cure a material
    breach of the license within 30 days after we notify it of the
    breach, subject to mandatory dispute resolution prior to the
    effectiveness of any proposed termination; and                                                                      
|
| |  | we are required to indemnify McAfee.com with
    respect to litigation related to our licensed technology.                                                                                                                                                                                                                                                                 

These risks manifest themselves, among other
ways, in terms of customer confusion, sales force confusion over
market boundaries and possible conflicts between the companies.

In March 2001, we entered into reseller
agreements with McAfee.com. Under these agreements, McAfee.com
may resell our products to business customers, except in Japan,
and, in certain countries, we may sell McAfee.com products to
OEMs and end-users directly or through ASPs.

We Are Subject To Intense Competition In The
Network Management And Security Markets And We Expect To Face
Increased Competition In The Future.

The markets for our products are intensely
competitive and we expect competition to increase in the
near-term. Some of our competitors have longer operating
histories, greater name recognition, larger technical staffs,
established relationships with hardware vendors and/or greater
financial, technical and marketing resources.

Anti-Virus
Software.

Our principal competitor in the anti-virus market
is the Norton Product Group of Symantec. Trend Micro remains the
strongest competitor in the Asian anti-virus market, with
Dr. Ahns making recent inroads, particularly in Japan
and Korea. Other anti-virus competitors include numerous smaller
companies and shareware authors that may in the future develop
competing software or be consolidated into larger competitors.

Network
Security.

Our principal competitors in the security market
vary by product type. For firewalls, our principal competitors
include CheckPoint, Symantec, and larger companies such as Cisco
Systems and Microsoft. For intrusion detection products, we
compete with Cisco Systems, Internet Security Systems and
Symantec. The markets for encryption and virtual private
network, or VPN, products are highly fragmented with numerous
small and large vendors. VPN competitors include hardware and
software vendors, including telecommunications companies and
traditional networking suppliers.

Network
Management.

Our principal competitor in the network
management market is Agilent. Other competitors include Acterna
Corporation, Cisco Systems, Computer Associates, Compuware,
Concord Communications,

17



---



##### 



DeskTalk Systems, GN Nettest, Network
Instruments, Radcom Technologies, Shomiti Systems and
WildPackets.


Helpdesk.

Our principal competitors in the help desk market
are Computer Associates, FrontRange Solutions and Peregrine
Systems.

Other
Competitors.

We also face competition from large software
companies such as HP, Intel, Microsoft and Novell, which may
offer network security and management products as enhancements
to their operating system.

We Face Product Development Risks Associated
With Rapid Technological Changes In Our Market.

The network security and management market is
highly fragmented and characterized by ongoing technological
developments, evolving industry standards and rapid changes in
customer requirements. Our success depends on our ability to
timely and effectively:



| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | offer a broad range of network security and
    management software products;                                                                                                                                                       
|
| |  | enhance existing products and expand product
    offerings;                                                                                                                                                                         
|
| |  | respond promptly to new customer requirements and
    industry standards; and                                                                                                                                                       
|
| |  | remain compatible with popular operating systems
    such as Linux, NetWare, Windows XP, Windows 2000,
    Windows 98 and Windows NT, and develop products that
    are compatible with new or otherwise emerging operating systems.

We may experience delays in software development
as we have at times in the past. Complex software products like
ours may contain undetected errors or version compatibility
problems, particularly when first released, which could delay or
harm market acceptance.

Our long-term success depends on our ability to
keep our products current. For example, the proliferation of new
and changing viruses makes it imperative to update anti-virus
products frequently to avoid obsolescence. Accordingly, we must
upgrade and update existing product offerings, modify and
enhance acquired products and introduce new products which meet
our customers needs. We believe that our ability to
provide these upgrades and updates frequently and at low costs
is key to our anti-virus success.

Competitors May Include Products Similar To
Ours In Their Hardware Or Software And Render Our Products
Obsolete, And If There Are Fewer Weaknesses In Third-Party
Software, The Perceived Need For Our Software May
Decline.

Vendors of hardware and of operating system
software or other software (such as firewall or e-mail software)
may enhance their products or bundle separate products to
include network security and management software similar to our
products. From time to time, Microsoft has indicated that it
would incorporate its own anti-virus software or functionality
into its products. The widespread inclusion of products that
perform the same or similar functions as our products within
computer hardware or other software could render our products
obsolete and unmarketable. Furthermore, even if these
incorporated products are inferior or more limited than our
products, customers may elect to accept the incorporated
products rather than purchase our products. If we are unable to
develop new network security and management products to further
enhance operating systems or other software and to successfully
replace any obsolete products, our business could suffer.

Many current viruses exploit known weaknesses in
third-party software. If these weaknesses are corrected or, if
there are fewer third-party software weaknesses, the perceived
need for our products may decline.

18



---



##### 



Our Hardware Based Products Face
Manufacturing, Supply, Inventory, Licensing And Obsolescence
Risks.

Third-Party
Manufacturing.

We rely on a small number of third parties to
manufacture some of our hardware-based Sniffer and E-ppliance
products. We expect the number of our hardware-based products
and our reliance on third-party manufacturers to increase as
software-only network security and management solutions become
less viable. Reliance on third-party manufacturers involves a
number of risks, including the lack of control over the
manufacturing process and the potential absence or
unavailability of adequate capacity. If any of our third party
manufacturers cannot or will not manufacture our products in
required volumes, on a cost-effective basis, in a timely manner,
or at all, we will have to secure additional manufacturing
capacity. Even if this additional capacity is available at
commercially acceptable terms, the qualification process could
be lengthy and could cause interruptions in product shipments.
The unexpected loss of any of our manufacturers would be
disruptive to our business.

Sourcing.

Our hardware-based products contain critical
components supplied by a single or a limited number of third
parties. Any significant shortage of components or the failure
of the third-party supplier to maintain or enhance these
products could lead to cancellations of customer orders or
delays in placement of orders.

Third-Party
Licenses.

Some of our hardware-based products incorporate
licensed software. We must be able to obtain reasonably priced
licenses and successfully integrate this software with our
hardware.

Obsolescence.

Hardware based products may face greater
obsolescence risks than software products. We could incur losses
or other charges in disposing of obsolete inventory.

We Rely On The Continued Prominence Of
Microsoft Technology.

Although we intend to support other operating
systems, we seek to be the leading supplier of network security
and management products for Windows/ Intel based networks. Sales
of our products would be materially and adversely affected by
market developments that are adverse to the Windows operating
environments, including the failure of users and application
developers to accept Windows. In addition, our ability to
develop products using the Windows operating environments is
dependent on our ability to gain timely access to, and to
develop expertise in, current and future developments by
Microsoft, including the recently introduced Windows XP. We may
be unable to gain the necessary access from Microsoft to its
product development activities.

We May Fail To Support Operating Systems Which
Successfully Compete With Microsofts Technology, Including
Competing Versions Of The Unix Operating System.

We are expanding our product support to include
the Unix operating system and the Linux operating system. Sales
of our products could be materially and adversely impacted by
our failure to support those operating systems or competing
operating systems that receive broad market acceptance. The Unix
system encompasses many separate operating systems of which we
only support a few, including for example, Sun
Microsystems Solaris Unix operating system.

We Rely Heavily On Our Intellectual Property
Rights Which Offer Only Limited Protection Against Potential
Infringers.

We rely on a combination of contractual rights,
trademarks, trade secrets, patents and copyrights to establish
and protect proprietary rights in our software. However, the
steps taken by us to protect our

19



---



##### 



proprietary software may not deter its misuse or
theft. We are aware that a substantial number of users of our
anti-virus products have not paid any registration or license
fees to us. Competitors may also independently develop
technologies or products that are substantially equivalent or
superior to our products. Changing legal interpretations of
liability for unauthorized use of our software, or lessened
sensitivity by corporate, government or institutional users to
avoiding infringement of intellectual property could also harm
our business.


Intellectual Property Litigation In The
Network Security And Management Market Is Common and Can Be
Expensive.

Litigation may be necessary to enforce and
protect trade secrets and other intellectual property rights
that we own. Similarly, we may be required to defend against
claimed infringement by others.

In addition to the expense and distractions
associated with litigation, adverse determinations could:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | result in the loss of our proprietary rights;                             
|
| |  | subject us to significant liabilities, including
    monetary liabilities;
|
| |  | require us to seek licenses from third parties; or                        
|
| |  | prevent us from manufacturing or selling our
    products.                

The litigation process is subject to inherent
uncertainties. We may not prevail in these matters, or we may be
unable to obtain licenses with respect to any patents or other
intellectual property rights that may be held valid or infringed
upon by our products or us.

If we acquire a portion of software included in
our products from third parties, our exposure to infringement
actions may increase because we must rely upon these third
parties as to the origin and ownership of any software being
acquired. Similarly, exposure to infringement claims increase if
we employ or hire software engineers previously employed by
competitors, notwithstanding measures taken by us or our
competitors to protect our competitors intellectual
property.

Pending Or Future Litigation Could Have A
Material Adverse Impact On Our Results Of Operation And
Financial Condition.

In addition to intellectual property litigation,
from time to time, we have been subject to litigation. Where we
can make a reasonable estimate of the liability relating to
pending litigation, we record a related liability. As additional
information becomes available, we assess the potential liability
and revise estimates as appropriate. However, because of
uncertainties relating to litigation, the amount of our
estimates could be wrong. In addition to the related cost and
use of cash, pending or future litigation could cause the
diversion of managements attention and resources. A
putative securities class action is currently pending against
us, our directors and our former officers. The plaintiffs allege
that we and the other defendants improperly engaged in a course
of conduct by which we improperly accounted for revenue from our
software license sales and that, as a result, certain of our
financial statements were false and misleading and not in
compliance with generally accepted accounting principles.

Product Liability And Related Claims May Be
Asserted Against Us.

Our network security and management software
products are used to protect and manage computer systems and
networks that may be critical to organizations. As a result, our
sale and support of these products involves the risk of
potential product liability and related claims. Our license
agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability
claims. It is possible, however, that the limitation of
liability provisions may not be effective under the laws of
certain jurisdictions, particularly in circumstances involving
unsigned licenses.

20



---



##### 



Computer Hackers May Damage Our
Products, Services and Systems.

Due to our high profile in the security software
market, we have been a target of computer hackers who have,
among other things, created viruses to sabotage or otherwise
attack our products and services, including our various
websites. For example, we have recently seen the spread of
viruses, or worms, that intentionally delete antivirus and
firewall software. Similarly, hackers may attempt to penetrate
our network security and misappropriate proprietary information
or cause interruptions of our internal systems and services.
Also, a number of websites have been subject to denial of
service attacks, where a website is bombarded with information
requests eventually causing the website to overload, which
causes a delay or disruption of service. If successful, any of
these events could damage users or our computer systems.
In addition, since we do not control diskette duplication by
distributors or our independent agents, diskettes containing our
software may be infected with viruses.

False Detection Of Viruses And Actual Or
Perceived Security Breaches Could Adversely Affect Our
Business.

Our anti-virus software products have in the past
and may at times in the future falsely detect viruses that do
not actually exist. These false alarms, while typical in the
industry, may impair the perceived reliability of our products
and may therefore adversely impact market acceptance of our
products. In addition, we have in the past been subject to
litigation claiming damages related to a false alarm, and
similar claims may be made in the future. 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.

Business Interruptions May Impede Our
Operations And Adversely Affect Our Business.

We face a number of potential business
interruption risks that are beyond our control. The State of
California has recently experienced intermittent power
shortages, sharp increases in the cost of energy and even
interruptions of service to some business customers.

Additionally, we may experience natural disasters
that could interrupt our business. Our corporate headquarters is
located near a major earthquake fault. The potential impact of a
major earthquake on our facilities, infrastructure and overall
operations is not known. Despite safety precautions that have
been implemented, there is no guarantee that an earthquake would
not seriously disturb our entire business process. We are
largely uninsured for losses and business disruptions caused by
an earthquake and other natural disasters.

We Face Risks Associated With U.S. Government
Contracting.

We are currently engaged in several research and
development contracts with agencies of the U.S. government.
The willingness of these government agencies to enter into
future contracts with us depends in part on our continued
ability to meet their expectations.

Minimum fee awards for companies entering into
government contracts are generally between 3% and 7% of the
costs incurred by them in performing their duties under the
related contract. However, these fee awards may be as low as 1%
of the contract costs. Furthermore, these contracts are subject
to cancellation at the convenience of the government agencies.
Although we have been awarded contract fees of more than 1% of
the contract costs in the past, minimum fee awards or
cancellations may occur in the future. Reductions or delays in
federal funds available for projects we are performing could
also have an adverse impact on our government business.
Contracts involving the U.S. government are also subject to
the risks of disallowance of costs upon audit, changes in
government procurement policies, required competitive bidding
and, with respect to contracts involving prime contractors or
government-designated subcontractors, the inability of those
parties to perform under their contracts.

21



---



##### 



Our Cryptography Technology Is Subject To
Export Restrictions.

Some of our network security products,
particularly those incorporating encryption, may be subject to
export restrictions. As a result, some products may not be
exported to international customers without prior
U.S. government approval. The list of products and end
users for which export approval is required, and the regulatory
policies with respect thereto, are subject to revision by the
U.S. government at any time. The cost of compliance with
U.S. and international export laws and changes in existing laws
could affect our ability to sell certain products in certain
markets, and could have a material adverse effect on our
international revenues.

Our Stock Price Has Been Volatile And Is
Likely To Remain Volatile, Which May Adversely Affect The Price
Of Our Stock.

During 2001, our stock price was highly volatile
ranging from a per-share high of $27.27 to low of $4.19.
Announcements, litigation developments, and our ability to meet
the expectations of investors with respect to our operating and
financial results may contribute to current and future stock
price volatility. We may not discover, or be able to confirm,
revenue or earnings shortfalls until the end of a quarter, which
could result in an immediate drop in our stock price. In
addition, similar events with respect to McAfee.com, our
publicly traded subsidiary, and fluctuations in its stock price,
may also contribute to the volatility of our stock price.
Securities class action litigation has been instituted following
previous periods of volatility. A number of putative class
actions were brought against our former officers, directors and
us. This litigation, and any other litigation, could result in
substantial costs and a diversion of managements attention
and resources.

Future Sales Of Our Common Stock In The Public
Market Or Option Exercises And Sales Could Lower Our Stock
Price.

A substantial number of the shares of our common
stock are subject to stock options and our outstanding
convertible debentures and notes may be converted into shares of
common stock. We cannot predict the effect, if any, that future
sales of shares of common stock, or the availability of shares
of common stock for future sale, will have on the market price
of our common stock. Sales of substantial amounts of common
stock, including shares issued upon the exercise of stock
options or the conversion of our outstanding convertible notes
or debentures, or the perception that such sales could occur,
may adversely affect prevailing market prices for our common
stock.

Our Charter Documents And Delaware Law, Our
Rights Plan And Our Stockholders Agreement With McAfee.com May
Impede Or Discourage A Takeover, Which Could Lower Our Stock
Price.

Our Charter
Documents and Delaware Law

Pursuant to our charter, our board of directors
has the authority to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any further vote of action by our stockholders.
The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of our
outstanding voting stock.

Our classified board and other provisions of
Delaware law and our certificate of incorporation and bylaws,
could also delay or make a merger, tender offer or proxy contest
involving us more difficult.

Our Rights
Plan

Our board of directors has adopted a shareholders
rights plan. The rights will become exercisable the tenth day
after a person or group announces acquisition of 15% or more of
our common stock or announces commencement of a tender or
exchange offer the consummation of which would result in
ownership by the person or group of 15% or more of our common
stock. If the rights become exercisable, the holders of the
rights (other than the person acquiring 15% or more of our
common stock) will be entitled to acquire in exchange for the
rights exercise price, shares of our common stock or
shares of any company in which we are merged, with a value equal
to twice the rights exercise price.

22



---



##### 



Our
Stockholders Agreement with McAfee.com

Under our McAfee.com stockholders agreement we
agreed that if (1) without the prior approval of our
continuing directors, as defined below, any person acquires or
agrees to acquire 15% or more of our outstanding common stock or
(2) our continuing directors cease to constitute a majority
of our serving directors, then for so long but only for so long
as that condition exists:



| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our shares of McAfee.com Class B common
    stock will be entitled to only one vote per share instead of
    three votes per share; and                                                                                                                                                                                   
|
| |  | we will be obligated to vote our McAfee.com
    shares to cause, and to take such actions reasonably within our
    control to cause, and shall seek to cause the McAfee.com
    directors appointed by us to cause, the McAfee.com board of
    directors to consist of at least a majority of independent
    directors.

Our continuing directors consist of our current
directors and any subsequent directors approved or not objected
to by a majority of our then-continuing directors.

Item 2.     Properties

Our headquarters currently occupy 208,368 square
feet in facilities located in Santa Clara, California under
leases expiring in 2013. Worldwide, we lease facilities with
approximately 1.0 million total square feet, with leases
that expire at various times. Our primary international
facilities are located in Australia, Brazil, Germany, Japan, the
Netherlands and the United Kingdom. Other significant domestic
sites include Maryland, Oregon and Texas. We believe that our
existing facilities are adequate for the present and that
additional space will be available as needed.

In 2001, we purchased 15.6 acres of land in
Legacy Corporate Park, Plano, Texas to construct a new regional
office in the Dallas area.

Item 3.     Legal
Proceedings

Information with respect to this item is
incorporated by reference to Note 17 to the Notes to
Consolidated Financial Statements included in this Form 10-K/ A.

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

No matters were submitted to a vote of
stockholders during the fourth quarter of the year ended
December 31, 2001.

23



---



##### 



PART II

Item 5.     Market
for the Registrants Common Equity and Related Stockholder
Matters

Price Range of Common Stock

Since our initial public offering on
October 6, 1992, our common stock has traded on the NASDAQ
National Market. Since the combination with Network General
Corporation on December 1, 1997, our common stock has
traded under the symbol NETA. Prior thereto, our common stock
traded under the symbol MCAF. Effective February 12, 2002,
our common stock will commence trading on the New York Stock
Exchange (NYSE) under the symbol NET and will no longer be
traded on NASDAQ.

The following table sets forth, for the period
indicated, the high and low closing sales prices for our common
stock for the last eight quarters, all as reported by NASDAQ.
The prices appearing in the tables below reflect over the
counter market quotations, which reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

|                             |                |      |   |       |  |  |   |       | 
|---------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                             |                | High |   | Low  
|                             |                |      |   |      
|Year Ended December 31, 2001 |                |      |   |       |  |  |   |      
|                             | First Quarter  |      | $ | 8.38  |  |  | $ | 4.19  | 
|                             | Second Quarter |      |   | 16.50 |  |  |   | 6.00  | 
|                             | Third Quarter  |      |   | 16.84 |  |  |   | 10.56 | 
|                             | Fourth Quarter |      |   | 27.27 |  |  |   | 13.40 | 
|Year Ended December 31, 2000 |                |      |   |       |  |  |   |      
|                             | First Quarter  |      | $ | 36.69 |  |  | $ | 23.31 | 
|                             | Second Quarter |      |   | 29.25 |  |  |   | 19.75 | 
|                             | Third Quarter  |      |   | 26.25 |  |  |   | 18.19 | 
|                             | Fourth Quarter |      |   | 23.00 |  |  |   | 4.13  | 

Dividend Policy

We have not paid any cash dividends since our
reorganization into a corporate form in October 1992. We intend
to retain future earnings for use in our business and do not
anticipate paying cash dividends in the foreseeable future.

Holders of Common Stock

As of December 31, 2001, there were 1,083
record owners of our common stock.

Item 6.     Selected
Financial Data

You should read the following selected
consolidated financial data with the consolidated financial
statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this Form 10-K/A.

On April 25, 2002, we announced that we had
discovered accounting inaccuracies in certain prior period
financial statements, requiring restatement of the financial
statements for these periods. We conducted an internal
investigation under the direction of the Audit Committee of our
Board of Directors to determine the scope and magnitude of these
inaccuracies. On May 17, 2002, we announced that the Audit
Committee of our Board of Directors had completed its internal
accounting investigation. As a result of the internal accounting
investigation, our statements of operations, cash flows and
stockholders equity for the years ended December 31,
2000, 1999 and 1998 and the balance sheets as of
December 31, 2000, 1999 and 1998 are being restated. In
addition, to give effect to accumulated prior period adjustments
and their related tax impacts, we announced the restatement of
our December 31, 2001 and March 31, 2002 balance
sheets. As a result, we are restating our statements of
operations and stockholders equity for the years ended
December 31, 2000, 1999

24



---



##### 



and 1998; statements of cash flows for the years
ended December 31, 2000 and 1999 and balance sheets as of
December 31, 2001 and 2000, which are included in this
10-K/A. The statements of operations and cash flows for the year
ended December 31, 2001 were not impacted by this
restatement.


The Audit Committees investigation
determined that in 2000, inaccurate accounting entries were
made, which required restatement. These entries
(a) recorded payments of approximately $12.4 million
to a distributor in a balance sheet tax liability account
instead of reducing Net revenue, (b) reclassified
approximately $14.2 million from a tax liability account to
the general and administrative and marketing and sales liability
accounts, understating general and administrative and marketing
and sales expenses by approximately $14.2 million,
(c) recorded additions of approximately $10.0 million
to sales return reserves as tax expense rather than as a
reduction of Net revenue, (d) increased a tax liability
account and reduced Net revenue by approximately
$22.0 million, (e) adjusted the foreign currency
accounts resulting in an overstatement of Net revenue and an
understatement of Interest and other income of approximately
$1.0 million and (f) reclassified approximately
$13.9 million from marketing and sales and general and
administrative to Net revenue, resulting in an overstatement of
marketing and sales and general and administrative expenses and
Net revenue. Other entries had the effect of overstating Cost of
net revenue by approximately $1.0 million, understating
Operating costs and expenses by approximately $2.6 million,
understating Interest and other income by approximately
$1.6 million, and misclassifying amounts, totaling
approximately $1.5 million, between marketing and sales and
general and administrative expenses. The tax effects of these
entries increased the provision for income taxes by
approximately $6.6 million. In the aggregate for 2000, the
adjustments for these entries and related tax effects increased
previously reported net loss by $21.2 million from
$102.7 million to $123.9 million, and increased
previously reported basic and diluted net loss by $0.16 per
share.

The internal investigation also determined that
inaccurate accounting entries, which required restatement, were
also made in 1999 and 1998. In 1999, these entries
(a) recorded additions of approximately $28.2 million
to sales return reserves as tax expense rather than as a
reduction of Net revenue and (b) reclassified approximately
$1.5 million from the tax liability accounts to general and
administrative expense liability accounts, understating general
and administrative expenses by $1.5 million. Other entries
misclassified approximately $0.5 million between marketing
and sales and general and administrative expenses. The tax
effects of these entries reduced the provision for income taxes
by approximately $32.7 million. In the aggregate for 1999,
the adjustments for these entries and related tax effects
reduced previously reported net loss by $3.0 million from
$159.9 million to $156.9 million, and reduced
previously reported basic and diluted net loss by $0.02 per
share.

The entries made during 1998 reclassified
approximately $6.2 million from the tax liability accounts
to general and administrative expense liability accounts,
understating general and administrative expenses by
$6.2 million. The tax effects of these entries reduced the
provision for income taxes by approximately $2.2 million.
In the aggregate for 1998, the adjustments for these entries and
related tax effects reduced previously reported net income by
$4.0 million from $36.4 million to $32.4 million,
and reduced previously reported basic and diluted net income by
$0.03 per share.

During the three months ended March 31,
2002, we adopted the Financial Accounting Standards Boards
Emerging Issues Task Force Statement No. 01-09, entitled
Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendors Products
(EITF 01-09). EITF 01-09 requires that
payments to customers or reductions in their accounts receivable
for certain marketing related amounts previously classified as
charges to marketing expense be recorded as reductions of
revenue. Upon adoption of EITF 01-09, we are required to
retroactively reclassify amounts recognized for such payments in
previously issued financial statements to comply with the income
statement display requirements of the consensus.

We were unable to identify the amounts required
to be reclassified under EITF 01-09 for the income statement for
the year ended December 31, 1997, as this information is
unavailable. We reclassified approximately $23.5 million,
$32.7 million, $44.5 million and $28.4 million
for the years ended December 31, 2001, 2000, 1999 and 1998,
respectively.

25



---



##### 



|                                                                                |  |                                              |          |               |  |               |          |               |  |      |          |   |  |   |         |  |  |   |         | 
|------------------------------------------------------------------------------- |  | -------------------------------------------- | -------- | ------------- |  | ------------- | -------- | ------------- |  | ---- | -------- | - |  | - | ------- |  |  | - | ------- | 
|                                                                                |  |                                             
|                                                                                |  | Years Ended December 31,                    
|                                                                                |  |                                             
|                                                                                |  | 2001                                         |          | 2000          |  | 1999          |          | 1998          |  | 1997
|                                                                                |  |                                              |          |               |  |               |          |               |  |     
|                                                                                |  |                                             
|                                                                                |  | (In thousands, except for per share amounts)
|                                                                                |  |                                              |          | (As Restated  |  | (As Restated  |          | (As Restated  |  |     
|                                                                                |  | (As                                          |          | and           |  | and           |          | and           |  |     
|                                                                                |  | Reclassified)                                |          | Reclassified) |  | Reclassified) |          | Reclassified) |  |     
|Statement of Operations Data:                                                   |  |                                              |          |               |  |               |          |               |  |      |          |   |  |   |         |  |  |   |         | 
|Net revenue                                                                     |  | $                                            | 810,974  |               |  | $             | 697,742  |               |  | $    | 610,984  |   |  | $ | 961,683 |  |  | $ | 735,692 | 
|Income (loss) from operations                                                   |  |                                              | (81,966  | )             |  |               | (169,192 | )             |  |      | (167,923 | ) |  |   | 113,806 |  |  |   | 61,947  | 
|Income (loss) before income taxes, minority
    interest and extraordinary item |  |                                              | (91,383  | )             |  |               | (112,376 | )             |  |      | (160,722 | ) |  |   | 132,007 |  |  |   | 82,813  | 
|Income (loss) before extraordinary item                                         |  |                                              | (102,381 | )             |  |               | (123,926 | )             |  |      | (156,885 | ) |  |   | 32,434  |  |  |   | 10,639  | 
|Extraordinary item, gain on redemption of debt,
    net of taxes                |  |                                              | 1,731    |               |  |               |         |               |  |      |         |   |  |   |        |  |  |   |        | 
|Net income (loss)                                                               |  |                                              | (100,650 | )             |  |               | (123,926 | )             |  |      | (156,885 | ) |  |   | 32,434  |  |  |   | 10,639  | 
|Net income (loss) per share, before extraordinary
    item, basic               |  | $                                            | (0.74    | )             |  | $             | (0.90    | )             |  | $    | (1.13    | ) |  | $ | 0.24    |  |  | $ | 0.08    | 
|Net income (loss) per share, before extraordinary
    item, diluted             |  | $                                            | (0.74    | )             |  | $             | (0.90    | )             |  | $    | (1.13    | ) |  | $ | 0.23    |  |  | $ | 0.08    | 
|Extraordinary item, basic                                                       |  | $                                            | 0.01     |               |  | $             |         |               |  | $    |         |   |  | $ |        |  |  | $ |        | 
|Extraordinary item, diluted                                                     |  | $                                            | 0.01     |               |  | $             |         |               |  | $    |         |   |  | $ |        |  |  | $ |        | 
|Net income (loss) per share, basic                                              |  | $                                            | (0.73    | )             |  | $             | (0.90    | )             |  | $    | (1.13    | ) |  | $ | 0.24    |  |  | $ | 0.08    | 
|Net income (loss) per share, diluted                                            |  | $                                            | (0.73    | )             |  | $             | (0.90    | )             |  | $    | (1.13    | ) |  | $ | 0.23    |  |  | $ | 0.08    | 
|Shares used in per share calculation 
    basic                                |  |                                              | 137,847  |               |  |               | 138,072  |               |  |      | 138,695  |   |  |   | 133,075 |  |  |   | 126,662 | 
|Shares used in per share calculation 
    diluted                              |  |                                              | 137,847  |               |  |               | 138,072  |               |  |      | 138,695  |   |  |   | 138,609 |  |  |   | 132,729 | 

|                                     |  |                          |           |               |  |               |           |               |  |      |           |  |  |   |           |  |  |   |         | 
|------------------------------------ |  | ------------------------ | --------- | ------------- |  | ------------- | --------- | ------------- |  | ---- | --------- |  |  | - | --------- |  |  | - | ------- | 
|                                     |  |                         
|                                     |  | Years Ended December 31,
|                                     |  |                         
|                                     |  | 2001                     |           | 2000          |  | 1999          |           | 1998          |  | 1997
|                                     |  |                          |           |               |  |               |           |               |  |     
|                                     |  | (As Restated)            |           | (As Restated) |  | (As Restated) |           | (As Restated) |  |     
|Balance Sheet Data:                  |  |                          |           |               |  |               |           |               |  |      |           |  |  |   |           |  |  |   |         | 
|Cash and cash equivalents            |  | $                        | 612,832   |               |  | $             | 275,539   |               |  | $    | 316,784   |  |  | $ | 418,899   |  |  | $ | 157,031 | 
|Working capital                      |  |                          | 512,788   |               |  |               | 168,028   |               |  |      | 274,274   |  |  |   | 533,052   |  |  |   | 247,811 | 
|Total assets                         |  |                          | 1,633,904 |               |  |               | 1,391,620 |               |  |      | 1,489,797 |  |  |   | 1,536,721 |  |  |   | 805,350 | 
|Deferred revenue and taxes           |  |                          | 294,805   |               |  |               | 186,129   |               |  |      | 163,816   |  |  |   | 205,598   |  |  |   | 129,557 | 
|Long term debt and other liabilities |  |                          | 579,243   |               |  |               | 396,868   |               |  |      | 379,267   |  |  |   | 374,132   |  |  |   | 2,353   | 
|Total equity                         |  |                          | 422,594   |               |  |               | 496,458   |               |  |      | 659,118   |  |  |   | 718,834   |  |  |   | 492,501 | 

Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Results Of Operations

Years Ended
December 31, 2001, 2000 and 1999, as restated

You should read the following discussion in
conjunction with the restated audited consolidated financial
statements for the years ended December 31, 2000 and 1999
and related notes of Networks Associates appearing elsewhere in
this Form 10-K/A.

On April 25, 2002, we announced that we had
discovered accounting inaccuracies in certain prior period
financial statements, requiring restatement of the financial
statements for these periods. We conducted an internal
investigation under the direction of the Audit Committee of our
Board of Directors to determine the scope and magnitude of these
inaccuracies. On May 17, 2002, we announced that the Audit
Committee of our Board of Directors had completed its internal
accounting investigation. As a result of the internal accounting
investigation, our statements of operations, cash flows and
stockholders equity for the years ended

26



---



##### 



December 31, 2000, 1999 and 1998 and the
balance sheets as of December 31, 2000, 1999 and 1998 are
being restated. In addition, to give effect to accumulated prior
period adjustments and their related tax impacts, we announced
the restatement of our December 31, 2001 and March 31,
2002 balance sheets. As a result, we are restating our
statements of operations, cash flows and stockholders
equity for the years ended December 31, 2000 and 1999 and
balance sheets as of December 31, 2001 and 2000, which are
included in this 10-K/A. The statements of operations and cash
flows for the year ended December 31, 2001 were not
impacted by this restatement.


The Audit Committees investigation
determined that in 2000, inaccurate accounting entries were
made, which required restatement. These entries
(a) recorded payments of approximately $12.4 million
to a distributor in a balance sheet tax liability account
instead of reducing Net revenue, (b) reclassified
approximately $14.2 million from a tax liability account to
the general and administrative and marketing and sales liability
accounts, understating general and administrative and marketing
and sales expenses by approximately $14.2 million,
(c) recorded additions of approximately $10.0 million
to sales return reserves as tax expense rather than as a
reduction of Net revenue, (d) increased a tax liability
account and reduced Net revenue by approximately
$22.0 million, (e) adjusted the foreign currency
accounts resulting in an overstatement of Net revenue and an
understatement of Interest and other income of approximately
$1.0 million and (f) reclassified approximately
$13.9 million from marketing and sales and general and
administrative expenses to Net revenue, resulting in an
overstatement of marketing and sales and general and
administrative expenses and Net revenue. Other entries had the
effect of overstating Cost of net revenue by approximately
$1.0 million, understating Operating costs and expenses by
approximately $2.6 million, understating Interest and other
income by approximately $1.6 million, and misclassifying
amounts, totaling approximately $1.5 million, between
marketing and sales and general and administrative expenses. The
tax effects of these entries increased the provision for income
taxes by approximately $6.6 million. In the aggregate for
2000, the adjustments for these entries and related tax effects
increased previously reported net loss by $21.2 million
from $102.7 million to $123.9 million, and increased
previously reported basic and diluted net loss by $0.16 per
share.

The internal investigation also determined that
inaccurate accounting entries, which required restatement, were
also made in 1999 and 1998. In 1999, these entries
(a) recorded additions of approximately $28.2 million
to sales return reserves as tax expense rather than as a
reduction of Net revenue and (b) reclassified approximately
$1.5 million from the tax liability accounts to general and
administrative expense liability accounts, understating general
and administrative expenses by $1.5 million. Other entries
misclassified approximately $0.5 million between marketing
and sales and general and administrative expenses. The tax
effects of these entries reduced the provision for income taxes
by approximately $32.7 million. In the aggregate for 1999,
the adjustments for these entries and related tax effects
reduced previously reported net loss by $3.0 million from
$159.9 million to $156.9 million, and reduced
previously reported basic and diluted net loss by $0.02 per
share.

The entries made during 1998 reclassified
approximately $6.2 million from the tax liability accounts
to general and administrative expense liability accounts,
understating general and administrative expenses by
$6.2 million. The tax effects of these entries reduced the
provision for income taxes by approximately $2.2 million.
In the aggregate for 1998, the adjustments for these entries and
related tax effects reduced previously reported net income by
$4.0 million from $36.4 million to $32.4 million,
and reduced previously reported basic and diluted net income by
$0.03 per share.

During the three months ended March 31,
2002, we adopted the Financial Accounting Standards Boards
Emerging Issues Task Force Statement No. 01-09, entitled
Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendors Products
(EITF 01-09). EITF 01-09 requires that
payments to customers or reductions in their accounts receivable
for certain marketing related amounts previously classified as
charges to marketing expense be recorded as reductions of
revenue. Upon adoption of EITF 01-09, we are required to
retroactively reclassify amounts recognized for such payments in
previously issued financial statements to comply with the income
statement display requirements of the consensus.

27



---



##### 



A summary of the impact of the adjustments to
correct the inaccurate accounting entries, the related tax
effects and the adoption of EITF 01-09 on our previously
issued financial statements is presented in Note 3 to the
Notes to Consolidated Financial Statements.

The following table sets forth for the periods
indicated the percentage of net revenue represented by certain
items in our Statements of Operations.

Net Revenue:

|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |    |     |   
|---------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------------------------------------- | -- | ------------- | --- | ------------- | -- | -- | --- | -- | -- | -- | --- | --
|                                                                 |                                                    |                                                                                      
|                                                                 |                                                    | Years Ended December 31,                                                             
|                                                                 |                                                    |                                                                                      
|                                                                 |                                                    | 2001                                                                                  |    | 2000          |     | 1999         
|                                                                 |                                                    |                                                                                       |    |               |     |              
|                                                                 |                                                    |                                                                                       |    | (As Restated  |     | (As Restated 
|                                                                 |                                                    | (As                                                                                   |    | and           |     | and          
|                                                                 |                                                    | Reclassified)                                                                         |    | Reclassified) |     | Reclassified)
|Product                                                          |                                                    |                                                                                       | 66 | %             |     |               | 66 | %  |     |    | 66 | % 
|Services and support                                             |                                                    |                                                                                       | 34 |               |     |               | 34 |    |     |    | 34 |   
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 |                                                    | Total net revenue                                                                     |    |               | 100 |               |    |    | 100 |    |    |    | 100 |   
|Cost of net revenue:                                             |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 | Product                                            |                                                                                       |    | 13            |     |               |    | 16 |     |    |    | 15 |    
|                                                                 | Services and support                               |                                                                                       |    | 6             |     |               |    | 6  |     |    |    | 7  |    
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 |                                                    | Total cost of net revenue                                                             |    |               | 19  |               |    |    | 22  |    |    |    | 22  |   
|Operating costs and expenses:                                    |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 | Research and development                           |                                                                                       |    | 18            |     |               |    | 25 |     |    |    | 25 |    
|                                                                 | Marketing and sales                                |                                                                                       |    | 52            |     |               |    | 54 |     |    |    | 53 |    
|                                                                 | General and administrative                         |                                                                                       |    | 13            |     |               |    | 12 |     |    |    | 14 |    
|                                                                 | Provision for doubtful accounts, net               |                                                                                       |    | (1            | )   |               |    | 2  |     |    |    | 7  |    
|                                                                 | Amortization of intangibles                        |                                                                                       |    | 8             |     |               |    | 9  |     |    |    | 10 |    
|                                                                 | Acquisition, restructuring and other related costs |                                                                                       |    | 1             |     |               |    |   |     |    |    | (3 | )  
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 |                                                    | Total operating costs and expenses                                                    |    |               | 91  |               |    |    | 102 |    |    |    | 106 |   
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 |                                                    | Loss from operations                                                                  |    |               | (10 | )             |    |    | (24 | )  |    |    | (28 | ) 
|Interest and other income                                        |                                                    |                                                                                       | 3  |               |     |               | 6  |    |     |    | 5  |   
|Interest expense                                                 |                                                    |                                                                                       | (3 | )             |     |               | (3 | )  |     |    | (3 | ) 
|Gain (loss) on investments, net                                  |                                                    |                                                                                       | 1  |               |     |               | 5  |    |     |    | (1 | ) 
|Write down of strategic and other investments                    |                                                    |                                                                                       | (2 | )             |     |               | (1 | )  |     |    |   |   
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 |                                                    | Loss before provision for income taxes, minority
    interest, and extraordinary item |    |               | (11 | )             |    |    | (17 | )  |    |    | (27 | ) 
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|Provision for (benefit from) income taxes                        |                                                    |                                                                                       | 1  |               |     |               | 2  |    |     |    | (1 | ) 
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 |                                                    | Net loss before minority interest and
    extraordinary item                          |    |               | (12 | )             |    |    | (19 | )  |    |    | (26 | ) 
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|Minority interest in loss of consolidated
    subsidiary         |                                                    |                                                                                       |   |               |     |               | 1  |    |     |    |   |   
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 |                                                    | Net loss before extraordinary item                                                    |    |               | (12 | )             |    |    | (18 | )  |    |    | (26 | ) 
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|Extraordinary item, gain on redemption of debt,
    net of taxes |                                                    |                                                                                       |   |               |     |               |   |    |     |    |   |   
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   
|                                                                 |                                                    | Net loss                                                                              |    |               | (12 | )%            |    |    | (18 | )% |    |    | (26 | )%
|                                                                 |                                                    |                                                                                       |    |               |     |               |    |    |     |    |    |   

28



---



##### 



OVERVIEW

We are a leading supplier of network security and
network management solutions. We operate through two businesses
consisting of our infrastructure business and McAfee.com, our
publicly traded subsidiary. Each business operates in one
industry: computer security, management, and availability
software, hardware and related services for, primarily,
consumer, corporate and government users.

Our infrastructure business is operated in six
geographic regions: the United States, Europe, Japan, Canada,
Asia-Pacific and Latin America. To more effectively market our
infrastructure business products in these geographic regions, we
have combined complementary products into three product groups:
McAfee, Sniffer Technologies and Magic. McAfee.com is an ASP
targeted at consumers and small to medium-sized businesses.

PGP Integration and Disposition.In the fourth quarter of 2001, we
substantially completed integrating the activities of our PGP
product group into our McAfee and Sniffer product groups. In
2001, the PGP product group accounted for approximately 6% of
net revenue. We are seeking buyers for the PGP desktop
encryption and Gauntlet firewall products. In connection with
the PGP integration, we recorded a restructuring charge of
approximately $3.8 million during the fourth quarter of
2001, consisting primarily of the costs related to severance
packages for 100 affected employees. Related to this
integration, we also expect, among other things:



| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to record an additional restructuring charge of
    approximately $5.0 million related to the divestiture of
    those PGP Security products that were not integrated into our
    Sniffer and McAfee product groups;*                                
|
| |  | expense reductions of up to approximately
    $50 million in 2002, primarily in the areas of cost of
    services and support, research and development, marketing and
    sales and to a lesser extent, general and administrative
    expenses;* and
|
| |  | overall revenue to be adversely impacted in at
    least the near-term due to, among other things, possible
    uncertainty on the part of those customers purchasing the PGP
    Security products being sold.*                                      

Change in Distributor Business Model.We market a significant portion of our
products to end-users through intermediaries, including
distributors. In December 2000, in light of the business
decision by some of our distributors, including our largest
distributor, to reduce inventory levels, and due to the
unpredictability of demand in the distribution channel, we began
a transition from a sell-in to a sell-through business model.
Commencing January 1, 2001, we moved to the sell-through
business model for each distributor. Under this model, we
recognize revenue on products sold to distributors when the
products are resold by the distributor to their customers.

Results reported for the quarter and year ended
December 31, 2000, include a significant reduction to net
revenue due to some our distribution partners business
decision to reduce their inventory levels by not replenishing
their inventory and requesting returns over and above their
contractual rights. Under the terms of their distribution
agreements at that time, our distributors had title to, and risk
of loss with respect to, the distributor inventory subject to
these requested returns. As of December 31, 2000, goods
that were held by our distributors and not subject to a returns
allowance totaled $10.9 million.

Net Revenue.Net
revenue increased 16% to $811.0 million in 2001 from
$697.7 million in 2000, including a $15.2 million
increase in revenue from McAfee.com. Net revenue increased 14%
to $697.7 million in 2000 from $611.0 million in 1999,
including a $22.4 million increase in revenue from
McAfee.com.





---

*This statement and other statements similarly
marked are forward-looking statements reflecting current
expectations. There can be no assurance that our actual
performance will meet current expectations. See Risk
Factors discussion beginning on page 11 of this
document.


29



---



##### 





| |  |                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The following table sets forth for the periods
    indicated, our product revenue and services and support revenue
    as a percent of net revenue.

|                     |             |                          |    |           |   |           |    |     |   |  |    |     |  
|-------------------- | ----------- | ------------------------ | -- | --------- | - | --------- | -- | --- | - |  | -- | --- | -
|                     |             |                         
|                     |             | Years Ended December 31,
|                     |             |                         
|                     |             | 2001                     |    | 2000      |   | 1999     
|                     |             |                          |    |           |   |          
|                     |             |                          |    | (As       |   | (As      
|                     |             |                          |    | Restated) |   | Restated)
|Product              |             |                          | 66 | %         |   |           | 66 | %   |   |  | 66 | %  
|Services and support |             |                          | 34 |           |   |           | 34 |     |   |  | 34 |    
|                     |             |                          |    |           |   |           |    |     |   |  |    |    
|                     | Net revenue |                          |    | 100       | % |           |    | 100 | % |  |    | 100 | %
|                     |             |                          |    |           |   |           |    |     |   |  |    |    

The following table sets forth for the periods
indicated, each major category of our product revenue as a
percent of product revenue.

|                      |                 |                          |    |           |   |           |    |     |   |  |    |     |  
|--------------------- | --------------- | ------------------------ | -- | --------- | - | --------- | -- | --- | - |  | -- | --- | -
|                      |                 |                         
|                      |                 | Years Ended December 31,
|                      |                 |                         
|                      |                 | 2001                     |    | 2000      |   | 1999     
|                      |                 |                          |    |           |   |          
|                      |                 |                          |    | (As       |   | (As      
|                      |                 |                          |    | Restated) |   | Restated)
|Subscription licenses |                 |                          | 37 | %         |   |           | 44 | %   |   |  | 42 | %  
|Perpetual licenses    |                 |                          | 33 |           |   |           | 23 |     |   |  | 25 |    
|Hardware              |                 |                          | 16 |           |   |           | 18 |     |   |  | 11 |    
|Retail                |                 |                          | 13 |           |   |           | 13 |     |   |  | 19 |    
|Royalties and other   |                 |                          | 1  |           |   |           | 2  |     |   |  | 3  |    
|                      |                 |                          |    |           |   |           |    |     |   |  |    |    
|                      | Product revenue |                          |    | 100       | % |           |    | 100 | % |  |    | 100 | %
|                      |                 |                          |    |           |   |           |    |     |   |  |    |    

Product revenue includes revenue from software
licenses, hardware, our retail product and royalties. Product
revenue increased 16% to $533.5 million in 2001 from
$458.0 million in 2000. The increase in product revenue
from 2000 to 2001 was attributable to an increase in new
customer purchases of our anti-virus suite of products and the
successful introduction of several new anti-virus products
during the year. Product revenue increased 14% to
$458.0 million in 2000 from $401.4 million in 1999. In
1999, product revenue was impacted by our decision to limit
distributor orders in an effort to realign channel inventory
levels as a result of Year 2000 concerns and increasing sales
cycles for our products. The increase in product revenue from
1999 to 2000 is due to an increase in new customer purchases of
our anti-virus suite of products and network fault and
performance suite of products. In 2000, we also experienced
positive results from our organization into separate product
groups, with separate sales groups focused on selling their
respective products.

We may experience higher overall revenue in the
near-term but lower future software license revenue due to
increased levels of perpetual licenses.* Sales of perpetual
licenses typically result in significantly higher up-front
revenue and lower recurring and future revenues as the sales
price for related upgrades and updates tends to be significantly
lower than that of the initial perpetual license.

The following table sets forth for the periods
indicated, each major category of our services and support as a
percent of services and support revenue.

|                        |                              |                          |    |           |   |           |    |     |   |  |    |     |  
|----------------------- | ---------------------------- | ------------------------ | -- | --------- | - | --------- | -- | --- | - |  | -- | --- | -
|                        |                              |                         
|                        |                              | Years Ended December 31,
|                        |                              |                         
|                        |                              | 2001                     |    | 2000      |   | 1999     
|                        |                              |                          |    |           |   |          
|                        |                              |                          |    | (As       |   | (As      
|                        |                              |                          |    | Restated) |   | Restated)
|Support and maintenance |                              |                          | 64 | %         |   |           | 67 | %   |   |  | 75 | %  
|Consulting              |                              |                          | 14 |           |   |           | 14 |     |   |  | 13 |    
|Training                |                              |                          | 7  |           |   |           | 8  |     |   |  | 11 |    
|Hosting arrangements    |                              |                          | 15 |           |   |           | 11 |     |   |  | 1  |    
|                        |                              |                          |    |           |   |           |    |     |   |  |    |    
|                        | Services and support revenue |                          |    | 100       | % |           |    | 100 | % |  |    | 100 | %
|                        |                              |                          |    |           |   |           |    |     |   |  |    |    

30



---



##### 



Services and support revenues include revenues
from software support and maintenance contracts, consulting,
training and hosting arrangements. Service revenues increased
16% to $277.4 million in 2001 from $239.8 million in
2000. The increase in services and support revenues from 2000 to
2001 resulted from a $14.8 million increase in hosting
revenue generated by McAfee.com; a $17.1 million increase
in maintenance and support revenue, principally due to the
growth of our installed customer base and the resulting renewal
of support and maintenance contracts; and an increase of
$5.8 million in consulting and training revenue. Service
revenues increased 14% to $239.8 million in 2000 from
$209.6 million in 1999. The increase in services and
support revenues from 1999 to 2000 resulted from a
$23.9 million increase in hosting revenue generated by
McAfee.com and a $6.3 million increase in all other
categories of service revenues.

Our future profitability and rate of growth, if
any, will be directly affected by increased price competition
and an increasingly higher revenue base from which to grow. Our
growth rate and net revenue depend significantly on renewals of
existing orders as well as our ability to respond successfully
to the pace of technological change and expand our customer
base. If our renewal rate or our pace of new customer
acquisition slows, our net revenues and operating results would
be adversely affected.

International revenue accounted for approximately
35%, 38% and 44%, of net revenue for 2001, 2000 and 1999,
respectively. The decrease in international revenue as a
percentage of net revenue from 2000 to 2001 was due to
under-performance in sales operations in Europe; the weak
economy in Japan; and, changes in sales management in our
Asia-Pacific region. The decrease in international net revenue
as a percentage of net revenue from 1999 to 2000 was due to
under-performance in sales operations and changes in sales
management in Europe; the weak economy in Japan; and weakness in
the Euro.

We have announced our intentions to increase our
international revenues.* Risks inherent in international revenue
include the impact of longer payment cycles, greater difficulty
in accounts receivable collection, unexpected changes in
regulatory requirements, seasonality due to the slowdown in
European business activity during the third quarter, tariffs and
other trade barriers, and difficulties staffing and managing
foreign operations. These factors may have a material adverse
effect on our future international revenue.

Cost of Net Revenue.Cost of net revenue increased 2% to
$158.1 million in 2001 from $155.7 million in 2000,
including an increase of $4.5 million from McAfee.com. Cost
of net revenue increased 19% to $155.7 million in 2000 from
$130.8 million in 1999. The cost of net revenue from 2000
to 2001 decreased as a percentage of net revenue from 22% to 19%
in 2001. The increase in the amount of cost of net revenue from
1999 to 2000 was primarily due to the increase in net revenue.
The increase in the amount of cost of net revenue from 2000 to
2001 results from an increase in the cost of service and support
revenue partially offset by a decrease in cost of product
revenue. The cost of net revenue as a percentage of net revenue
was 22% in 2000 and 1999.

Our cost of product revenue consists primarily of
the cost of media, manuals and packaging for products
distributed through traditional channels; royalties; and, with
respect to hardware-based anti-virus products and network fault
and performance products, computer platforms and other hardware
components. Cost of product revenues decreased 9% to
$103.1 million in 2001 from $113.4 million in 2000.
The decrease from 2000 to 2001 in the cost of product revenue
relates to a $10.2 million decrease in materials costs
attributable to computer platforms and other hardware product
costs; and, $1.4 million in cost savings associated with
discontinuing the myCIO.com business unit, offset by an increase
in product costs associated with government contracts. Cost of
product revenues increased 28% to $113.4 million in 2000
from $88.7 million in 1999. The increase in product cost of
revenue from 1999 to 2000 was due to a $27.0 million
increase in materials costs attributable to computer platforms
and other hardware product costs resulting from an increase in
hardware revenue, offset by a decrease in product costs
associated with government contracts. As a percentage of net
product revenue, cost of product revenue was 19%, 25% and 22% in
2001, 2000 and 1999, respectively.

Due to new hardware-based anti-virus product
introductions during the second half of 2001 and anticipated
growth in our hardware-based network fault and performance
products, we expect that the cost of product revenue will
increase in absolute terms and as a percentage of product
revenue in future periods.*

31



---



##### 



Cost of services and support revenue consists
principally of salaries and benefits related to employees
providing customer support and consulting services. The cost of
services and support revenue increased 30% to $55.0 million
in 2001 from $42.3 million in 2000. The increase from 2000
to 2001 was due almost exclusively to additional technical
support and customer service personnel hired during 2001 to meet
our customers technical support needs. The cost of
services and support revenue remained relatively flat at
$42.3 million in 2000 and $42.1 million in 1999. Cost
of services and support revenue as a percentage of net services
and support revenue, was 20%, 18% and 20% in 2001, 2000 and
1999, respectively.

Due to new service introductions during 2001,
including anti-virus hosted services, anticipated growth in
hosted services by McAfee.com, increased maintenance and support
orders and an increase in consulting and training services, we
expect that the cost of service revenue will increase in
absolute terms and as a percentage of net revenue in future
periods.* We expect savings of up to approximately
$5.4 million in cost of service and support in 2002 as a
result of the PGP integration and disposition.*

We have excluded the effects of stock-based
compensation in our discussion of operating costs and expenses
below. The size and amount of our stock based charges will vary
from period to period based on movements in our stock price,
making period to period comparisons difficult and, in some
cases, not meaningful. See Stock-Based Compensation
below.

The following sets forth, for the periods
indicated our operating expenses, excluding the effects of stock
based compensation (in thousands):

|                                                  |                                                                                           |                          |         |           |  |           |         |         |  |   |         |         | 
|------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------ | ------- | --------- |  | --------- | ------- | ------- |  | - | ------- | ------- | 
|                                                  |                                                                                           |                         
|                                                  |                                                                                           | Years Ended December 31,
|                                                  |                                                                                           |                         
|                                                  |                                                                                           | 2001                     |         | 2000      |  | 1999     
|                                                  |                                                                                           |                          |         |           |  |          
|                                                  |                                                                                           |                          |         | (As       |  | (As      
|                                                  |                                                                                           |                          |         | Restated) |  | Restated)
|Research and development(1)                       |                                                                                           | $                        | 142,097 |           |  | $         | 171,074 |         |  | $ | 148,213 |        
|Marketing and sales(2)                            |                                                                                           |                          | 409,603 |           |  |           | 372,431 |         |  |   | 318,998 |        
|General and administrative(3)                     |                                                                                           |                          | 100,711 |           |  |           | 82,814  |         |  |   | 80,826  |        
|Provision for doubtful accounts                   |                                                                                           |                          | (9,673  | )         |  |           | 9,924   |         |  |   | 44,809  |        
|Amortization of intangibles                       |                                                                                           |                          | 64,110  |           |  |           | 66,282  |         |  |   | 58,400  |        
|Acquisition, restructuring and related charges(4) |                                                                                           |                          | 3,302   |           |  |           |        |         |  |   | (18,732 | )      
|                                                  |                                                                                           |                          |         |           |  |           |         |         |  |   |         |        
|                                                  | Total operating costs and expenses, excluding the
    effects of stock-based compensation |                          | $       | 710,150   |  |           | $       | 702,525 |  |   | $       | 632,514 | 
|                                                  |                                                                                           |                          |         |           |  |           |         |         |  |   |         |        



---



|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Excludes stock-based compensation charge of
    $4,604, $1,894 and $4,515 for 2001, 2000 and 1999, respectively. 
|   
|(2) | Excludes stock-based compensation charge of
    $10,354, $4,570 and $7,162 for 2001, 2000 and 1999, respectively.
|   
|(3) | Excludes stock-based compensation charge of
    $9,235, $2,250 and $3,893 for 2001, 2000 and 1999, respectively. 
|   
|(4) | Excludes stock-based compensation charge of $519,
    $0 and $0 for 2001, 2000 and 1999, respectively.           

Research and Development.Research and development expenses
consist primarily of salary, benefits, and contractors fees for
our development and technical support staff, and other costs
associated with the enhancements of existing products and
services and development of new products and services. Excluding
the effects of stock-based compensation of $4.6 million and
$1.9 million in 2001 and 2000, respectively, research and
development expenses decreased 17% to $142.1 million in
2001 from $171.1 million in 2000. Of the total decrease,
approximately $15.1 million was attributable to the
discontinuance of certain previously out-sourced development
efforts; $11.2 million was attributable to the conversion
of temporary personnel into full-time employees; and the balance
was due to overall efficiencies achieved by our research and
development group.

Excluding the effects of stock-based compensation
of $1.9 million and $4.5 million in 2000 and 1999,
respectively, research and development expenses increased 15% to
$171.1 million in 2000 from $148.2 million

32



---



##### 



in 1999. Of the increase, approximately
$19.0 million was due to the increase in out-sourced
development efforts and the balance was due to an increase in
the number of permanent and temporary personnel to support
growth in our product and service offerings.


As a percentage of net revenue, research and
development expenses were 18%, 25% and 25% in 2001, 2000 and
1999, respectively. Excluding stock-based compensation charges,
as a percentage of net revenue, research and development
expenses were 18%, 25% and 24% in 2001, 2000 and 1999,
respectively. We believe that continued investment in product
development is critical to attaining our strategic objectives
and, as a result, expect product development expenses to
increase in future periods. We anticipate that research and
development expenses will continue to increase in absolute
dollars, but will continue to fluctuate as a percent of net
revenue.* We expect savings of up to approximately
$19.4 million in research and development expenses in 2002
as a result the PGP integration and disposition.* Excluding
stock-based compensation charges, we expect research and
development expenses in 2002 to range between 15% and 17% of net
revenue.*

Marketing and Sales.Marketing and sales expenses consist
primarily of salary, commissions and benefits for marketing and
sales personnel and costs associated with advertising and
promotions. Excluding the effects of stock-based compensation of
$10.4 million and $4.6 million in 2001 and 2000,
respectively, marketing and sales expenses increased 10% to
$409.6 million in 2001 from $372.4 million in 2000. Of
the total increase, approximately $17.3 million was due to
an increase in commission expense associated with increases in
our revenues. The balance of the increase was due to additional
salary and other personnel costs associated with additional
international marketing and sales personnel hired during 2001.

Excluding the effects of stock-based compensation
of $4.6 million and $7.2 million in 2000 and 1999,
respectively, marketing and sales expenses increased 17% to
$372.4 million from $319.0 million in 1999.
Approximately $20.9 million of this increase relates to the
use of out-sourced marketing and other professional services
related to additional marketing and sales activities associated
with advertising and promotions for McAfee.com. The balance of
the increase is related to hiring and training of our enterprise
level sales force.

As a percentage of net revenue, marketing and
sales expense was 52%, 54% and 53% in 2001, 2000 and 1999,
respectively. Excluding stock-based compensation charges, as a
percentage of net revenue, marketing and sales expense was 51%,
53% and 52% in 2001, 2000 and 1999, respectively. We anticipate
that marketing and sales expenses will continue to increase in
absolute dollars, but will continue to fluctuate as a percentage
of net revenue.* We expect savings of up to approximately
$24.3 million in marketing and sales expenses in 2002 as a
result of the PGP integration and disposition.* Excluding
stock-based compensation charges, we expect marketing and sales
expenses in 2002 to range between 45% and 50% of net revenue.*

General and Administrative.General and administrative expenses
consist principally of salary and benefit costs for executive
and administrative personnel, professional services and other
general corporate activities. Excluding the effect of
stock-based compensation of $9.2 million and
$2.3 million for 2001 and 2000, respectively, general and
administrative expenses increased 22% to $100.7 million in
2001 from $82.8 million in 2000. Of the total increase,
approximately $9.9 million related to an increase in legal
fees and litigation related charges and approximately
$2.2 million related to severance for our former
executives. The balance of the increase was related to an
increase in personnel and recruiting services costs associated
with hiring our chief executive officer, chief financial
officer, international executives and additional finance,
accounting, and administrative personnel.

Excluding the effects of stock-based compensation
of $2.3 million and $3.9 million in 2000 and 1999,
respectively, general and administrative expenses increased 2%
to $82.8 million in 2000 from $80.8 million in 1999.
The increase in general and administrative expenses from 1999 to
2000 was related to the expansion of our worldwide information
technology infrastructure.

As a percentage of net revenues, general and
administrative expenses were 13%, 12% and 14% in 2001, 2000 and
1999, respectively. Excluding stock-based compensation charges,
as a percentage of net revenue, general and administrative
expenses, were 12%, 12% and 13% in 2001, 2000 and 1999,
respectively. We expect our general and administrative expenses
to increase in absolute dollars as we continue to expand our
staff and

33



---



##### 



incur additional infrastructure and other costs
to support the anticipated growth of our business.* We expect
savings of up to approximately $1.2 million in general and
administrative expenses in 2002 as a result the PGP integration
and disposition.* Excluding stock-based compensation charges, we
expect general and administrative expenses in 2002 to range
between 9% and 11% of net revenue.*


Provision for Doubtful Accounts, Net.Provision for doubtful accounts
consists of our estimates for the uncollectability of
receivables, net of recoveries of amounts previously written
off. The provision for doubtful accounts became a net recovery
of $9.7 million in 2001 from a provision of
$9.9 million in 2000. This change related to previously
reserved receivables from two distributors who were undergoing
restructurings of their business operations and experiencing
cash flow difficulties at the end of 2000. The provision for
doubtful accounts decreased by 78% to $9.9 million in 2000
from $44.8 million in 1999. In 1999, one of our largest
European distributors entered bankruptcy requiring us to record
a related provision of approximately $28.7 million. Also in
1999, Pinacor, a U.S. distributor, entered bankruptcy
requiring us to record a related accounts receivable write-off
of approximately $6.0 million.

Amortization of Intangibles.We expensed $64.1 million,
$66.3 million and $58.4 million of amortization
related to intangibles in 2001, 2000 and 1999, respectively.
Intangibles consist of purchased goodwill, purchased technology
and other identifiable intangible assets. The decrease in
amortization in 2001 was a result of certain purchased
technology and other intangible assets being fully amortized
during 2001, decreasing the annual amortization by
$4.2 million, partially offset by an increase in
amortization amounting to $2.0 million in trademarks and
patents acquired during 2001. The increase in amortization in
2000 resulted from a $3.6 million impairment charge
recognized by McAfee.com (described below), an increase of
$3.3 million of amortization for the additions to goodwill
related to McAfee.coms acquisitions during 2000, a
$1.3 million increase in amortization expense associated
with additions to patents and trademarks, offset by a slight
decrease of $0.3 million related to certain other
intangible assets being fully amortized during 2000. During
2000, McAfee.com performed a review of the carrying value of the
goodwill associated with one of its acquisitions and recognized
an impairment charge of $3.6 million. McAfee.com determined
that certain storage technology purchased as part of the
original acquisition was not able to be incorporated into future
products. Accordingly, the full carrying value of the
unamortized goodwill and purchased technology was written off.

Acquisition, Restructuring and Other Related
Costs.Acquisition accruals were
established in 1997 and 1998 in connection with various pooling
of interest transactions. In the quarters ended June 30,
1999 and September 30, 1999, we reassessed these estimated
accruals and concluded that no additional costs were to be
incurred related to these pooling transactions. As such, in 1999
the unused acquisition accruals of $18.7 million were
released back into acquisition, restructuring and other related
costs.

In connection with the PGP integration and
planned disposition, we recorded a restructuring charge of
approximately $3.8 million during the fourth quarter of
2001. The restructuring charge consists of the costs related to
severance packages for 100 affected employees.

The following table sets forth our restructuring
accrual established in 2001, and the activity against the
accrual during 2001 (in thousands):

|                           |  |             |      |             |  |                |        |       |  |   |      |   |  |   |        |  
|-------------------------- |  | ----------- | ---- | ----------- |  | -------------- | ------ | ----- |  | - | ---- | - |  | - | ------ | -
|                           |  |             |      |             |  | Non-cash Stock |        |      
|                           |  | Direct      |      |             |  | Based          |        |      
|                           |  | Transaction |      | Severance & |  | Compensation   |        |      
|                           |  | Costs       |      | Benefits    |  | Charge         |        | Total
|                           |  |             |      |             |  |                |        |      
|Balance, October 9, 2001   |  | $           | 116  |             |  | $              | 3,186  |       |  | $ | 519  |   |  | $ | 3,821  |  
|Paid out/ non-cash         |  |             | (116 | )           |  |                | (3,186 | )     |  |   | (519 | ) |  |   | (3,821 | )
|                           |  |             |      |             |  |                |        |       |  |   |      |   |  |   |        |  
|Balance, December 31, 2001 |  | $           |     |             |  | $              |       |       |  | $ |     |   |  | $ |       |  
|                           |  |             |      |             |  |                |        |       |  |   |      |   |  |   |        |  

Severance and benefits and direct transaction
costs were paid in cash during 2001. In the first quarter of
2002, we anticipate incurring an additional $5.0 million of
restructuring costs related to the planned PGP disposition.*

34



---



##### 



Interest and Other Income.Interest and miscellaneous income
decreased to $28.6 million in 2001 from $44.6 million
in 2000 and $30.7 million in 1999. Interest and other
income decreased from 2000 to 2001 due to lower interest income
from our marketable securities due to lower average cash
balances and yields. Interest and other income increased from
1999 to 2000, due to an increase in higher average cash balances
invested at slightly higher interest rates.

Interest Expense.Interest expense increased to
$24.7 million in 2001 from $18.2 million in 2000 and
from $17.3 million in 1999. Interest expense increased
during 2001 due to the issuance in August 2001 of our 5.25%
convertible subordinated notes due 2006.

Gain (Loss) on Investments, Net.In 2001, we recognized a
$7.3 million gain on the sale of equity and debt
securities. In 2000, we recognized a net gain of
$28.5 million on the sale of our venture and strategic
investments and a gain of $11.9 million on the sale of
shares of Network Associates Company Limited (Japan). In 1999,
we recognized a loss of $6.1 million on our equity and debt
securities, including a loss of $2.5 million on the
liquidation of our DirectWeb investment, a related party.

Write Down of Strategic and Other Investments.For 2001 and 2000, we recorded an
impairment charge of $20.6 million and $10.0 million,
respectively, related to an other than temporary decline in the
value of some of our venture and strategic investments. As of
December 31, 2001, the minority venture investments we
continue to hold totaled $2.4 million at estimated fair
value, consisting of investments in public and private
companies, amounting to $2.2 million and $200,000,
respectively.

Provision for (Benefit from) Income Taxes.Our provision for (benefit from)
income taxes was $11.4 million, $16.5 million and
$(3.5) million in 2001, 2000 and 1999, respectively. Our
tax expense (benefit) for 2001, 2000 and 1999 was 12%, 15% and
(2)%, respectively, of loss before provision for income taxes,
minority interest and extraordinary item. The decrease in the
effective tax rate from 2000 to 2001 was primarily attributable
to taxes on foreign earnings. Each year, our tax expense is
mainly influenced by the amount of non-deductible expenses
(primarily goodwill) that are incurred and the mix of income
between geographic jurisdictions, including taxable income in
certain foreign countries.

The valuation allowance for our deferred tax
assets increased from 2000 to 2001, as well as, from 1999 to
2000. The increase was due to uncertainty of our ability to
utilize some of our deferred tax assets, primarily foreign tax
credits.

Extraordinary Gain.In 2001, we redeemed a portion of our
zero coupon convertible subordinated debentures due 2018 for
approximately $173.7 million. The aggregate accreted value
of the debentures was $179.7 million, which resulted in an
extraordinary gain of $1.7 million, net of
$1.2 million in taxes.

STOCK-BASED COMPENSATION

We expensed $24.7 million, $8.7 million
and $15.6 million in 2001, 2000 and 1999, respectively.
Stock-based compensation charges relate to the repricing of
employee stock options and the issuance of McAfee.com stock
options to our executives and employees, as well as
non-recurring stock compensation charges primarily related to
executive compensation. We do not expect to incur charges
related to these McAfee.com option grants in the future.*
However, we do expect significant stock-based compensation
charges related to repriced employee stock options.*

35



---



##### 



Our stock based compensation charges are made up
of the following for the years presented (in thousands):

|                                                                         |                                |                          |        |        |  |      |       |       |  |   |       |        | 
|------------------------------------------------------------------------ | ------------------------------ | ------------------------ | ------ | ------ |  | ---- | ----- | ----- |  | - | ----- | ------ | 
|                                                                         |                                |                         
|                                                                         |                                | Years Ended December 31,
|                                                                         |                                |                         
|                                                                         |                                | 2001                     |        | 2000   |  | 1999
|                                                                         |                                |                          |        |        |  |     
|Repriced options                                                         |                                | $                        | 17,396 |        |  | $    | 8,714 |       |  | $ | 8,834 |       
|McAfee.com options and shares issued to Network
    Associates personnel |                                |                          |       |        |  |      |      |       |  |   | 6,736 |       
|Warrants to outside consultants                                          |                                |                          | 1,049  |        |  |      |      |       |  |   |      |       
|Former executives                                                        |                                |                          | 2,668  |        |  |      |      |       |  |   |      |       
|New executives                                                           |                                |                          | 3,080  |        |  |      |      |       |  |   |      |       
|PGP restructuring                                                        |                                |                          | 519    |        |  |      |      |       |  |   |      |       
|                                                                         |                                |                          |        |        |  |      |       |       |  |   |       |       
|                                                                         | Total stock-based compensation |                          | $      | 24,712 |  |      | $     | 8,714 |  |   | $     | 15,570 | 
|                                                                         |                                |                          |        |        |  |      |       |       |  |   |       |       

Repriced Options.On
April 22, 1999, we offered to substantially all of our
employees, excluding executive officers, the right to cancel
certain outstanding stock options and receive new options with
an exercise price of $11.063, the then current fair market value
of the stock. Options to purchase a total of 10.3 million
shares were cancelled and the same number of new options were
granted. These new options vest at the same rate that they would
have vested under previous option plans and are subject to
variable accounting. Accordingly, we have and will continue to
remeasure compensation cost for these repriced options until
these options are exercised, cancelled, or forfeited without
replacement. The first valuation period began July 1, 2000.

Subsequent to April 22, 1999, some
employees, who received repriced options became employees of
McAfee.com. In connection with this transfer their repriced
options were canceled and replaced with options for McAfee.com
stock. Variable plan accounting as described above, also applies
to these replacement options and we will record variable charges
based on the movements in the fair value of McAfee.com common
stock from July 1, 2000.

The amount of stock-based compensation recorded
was and will be based on any excess of the closing stock price
at the end of the reporting period or date of exercise,
forfeiture or cancellation without replacement, if earlier, over
the fair value of our and McAfee.coms common stock on
July 1, 2000, which was $20.375 and $26.063, respectively.
The resulting compensation charge to earnings will be recorded
over the remaining vesting period, using the accelerated method
of amortization discussed in FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans. When options are
fully vested, the charge will be recorded to earnings
immediately. At December 31, 2001, these Network Associates
and McAfee.com options are substantially fully vested. Depending
upon movements in the market value of our and McAfee.coms
common stock, this accounting treatment may result in additional
stock-based compensation charges in future periods.

During 2001 and 2000, we incurred charges to
earnings of approximately $15.6 million and
$2.0 million related to options subject to variable plan
accounting. For 2001 and 2000, our stock compensation charges
related to options subject to variable plan accounting were
based on a year end per share price of our stock of $25.85 and
$4.19, respectively, and a per share price of McAfee.com stock
of $33.91 and $5.00, respectively. As of December 31, 2001,
we and McAfee.com had options to purchase 2.2 million
shares and 0.2 million shares, respectively, which were
outstanding and subject to variable plan accounting.

We also incurred an initial stock-based
compensation charge in connection with the initial issuance of
the repriced options. This charge was calculated based on the
difference between the exercise price of the new options and
their market value on the date of acceptance by employees.
Approximately $1.8 million, $6.7 million and
$8.8 million was expensed during 2001, 2000 and 1999,
respectively.

McAfee.com Options and Shares Issued to
Network Associates Personnel.During
1999, McAfee.com granted 1.7 million options to purchase
shares of its Class A common stock and issued 379,000
shares of its

36



---



##### 



Class A common stock to executives and
employees of Network Associates. In connection with these
grants, McAfee.com recorded a stock based compensation charge of
$6.7 million.


Warrants to Outside Consultants.In January 2001, upon completion of
the search for our chief executive officer, we issued warrants
to a retained executive search firm for services performed. The
warrants, if exercised, can be exchanged for 166,667 shares of
our common stock. The weighted-average exercise price of the
underlying shares is $2.97 per share. The warrants are
immediately exercisable and expire in January 2004. The combined
fair value of the warrants was determined to be approximately
$530,000. The fair market value of the warrants was included as
stock compensation during 2001 and included in general and
administrative expenses in the accompanying statement of
operations.

In April 2001, upon completion of the search for
our chief financial officer, we issued warrants to a retained
executive search firm for services performed. The warrants, if
exercised, can be exchanged for 66,667 shares of our common
stock. The weighted-average exercise price of the underlying
shares is $4.50 per share. The warrants are immediately
exercisable and expire in April 2004. The combined fair value of
the warrants was determined to be approximately $280,000. The
fair market value of the warrants was included as a stock
compensation charge during 2001 and included in general and
administrative expenses in the accompanying statement of
operations.

In November 2001, upon completion of the search
for two executives for international operations, we issued
warrants to a retained executive search firm for services
performed. The warrants, if exercised, can be exchanged for
20,833 shares of our common stock. The weighted-average exercise
price of the underlying shares is $19.64 per share. The warrants
are immediately exercisable and expire in 2004. The combined
fair value of the warrants was determined to be approximately
$239,000. The fair market value of the warrants was included as
a stock compensation charge during 2001 and included in general
and administrative expenses in the accompanying statement of
operations.

Former Executives.In January 2001, our board of
directors appointed George Samenuk as our chief executive
officer and president. Effective January 2001, William Larson,
former chief executive officer, Prabhat Goyal, former chief
financial officer, and Peter Watkins, former president and chief
operating officer, became special advisors. Options held by
Mr. Larson, Mr. Goyal and Mr. Watkins continued
to vest during 2001 while they each served during their one-year
terms as special advisors. As a result, we recorded a one-time
stock compensation charge of approximately $603,000 during 2001.

In December 2001, we terminated the employment of
three executives. Upon termination, the options held by these
executives were modified. As a result, we recorded a one-time
stock compensation charge of $2.1 million during 2001.

New Executives.On
January 3, 2001, we entered into an employment agreement
with George Samenuk to become our chief executive officer. In
accordance with the terms of the agreement, we issued 400,000
shares of restricted stock to Mr. Samenuk. The price of the
underlying shares is $0.01 per share. The shares will vest and
our right to repurchase such shares will lapse as follows: 12.5%
on the first four quarterly anniversaries of
Mr. Samenuks employment with us with the remaining
50% on the second year anniversary of Mr. Samenuks
employment with us. The fair value of the restricted stock was
determined to be approximately $1.7 million and was
estimated based on the difference between the exercise price of
the restricted stock and the fair market value of our common
stock on Mr. Samenuks employment commencement date.
During 2001, we recorded approximately $836,000 related to stock
compensation associated with Mr. Samenuks restricted
stock.

On April 3, 2001, we entered into an
employment agreement with Stephen C. Richards to become
executive vice president and chief financial officer. In
accordance with the terms of the agreement, we issued 50,000
shares of stock to Mr. Richards for $0.01 per share. During
2001, we recorded approximately $350,000 related to stock
compensation associated with Mr. Richards stock.

On October 30, 2001, we entered into an
employment agreement with Arthur R. Matin to become executive
the president of our McAfee product group. In accordance with
the terms of the agreement, we

37



---



##### 



issued 100,000 shares of restricted stock to
Mr. Matin for $0.01 per share. During 2001, we recorded
approximately $1.9 million related to stock compensation
associated with Mr. Matins stock.


PGP Restructuring.In connection with the integration of
the PGP product group, we accelerated the vesting of 45,600
options held by the 100 employees terminated during 2001. As a
result of this modification, we recorded a stock based
compensation charge of $519,000 with restructuring expense in
our statement of operations. The charge was calculated based on
the intrinsic value of the modified options on the date the
acceleration was approved by our board of directors.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are as follows:



| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | revenue recognition;                                                                                                                                                                                                                  
|
| |  | estimating valuation allowances and accrued
    liabilities, specifically sales returns and other allowances,
    the allowance for doubtful accounts, and assessment of the
    probability of the outcome of our current litigation;
|
| |  | accounting for income taxes;                                                                                                                                                                                                          
|
| |  | valuation of long-lived and intangible assets and
    goodwill; and                                                                                                                                                                   
|
| |  | determining functional currencies for the
    purposes of consolidating our international operations.                                                                                                                                 

Revenue Recognition.We derive our revenue from primarily
two sources (i) product revenue, which includes software
license, hardware and royalty revenue, and (ii) services
and support revenue which includes software license maintenance,
training, consulting and hosting arrangements revenue. As
described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized
in any accounting period. Material differences may result in the
amount and timing of our revenue for any period if our
management made different judgments or utilized different
estimates.

We license our software products on a one and
two-year time basis or on a perpetual basis. Our two-year
time-based licenses include the first year of maintenance and
support. Our hosting arrangements require customers to pay a
fixed fee and receive service over a period of time, generally
one or two years. Customers do not pay any set up fee.

We apply the provisions of Statement of
Position 97-2, Software Revenue Recognition, as
amended by Statement of Position 98-9 Modification of
SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions to all transactions involving the
sale of software products and hardware transactions where the
software is not incidental. For hardware transactions where
software is not incidental, we do not bifurcate the fee and we
do not apply separate accounting guidance to the hardware and
software elements. For hardware transactions where no software
is involved we apply the provisions of Staff Accounting
Bulletin 101 Revenue Recognition. In addition,
we apply the provisions of Emerging Issues Task Force Issue
No. 00-03 Application of AICPA Statement of
Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entitys Hardware to our
hosted software service transactions.

We recognize revenue from the sale of software
licenses when persuasive evidence of an arrangement exists, the
product has been delivered, the fee is fixed and determinable
and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to
a common carrier.

At the time of the transaction, we assess whether
the fee associated with our revenue transactions is fixed and
determinable and whether or not collection is reasonably
assured. We assess whether the fee is fixed and determinable
based on the payment terms associated with the transaction. If a
significant portion of a fee is due after our normal payment
terms, which are 30 to 90 days from invoice date, we
account for the fee as not being fixed and determinable. In
these cases, we recognize revenue as the fees become due.

We assess collection based on a number of
factors, including past transaction history with the customer
and the credit-worthiness of the customer. We do not request
collateral from our customers. If we determine

38



---



##### 



that collection of a fee is not reasonably
assured, we defer the fee and recognize revenue at the time
collection becomes reasonably assured, which is generally upon
receipt of cash.


For all sales, except those completed over the
Internet, we use either a binding purchase order or signed
license agreement as evidence of an arrangement. For sales over
the Internet, we use a credit card authorization as evidence of
an arrangement. Sales through our distributors are evidenced by
a master agreement governing the relationship together with
binding purchase orders on a transaction by transaction basis.

For arrangements with multiple obligations (for
example, undelivered maintenance and support), we allocate
revenue to each component of the arrangement using the residual
value method based on the fair value of the undelivered
elements, which is specific to Network Associates. This means
that we defer revenue from the arrangement fee equivalent to the
fair value of the undelivered elements. Fair values for the
ongoing maintenance and support obligations for both our two
year time based licenses and perpetual licenses are based upon
separate sales of renewals to other customers or upon renewal
rates quoted in the contracts. Fair value of services, such as
training or consulting, is based upon separate sales by us of
these services to other customers.

Our arrangements do not generally include
acceptance clauses. However, if an arrangement includes an
acceptance provision, acceptance occurs upon the earlier of
receipt of a written customer acceptance or expiration of the
acceptance period.

We recognize revenue for maintenance services
ratably over the contract term. Our training and consulting
services are billed based on hourly rates, and we generally
recognize revenue as these services are performed. However, at
the time of entering into a transaction, we assess whether or
not any services included within the arrangement require us to
perform significant work either to alter the underlying software
or to build additional complex interfaces so that the software
performs as the customer requests. If these services are
included as part of an arrangement, we recognize the entire fee
using the percentage of completion method. We estimate the
percentage of completion based on our estimate of the total
costs estimated to complete the project as a percentage of the
costs incurred to date and the estimated costs to complete.

Sales Returns and Other Allowances, Allowance
for Doubtful Accounts and Litigation.The preparation of financial statements requires our management
to make estimates and assumptions that affect the reported
amount of assets and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Specifically, our management must make estimates of
potential future product returns related to current period
product revenue. Management analyzes historical returns, current
economic trends, and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales
returns and other allowances. Significant management judgments
and estimates must be made and used in connection with
establishing the sales returns and other allowances in any
accounting period. Material differences may result in the amount
and timing of our revenue for any period if management made
different judgments or utilized different estimates. The
provision for sales returns and other allowances amounted to
$125.9 million in 2001. Similarly, our management must make
estimates of the uncollectability of our accounts receivables.
Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Our accounts receivable balance
was $136.4 million, net of allowance for doubtful accounts
of $8.4 million as of December 31, 2001.

Managements current estimated range of
liability related to some of the pending litigation is based on
claims for which our management can estimate the amount and
range of loss. We have recorded the minimum estimated liability
related to those claims, where there is a range of loss. Because
of the uncertainties related to both the amount and range of
loss on the remaining pending litigation, management is unable
to make a reasonable estimate of the liability that could result
from an unfavorable outcome. As additional information becomes
available, we will assess the potential liability related to our
pending litigation and revise our estimates. Such revisions in
our estimates of the potential liability could materially impact
our results of operation and financial position.

39



---



##### 



Accounting for Income Taxes.As part of the process of preparing
our consolidated financial statements we are required to
estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual
current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we
believe that recovery is not likely, we must establish a
valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of
operations.

Significant management judgment is required in
determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. We have recorded a
valuation allowance of $135.6 million as of
December 31, 2001, due to uncertainties related to our
ability to utilize some of our deferred tax assets, primarily
consisting of certain net operating losses carried forward and
foreign tax credits, before they expire. The valuation allowance
is based on our estimates of taxable income by jurisdiction in
which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results
differ from these estimates or we adjust these estimates in
future periods we may need to establish an additional valuation
allowance which could materially impact our financial position
and results of operations.

The net deferred tax asset as of
December 31, 2001 was $206.8 million, net of a
valuation allowance of $135.6 million.

Valuation of Long-lived and Intangible Assets
and Goodwill.We assess the impairment
of identifiable intangibles, long-lived assets and related
goodwill and enterprise level goodwill whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could
trigger an impairment review include the following:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | significant underperformance relative to expected
    historical or projected future operating results;          
|
| |  | significant changes in the manner of our use of
    the acquired assets or the strategy for our overall business;
|
| |  | significant negative industry or economic trends;                                                                
|
| |  | significant decline in our stock price for a
    sustained period; and                                           
|
| |  | our market capitalization relative to net book
    value.                                                        

When we determine that the carrying value of
intangibles, long-lived assets and related goodwill and
enterprise level goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash
flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current
business model. Net intangible assets, long-lived assets, and
goodwill amounted to $253.5 million as of December 31,
2001.

In 2002, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets became effective and as a result,
we will cease to amortize approximately $156.9 million of
goodwill. We had recorded approximately $51.1 million of
amortization on these amounts during 2001 and would have
recorded approximately $55.1 million of amortization during
2002. In lieu of amortization, we are required to perform an
initial impairment review of our goodwill in 2002 and an annual
impairment review thereafter. We expect to complete our initial
review during the first quarter of 2002.

We currently do not expect to record an
impairment charge upon completion of the initial impairment
review. However, there can be no assurance that at the time the
review is completed a material impairment charge will not be
recorded.*

40



---



##### 



Determining Functional Currencies for the
Purpose of Consolidation.We have
several foreign subsidiaries which together account for
approximately 35% of our net revenues, 12% of our assets and 12%
of our total liabilities as of December 31, 2001.

In preparing our consolidated financial
statements, we are required to translate the financial
statements of the foreign subsidiaries from the currency in
which they keep their accounting records, generally the local
currency, into United States dollars. This process results in
exchange gains and losses which, under the relevant accounting
guidance are either included within the statement of operations
or as a separate part of our net equity under the caption
cumulative translation adjustment.

Under the relevant accounting guidance the
treatment of these translation gains or losses is dependent upon
our managements determination of the functional currency
of each subsidiary. The functional currency is determined based
on management judgment and involves consideration of all
relevant economic facts and circumstances affecting the
subsidiary. Generally, the currency in which the subsidiary
transacts a majority of its transactions, including billings,
financing, payroll and other expenditures would be considered
the functional currency but any dependency upon the parent and
the nature of the subsidiarys operations must also be
considered.

If any subsidiarys functional currency is
deemed to be the local currency, then any gain or loss
associated with the translation of that subsidiarys
financial statements is included in cumulative translation
adjustments. However, if the functional currency is deemed to be
the United States dollar then any gain or loss associated with
the translation of these financial statements would be included
within our statement of operations. If we dispose of any of our
subsidiaries, any cumulative translation gains or losses would
be realized into our statement of operations. If we determine
that there has been a change in the functional currency of a
subsidiary to the United States dollar, any translation gains or
losses arising after the date of change would be included within
our statement of operations.

Based on our assessment of the factors discussed
above, we consider the relevant subsidiarys local currency
to be the functional currency for each of our international
subsidiaries. Accordingly we had cumulative translation losses
of approximately $35.1 million and $34.1 million which
were included as part of accumulated other comprehensive loss
within our balance sheet at December 31, 2001 and 2000,
respectively. During 2001, 2000 and 1999, translation
adjustments of $1.0 million, $24.0 million and
$6.8 million, respectively, were included under accumulated
other comprehensive loss. Had we determined that the functional
currency of our subsidiaries was the United States dollar, these
losses would have increased our loss for each of the years
presented.

The magnitude of these gains or losses is
dependent upon movements in the exchange rates of the foreign
currencies in which we transact business against the United
States dollar. These currencies include the Japanese Yen, the
Euro, the United Kingdom Pound Sterling and Australian and
Canadian dollars. Any future translation gains or losses could
be significantly higher than those noted in each of these years.
In addition, if determine that a change in the functional
currency of one of our subsidiaries has occurred at any point in
time we would be required to include any translation gains or
losses from the date of change in our statement of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2000, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 00-14, Accounting for
Certain Sales Incentives. EITF Issue No. 00-14
addresses the recognition, measurement, and income statement
classification for sales incentives that a vendor voluntarily
offers to customers (without charge), which the customer can use
in, or exercise as a result of, a single exchange transaction.
Sales incentives that fall within the scope of EITF Issue
No. 00-14 include offers that a customer can use to receive
a reduction in the price of a product or service at the point of
sale. The EITF agreed to change the transition date for Issue
00-14, dictating that a company should apply this consensus no
later than the companys annual or interim financial
statements for the periods beginning after December 15,
2001. In June 2001, the EITF issued EITF Issue No. 00-25,
Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the

41



---



##### 



Vendors Products, effective for
periods beginning after December 15, 2001. EITF Issue
No. 00-25 addresses whether consideration from a vendor to
a reseller is (a) an adjustment of the selling prices of
the vendors products and, therefore, should be deducted
from revenue when recognized in the vendors statement of
operations or (b) a cost incurred by the vendor for assets
or services received from the reseller and, therefore, should be
included as a cost or expense when recognized in the
vendors statement of operations. Upon application of these
EITFs, financial statements for prior periods presented for
comparative purposes should be reclassified to comply with the
income statement display requirements under these Issues. In
September of 2001, the EITF issued EITF Issue No. 01-09,
Accounting for Consideration Given by Vendor to a Customer
or a Reseller of the Vendors Products, which is a
codification of EITF Issues No. 00-14, No. 00-25 and
No. 00-22 Accounting for Points and
Certain Other Time-or Volume-Based Sales Incentive Offers and
Offers for Free Products or Services to be Delivered in the
Future. As part of the restatement discussed in
Note 3 of the Notes to Consolidated Financial Statements,
we adopted EITF 01-09. See Note 3 of the Notes to
Consolidated Financial Statements.


In July 2001, the FASB issued SFAS No. 141,
Business Combinations. SFAS No. 141 requires
the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the
pooling-of-interests method. We believe that the adoption of
SFAS No. 141 will not have a significant impact on our
financial statements.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which is
effective for fiscal years beginning after December 15,
2001. SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the
standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the testing for
impairment of existing goodwill and other intangibles. Upon
adoption of SFAS 142 we will cease to amortize
approximately $156.9 million of goodwill, we had recorded
approximately $51.1 million of amortization on these
amounts during 2001 and would have recorded approximately
$55.1 million of amortization during 2002. In addition we
will be required to perform an impairment review of our goodwill
balance upon the initial adoption of SFAS No. 142. The
impairment review will involve a two-step process as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Step 1  We will compare the fair
    value of our reporting units to the carrying value, including
    goodwill of each of those units. For each reporting unit where
    the carrying value, including goodwill, exceeds the units
    fair value, we will move on to step 2. If a units fair
    value exceeds the carrying value, no further work is performed
    and no impairment charge is necessary.                                                                                                                                                                        
|
| |  | Step 2  We will perform an
    allocation of the fair value of the reporting unit to its
    identifiable tangible and non-goodwill intangible assets and
    liabilities. This will derive an implied fair value for the
    reporting units goodwill. We will then compare the implied
    fair value of the reporting units goodwill with the
    carrying amount of reporting units goodwill. If the
    carrying amount of the reporting units goodwill is greater
    than the implied fair value of its goodwill, an impairment loss
    must be recognized for the excess.

We expect to complete this review during the
first quarter of 2002. We do not expect to record an impairment
charge upon completion of the initial review. However, there can
be no assurance that at the time the review is completed a
material impairment charge may not be recorded.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and develops a single
accounting method under which long-lived assets that are to be
disposed of by sale are measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS No. 144
expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after

42



---



##### 



December 15, 2001 and its provisions are to
be applied prospectively. We are currently assessing the impact
of SFAS No. 144 on our financial position and results of
operations.


Liquidity and Capital Resources, as
restated

At December 31, 2001, we had
$612.8 million in cash and cash equivalents and
$330.1 million in marketable securities, for a combined
total of $942.9 million.

Net cash provided by (used in) operating
activities was $145.7 million, $26.7 million and
$(18.1) million in 2001, 2000 and 1999, respectively.

Net cash provided by operating activities in 2001
resulted primarily from net income before non-cash charges and
minority interest. Non-cash charges include depreciation,
amortization, provision for doubtful accounts, provision for
sales return and allowances, interest on our zero coupon
convertible debentures, stock-based compensation charges,
write-down of our strategic investments, net gains on
investments and extraordinary items. After excluding the effects
of non-cash charges, our net income was approximately $184.2
million during 2001. Additional cash was generated from an
increase of $96.4 million in our deferred revenue balance, which
results from deferral, in accordance with our revenue
recognition policy, of a portion of fees received from our
customers. This increase was partially offset by an increase in
our other net working capital balances, primarily an increase in
our accounts receivable of $136.6 million in 2001 offset by
an increase in our accounts payable and accrued liabilities
balance of $12.5 million.

Net cash provided by operating activities in 2000
resulted from increases in our deferred revenue resulting from
the deferral of a portion of fees received from our customers in
our sales arrangements. Before non-cash charges, our net income
was $71.5 million during 2000. Additional cash was
generated from an increase in our accounts payable and accrued
liabilities. This increase was partially offset by an increase
in our accounts receivable and deferred taxes balances.

Net cash used in operating activities in 1999
resulted primarily from a decrease in deferred revenue and an
increase in deferred tax assets and accounts receivable. Before
non-cash charges, our cash basis net income was
$186.2 million during 1999. Additional cash was generated
from an increase in our prepaid and other current assets and
accounts payable and accrued liabilities balances.

Our accounts receivable balance as a percentage
of sales may increase due to our increased emphasis on large
accounts and expanding international sales, both of which
typically have longer payment terms. Additionally, our
receivable collection has become more dependent on the longer
payment cycle for VARs, distributors and system integrators. To
address this increase in accounts receivable and to improve cash
flow, we may from time to time take actions to encourage earlier
payment of receivables or sell receivables. During 1999, 2000
and 2001, we sold receivables aggregating approximately
$48 million, $12.7 million and zero, respectively. These
receivables were sold at a customary discount of up to 3.5% of
face amount without recourse to us. The discounts were recorded
as an operating expense. As of December 31, 1999 and 2000,
no receivables sold in 1999 and 2000, as applicable, remained
outstanding. To the extent that our accounts receivable balance
increases, we will be subject to greater credit risk with
respect thereto.

Net cash provided by (used in) investing
activities was $20.8 million, $10.4 million and
$(173.8) million in 2001, 2000 and 1999, respectively, primarily
reflecting transactions in marketable securities and additions
to fixed assets. In 2001, the activity in the portfolio of our
investment in marketable securities generated net cash proceeds
of $76.1 million. This proceeds were offset by our purchase
of shares of our Japanese subsidiary owned by minority
stockholders for $10.6 million and by our purchases of
fixed assets and technologies totaling $43.7 million. In
2000, we obtained cash proceeds of $36.8 million and
$11.9 million from the sale of our shares in Goto.com and
the sale of less than 5% of our shares in our Japanese
subsidiary, respectively. Our disbursements related to purchases
of fixed assets, technologies and other investments for a total
of $88.1 million were partly offset by net cash proceeds of
$51.9 million from the activity in our investment portfolio.

Net cash provided by financing activities in 2001
amounted to $158.9 million, primarily consisting of
issuance of convertible notes for $335.1 million, as well
as issuance of common stock under our stock option

43



---



##### 



plan and employee stock purchase plan for
$51.1 million. In addition, as described below, we settled
all outstanding put options for a payment of approximately
$53.8 million in February 2001. These proceeds were offset
by our repurchase of zero coupon convertible debentures for
$173.7 million. Net cash used in financing activities was
$39.4 million in 2000 consisting primarily of the
repurchase of our common stock which represented approximately
$100.4 million. The repurchases of our common stock were
slightly offset by proceeds associated with the exercise of our
stock options and employee stock purchase plan including the
sale of put options, for a total of $61.2 million. Net cash
provided by financing activities was $96.6 million in 1999
consisting primarily of the proceeds from McAfee.coms
initial public offering for $78.9 million as well as
proceeds associated with the exercise of our stock options and
sale of put options, for a total of $33.2 million. These
proceeds were offset by the disbursements we made to purchase
back some of our common stock and repay notes payable.


During 2001, a significant portion of our cash
inflows were generated by our operations. Because our operating
results may fluctuate significantly, as a result of decrease in
customer demand or decrease in the acceptance of our future
products, our ability to generate positive cash flow from
operations may be jeopardized.

Future payments due under debt and lease
obligations as of December 31 (in thousands):

|                    |  |                |         |              |  |            |         |       |  |   |         |  |  |   |         | 
|------------------- |  | -------------- | ------- | ------------ |  | ---------- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                    |  |                |         | 5.25%        |  |            |         |      
|                    |  | Zero Coupon    |         | Convertible  |  | Non        |         |      
|                    |  | Convertible    |         | Subordinated |  | Cancelable |         |      
|                    |  | Debentures due |         | Notes due    |  | Operating  |         |      
|                    |  | 2018(1)        |         | 2006(2)      |  | Leases     |         | Total
|                    |  |                |         |              |  |            |         |      
|2002                |  | $              |        |              |  | $          |        |       |  | $ | 20,550  |  |  | $ | 20,550  | 
|2003                |  |                | 246,501 |              |  |            |        |       |  |   | 14,924  |  |  |   | 261,425 | 
|2004                |  |                |        |              |  |            |        |       |  |   | 12,673  |  |  |   | 12,673  | 
|2005                |  |                |        |              |  |            |        |       |  |   | 11,802  |  |  |   | 11,802  | 
|2006                |  |                |        |              |  |            | 345,000 |       |  |   | 10,296  |  |  |   | 355,296 | 
|2007 and thereafter |  |                |        |              |  |            |        |       |  |   | 61,606  |  |  |   | 61,606  | 
|                    |  |                |         |              |  |            |         |       |  |   |         |  |  |   |         | 
|                    |  | $              | 246,501 |              |  | $          | 345,000 |       |  | $ | 131,851 |  |  | $ | 723,352 | 
|                    |  |                |         |              |  |            |         |       |  |   |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed below, in February 2003, we may be
    required to use a significant portion of our cash balance to
    redeem our outstanding zero coupon debentures. The redemption
    value corresponds to the aggregate face value outstanding of
    $498.5 million less the related unamortized discount of
    $252.0 million on February 13, 2003.
|   
|(2) | In 2002, 2003, 2004, 2005 and 2006, we will make
    interest payments of $18.1 million.                                                                                                                                                                                                                                                                

We believe that our available cash and
anticipated cash flow from operations will be sufficient to fund
our working capital and capital expenditure requirements for at
least the next twelve months.*

Convertible Debt

On February 13, 1998, we issued zero coupon
convertible subordinated debentures due 2018, which have an
aggregate face amount at maturity of $885.5 million and
generated net proceeds to us of approximately
$337.6 million (after deducting fees and expenses). The
initial price for the debentures was $391.06 per $1,000 of
principal amount at maturity. At the option of the holder, we
are required to redeem the debentures as of February 13,
2003, February 13, 2008 and February 13, 2013 at
purchase prices equal to the initial issue price plus the
accretion of the discount on the debentures to such dates (or
$494.52, $625.35 and $790.79 per $1,000 of principal amount at
maturity, respectively). In the case of such a required
redemption, at our option, we may pay the aggregate redemption
price in cash, shares of our common stock or a combination of
cash and common stock. The number of shares of common stock so
issued by us would be based on the fair value of our common
stock at the time of any required redemption. On the same dates
and at the same redemption prices, we may at our option redeem
the outstanding debentures for cash. The debentures may also be
redeemed at

44



---



##### 



the option of the holder if there is a
Fundamental Change (as defined in the related indenture) at a
price equal to the issue price plus the accretion of the
discount on the debenture to the date of redemption, subject to
adjustment. The accretion of the discount on the debentures is
calculated using the effective interest method.


During 2001, we redeemed zero coupon convertible
subordinated debentures, which had an aggregate face amount at
maturity of $387.0 million, at a net price of
$173.7 million, which was financed from the Companys
investment portfolio. In connection with the redemption, we
recognized an extraordinary gain of approximately
$1.7 million, net of approximately $1.2 million in
taxes. If and when appropriate opportunities present themselves,
we may use a portion of our cash balances to buy back additional
amounts of our zero coupon convertible subordinated debentures.*

As of December 31, 2001, our aggregate cash,
cash equivalents and marketable securities were approximately
$943.0 million, including $102.5 million held by
McAfee.com. Assuming that as of February 13, 2003 all
currently outstanding zero coupon convertible subordinated
debentures are redeemed, the aggregate redemption price would
equal approximately $246.5 million.

On August 17, 2001, we issued 5.25%
convertible subordinated notes due 2006 with an aggregate
principal amount of $345.0 million. The issuance generated
net proceeds to us of approximately $335.1 million (after
deducting fees and expenses). The notes mature on
August 15, 2006, unless earlier redeemed by us at our
option or converted at the holders option. Interest is
payable semi-annually in cash in arrears on February 15 and
August 15 of each year, commencing February 15, 2002.
At the option of the holder, the notes may be converted into our
common stock at any time, unless previously redeemed, at a
conversion price of $18.07 per share. We may redeem all or a
portion of the notes for cash at any time on or after
August 20, 2004 at a redemption price of 101.3125% of the
principal amount between August 20, 2004 and
August 14, 2005 and 100.0% of the principal amount after
August 14, 2005. The notes are unsecured and are
subordinated to all of our existing and future Senior
Indebtedness (as defined in the related Indenture) and are pari
passu with respect to the zero coupon subordinated debentures
due 2018.

Derivatives

We conduct our operations globally. Consequently
the results of our operations are exposed to movements in
foreign currency exchange rates. We enter into forward exchange
contracts to reduce exposures associated with nonfunctional
currency accounts receivable and accounts payable denominated in
Euros, Canadian and Australian dollars and several European
currencies. The forward contracts range from one to three months
in original maturity. In general, we do not hedge anticipated
foreign currency cash flows nor do we enter into forward
contracts for trading purposes. We do not use any derivatives
for trading or speculative purposes.

The forward contracts do not qualify for hedge
accounting and accordingly are marked to market at the end of
each reporting period with any unrealized gain or loss being
recognized in the statement of operations.

The forward contracts outstanding and their fair
values are presented below as of December 31 (in thousands):

|                          |  |            |     |                |  |   |     | 
|------------------------- |  | ---------- | --- | -------------- |  | - | --- | 
|                          |  |           
|                          |  | 2001      
|                          |  |           
|                          |  | Fair Value |     | Carrying Value
|                          |  |            |     |               
|Australian Dollar         |  | $          | 5   |                |  | $ | 5   | 
|Canadian Dollar           |  |            | 7   |                |  |   | 7   | 
|Other European Currencies |  |            | 90  |                |  |   | 90  | 
|                          |  |            |     |                |  |   |     | 
|                          |  | $          | 102 |                |  | $ | 102 | 
|                          |  |            |     |                |  |   |     | 

45



---



##### 



|                          |  |            |     |                |  |   |     |  
|------------------------- |  | ---------- | --- | -------------- |  | - | --- | -
|                          |  |           
|                          |  | 2000      
|                          |  |           
|                          |  | Fair Value |     | Carrying Value
|                          |  |            |     |               
|Australian Dollar         |  | $          | (8  | )              |  | $ | (8  | )
|Canadian Dollar           |  |            | 27  |                |  |   | 27  |  
|Euro                      |  |            | (50 | )              |  |   | (50 | )
|Other European Currencies |  |            | (1  | )              |  |   | (1  | )
|                          |  |            |     |                |  |   |     |  
|                          |  | $          | (32 | )              |  | $ | (32 | )
|                          |  |            |     |                |  |   |     |  

The carrying value is based on the fair value of
the underlying contracts based on quoted market values.

Net realized gains and losses arising from
settlement of our forward foreign exchange contracts were not
significant in 2001, 2000, and 1999.

Stock Repurchase Program

In May 1999, our board of directors authorized
the repurchase of up to $100.0 million of our common stock
in the open market. In July 2000, our board of directors
authorized the repurchase of up to an additional
$50.0 million of common stock in the open market. Through
December 31, 2000, we repurchased 5.0 million shares
of our common stock bringing total cash outlay to date to
approximately $112.9 million. The timing and size of any
future stock repurchases are subject to market conditions, stock
prices, cash position and other cash requirements. Such
repurchases are intended to cover our issuances under the
Employee Stock Purchase Plan (ESPP), the 1997 Plan, and
issuances related to potential mergers and acquisitions.

On August 2, 1999, February 16, 2000
and May 31, 2000, we sold European style put
options for 3.0 million shares of our common stock as part
of our stock repurchase plan. On August 3, 2000, put
options sold on August 2, 1999 for 1.0 million shares
were exercised in our stock. In February 2001, we settled the
remaining put options, which resulted in the purchase of
2.0 million shares of our stock for approximately
$53.8 million. We do not currently expect to make any
further repurchases of our common stock under this stock
repurchase program.*

Euro

On January 1, 1999, the Euro was
introduced. On that day, the exchange ratios of the currencies
of the eleven countries participating in the first phase of the
European Economic and Monetary Union were fixed. The Euro became
a currency in its own right and the currencies of the
participating countries, while continuing to exist for a
three-year transition period, are now fixed denominations of the
Euro. The conversion to the Euro will have significant effects
on the foreign exchange markets and bond markets and is
requiring significant changes in the operations and systems
within the European banking industry. Our information system is
designed to accommodate multi-currency environments. As a
result, we have the flexibility to transact business with
vendors and customers in either Euro or traditional national
currency units.

Financial Risk Management

The following discussion about our risk
management activities includes forward-looking
statements that involve risks and uncertainties. Actual
results could differ materially from those projected in the
forward-looking statements.

As a global concern, we face exposure to adverse
movements in foreign currency exchange rates. These exposures
may change over time as business practices evolve and could have
a material adverse impact on our financial results. Our primary
exposures related to non U.S. dollar-denominated sales and
operating expenses in Japan, Canada, Australia, Europe, Latin
America, and Asia. At the present time, we hedge only those
currency exposures associated with certain assets and
liabilities denominated in nonfunctional currencies and do not
generally hedge anticipated foreign currency cash flows. Our
hedging activity is intended to offset the impact of currency
fluctuations on certain nonfunctional currency assets and
liabilities. The success of this activity depends upon estimates
of transaction activity denominated in various currencies,
primarily the

46



---



##### 



Japanese Yen, Canadian dollar, Australian dollar,
the Euro and certain European currencies. To the extent that
these estimates are overstated or understated during periods of
currency volatility, we could experience unanticipated currency
gains or losses.


We maintain investment portfolio holdings of
various issuers, types and maturities. These securities are
classified as available-for-sale, and consequently are recorded
on the balance sheet at fair value with unrealized gains and
losses reported as a separate component of accumulated other
comprehensive income (loss). These securities are not leveraged
and are held for purposes other than trading.

We also maintain minority investments in private
and publicly traded companies. These investments are reviewed
for other than temporary declines in value on a quarterly basis.
Reasons for other than temporary declines in value include
whether the related company would have insufficient cash flow to
operate for the next twelve months, significant changes in the
operating performance or operating model and changes in market
conditions. As of December 31, 2001, the minority venture
investments we continue to hold totaled $2.4 million at
estimated fair value. The $2.4 million in minority venture
investments include investments in public and private companies,
amounting to $2.2 million and $200,000, respectively.
During 2001, we recorded a $20.6 million impairment charge
in connection with these investments.

The following tables present the hypothetical
changes in fair values in the securities held at
December 31, 2001 that are sensitive to the changes in
interest rates. The modeling technique used measures the change
in fair values arising from hypothetical parallel shifts in the
yield curve of plus or minus 50 basis points (BPS),
100 BPS and 150 BPS over six and twelve-month time
horizons. Beginning fair values represent the market principal
plus accrued interest and dividends at December 31, 2001.
Ending fair values are the market principal plus accrued
interest, dividends and reinvestment income at six and twelve
month time horizons.

The following table estimates the fair value of
the portfolio at a six-month time horizon (in millions):

|                                      |       |                            |        |           |  |                            |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |        | 
|------------------------------------- | ----- | -------------------------- | ------ | --------- |  | -------------------------- | ------ | ------ |  | ------ | ------ | ------- |  | ------- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |       |                            |        |           |  |                           
|                                      |       | Valuation of Securities    |        |           |  | Valuation of Securities   
|                                      |       | Given an Interest Rate     |        | No        |  | Given an Interest Rate    
|                                      |       | Decrease of X Basis Points |        | Change in |  | Increase of X Basis Points
|                                      |       |                            |        | Interest  |  |                           
|Issuer                                |       | 150 BPS                    |        | 100 BPS   |  | 50 BPS                     |        | Rate   |  | 50 BPS |        | 100 BPS |  | 150 BPS
|                                      |       |                            |        |           |  |                            |        |        |  |        |        |         |  |        
|U.S. Government notes and bonds       |       | $                          | 215.55 |           |  | $                          | 214.69 |        |  | $      | 213.79 |         |  | $       | 212.90 |        |  | $ | 211.99 |        |  | $ | 211.08 |        |  | $ | 210.18 |       
|Municipal notes and bonds             |       |                            | 12.21  |           |  |                            | 12.21  |        |  |        | 12.21  |         |  |         | 12.21  |        |  |   | 12.21  |        |  |   | 12.21  |        |  |   | 12.21  |       
|Corporate notes, bonds and preferreds |       |                            | 607.47 |           |  |                            | 607.16 |        |  |        | 606.79 |         |  |         | 606.43 |        |  |   | 605.67 |        |  |   | 605.67 |        |  |   | 605.71 |       
|                                      |       |                            |        |           |  |                            |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                      | Total |                            | $      | 835.23    |  |                            | $      | 834.06 |  |        | $      | 832.79  |  |         | $      | 831.54 |  |   | $      | 829.87 |  |   | $      | 828.96 |  |   | $      | 828.10 | 
|                                      |       |                            |        |           |  |                            |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |       

The following table estimates the fair value of
the portfolio at a twelve-month time horizon (in millions):

|                                      |       |                            |        |           |  |                            |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |        | 
|------------------------------------- | ----- | -------------------------- | ------ | --------- |  | -------------------------- | ------ | ------ |  | ------ | ------ | ------- |  | ------- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |       |                            |        |           |  |                           
|                                      |       | Valuation of Securities    |        |           |  | Valuation of Securities   
|                                      |       | Given an Interest Rate     |        | No        |  | Given an Interest Rate    
|                                      |       | Decrease of X Basis Points |        | Change in |  | Increase of X Basis Points
|                                      |       |                            |        | Interest  |  |                           
|Issuer                                |       | 150 BPS                    |        | 100 BPS   |  | 50 BPS                     |        | Rate   |  | 50 BPS |        | 100 BPS |  | 150 BPS
|                                      |       |                            |        |           |  |                            |        |        |  |        |        |         |  |        
|U.S. Government notes and bonds       |       | $                          | 218.11 |           |  | $                          | 217.50 |        |  | $      | 216.86 |         |  | $       | 216.21 |        |  | $ | 215.56 |        |  | $ | 214.91 |        |  | $ | 214.25 |       
|Municipal notes and bonds             |       |                            | 12.28  |           |  |                            | 12.29  |        |  |        | 12.30  |         |  |         | 12.30  |        |  |   | 12.31  |        |  |   | 12.31  |        |  |   | 12.32  |       
|Corporate notes, bonds and preferreds |       |                            | 608.52 |           |  |                            | 608.34 |        |  |        | 608.11 |         |  |         | 607.88 |        |  |   | 607.38 |        |  |   | 607.42 |        |  |   | 607.45 |       
|                                      |       |                            |        |           |  |                            |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                      | Total |                            | $      | 838.91    |  |                            | $      | 838.13 |  |        | $      | 837.27  |  |         | $      | 836.39 |  |   | $      | 835.25 |  |   | $      | 834.64 |  |   | $      | 834.02 | 
|                                      |       |                            |        |           |  |                            |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |       



|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    About Market Risk

Quantitative and qualitative disclosure about
market risk is set forth at Managements Discussion
and Analysis of Financial Condition and Results of
Operations under Item 7.

47



---



##### 





|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data, as restated

Quarterly Operating Results
(Unaudited)

|                                                                                              |  |                                       |         |               |  |               |         |               |  |               |         |               |  |               |         |               |  |   |          |   |  |   |         |   |  |   |         |  |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | - | -------- | - |  | - | ------- | - |  | - | ------- |  |  | - | ------- | -
|                                                                                              |  |                                      
|                                                                                              |  | Three Months Ended                   
|                                                                                              |  |                                      
|                                                                                              |  | December 31,                          |         | September 30, |  | June 30,      |         | March 31,     |  | December 31,  |         | September 30, |  | June 30,      |         | March 31,    
|                                                                                              |  | 2001                                  |         | 2001          |  | 2001          |         | 2001          |  | 2000          |         | 2000          |  | 2000          |         | 2000         
|                                                                                              |  |                                       |         |               |  |               |         |               |  |               |         |               |  |               |         |              
|                                                                                              |  |                                      
|                                                                                              |  | (In thousands, except per share data)
|                                                                                              |  | (As                                   |         | (As           |  | (As           |         | (As           |  | (As           |         |               |  | (As           |         | (As          
|                                                                                              |  | Reclassified)                         |         | Reclassified) |  | Reclassified) |         | Reclassified) |  | Restated      |         | (As           |  | Restated      |         | Restated     
|                                                                                              |  |                                       |         |               |  |               |         |               |  | and           |         | Restated and  |  | and           |         | and          
|                                                                                              |  |                                       |         |               |  |               |         |               |  | Reclassified) |         | Reclassified) |  | Reclassified) |         | Reclassified)
|Statement of Operations and Other
    Data:                                                   |  |                                       |         |               |  |               |         |               |  |               |         |               |  |               |         |               |  |   |          |   |  |   |         |   |  |   |         |  |  |   |         |  
|Net revenues                                                                                  |  | $                                     | 257,546 |               |  | $             | 205,270 |               |  | $             | 192,562 |               |  | $             | 155,596 |               |  | $ | 68,740   |   |  | $ | 221,773 |   |  | $ | 220,041 |  |  | $ | 187,188 |  
|Gross margin                                                                                  |  |                                       | 218,228 |               |  |               | 162,851 |               |  |               | 152,908 |               |  |               | 118,909 |               |  |   | 23,986   |   |  |   | 181,747 |   |  |   | 181,139 |  |  |   | 155,175 |  
|Income (loss) from operations                                                                 |  |                                       | 14,700  |               |  |               | (8,841  | )             |  |               | (27,960 | )             |  |               | (59,865 | )             |  |   | (165,301 | ) |  |   | 120     |   |  |   | 3,147   |  |  |   | (7,158  | )
|Income (loss) before provision for income
    taxes, minority interest and extraordinary item |  |                                       | 13,198  |               |  |               | (8,148  | )             |  |               | (37,930 | )             |  |               | (58,503 | )             |  |   | (167,763 | ) |  |   | 5,456   |   |  |   | 9,464   |  |  |   | 40,467  |  
|Income (loss) before extraordinary item                                                       |  |                                       | (5,513  | )             |  |               | (12,328 | )             |  |               | (37,179 | )             |  |               | (47,361 | )             |  |   | (144,623 | ) |  |   | (3,071  | ) |  |   | 3,177   |  |  |   | 20,591  |  
|Extraordinary item, gain on redemption of debt,
    net of taxes                              |  |                                       | 654     |               |  |               | 1,077   |               |  |               |        |               |  |               |        |               |  |   |         |   |  |   |        |   |  |   |        |  |  |   |        |  
|Net income (loss)                                                                             |  |                                       | (4,859  | )             |  |               | (11,251 | )             |  |               | (37,179 | )             |  |               | (47,361 | )             |  |   | (144,623 | ) |  |   | (3,071  | ) |  |   | 3,177   |  |  |   | 20,591  |  
|Extraordinary item per share                                                                  |  | $                                     |        |               |  | $             | 0.01    |               |  | $             |        |               |  | $             |        |               |  | $ |         |   |  | $ |        |   |  | $ |        |  |  | $ |        |  
|Basic income (loss) per share                                                                 |  | $                                     | (0.03   | )             |  | $             | (0.08   | )             |  | $             | (0.27   | )             |  | $             | (0.35   | )             |  | $ | (1.05    | ) |  | $ | (0.02   | ) |  | $ | 0.02    |  |  | $ | 0.15    |  
|Diluted income (loss) per share                                                               |  | $                                     | (0.03   | )             |  | $             | (0.08   | )             |  | $             | (0.27   | )             |  | $             | (0.35   | )             |  | $ | (1.05    | ) |  | $ | (0.02   | ) |  | $ | 0.02    |  |  | $ | 0.14    |  

We believe that period-to-period comparisons of
our financial results should not be relied upon as an indication
of future performance. For example, in the fourth quarter of
2000, our revenue decreased 69% from the prior quarter due to
some of our distribution partners business decision to
reduce their inventory levels by not replenishing their
inventory and requesting returns over and above their
contractual rights.

Our revenues and results of operations have been
subject to significant fluctuations, particularly on a quarterly
basis, and our revenues and results of operations could
fluctuate significantly quarter to quarter and year to year.
Causes of such fluctuations may include the volume and timing of
new orders and renewals, the sales cycle for our products, the
introduction of new products, return rates, inventory levels,
product upgrades or updates by us or our competitors, changes in
product mix, changes in product prices and pricing models,
seasonality, trends in the computer industry, general economic
conditions (such as the recent economic slowdown), extraordinary
events such as acquisitions or litigation and the occurrence of
unexpected events.

Significant quarterly fluctuations in revenues
will cause significant fluctuations in our cash flows and the
cash and cash equivalents, accounts receivable and deferred
revenue accounts on our balance sheet. In addition, the
operating results of many software companies reflect seasonal
trends, and our business, financial condition and results of
operations may be affected by such trends in the future. These
trends may include higher net revenue in the fourth quarter as
many customers complete annual budgetary cycles, and lower net
revenue in the summer months when many businesses experience
lower sales, particularly in the European market.

Our Financial Statements and supplementary data
required by this item are set forth at the pages indicated at
Item 14(a).

48



---



##### 



The following are reconciliations of our
quarterly operating results from financial statements previously
filed to these restated financial statements (in thousands,
except per share data):

|                                                                 |  |                                      |          |              |  |                   |        |                 |  |   |         |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------------------------------ | -------- | ------------ |  | ----------------- | ------ | --------------- |  | - | ------- | - |  | - | -------- | -
|                                                                 |  |                                     
|                                                                 |  | Three Months Ended December 31, 2000
|                                                                 |  |                                     
|                                                                 |  | As Previously                        |          |              |  | EITF No. 01-09    |        | As Restated and
|                                                                 |  | Reported                             |          | Inaccuracies |  | Reclassifications |        | Reclassified   
|                                                                 |  |                                      |          |              |  |                   |        |                
|Net revenue                                                      |  | $                                    | 58,827   |              |  | $                 | 22,000 |                 |  | $ | (12,087 | ) |  | $ | 68,740   |  
|Gross margin                                                     |  |                                      | 14,073   |              |  |                   | 22,000 |                 |  |   | (12,087 | ) |  |   | 23,986   |  
|Loss from operations                                             |  |                                      | (187,301 | )            |  |                   | 22,000 |                 |  |   |        |   |  |   | (165,301 | )
|Loss before provision for income taxes and
    minority interest |  |                                      | (189,763 | )            |  |                   | 22,000 |                 |  |   |        |   |  |   | (167,763 | )
|Net loss                                                         |  |                                      | (147,224 | )            |  |                   | 2,601  |                 |  |   |        |   |  |   | (144,623 | )
|Basic and diluted loss per share                                 |  | $                                    | (1.07    | )            |  |                   |        |                 |  |   |         |   |  | $ | (1.05    | )

|                                                                   |  |                                       |         |              |  |                   |         |                 |  |   |        |   |  |   |         |  
|------------------------------------------------------------------ |  | ------------------------------------- | ------- | ------------ |  | ----------------- | ------- | --------------- |  | - | ------ | - |  | - | ------- | -
|                                                                   |  |                                      
|                                                                   |  | Three Months Ended September 30, 2000
|                                                                   |  |                                      
|                                                                   |  | As Previously                         |         |              |  | EITF No. 01-09    |         | As Restated and
|                                                                   |  | Reported                              |         | Inaccuracies |  | Reclassifications |         | Reclassified   
|                                                                   |  |                                       |         |              |  |                   |         |                
|Net revenue                                                        |  | $                                     | 238,737 |              |  | $                 | (11,000 | )               |  | $ | (5,964 | ) |  | $ | 221,773 |  
|Gross margin                                                       |  |                                       | 198,711 |              |  |                   | (11,000 | )               |  |   | (5,964 | ) |  |   | 181,747 |  
|Income from operations                                             |  |                                       | 10,720  |              |  |                   | (10,600 | )               |  |   |       |   |  |   | 120     |  
|Income before provision for income taxes and
    minority interest |  |                                       | 16,456  |              |  |                   | (11,000 | )               |  |   |       |   |  |   | 5,456   |  
|Net income (loss)                                                  |  |                                       | 4,079   |              |  |                   | (7,150  | )               |  |   |       |   |  |   | (3,071  | )
|Basic and diluted net income (loss) per share                      |  | $                                     | 0.03    |              |  |                   |         |                 |  |   |        |   |  | $ | (0.02   | )

|                                                                   |  |                                  |         |              |  |                   |         |                 |  |   |        |   |  |   |         | 
|------------------------------------------------------------------ |  | -------------------------------- | ------- | ------------ |  | ----------------- | ------- | --------------- |  | - | ------ | - |  | - | ------- | 
|                                                                   |  |                                 
|                                                                   |  | Three Months Ended June 30, 2000
|                                                                   |  |                                 
|                                                                   |  | As Previously                    |         |              |  | EITF No. 01-09    |         | As Restated and
|                                                                   |  | Reported                         |         | Inaccuracies |  | Reclassifications |         | Reclassified   
|                                                                   |  |                                  |         |              |  |                   |         |                
|Net revenue                                                        |  | $                                | 233,672 |              |  | $                 | (8,000  | )               |  | $ | (5,631 | ) |  | $ | 220,041 | 
|Gross margin                                                       |  |                                  | 194,770 |              |  |                   | (8,000  | )               |  |   | (5,631 | ) |  |   | 181,139 | 
|Income from operations                                             |  |                                  | 16,147  |              |  |                   | (13,000 | )               |  |   |       |   |  |   | 3,147   | 
|Income before provision for income taxes and
    minority interest |  |                                  | 22,114  |              |  |                   | (12,650 | )               |  |   |       |   |  |   | 9,464   | 
|Net income                                                         |  |                                  | 11,399  |              |  |                   | (8,222  | )               |  |   |       |   |  |   | 3,177   | 
|Basic and diluted net income per share                             |  | $                                | 0.08    |              |  |                   |         |                 |  |   |        |   |  | $ | 0.02    | 

|                                                                   |  |                                   |         |              |  |                   |         |                 |  |   |        |   |  |   |         |  
|------------------------------------------------------------------ |  | --------------------------------- | ------- | ------------ |  | ----------------- | ------- | --------------- |  | - | ------ | - |  | - | ------- | -
|                                                                   |  |                                  
|                                                                   |  | Three Months Ended March 31, 2000
|                                                                   |  |                                  
|                                                                   |  | As Previously                     |         |              |  | EITF No. 01-09    |         | As Restated and
|                                                                   |  | Reported                          |         | Inaccuracies |  | Reclassifications |         | Reclassified   
|                                                                   |  |                                   |         |              |  |                   |         |                
|Net revenue                                                        |  | $                                 | 214,456 |              |  | $                 | (18,288 | )               |  | $ | (8,980 | ) |  | $ | 187,188 |  
|Gross margin                                                       |  |                                   | 181,443 |              |  |                   | (17,288 | )               |  |   | (8,980 | ) |  |   | 155,175 |  
|Income (loss) from operations                                      |  |                                   | 8,467   |              |  |                   | (15,625 | )               |  |   |       |   |  |   | (7,158  | )
|Income before provision for income taxes and
    minority interest |  |                                   | 53,442  |              |  |                   | (12,975 | )               |  |   |       |   |  |   | 40,467  |  
|Net income                                                         |  |                                   | 29,025  |              |  |                   | (8,434  | )               |  |   |       |   |  |   | 20,591  |  
|Basic net income per share                                         |  | $                                 | 0.21    |              |  |                   |         |                 |  |   |        |   |  | $ | 0.15    |  
|Diluted net income per share                                       |  | $                                 | 0.20    |              |  |                   |         |                 |  |   |        |   |  | $ | 0.14    |  

Item 9.     Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure

Not applicable.

49



---



##### 



PART III

Item 10.     Directors
and Officers of the Registrant

The information required hereunder is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on May 15, 2002.

We have revised our Insider Trading Policy to
allow our directors, officers and other employees covered under
the policy to establish, under limited circumstances
contemplated by Rule 10b5-1 under the Securities Exchange
Act of 1934, written programs that permit automatic trading of
our stock or trading of our stock by an independent person (such
as an investment bank) who is not aware of material inside
information at the time of the trade. As of January 31,
2002, George Samenuk, our chief executive officer and chairman;
Stephen C. Richards, our chief operating officer and chief
financial officer; Vernon Gene Hodges, our president; Kent H.
Roberts, our executive vice president and general counsel; and
Bakulesh Mehta, the president of our Sniffer Technologies
product group have adopted Rule 10b5-1 trading plans. The
Company believes that additional directors, officers and
employees may establish such programs. In the quarter ended
December 31, 2001, no trades were made pursuant to
Rule 10b5-1 trading plans.

Item 11.     Executive
Compensation

The information required hereunder is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on May 15, 2002.

Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required hereunder is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on May 15, 2002.

Item 13.     Certain
Relationships and Related Transactions

The information required hereunder is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on May 15, 2002.

50



---



##### 



PART IV

Item 14.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

(a)(1) Financial Statements, as
restated:

|                                                                  |  |        |    | 
|----------------------------------------------------------------- |  | ------ | -- | 
|                                                                  |  | Page  
|                                                                  |  | Number
|                                                                  |  |       
|Report of Independent Accountants                                 |  |        | 52 | 
|Consolidated Balance Sheets:                                      |  |        |    | 
|December 31, 2001, and 2000                                       |  |        | 53 | 
|Consolidated Statements of Operations and
    Comprehensive Loss: |  |        |    | 
|Years ended December 31, 2001, 2000, and 1999                     |  |        | 54 | 
|Consolidated Statements of Stockholders
    Equity:              |  |        |    | 
|Years ended December 31, 2001, 2000, and 1999                     |  |        | 55 | 
|Consolidated Statements of Cash Flows:                            |  |        |    | 
|Years ended December 31, 2001, 2000, and 1999                     |  |        | 56 | 
|Notes to Consolidated Financial Statements                        |  |        | 57 | 

(a)(2) Financial Statement Schedule, as
restated

The following financial statement schedule of
Networks Associates, Inc. for the years ended December 31,
2001, 2000, and 1999 is filed as part of this Form 10-K/ A
and should be read in conjunction with Networks Associates,
Inc.s Consolidated Financial Statements.

|                                                    |  |  |     | 
|--------------------------------------------------- |  |  | --- | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | 100 | 

Schedules not listed above have been omitted
because they are not applicable or are not required or because
the required information is included in the Consolidated
Financial Statements or Notes thereto.

(a)(3) Exhibits: See Index to
Exhibits on Page 101. The Exhibits listed on the
accompanying Index of Exhibits are filed or incorporated by
reference as part of this report.

(b) Reports on Form 8-K:



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 11, 2001, the Company filed a
    report on Form 8-K announcing the planned integration and
    disposition of its PGP security product group.

51



---



##### 



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Networks Associates, Inc.:


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 14(a)(1) on page 51 present fairly, in all
material respects, the financial position of Networks
Associates, Inc. and its subsidiaries at December 31, 2001
and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 14 (a)(2) on page 51
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As indicated in Note 3 to these accompanying
consolidated financial statements, the Company has restated and
reclassified its consolidated financial statements and financial
schedule for the years ended December 31, 2000, 1999 and
1998 and the balance sheet as of December 31, 2001.



|                                       | 
|-------------------------------------- | 
|/s/ PRICEWATERHOUSECOOPERS LLP         | 
|                                      
|PricewaterhouseCoopers LLP             | 
|San Jose, California                   | 
|January 17, 2002, except as to Note 3, | 
|which is as of May 17, 2002            | 

52



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |         |           | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------- | ------------ | --------- |  | -------- | ------- | --------- | 
|                                                                            |                                                                                                                                                                                       |                                                                  
|                                                                            |                                                                                                                                                                                       | December 31,                                                     
|                                                                            |                                                                                                                                                                                       |                                                                  
|                                                                            |                                                                                                                                                                                       | 2001                                                              |          | 2000        
|                                                                            |                                                                                                                                                                                       |                                                                   |          |             
|                                                                            |                                                                                                                                                                                       |                                                                  
|                                                                            |                                                                                                                                                                                       | (In thousands, except                                            
|                                                                            |                                                                                                                                                                                       | share and per share data)                                        
|                                                                            |                                                                                                                                                                                       | (As Restated                                                      |          | (As Restated
|                                                                            |                                                                                                                                                                                       | See Note 3)                                                       |          | See Note 3) 
|ASSETS                                                                     
|Current assets:                                                             |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            | Cash and cash equivalents                                                                                                                                                             |                                                                   | $        | 612,832      |           |  | $        | 275,539 |          
|                                                                            | Short-term marketable securities                                                                                                                                                      |                                                                   |          | 135,761      |           |  |          | 85,721  |          
|                                                                            | Accounts receivable, net of allowance for
    doubtful accounts of $8,394 and $15,332, respectively                                                                                   |                                                                   |          | 136,366      |           |  |          | 122,315 |          
|                                                                            | Prepaid expenses, income taxes and other current
    assets                                                                                                                           |                                                                   |          | 54,959       |           |  |          | 50,346  |          
|                                                                            | Deferred taxes                                                                                                                                                                        |                                                                   |          | 142,869      |           |  |          | 86,771  |          
|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            |                                                                                                                                                                                       | Total current assets                                              |          |              | 1,082,787 |  |          |         | 620,692   | 
|Long-term marketable securities                                             |                                                                                                                                                                                       |                                                                   | 194,357  |              |           |  | 332,893  |        
|Fixed assets, net                                                           |                                                                                                                                                                                       |                                                                   | 64,040   |              |           |  | 75,499   |        
|Land                                                                        |                                                                                                                                                                                       |                                                                   | 4,414    |              |           |  |         |        
|Deferred taxes                                                              |                                                                                                                                                                                       |                                                                   | 84,399   |              |           |  | 120,261  |        
|Intangible assets                                                           |                                                                                                                                                                                       |                                                                   | 185,054  |              |           |  | 220,255  |        
|Other assets                                                                |                                                                                                                                                                                       |                                                                   | 18,853   |              |           |  | 22,020   |        
|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            |                                                                                                                                                                                       | Total assets                                                      |          | $            | 1,633,904 |  |          | $       | 1,391,620 | 
|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|LIABILITIES                                                                
|Current liabilities:                                                        |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            | Accounts payable                                                                                                                                                                      |                                                                   | $        | 26,368       |           |  | $        | 46,816  |          
|                                                                            | Accrued liabilities                                                                                                                                                                   |                                                                   |          | 293,583      |           |  |          | 254,282 |          
|                                                                            | Deferred revenue                                                                                                                                                                      |                                                                   |          | 250,048      |           |  |          | 151,566 |          
|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            |                                                                                                                                                                                       | Total current liabilities                                         |          |              | 569,999   |  |          |         | 452,664   | 
|Deferred taxes                                                              |                                                                                                                                                                                       |                                                                   | 20,445   |              |           |  | 7,971    |        
|Deferred revenue, less current portion                                      |                                                                                                                                                                                       |                                                                   | 24,312   |              |           |  | 26,592   |        
|Convertible debentures                                                      |                                                                                                                                                                                       |                                                                   | 578,850  |              |           |  | 396,336  |        
|Other long term liabilities                                                 |                                                                                                                                                                                       |                                                                   | 393      |              |           |  | 532      |        
|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            |                                                                                                                                                                                       | Total liabilities                                                 |          |              | 1,193,999 |  |          |         | 884,095   | 
|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|Commitments and contingencies (Notes 9 and
    17)                          |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|Minority interest                                                           |                                                                                                                                                                                       |                                                                   | 17,311   |              |           |  | 11,067   |        
|STOCKHOLDERS EQUITY                                                       
|Preferred stock, $0.01 par value:                                           |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            | Authorized: 5,000,000 shares; Issued and
    outstanding: none in 2001 and 2000                                                                                                       |                                                                   |          |             |           |  |          |        |          
|Common stock, $0.01 par value:                                              |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            | Authorized: 300,000,000 shares; Issued:
    140,699,222 shares in 2001 and 139,328,528 shares in 2000;
    Outstanding: 140,699,222 shares in 2001 and 138,089,775 shares
    in 2000 |                                                                   |          | 1,406        |           |  |          | 1,381   |          
|Treasury stock, at cost: no shares in 2001 and
    1,238,753 shares in 2000 |                                                                                                                                                                                       |                                                                   |         |              |           |  | (23,186  | )      
|Additional paid-in capital                                                  |                                                                                                                                                                                       |                                                                   | 742,315  |              |           |  | 685,423  |        
|Accumulated other comprehensive loss                                        |                                                                                                                                                                                       |                                                                   | (30,345  | )            |           |  | (31,266  | )      
|Accumulated deficit                                                         |                                                                                                                                                                                       |                                                                   | (290,782 | )            |           |  | (135,894 | )      
|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            |                                                                                                                                                                                       | Total stockholders equity                                        |          |              | 422,594   |  |          |         | 496,458   | 
|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        
|                                                                            |                                                                                                                                                                                       | Total liabilities, minority interest and
    stockholders equity |          | $            | 1,633,904 |  |          | $       | 1,391,620 | 
|                                                                            |                                                                                                                                                                                       |                                                                   |          |              |           |  |          |        

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

53



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS

|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |         |          |  
|---------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------- | ------------ | -------- | ------------ | -------- | ------- | -------- | - | -------- | ------- | -------- | -
|                                                                 |                                                                     |                                                                                     
|                                                                 |                                                                     | Years Ended December 31,                                                            
|                                                                 |                                                                     |                                                                                     
|                                                                 |                                                                     | 2001                                                                                 |         | 2000         |          | 1999        
|                                                                 |                                                                     |                                                                                      |         |              |          |             
|                                                                 |                                                                     | (As                                                                                  |         | (As Restated |          | (As Restated
|                                                                 |                                                                     | Reclassified                                                                         |         | and          |          | and         
|                                                                 |                                                                     | See Note 3)                                                                          |         | Reclassified |          | Reclassified
|                                                                 |                                                                     |                                                                                      |         | See Note 3)  |          | See Note 3) 
|                                                                 |                                                                     |                                                                                     
|                                                                 |                                                                     | (In thousands, except per share data)                                               
|Net revenue:                                                     |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 | Product                                                             |                                                                                      | $       | 533,538      |          |              | $        | 457,964 |          |   | $        | 401,413 |         
|                                                                 | Services and support                                                |                                                                                      |         | 277,436      |          |              |          | 239,778 |          |   |          | 209,571 |         
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 |                                                                     | Total net revenue                                                                    |         |              | 810,974  |              |          |         | 697,742  |   |          |         | 610,984  |  
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|Cost of net revenue:                                             |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 | Product                                                             |                                                                                      |         | 103,052      |          |              |          | 113,394 |          |   |          | 88,729  |         
|                                                                 | Services and support                                                |                                                                                      |         | 55,026       |          |              |          | 42,301  |          |   |          | 42,094  |         
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 |                                                                     | Total cost of net revenue                                                            |         |              | 158,078  |              |          |         | 155,695  |   |          |         | 130,823  |  
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|Operating costs and expenses:                                    |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 | Research and development(1)                                         |                                                                                      |         | 146,701      |          |              |          | 172,968 |          |   |          | 152,728 |         
|                                                                 | Marketing and sales(2)                                              |                                                                                      |         | 419,957      |          |              |          | 377,001 |          |   |          | 326,160 |         
|                                                                 | General and administrative(3)                                       |                                                                                      |         | 109,946      |          |              |          | 85,064  |          |   |          | 84,719  |         
|                                                                 | Provision for doubtful accounts, net                                |                                                                                      |         | (9,673       | )        |              |          | 9,924   |          |   |          | 44,809  |         
|                                                                 | Amortization of intangibles                                         |                                                                                      |         | 64,110       |          |              |          | 66,282  |          |   |          | 58,400  |         
|                                                                 | Acquisition, restructuring and other related
    costs(4)           |                                                                                      |         | 3,821        |          |              |          |        |          |   |          | (18,732 | )       
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 |                                                                     | Total operating costs and expenses                                                   |         |              | 734,862  |              |          |         | 711,239  |   |          |         | 648,084  |  
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 |                                                                     | Loss from operations                                                                 |         |              | (81,966  | )            |          |         | (169,192 | ) |          |         | (167,923 | )
|Interest and other income                                        |                                                                     |                                                                                      | 28,631  |              |          |              | 44,624   |         |          |   | 30,678   |        
|Interest expense                                                 |                                                                     |                                                                                      | (24,697 | )            |          |              | (18,169  | )       |          |   | (17,332  | )      
|Gain (loss) on investments, net                                  |                                                                     |                                                                                      | 7,280   |              |          |              | 40,361   |         |          |   | (6,145   | )      
|Write down of strategic and other investments                    |                                                                     |                                                                                      | (20,631 | )            |          |              | (10,000  | )       |          |   |         |        
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 |                                                                     | Loss before provision for income taxes, minority
    interest and extraordinary item |         |              | (91,383  | )            |          |         | (112,376 | ) |          |         | (160,722 | )
|Provision for (benefit from) income taxes                        |                                                                     |                                                                                      | 11,409  |              |          |              | 16,504   |         |          |   | (3,497   | )      
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 |                                                                     | Net loss before minority interest and
    extraordinary item                         |         |              | (102,792 | )            |          |         | (128,880 | ) |          |         | (157,225 | )
|Minority interest in loss of consolidated
    subsidiaries       |                                                                     |                                                                                      | 411     |              |          |              | 4,954    |         |          |   | 340      |        
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 |                                                                     | Loss before extraordinary item                                                       |         |              | (102,381 | )            |          |         | (123,926 | ) |          |         | (156,885 | )
|Extraordinary item, gain on redemption of debt,
    net of taxes |                                                                     |                                                                                      | 1,731   |              |          |              |         |         |          |   |         |        
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 |                                                                     | Net loss                                                                             |         | $            | (100,650 | )            |          | $       | (123,926 | ) |          | $       | (156,885 | )
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|Other comprehensive income (loss):                               |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 | Unrealized gain (loss) on marketable
    securities and investments |                                                                                      | $       | 1,950        |          |              | $        | 2,654   |          |   | $        | (1,610  | )       
|                                                                 | Foreign currency translation loss                                   |                                                                                      |         | (1,029       | )        |              |          | (23,963 | )        |   |          | (6,813  | )       
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|Comprehensive loss                                               |                                                                     | $                                                                                    | (99,729 | )            |          | $            | (145,235 | )       |          | $ | (165,308 | )      
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|Basic and Diluted net loss per share:                            |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|                                                                 | Loss before extraordinary item                                      |                                                                                      | $       | (0.74        | )        |              | $        | (0.90   | )        |   | $        | (1.13   | )       
|Extraordinary item, gain on redemption of debt,
    net of taxes |                                                                     |                                                                                      | 0.01    |              |          |              |         |         |          |   |         |        
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|Net (loss) per share  basic and diluted                         |                                                                     | $                                                                                    | (0.73   | )            |          | $            | (0.90    | )       |          | $ | (1.13    | )      
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        
|Shares used in per share calculation  basic
    and diluted     |                                                                     |                                                                                      | 137,847 |              |          |              | 138,072  |         |          |   | 138,695  |        
|                                                                 |                                                                     |                                                                                      |         |              |          |              |          |         |          |   |          |        



---



|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Includes stock-based compensation charge of
    $4,604, $1,894 and $4,515 in 2001, 2000 and 1999, respectively. 
|   
|(2) | Includes stock-based compensation charge of
    $10,354, $4,570 and $7,162 in 2001, 2000 and 1999, respectively.
|   
|(3) | Includes stock-based compensation charge of
    $9,235, $2,250 and $3,893 in 2001, 2000 and 1999, respectively. 
|   
|(4) | Includes stock-based compensation charge of $519,
    $0 and $0 in 2001, 2000 and 1999, respectively.           

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

54



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                         |                                                                                  |                |         |          |   |            |       |               |   |              |         |               |   |        |         |        |   |   |         |         |   |   |          |          |   |   |         |          |  
|-------------------------------------------------------- | -------------------------------------------------------------------------------- | -------------- | ------- | -------- | - | ---------- | ----- | ------------- | - | ------------ | ------- | ------------- | - | ------ | ------- | ------ | - | - | ------- | ------- | - | - | -------- | -------- | - | - | ------- | -------- | -
|                                                         |                                                                                  |                |         |          |   |            |       | Accumulated   |   | Retained     |         |              
|                                                         |                                                                                  | Common Stock   |         |          |   | Additional |       | Other         |   | Earnings     |         | Total        
|                                                         |                                                                                  |                |         | Treasury |   | Paid-In    |       | Comprehensive |   | (Accumulated |         | Stockholders
|                                                         |                                                                                  | Shares         |         | Amount   |   | Stock      |       | Stock         |   | Loss         |         | Deficit)      |   | Equity
|                                                         |                                                                                  |                |         |          |   |            |       |               |   |              |         |               |   |       
|                                                         |                                                                                  |               
|                                                         |                                                                                  | (In thousands)
|Balances, December 31, 1998 (As previously
    reported) |                                                                                  |                | 137,123 |          |   | $          | 1,371 |               |   | $            |        |               |   | $      | 527,862 |        |   | $ | (1,534  | )       |   | $ | 195,139  |          |   | $ | 722,838 |         
|                                                         | Inaccuracies                                                                     |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         |        |   |   |          | (4,004   | ) |   |         | (4,004   | )
|                                                         |                                                                                  |                |         |          |   |            |       |               |   |              |         |               |   |        |         |        |   |   |         |         |   |   |          |          |   |   |         |         
|Balances, December 31, 1998 (As restated)                |                                                                                  |                | 137,123 |          |   |            | 1,371 |               |   |              |        |               |   |        | 527,862 |        |   |   | (1,534  | )       |   |   | 191,135  |          |   |   | 718,834 |         
|                                                         | Issuance of common stock upon exercise of stock
    options                      |                |         | 1,196    |   |            |       | 12            |   |              |         | 1,414         |   |        |         | 17,348 |   |   |         |        |   |   |          | (360     | ) |   |         | 18,414   |  
|                                                         | Issuance of common stock upon exercise of stock
    options by McAfee.com        |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 123    |   |   |         |        |   |   |          |         |   |   |         | 123      |  
|                                                         | Issuance of common stock from Employee Stock
    Purchase Plan                   |                |         | 578      |   |            |       | 6             |   |              |         |              |   |        |         | 8,929  |   |   |         |        |   |   |          |         |   |   |         | 8,935    |  
|                                                         | Repurchase of common stock                                                       |                |         | (685     | ) |            |       | (7            | ) |              |         | (12,437       | ) |        |         |       |   |   |         |        |   |   |          |         |   |   |         | (12,444  | )
|                                                         | FSA conversion of preferred stock to common stock                                |                |         | 438      |   |            |       | 4             |   |              |         |              |   |        |         |       |   |   |         |        |   |   |          |         |   |   |         | 4        |  
|                                                         | Exercise of warrants                                                             |                |         | 85       |   |            |       | 1             |   |              |         |              |   |        |         | 458    |   |   |         |        |   |   |          |          |   |   |         | 459      |  
|                                                         | Proceeds from sale of put options                                                |                |         |          |   |            |       |               |   |              |         |               |   |        |         | 5,250  |   |   |         |        |   |   |          |         |   |   |         | 5,250    |  
|                                                         | Compensation charge due to repricing of stock
    options and McAfee.com options |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 15,570 |   |   |         |        |   |   |          |         |   |   |         | 15,570   |  
|                                                         | Issuance of stock by consolidated subsidiary                                     |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 78,945 |   |   |         |        |   |   |          |         |   |   |         | 78,945   |  
|                                                         | Minority Interest                                                                |                |         |         |   |            |       |              |   |              |         |              |   |        |         | (9,664 | ) |   |         |        |   |   |          |         |   |   |         | (9,664   | )
|                                                         | Foreign currency translation                                                     |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         | (6,813  | ) |   |          |         |   |   |         | (6,813   | )
|                                                         | Unrealized loss on investments                                                   |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         | (1,610  | ) |   |          |         |   |   |         | (1,610   | )
|                                                         | Net loss (As Restated See Note 3)                                                |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         |        |   |   |          | (156,885 | ) |   |         | (156,885 | )
|                                                         |                                                                                  |                |         |          |   |            |       |               |   |              |         |               |   |        |         |        |   |   |         |         |   |   |          |          |   |   |         |         
|Balances, December 31, 1999 (As restated)                |                                                                                  |                | 138,735 |          |   |            | 1,387 |               |   |              | (11,023 | )             |   |        | 644,821 |        |   |   | (9,957  | )       |   |   | 33,890   |          |   |   | 659,118 |         
|                                                         | Issuance of common stock upon exercise of stock
    options                      |                |         | 3,036    |   |            |       | 30            |   |              |         | 72,054        |   |        |         |       |   |   |         |        |   |   |          | (39,788  | ) |   |         | 32,296   |  
|                                                         | Issuance of common stock upon exercise of stock
    options by McAfee.com        |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 3,461  |   |   |         |        |   |   |          |         |   |   |         | 3,461    |  
|                                                         | Issuance of common stock from Employee Stock
    Purchase Plan                   |                |         | 666      |   |            |       | 7             |   |              |         | 16,156        |   |        |         | 1,322  |   |   |         |        |   |   |          | (6,070   | ) |   |         | 11,415   |  
|                                                         | Repurchase of common stock                                                       |                |         | (4,347   | ) |            |       | (43           | ) |              |         | (100,373      | ) |        |         |       |   |   |         |        |   |   |          |         |   |   |         | (100,416 | )
|                                                         | Proceeds from sale of put options                                                |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 13,890 |   |   |         |        |   |   |          |         |   |   |         | 13,890   |  
|                                                         | Compensation charge due to repricing of stock
    options and McAfee.com options |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 8,714  |   |   |         |        |   |   |          |         |   |   |         | 8,714    |  
|                                                         | Issuance of stock by consolidated subsidiary                                     |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 19,600 |   |   |         |        |   |   |          |         |   |   |         | 19,600   |  
|                                                         | Minority interest                                                                |                |         |         |   |            |       |              |   |              |         |              |   |        |         | (6,385 | ) |   |         |        |   |   |          |         |   |   |         | (6,385   | )
|                                                         | Foreign currency translation                                                     |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         | (23,963 | ) |   |          |         |   |   |         | (23,963  | )
|                                                         | Unrealized gain on investments                                                   |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         | 2,654   |   |   |          |         |   |   |         | 2,654    |  
|                                                         | Net loss (As Restated See Note 3)                                                |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         |        |   |   |          | (123,926 | ) |   |         | (123,926 | )
|                                                         |                                                                                  |                |         |          |   |            |       |               |   |              |         |               |   |        |         |        |   |   |         |         |   |   |          |          |   |   |         |         
|Balances, December 31, 2000 (As restated)                |                                                                                  |                | 138,090 |          |   |            | 1,381 |               |   |              | (23,186 | )             |   |        | 685,423 |        |   |   | (31,266 | )       |   |   | (135,894 | )        |   |   | 496,458 |         
|                                                         | Issuance of common stock upon exercise of stock
    options                      |                |         | 3,233    |   |            |       | 13            |   |              |         | 41,575        |   |        |         | 15,482 |   |   |         |        |   |   |          | (27,626  | ) |   |         | 29,444   |  
|                                                         | Issuance of common stock upon exercise of stock
    options by McAfee.com        |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 12,107 |   |   |         |        |   |   |          |         |   |   |         | 12,107   |  
|                                                         | Issuance of common stock from Employee Stock
    Purchase Plan                   |                |         | 1,376    |   |            |       | 12            |   |              |         | 35,411        |   |        |         | 705    |   |   |         |        |   |   |          | (26,612  | ) |   |         | 9,516    |  
|                                                         | Repurchase of common stock                                                       |                |         | (2,000   | ) |            |       |              |   |              |         | (53,800       | ) |        |         |       |   |   |         |        |   |   |          |         |   |   |         | (53,800  | )
|                                                         | Compensation charge due to repricing of stock
    options                        |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 24,712 |   |   |         |        |   |   |          |         |   |   |         | 24,712   |  
|                                                         | Tax benefit from exercise of nonqualified stock
    options                      |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 5,389  |   |   |         |        |   |   |          |         |   |   |         | 5,389    |  
|                                                         | Issuance of stock by consolidated subsidiary                                     |                |         |         |   |            |       |              |   |              |         |              |   |        |         | 5,523  |   |   |         |        |   |   |          |         |   |   |         | 5,523    |  
|                                                         | Minority interest                                                                |                |         |         |   |            |       |              |   |              |         |              |   |        |         | (7,026 | ) |   |         |        |   |   |          |         |   |   |         | (7,026   | )
|                                                         | Foreign currency translation                                                     |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         | (1,029  | ) |   |          |         |   |   |         | (1,029   | )
|                                                         | Unrealized gain on investments                                                   |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         | 1,950   |   |   |          |         |   |   |         | 1,950    |  
|                                                         | Net loss                                                                         |                |         |         |   |            |       |              |   |              |         |              |   |        |         |       |   |   |         |        |   |   |          | (100,650 | ) |   |         | (100,650 | )
|                                                         |                                                                                  |                |         |          |   |            |       |               |   |              |         |               |   |        |         |        |   |   |         |         |   |   |          |          |   |   |         |         
|Balances, December 31, 2001 (As restated)                |                                                                                  |                | 140,699 |          |   | $          | 1,406 |               |   | $            |        |               |   | $      | 742,315 |        |   | $ | (30,345 | )       |   | $ | (290,782 | )        |   | $ | 422,594 |         
|                                                         |                                                                                  |                |         |          |   |            |       |               |   |              |         |               |   |        |         |        |   |   |         |         |   |   |          |          |   |   |         |         

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

55



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |          |         |          |          |  
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------- | ------- | ------------ | ------- | -------- | ------- | ------- | -------- | -------- | ------- | -------- | -------- | -
|                                                         |                                                                                               |                                                                  
|                                                         |                                                                                               | Years Ended December 31,                                         
|                                                         |                                                                                               |                                                                  
|                                                         |                                                                                               | 2001                                                              |                                                             | 2000                                                    |         | 1999        
|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |             
|                                                         |                                                                                               |                                                                   |                                                             | (As Restated                                            |         | (As Restated
|                                                         |                                                                                               |                                                                   |                                                             | See Note 3)                                             |         | See Note 3) 
|                                                         |                                                                                               |                                                                  
|                                                         |                                                                                               | (In thousands)                                                   
|Cash flows from operating activities:                    |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|                                                         | Net loss                                                                                      |                                                                   | $                                                           | (100,650                                                | )       |              | $       | (123,926 | )       |         | $        | (156,885 | )      
|                                                         | Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |          |        
|                                                         |                                                                                               | Depreciation and amortization                                     |                                                             |                                                         | 108,054 |              |         |          | 90,096  |         |          |          | 81,492  |         
|                                                         |                                                                                               | Provision for doubtful accounts, net                              |                                                             |                                                         | (9,673  | )            |         |          | 9,924   |         |          |          | 44,809  |         
|                                                         |                                                                                               | Provision for sales returns and allowances, net                   |                                                             |                                                         | 125,868 |              |         |          | 100,202 |         |          |          | 178,118 |         
|                                                         |                                                                                               | Impairment of goodwill                                            |                                                             |                                                         |        |              |         |          | 3,639   |         |          |          |        |         
|                                                         |                                                                                               | Impairment of strategic investments                               |                                                             |                                                         | 20,631  |              |         |          | 10,000  |         |          |          |        |         
|                                                         |                                                                                               | Non-cash interest on debt                                         |                                                             |                                                         | 24,697  |              |         |          | 18,169  |         |          |          | 17,332  |         
|                                                         |                                                                                               | Stock-based compensation                                          |                                                             |                                                         | 24,712  |              |         |          | 8,714   |         |          |          | 15,570  |         
|                                                         |                                                                                               | Deferred taxes                                                    |                                                             |                                                         | (15,971 | )            |         |          | (27,385 | )       |          |          | (81,847 | )       
|                                                         |                                                                                               | Net realized (gain) loss on investments                           |                                                             |                                                         | (7,280  | )            |         |          | 137     |         |          |          | 6,145   |         
|                                                         |                                                                                               | Gain on the sale of Goto.com investment                           |                                                             |                                                         |        |              |         |          | (28,551 | )       |          |          |        |         
|                                                         |                                                                                               | Gain on the sale of Network Associates Japan
    investment       |                                                             |                                                         |        |              |         |          | (11,947 | )       |          |          |        |         
|                                                         |                                                                                               | Minority interest                                                 |                                                             |                                                         | (411    | )            |         |          | (4,954  | )       |          |          | (340    | )       
|                                                         |                                                                                               | Extraordinary item  gain on redemption of
    debt, net of taxes |                                                             |                                                         | (1,731  | )            |         |          |        |         |          |          |        |         
|                                                         |                                                                                               | Tax benefit from exercise of nonqualified stock
    options       |                                                             |                                                         | 5,389   |              |         |          |        |         |          |          |        |         
|                                                         |                                                                                               | Changes in assets and liabilities:                                |                                                             |                                                         |         |              |         |          |         |         |          |          |         |         
|                                                         |                                                                                               |                                                                   | Accounts receivable                                         |                                                         |         | (136,569     | )       |          |         | (63,820 | )        |          |         | (136,789 | )       
|                                                         |                                                                                               |                                                                   | Prepaid expenses, income taxes and other current
    assets |                                                         |         | (310         | )       |          |         | (11,723 | )        |          |         | 22,650   |         
|                                                         |                                                                                               |                                                                   | Accounts payable and accrued liabilities                    |                                                         |         | 12,539       |         |          |         | 28,006  |          |          |         | 31,022   |         
|                                                         |                                                                                               |                                                                   | Deferred revenue                                            |                                                         |         | 96,411       |         |          |         | 30,091  |          |          |         | (39,357  | )       
|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|                                                         |                                                                                               |                                                                   |                                                             | Net cash provided by (used in) operating
    activities |         |              | 145,706 |          |         |         | 26,672   |          |         |          | (18,080  | )
|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|Cash flows from investing activities:                    |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|                                                         | Purchase of marketable securities                                                             |                                                                   |                                                             | (678,093                                                | )       |              |         | (510,247 | )       |         |          | (393,363 | )      
|                                                         | Sale of marketable securities                                                                 |                                                                   |                                                             | 754,182                                                 |         |              |         | 562,132  |         |         |          | 233,499  |        
|                                                         | Purchase of acquired technology                                                               |                                                                   |                                                             | (12,250                                                 | )       |              |         | (12,500  | )       |         |          |         |        
|                                                         | Purchase of other investments                                                                 |                                                                   |                                                             |                                                        |         |              |         | (21,650  | )       |         |          |         |        
|                                                         | Purchase of fixed assets                                                                      |                                                                   |                                                             | (31,493                                                 | )       |              |         | (54,031  | )       |         |          | (20,458  | )      
|                                                         | Proceeds from sale of Goto.com investment                                                     |                                                                   |                                                             |                                                        |         |              |         | 36,750   |         |         |          |         |        
|                                                         | Proceeds from sale of fixed assets                                                            |                                                                   |                                                             |                                                        |         |              |         |         |         |         |          | 6,518    |        
|                                                         | Proceeds from sale of shares of Network
    Associates Japan                                  |                                                                   |                                                             |                                                        |         |              |         | 11,947   |         |         |          |         |        
|                                                         | Purchase of shares of Network Associates Japan                                                |                                                                   |                                                             | (10,655                                                 | )       |              |         |         |         |         |          |         |        
|                                                         | Acquisition by subsidiary, net of cash acquired                                               |                                                                   |                                                             | (916                                                    | )       |              |         | (1,958   | )       |         |          |         |        
|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|                                                         |                                                                                               |                                                                   |                                                             | Net cash provided by (used in) investing
    activities |         |              | 20,775  |          |         |         | 10,443   |          |         |          | (173,804 | )
|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|Cash flows from financing activities:                    |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|                                                         | Repayment of notes payable                                                                    |                                                                   |                                                             |                                                        |         |              |         | (367     | )       |         |          | (3,085   | )      
|                                                         | Issuance of common stock under stock option,
    purchase plans and warrants                  |                                                                   |                                                             | 51,067                                                  |         |              |         | 47,172   |         |         |          | 27,931   |        
|                                                         | Proceeds from sale of put options                                                             |                                                                   |                                                             |                                                        |         |              |         | 13,890   |         |         |          | 5,250    |        
|                                                         | Repurchase of common stock                                                                    |                                                                   |                                                             | (53,800                                                 | )       |              |         | (100,416 | )       |         |          | (12,444  | )      
|                                                         | Proceeds of McAfee.com initial public offering,
    net                                       |                                                                   |                                                             |                                                        |         |              |         |         |         |         |          | 78,945   |        
|                                                         | Change in minority interest and other                                                         |                                                                   |                                                             | 264                                                     |         |              |         | 318      |         |         |          |         |        
|                                                         | Issuance of convertible debentures, net of
    issuance costs                                 |                                                                   |                                                             | 335,081                                                 |         |              |         |         |         |         |          |         |        
|                                                         | Repurchase of convertible debentures                                                          |                                                                   |                                                             | (173,708                                                | )       |              |         |          |         |         |          |          |        
|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|                                                         |                                                                                               |                                                                   |                                                             | Net cash provided by (used in) financing
    activities |         |              | 158,904 |          |         |         | (39,403  | )        |         |          | 96,597   |  
|                                                         | Effect of exchange rate changes on cash and cash
    equivalents                              |                                                                   |                                                             | 11,908                                                  |         |              |         | (38,957  | )       |         |          | (6,828   | )      
|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|Net increase (decrease) in cash and cash
    equivalents |                                                                                               |                                                                   | 337,293                                                     |                                                         |         |              | (41,245 | )        |         |         | (102,115 | )       
|Cash and cash equivalents at beginning of year           |                                                                                               |                                                                   | 275,539                                                     |                                                         |         |              | 316,784 |          |         |         | 418,899  |         
|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|Cash and cash equivalents at end of year                 |                                                                                               | $                                                                 | 612,832                                                     |                                                         |         | $            | 275,539 |          |         | $       | 316,784  |         
|                                                         |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|Non cash investing activities:                           |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|                                                         | Unrealized gain (loss) on marketable
    investments                                          |                                                                   | $                                                           | 1,950                                                   |         |              | $       | 2,654    |         |         | $        | (1,610   | )      
|                                                         | Conversion of FSA preferred stock into common
    stock                                       |                                                                   | $                                                           |                                                        |         |              | $       |         |         |         | $        | 459      |        
|                                                         | McAfee.com stock issued in acquisitions                                                       |                                                                   | $                                                           | 5,523                                                   |         |              | $       | 19,600   |         |         | $        |         |        
|Supplemental disclosure of cash flow information:        |                                                                                               |                                                                   |                                                             |                                                         |         |              |         |          |         |         |          |         
|                                                         | Cash paid (refund received) during the year for
    income taxes                              |                                                                   | $                                                           | 8,844                                                   |         |              | $       | 46,715   |         |         | $        | (17,544  | )      

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

56



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Business

Networks Associates, Inc. and its majority owned
subsidiaries (the Company) develop, market,
distribute and support network security and network management
software products. The Companys markets are worldwide and
include corporate, governmental, institutional users, and
individuals as well as resellers and distributors. International
sales and support are provided by subsidiaries in principally
European and Asian markets and through independent agents and
distributors elsewhere.

2.     Summary of
Significant Accounting Policies

Basis of
Presentation

The accompanying consolidated financial
statements include the accounts of the Company and majority
owned subsidiaries, including McAfee.com. All intercompany
accounts and transactions have been eliminated. Subsidiaries may
enter into contractual arrangements that may restrict their
ability to make dividend payments or loans and advances to
Networks Associates, the parent company.

Certain reclassifications have been made to the
prior years financial statements to conform to the current
years presentation. These reclassifications had no effect
on the prior years stockholders equity or results of
operations.

Minority
Interest

Minority interest in (income) loss of
consolidated subsidiaries represents the minority
stockholders share of the income or loss of various
consolidated subsidiaries. The minority interest in the
consolidated balance sheets reflect the original investment by
these minority stockholders in these consolidated subsidiaries,
along with their proportional share of the accumulated earnings
or losses, together with their share of any capital
transactions, such as stock issuances.

Use of
Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make estimates
and assumptions that affect the reported amount of assets and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reported period. Significant estimates
include those required in the valuation of intangible assets
acquired in purchase combinations, allowances for doubtful
accounts, sales returns and allowances, vendor specific
objective evidence of the fair value of the various elements of
the Companys multiple element software transactions and
valuation allowances for deferred tax assets. Actual results
could differ from those estimates.

Certain Risks
and Concentrations

The Companys revenues are derived from the
license of its software products. The markets in which the
Company competes are highly competitive and rapidly changing.
Significant technological changes, changes in customer
requirements, or the emergence of competitive products with new
capabilities or technologies could adversely affect operating
results. The Company has historically derived a majority of its
net revenues from the anti-virus software products and network
fault and performance management products. These products are
expected to continue to account for a significant portion of net
revenue for the foreseeable future. As a result of this revenue
concentration, the Companys business could be harmed by a
decline in demand for, or in the prices of, these products as a
result of, among other factors, any change in pricing model, a
maturation in the markets for these products, increased price
competition or a failure by the Company to keep up with
technological change.

57



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company sells a significant amount of its
products through intermediaries such as distributors. The
Companys top ten in the United States distributors
typically represent approximately 38% to 43% of net revenue in
any quarter. Our largest distributor, Ingram Micro, Inc.,
accounted for approximately 28% of net revenue for the year
ended December 31, 2001.

The Companys distributor agreements may be
terminated by either party without cause. If one of the
Companys significant distributors terminates its
distribution agreement, the Company could experience a
significant interruption in the distribution of its products.

The Companys distributors may sell other
vendors products that are complementary to, or compete
with, its products. While the Company encourages its
distributors to focus on the Companys products through
market and support programs, these distributors may give greater
priority to products of other suppliers, including competitors.

Some of the Companys distributors may
experience financial difficulties, which could adversely impact
collection of accounts receivable. The Company regularly reviews
the collectibility and credit-worthiness of its distributors to
determine an appropriate allowance for doubtful accounts. The
Companys bad debt allowance was approximately
$8.4 million at December 31, 2001 and
$15.3 million at December 31, 2000. In 1999, one large
European distributor, CHS, entered bankruptcy requiring the
Company to record a related accounts receivable write-off of
approximately $28.7 million. Also in 1999, Pinacor, a
U.S. distributor, entered bankruptcy requiring the Company
to record a related accounts receivable write-off of
approximately $6.0 million. The Companys
uncollectable accounts could exceed our current or future
allowances.

The Company has significant accounts receivable
from several major distributors and from customers across a
broad demographic base. The Company performs ongoing credit
evaluations of its customers and maintains allowances for
doubtful accounts. The Company does not request collateral from
any of its customers prior to granting credit.

The Company maintains the majority of cash
balances and all of its short-term investments with eight
financial institutions. The Company invests with high credit
quality financial institutions and, by policy, limits the amount
of credit exposure to any one financial institution.

Certain of the Companys products contain
critical components supplied by a single or a limited number of
third parties. The Company has been required to purchase and
inventory certain of the computer platforms around which it
designs its products to ensure an available supply of the
product for customers. Any significant shortage of these
platforms or other components or the failure of the third party
supplier to maintain or enhance these products could materially
adversely affect the Companys results of operations.

The Company relies on a limited number of third
parties to manufacture some of its hardware-based Sniffer and
E-ppliance products. Reliance on third-party manufacturers
involves a number of risks, including the lack of control over
the manufacturing process and the potential absence or
unavailability of adequate capacity. If any of the
Companys third party manufacturers cannot or will not
manufacture its products in required volumes, on a
cost-effective basis, in a timely manner, or at all, the Company
will have to secure additional manufacturing capacity. Even if
this additional capacity is available at commercially acceptable
terms, the qualification process could be lengthy and could
cause interruptions in product shipments.

Foreign
Currency Translation

The Company considers the local currency to be
the functional currency for its international subsidiaries.
Assets and liabilities denominated in foreign currencies are
translated using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments resulting
from this process are charged or credited to accumulated other
comprehen-

58



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

sive loss. Where the US Dollar is the functional
currency of the subsidiary, all remeasurement adjustments are
recorded in the statement of operations.

Foreign currency transaction gains and losses,
which to date have not been material, are included in the
statement of operations.

Derivatives

The Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended,
at the beginning of its fiscal year 2001. The standard requires
the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to
fair value through the statement of operations. If the
derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings, or recognized
in other comprehensive income (loss) until the hedged item is
recognized in earnings. The ineffective portion of a
derivatives change in fair value will be immediately
recognized in earnings. The Companys use of derivative
financial instruments is discussed in Note 6 to these Notes
to the Consolidated Financial Statements.

The adoption of SFAS No. 133 did not have a
material effect on the financial statements of the Company.

Cash and Cash
Equivalents

Cash equivalents are comprised of highly liquid
debt instruments with original maturities or remaining
maturities at date of purchase of 90 days or less.

Marketable
Securities

All marketable securities are classified as
available-for-sale securities. Available-for-sale securities are
carried at fair value with resulting unrealized gains and
losses, net of related taxes, reported as a component of
accumulated other comprehensive income (loss). Premium and
discount on debt securities recorded at the date of purchase are
amortized and accreted, respectively, to interest income using
the effective interest method. Short-term marketable securities
are those with remaining maturities at the balance sheet date of
one year or less. Long-term marketable securities have remaining
maturities at the balance sheet date of greater than one year.
Realized gains and losses on sales of all such investments are
reported in earnings and computed using the specific
identification cost method.

The Company assesses the value of its
available-for-sale marketable securities on a regular basis to
assess whether an other-than-temporary decline in the fair value
has occurred. Factors which the Company uses to assess whether
an other than temporary decline has occurred include, but are
not limited to, the period of time which the fair value is below
original cost, significant changes in the operating performance,
financial condition or business model, and changes in market
conditions. Any other than temporary decline in
value is reported in earnings and a new cost basis for the
marketable security established.

Inventory

Inventory is comprised of primarily finished
goods. Inventory is included in other current assets and is
valued at purchase cost computed on a first in, first out basis,
not in excess of market value.

Fixed
Assets

Fixed assets are presented at cost less
accumulated depreciation and amortization. Depreciation and
amortization of fixed assets are computed using the
straight-line method over the estimated useful lives of the

59



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

related assets (three to five years) (see
Note 7 of these Notes to Consolidated Financial
Statements). Leasehold improvements are amortized on a
straight-line basis over the remaining life of the lease or the
estimated useful life of the asset, whichever is shorter.

Repairs and maintenance expenditures, which are
not considered improvements and do not extend the useful life of
fixed assets, are expensed as incurred. The cost and related
accumulated depreciation applicable to fixed assets sold or no
longer in service are eliminated from the accounts and any gain
or loss is included in operations.

Intangible
Assets

Intangible assets, including goodwill, purchased
technology and other intangible assets, are carried at cost less
accumulated amortization. The Company amortizes goodwill and
other identifiable intangibles on a straight-line basis over
their estimated useful lives. The range of estimated useful
lives on the Companys identifiable intangibles is four to
eight years (see Note 7 to these Notes to Consolidated
Financial Statements).

Impairment of
Intangibles and Long-Lived Assets

The Company assess the impairment of identifiable
intangibles, goodwill and fixed assets whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. Factors considered important which could
trigger an impairment review include, but are not limited to,
significant underperformance relative to expected historical or
projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for the
Companys overall business, significant negative industry
or economic trends, significant decline in the Companys
stock price for a sustained period, and the Companys
market capitalization relative to net book value. When the
Company determines that the carrying value of long-lived assets
may not be recoverable based upon the existence of one or more
of the above indicators of impairment, the Company measures any
impairment based on a projected discounted cash flow method
using a discount rate commensurate with the risk inherent in the
Companys current business model.

Internal Use
Software

Software development costs, including costs
incurred to purchase third party software, are capitalized
beginning when the Company has determined factors are present,
including among others, that technology exists to achieve the
performance requirements, buy versus internal development
decisions have been made and the Companys management has
authorized the funding for the project. Capitalization of
software costs ceases when the software is substantially
complete and is ready for its intended use and is amortized over
its estimated useful life of three years using the straight-line
method.

When events or circumstances indicate the
carrying value of internal use software might not be
recoverable, the Company will assess the recoverability of these
assets by determining whether the amortization of the asset
balance over its remaining life can be recovered through
undiscounted future operating cash flows. The amount of
impairment, if any, is recognized to the extent that the
carrying value exceeds the projected discounted future operating
cash flows and is recognized as a write down of the asset. In
addition, when it is no longer probable that computer software
being developed will be placed in service, the asset will be
recorded at the lower of its carrying value or fair value, if
any, less direct selling costs.

Investments

Investments consist of minority investments in
non-publicly and publicly traded companies in which the Company
holds less than a 20% interest. The private investments are
included in other assets on the Companys balance sheet and
are carried at original cost, less reductions related to
other-than-temporary

60



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

declines in value. The public investments are
included in short term marketable securities and are carried at
fair value. The Company assesses the recoverability of its
investments on a regular basis. Factors that the Company
considers which could trigger an other than temporary decline in
the value of such investments include, but are not limited to,
the likelihood that the related company would have insufficient
cash flows to operate for the next twelve months, significant
changes in the operating performance or business model, and
changes in market conditions. For public investments, the
Company also considers the period of time the fair value of the
investment has been less than its carrying value. The Company
recorded charges related to other than temporary declines in the
value of certain strategic investments of $20.6 million and
$10.0 million in 2001 and 2000, respectively.

Fair Value of
Financial Instruments

Carrying amounts of the Companys financial
instruments including investments, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to
their short maturities. The fair values of the Companys
investments in marketable securities is disclosed in Note 5 to
the Notes to these Consolidated Financial Statements. The fair
value of the Companys convertible debt instruments is
disclosed in Note 10 to the Notes to these Consolidated
Financial Statements.

Revenue
Recognition

The Companys revenue is derived from
primarily two sources (i) product revenue, which includes
software license, hardware, retail and royalty revenue and
(ii) services and support revenue which includes software
license maintenance and support, training, consulting, and
hosting arrangements revenue.

The Company licenses its software products under
one and two-year term or perpetual licenses. The two-year
licenses include the first year of maintenance and support. The
Company sells its products and services via its direct sales
force, through domestic and foreign distributors and via the
Internet. Under the Companys hosting arrangements, which
do not include any upfront set up fees, customers pay a fixed
fee and receive service over a period of time, generally one
year.

The Company applies the provisions of Statement
of Position 97-2, Software Revenue Recognition,
as amended by Statement of Position 98-9 Modification
of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions to all transactions involving the
sale of software products and hardware transactions where the
software is not incidental. For hardware transactions where
software is not incidental, the Company does not bifurcate the
fee and apply separate accounting guidance to the hardware and
software elements. For hardware transactions where no software
is involved, the Company applies the provisions of Staff
Accounting Bulletin 101 Revenue Recognition. In
addition, the Company applies the provisions of Emerging Issues
Task Force Issue No. 00-03 Application of AICPA
Statement of Position 97-2 to Arrangements that Include the
Right to Use Software Stored on Another Entitys
Hardware to its hosted software service transactions.

Product revenue from the license of the
Companys software products and sale of hardware products
where the software is and is not incidental is recognized when
persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed and determinable, and
collection of the resulting receivable is reasonably assured,
and, if applicable, upon acceptance when acceptance criteria are
specified or upon expiration of the acceptance period.
Maintenance and support revenue for providing product updates
and customer support is deferred and recognized ratably over the
service period. Hosting revenue is recognized ratably over the
service period, which is generally one year. Training and
consulting revenue is recognized as services are performed and
billable according to the terms of the service arrangement.
Revenue on one-year time-based subscription licenses is
recognized ratably over the contract term. Royalty revenue is
generally recognized upon receipt of periodic royalty reports
received from customers, which generally coincides with receipt
of cash.

61



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For all sales except those completed via the
Internet, the Company uses either a binding purchase order or
signed license agreement as evidence of an arrangement. For
sales over the internet, the Company uses a credit card
authorization as evidence of an arrangement. Sales through
distributors are evidenced by a master agreement governing the
relationship together with binding purchase orders on a
transaction by transaction basis.

Fees due under an arrangement are generally
deemed not to be fixed and determinable if a significant portion
of the fee is due beyond the Companys normal payment terms
which are 30 to 90 days from the date of invoice. In these
cases, revenue is not recognized until the fees become due. The
Company assesses collection based on a number of factors,
including past transaction history with the customer and the
credit-worthiness of the customer. The Company does not request
collateral from its customers. If the Company determines that
collection of a fee is not reasonably assured, the fee is
deferred and revenue recognized at the time collection becomes
reasonably assured, which is generally upon receipt of cash.

During 2001, the Company entered into new
arrangements with all of its distributors. Under the terms of
these new arrangements, the distributors are not required to pay
for any products until they have sold through to their
customers. In addition, the distributors have an unlimited right
of return up until the point of sale. After sale, the Company
must approve any returns from end-users. As a result, the
Company recognizes revenue from sales to distributors and
resellers when products have been sold by the distributors or
resellers to their customers. In addition, the Company makes an
estimate of returns from end users based on its historical
experience. The provision for estimated returns is recorded as a
reduction to revenue. During 2000 and 1999, revenue from sales
to distributors or resellers was recognized, less an estimate
for returns, upon sale to the distributor. The Companys
estimate for returns was based on its historical experience plus
amounts to cover specific returns initiated by the Company.

For arrangements with multiple obligations (e.g.
undelivered maintenance and support bundled with two year term
and perpetual licenses), the Company allocates revenue to each
component of the arrangement using the residual value method
based on evidence of the fair value of the undelivered elements,
which is specific to the Company. The vendor specific objective
evidence of fair values for the ongoing maintenance and support
obligations for both two year term and perpetual licenses are
based upon the prices paid for the separate renewal of these
services by the customer or upon substantive renewal rates
stated in the contractual arrangements. Vendor specific
objective evidence of the fair value of other services,
primarily consulting and training services, is based upon
separate sales of these services.

If a multiple element arrangement includes
services that are deemed essential to the functionality of a
delivered element, the Company recognizes the arrangement fee
using the percentage of completion method. Under this method,
individual contract revenues are recorded based on the
percentage relationship that contract costs incurred bear to
costs incurred plus managements estimate of cost to
complete. Losses, if any, are accrued when their occurrence
becomes known and the amount of the loss is reasonably
determinable.

Government
Contracts

The Company enters into research and development
contracts with government agencies under various pricing
arrangements. Government contracting revenue is classified as
services and support revenue in the accompanying consolidated
statements of operations and comprehensive loss. Revenue from
cost-plus-fixed-fee contracts is recognized on the
basis of reimbursable contract costs incurred during the period,
plus a percentage of the fixed fee. Revenue from time and
material contracts is recognized on the basis of hours
utilized, plus other reimbursable contract costs incurred during
the period. Revenue from firm-fixed-price contracts
is recognized on the percentage of completion method. Under this
method, individual contract revenues are recorded based on the
percentage relationship that contract costs incurred bear to
costs incurred plus managements estimate of costs to
complete. Losses, if any, are accrued when their occurrence
becomes known and the amount of the loss is reasonably
determinable. During 2001, 2000 and 1999, the Company

62



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recognized revenue of $16.6 million,
$12.3 million and $14.0 million, respectively,
associated with government contracts. Associated costs were
$14.9 million, $12.0 million and $13.3 million in
2001, 2000 and 1999, respectively.

Under government contracts, the Company is
subject to audit by the Defense Contract Audit
Agency (DCAA) which could result in the renegotiation of
amounts previously billed. The DCAA has performed audits of the
Companys costs through 1999. Management believes that the
results of such audits will not have a material adverse impact
on the Companys financial position, results of operations
or cash flows.

Research and
Development

Costs incurred in the research and development of
new software products are expensed as incurred until
technological feasibility is established. Development costs are
capitalized beginning when a products technological
feasibility has been established and ending when the product is
available for general release to customers. Technological
feasibility is reached when the product reaches the working
model stage. To date, products and enhancements have generally
reached technological feasibility and have been released for
sale at substantially the same time and all research and
development costs have been expensed.

Advertising
Costs

Advertising production costs are expensed as
incurred. Media for television and print placement costs are
expensed in the period the advertising appears. Total
advertising and promotional expenses were $25.1 million,
$43.7 million and $36.4 million for 2001, 2000 and
1999, respectively.

Stock-based
Compensation

As permitted by SFAS No. 123,
Accounting for Stock-Based Compensation, the Company
accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and FASB
Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock-Based Compensation, an
interpretation of APB Opinion No. 25 and related
interpretations in accounting for its stock-based compensation
plans. Stock-based compensation related to non-employees is
based on the fair value of the related stock or options in
accordance with SFAS No. 123 and its interpretations.
Expense associated with stock-based compensation is amortized
over the vesting period of each individual award.

Income
Taxes

The Company accounts for income taxes in
accordance with the liability method of accounting for income
taxes. Under the liability method, deferred assets and
liabilities are recognized based upon anticipated future tax
consequences attributable to differences between financial
statement carrying amounts of assets and liabilities and their
respective tax bases. The provision for income taxes is
comprised of the current tax liability and the change in
deferred tax assets and liabilities. The Company establishes a
valuation allowance to the extent that it is more likely than
not that deferred tax assets will not be recoverable against
future taxable income.

Net Loss Per
Share

Basic net loss per share is computed using the
weighted-average common shares outstanding during the period.
Diluted net loss per share is computed using the weighted
average common shares and potentially dilutive shares
outstanding during the period. Potentially dilutive common
shares include incremental

63



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

common shares issuable upon exercise of stock
options and stock purchase warrants and conversion of the
convertible debt.

Comprehensive
Loss

Unrealized gains (losses) on
available-for-sale securities and foreign currency translation
adjustments are included in the Companys components of
comprehensive loss, which are excluded from net loss.

For 2001, 2000 and 1999 other comprehensive
income (loss) comprises the following items (in thousands):

|                                                                 |                                |                                  |         |        |        |            |         |       |         |   |         |        |         |  
|---------------------------------------------------------------- | ------------------------------ | -------------------------------- | ------- | ------ | ------ | ---------- | ------- | ----- | ------- | - | ------- | ------ | ------- | -
|                                                                 |                                | Before                           |         | Income |        | Net of    
|                                                                 |                                | Income Tax                       |         | Tax    |        | Income Tax
|                                                                 |                                |                                  |         |        |        |           
|2001                                                             |                                |                                  |         |        |        |            |         |       |         |   |         |       
|Net unrealized gain on marketable securities and
    investments |                                | $                                | 16,601  |        |        | $          | (6,640  | )     |         | $ | 9,961   |       
|Net realized gain on marketable securities and
    investments   |                                |                                  | 7,280   |        |        |            | (2,912  | )     |         |   | 4,368   |       
|Impairment recognized                                            |                                |                                  | (20,631 | )      |        |            | 8,252   |       |         |   | (12,379 | )     
|Cumulative translation adjustment, net                           |                                |                                  | (1,029  | )      |        |            |        |       |         |   | (1,029  | )     
|                                                                 |                                |                                  |         |        |        |            |         |       |         |   |         |       
|                                                                 |                                | Total other comprehensive income |         | $      | 2,221  |            |         | $     | (1,300  | ) |         | $      | 921     |  
|                                                                 |                                |                                  |         |        |        |            |         |       |         |   |         |       
|2000                                                             |                                |                                  |         |        |        |            |         |       |         |   |         |       
|Net unrealized loss on marketable securities and
    investments |                                | $                                | (12,605 | )      |        | $          | 5,042   |       |         | $ | (7,563  | )     
|Net realized gain on marketable securities and
    investments   |                                |                                  | 40,361  |        |        |            | (16,144 | )     |         |   | 24,217  |       
|Impairment recognized                                            |                                |                                  | (10,000 | )      |        |            | (4,000  | )     |         |   | (14,000 | )     
|Cumulative translation adjustment, net                           |                                |                                  | (23,963 | )      |        |            |        |       |         |   | (23,963 | )     
|                                                                 |                                |                                  |         |        |        |            |         |       |         |   |         |       
|                                                                 |                                | Total other comprehensive loss   |         | $      | (6,207 | )          |         | $     | (15,102 | ) |         | $      | (21,309 | )
|                                                                 |                                |                                  |         |        |        |            |         |       |         |   |         |       
|1999                                                             |                                |                                  |         |        |        |            |         |       |         |   |         |       
|Net unrealized gain on marketable securities and
    investments |                                | $                                | 3,461   |        |        | $          | (1,384  | )     |         | $ | 2,077   |       
|Net realized loss on marketable securities and
    investments   |                                |                                  | (6,145  | )      |        |            | 2,458   |       |         |   | (3,687  | )     
|Cumulative translation adjustment, net                           |                                |                                  | (6,813  | )      |        |            |        |       |         |   | (6,813  | )     
|                                                                 |                                |                                  |         |        |        |            |         |       |         |   |         |       
|                                                                 | Total other comprehensive loss |                                  | $       | (9,497 | )      |            | $       | 1,074 |         |   | $       | (8,423 | )      
|                                                                 |                                |                                  |         |        |        |            |         |       |         |   |         |       

Accumulated other comprehensive income
(loss) comprises of the following (in thousands):

|                                                 |       |      |         |         |   |      |         |         |   |   |         |        |  
|------------------------------------------------ | ----- | ---- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------ | -
|                                                 |       | 2001 |         | 2000    |   | 1999
|                                                 |       |      |         |         |   |     
|Unrealized gain on available-for-sale securities |       | $    | 4,800   |         |   | $    | 2,850   |         |   | $ | 196     |       
|Cumulative translation adjustment                |       |      | (35,145 | )       |   |      | (34,116 | )       |   |   | (10,153 | )     
|                                                 |       |      |         |         |   |      |         |         |   |   |         |       
|                                                 | Total |      | $       | (30,345 | ) |      | $       | (31,266 | ) |   | $       | (9,957 | )
|                                                 |       |      |         |         |   |      |         |         |   |   |         |       

Recent
Accounting Pronouncements

In May 2000, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 00-14, Accounting
for Certain Sales Incentives. EITF Issue No. 00-14
addresses the recognition, measurement, and income statement
classification for sales incentives that a vendor voluntarily
offers to customers (without charge), which the customer can use
in, or exercise as a result of, a single exchange transaction.
Sales incentives that fall within the scope of EITF Issue
No. 00-14 include offers that a customer can use to receive
a reduction in the price of a product or service at the point of
sale. The EITF changed the transition date for Issue 00-14,
concluding that a company should apply this consensus no later
than the companys annual or interim financial statements
for the periods beginning after December 15, 2001. In June
2001, the EITF issued EITF Issue

64



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendors Products, effective for periods beginning
after December 15, 2001. EITF Issue No. 00-25
addresses whether consideration from a vendor to a reseller is
(a) an adjustment of the selling prices of the
vendors products and, therefore, should be deducted from
revenue when recognized in the vendors statement of
operations or (b) a cost incurred by the vendor for assets
or services received from the reseller and, therefore, should be
included as a cost or expense when recognized in the
vendors statement of operations. Upon application of these
EITFs, financial statements for prior periods presented for
comparative purposes should be reclassified to comply with the
income statement display requirements under these Issues. In
September of 2001, the EITF issued EITF Issue No. 01-09,
Accounting for Consideration Given by Vendor to a Customer
or a Reseller of the Vendors Products, which is a
codification of EITF Issues No. 00-14, No. 00-25 and
No. 00-22 Accounting for Points and
Certain Other Time-or Volume-Based Sales Incentive Offers and
Offers for Free Products or Services to be Delivered in the
Future. As part of the restatement discussed in Note 3 of
the Notes to Consolidated Financial Statements, the Company
adopted EITF 01-09. See Note 3 of the Notes to
Consolidated Financial Statements.

In July 2001, the FASB issued SFAS No. 141,
Business Combinations. SFAS No. 141 requires
the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company believes that the
adoption of SFAS No. 141 will not have a significant impact
on its financial statements.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which is
effective for fiscal years beginning after December 15,
2001. SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the
standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the testing for
impairment of existing goodwill and other intangibles. Upon
adoption of SFAS No. 142, the Company will cease to
amortize approximately $156.9 million of goodwill, the
Company had recorded approximately $51.1 million of
amortization on these amounts during 2001 and would have
recorded approximately $55.1 million of amortization during
2002. In lieu of amortization the Company will be required to
perform an impairment review of its goodwill balance upon the
initial adoption of SFAS No. 142. The impairment review
will involve a two-step process as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Step 1  the Company will compare the
    fair value of its reporting units to the carrying value,
    including goodwill of each of those units. For each reporting
    unit where the carrying value, including goodwill, exceeds the
    units fair value, the Company will move on to step 2.
    If a units fair value exceeds the carrying value, no
    further work is performed and no impairment charge is necessary.                                                                                                                                                                            
|
| |  | Step 2  the Company will perform an
    allocation of the fair value of the reporting unit to its
    identifiable tangible and non-goodwill intangible assets and
    liabilities. This will derive an implied fair value for the
    reporting units goodwill. The Company will then compare
    the implied fair value of the reporting units goodwill
    with the carrying amount of the reporting units goodwill.
    If the carrying amount of the reporting units goodwill is
    greater than the implied fair value of its goodwill, an
    impairment loss must be recognized for the excess.

The Company expects to complete the initial
review during the first quarter of 2002. The Company does not
expect to record an impairment charge upon completion of the
initial review, however, there can be no assurance that at the
time the review is completed a material impairment charge will
not be recorded.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and develops a single
accounting method under which long-lived assets that are to be
disposed of by sale are

65



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

measured at the lower of book value or fair value
less cost to sell. Additionally, SFAS No. 144 expands the
scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS
No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and its
provisions are to be applied prospectively. The Company is
currently assessing the impact of SFAS No. 144 on its
financial position and results of operations.

3.     Restatement
and Adoption of New Accounting Pronouncements

On April 25, 2002, the Company announced
that it had discovered accounting inaccuracies in certain prior
period financial statements requiring restatement of the
financial statements for these periods. The Company conducted an
internal investigation under the direction of the Audit
Committee of its Board of Directors to determine the scope and
magnitude of these inaccuracies. On May 17, 2002, the
Company announced that the Audit Committee of its Board of
Directors had completed its internal accounting investigation.
As a result of the internal accounting investigation, the
Companys statements of operations, cash flows and
stockholders equity for the years ended December 31,
2000, 1999 and 1998 and the balance sheets as of
December 31, 2000, 1999 and 1998 are being restated. In
addition, to give effect to accumulated prior period adjustments
and their related tax impacts, the Company announced the
restatement of its December 31, 2001 and March 31,
2002 balance sheets. As a result, the Company is restating its
statements of operations, cash flows and stockholders
equity for the years ended December 31, 2000 and 1999 and
balance sheets as of December 31, 2001 and 2000, which are
included in this 10-K/ A. The statements of operations and cash
flows for the year ended December 31, 2001 were not
impacted by this restatement.

The Audit Committees investigation
determined that in 2000, inaccurate accounting entries were
made, which required restatement. These entries
(a) recorded payments of approximately $12.4 million
to a distributor in a balance sheet tax liability account
instead of reducing Net revenue, (b) reclassified
approximately $14.2 million from a tax liability account to
the general and administrative and marketing and sales liability
accounts, understating general and administrative and marketing
and sales expenses by approximately $14.2 million,
(c) recorded additions of approximately $10.0 million
to sales return reserves as tax expense rather than as a
reduction of Net revenue, (d) increased a tax liability
account and reduced Net revenue by approximately
$22.0 million, (e) adjusted the foreign currency
accounts resulting in an overstatement of Net revenue and an
understatement of Interest and other income of approximately
$1.0 million and (f) reclassified approximately
$13.9 million from marketing and sales and general and
administrative expenses to Net revenue, resulting in an
overstatement of marketing and sales and general and
administrative expenses and Net revenue. Other entries had the
effect of overstating Cost of net revenue by approximately
$1.0 million, understating Operating costs and expenses by
approximately $2.6 million, understating Interest and other
income by approximately $1.6 million, and misclassifying
amounts, totaling approximately $1.5 million, between
marketing and sales and general and administrative expenses. The
tax effects of these entries increased the provision for income
taxes by approximately $6.6 million. In the aggregate for
2000, the adjustments for these entries and related tax effects
increased previously reported net loss by $21.2 million
from $102.7 million to $123.9 million, and increased
previously reported basic and diluted net loss by $0.16 per
share.

The internal investigation also determined that
inaccurate accounting entries, which required restatement, were
also made in 1999 and 1998. In 1999, these entries
(a) recorded additions of approximately $28.2 million
to sales return reserves as tax expense rather than as a
reduction of Net revenue and (b) reclassified approximately
$1.5 million from the tax liability accounts to general and
administrative expense liability accounts, understating general
and administrative expenses by $1.5 million. Other entries
misclassified approximately $0.5 million between marketing
and sales and general and administrative expenses. The tax
effects of these entries reduced the provision for income taxes
by approximately $32.7 million. In the aggregate for 1999,
the adjustments for these entries and related tax effects reduced

66



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

previously reported net loss by $3.0 million
from $159.9 million to $156.9 million, and reduced
previously reported basic and diluted net loss by $0.02 per
share.

The entries made during 1998 reclassified
approximately $6.2 million from the tax liability accounts
to general and administrative expense liability accounts,
understating general and administrative expenses by
$6.2 million. The tax effects of these entries reduced the
provision for income taxes by approximately $2.2 million.
In the aggregate for 1998, the adjustments for these entries and
related tax effects reduced previously reported net income by
$4.0 million from $36.4 million to $32.4 million,
and reduced previously reported basic and diluted net income by
$0.03 per share.

During the three months ended March 31,
2002, the Company adopted the Financial Accounting Standards
Boards Emerging Issues Task Force Statement
No. 01-09, entitled Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the
Vendors Products (EITF 01-09).
EITF 01-09 requires that payments to customers or
reductions in their accounts receivable for certain marketing
related amounts previously classified as charges to marketing
expense be recorded as reductions of revenue. Upon adoption of
EITF 01-09, the Company is required to retroactively
reclassify amounts recognized for such payments in previously
issued financial statements to comply with the income statement
display requirements of the consensus.

The consolidated financial statements for the
years ended December 31, 2000 and 1999 and the balance
sheet as of December 31, 2001 contained herein have been
restated to incorporate the adjustments described herein and the
related tax effects. In addition, for the years ended
December 31, 2001, 2000 and 1999, the Company reclassified
amounts of approximately $23.5 million, $32.7 million
and $44.5 million, respectively, from marketing and sales
expense to revenue upon the adoption of EITF 01-09.

67



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following are reconciliations of the
Companys financial position and results of operations from
financial statements previously filed to these restated and
reclassified financial statements (in thousands, except per
share data):

Balance Sheet as of December 31,
2001

|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |           |           | 
|----------------------------------------------------------- | -------------------------- | ----------------------------------------------------------------- | -------- | --------------- | --------- | ----------- | ------- | ------- | ----- | - | -------- | --------- | --------- | 
|                                                            |                            |                                                                   |          | Cumulative      |           |            
|                                                            |                            | As Previously                                                     |          | Effect of Prior |           |            
|                                                            |                            | Reported                                                          |          | Year Changes    |           | As Restated
|                                                            |                            |                                                                   |          |                 |           |            
|Cash and cash equivalents                                   |                            | $                                                                 | 612,832  |                 |           | $           |        |         |       | $ | 612,832  |          
|Short-term marketable securities                            |                            |                                                                   | 135,761  |                 |           |             |        |         |       |   | 135,761  |          
|Accounts receivable, net                                    |                            |                                                                   | 136,366  |                 |           |             |        |         |       |   | 136,366  |          
|Prepaid expenses, income taxes and other current
    assets |                            |                                                                   | 54,959   |                 |           |             |        |         |       |   | 54,959   |          
|Deferred taxes                                              |                            |                                                                   | 142,869  |                 |           |             |        |         |       |   | 142,869  |          
|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |          
|                                                            | Total current assets       |                                                                   |          | 1,082,787       |           |             |         |        |       |   |          | 1,082,787 |          
|Long-term marketable securities                             |                            |                                                                   | 194,357  |                 |           |             |        |         |       |   | 194,357  |          
|Fixed assets, net                                           |                            |                                                                   | 64,040   |                 |           |             |        |         |       |   | 64,040   |          
|Land                                                        |                            |                                                                   | 4,414    |                 |           |             |        |         |       |   | 4,414    |          
|Deferred taxes                                              |                            |                                                                   | 77,627   |                 |           |             | 6,772   |         |       |   | 84,399   |          
|Intangible assets                                           |                            |                                                                   | 185,054  |                 |           |             |        |         |       |   | 185,054  |          
|Other assets                                                |                            |                                                                   | 18,853   |                 |           |             |        |         |       |   | 18,853   |          
|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |          
|                                                            | Total assets               |                                                                   | $        | 1,627,132       |           |             | $       | 6,772   |       |   | $        | 1,633,904 |          
|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |          
|Accounts payable                                            |                            | $                                                                 | 26,368   |                 |           | $           |        |         |       | $ | 26,368   |          
|Accrued liabilities                                         |                            |                                                                   | 264,618  |                 |           |             | 28,965  |         |       |   | 293,583  |          
|Deferred revenue                                            |                            |                                                                   | 250,048  |                 |           |             |         |         |       |   | 250,048  |          
|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |          
|                                                            | Total current liabilities  |                                                                   |          | 541,034         |           |             |         | 28,965  |       |   |          | 569,999   |          
|Deferred taxes                                              |                            |                                                                   | 20,445   |                 |           |             |        |         |       |   | 20,445   |          
|Deferred revenue, less current portion                      |                            |                                                                   | 24,312   |                 |           |             |        |         |       |   | 24,312   |          
|Convertible debentures                                      |                            |                                                                   | 578,850  |                 |           |             |        |         |       |   | 578,850  |          
|Long term debt and other liabilities                        |                            |                                                                   | 393      |                 |           |             |        |         |       |   | 393      |          
|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |          
|                                                            | Total liabilities          |                                                                   |          | 1,165,034       |           |             |         | 28,965  |       |   |          | 1,193,999 |          
|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |          
|                                                           
|Minority interest                                           |                            |                                                                   | 17,311   |                 |           |             |        |         |       |   | 17,311   |          
|                                                           
|Common stock                                                |                            |                                                                   | 1,406    |                 |           |             |        |         |       |   | 1,406    |          
|Treasury stock                                              |                            |                                                                   |         |                 |           |             |        |         |       |   |         |          
|Additional paid in capital                                  |                            |                                                                   | 742,315  |                 |           |             |        |         |       |   | 742,315  |          
|Accumulated other comprehensive loss                        |                            |                                                                   | (30,345  | )               |           |             |        |         |       |   | (30,345  | )        
|Accumulated deficit                                         |                            |                                                                   | (268,589 | )               |           |             | (22,193 | )       |       |   | (290,782 | )        
|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |          
|                                                            | Total stockholders equity |                                                                   |          | 444,787         |           |             |         | (22,193 | )     |   |          | 422,594   |          
|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |          
|                                                            |                            | Total liabilities, minority interest and
    stockholders equity |          | $               | 1,627,132 |             |         | $       | 6,772 |   |          | $         | 1,633,904 | 
|                                                            |                            |                                                                   |          |                 |           |             |         |         |       |   |          |          

68



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Balance Sheet as of December 31,
2000

|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |           |           | 
|----------------------------------------------------------- | -------------------------- | ----------------------------------------------------------------- | -------- | --------------- | --------- | ------------ | ------ | ----------- | ------ | - | ------- | ------- | ------ | - | -------- | --------- | --------- | 
|                                                            |                            |                                                                   |          | Cumulative      |           |              |        |            
|                                                            |                            | As Previously                                                     |          | Effect of Prior |           |              |        |            
|                                                            |                            | Reported                                                          |          | Year Changes    |           | Inaccuracies |        | As Restated
|                                                            |                            |                                                                   |          |                 |           |              |        |            
|Cash and cash equivalents                                   |                            | $                                                                 | 275,539  |                 |           | $            |       |             |        | $ |        |         |        | $ | 275,539  |          
|Short-term marketable securities                            |                            |                                                                   | 85,721   |                 |           |              |       |             |        |   |        |         |        |   | 85,721   |          
|Accounts receivable, net                                    |                            |                                                                   | 122,315  |                 |           |              |       |             |        |   |        |         |        |   | 122,315  |          
|Prepaid expenses, income taxes and other current
    assets |                            |                                                                   | 50,346   |                 |           |              |       |             |        |   |        |         |        |   | 50,346   |          
|Deferred taxes                                              |                            |                                                                   | 86,771   |                 |           |              |       |             |        |   |        |         |        |   | 86,771   |          
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            | Total current assets       |                                                                   |          | 620,692         |           |              |        |            |        |   |         |        |        |   |          | 620,692   |          
|Long-term marketable securities                             |                            |                                                                   | 332,893  |                 |           |              |       |             |        |   |        |         |        |   | 332,893  |          
|Fixed assets, net                                           |                            |                                                                   | 75,499   |                 |           |              |       |             |        |   |        |         |        |   | 75,499   |          
|Deferred taxes                                              |                            |                                                                   | 113,489  |                 |           |              | 10,403 |             |        |   | (3,631  | )       |        |   | 120,261  |          
|Intangible assets                                           |                            |                                                                   | 220,255  |                 |           |              |       |             |        |   |        |         |        |   | 220,255  |          
|Other assets                                                |                            |                                                                   | 22,020   |                 |           |              |       |             |        |   |        |         |        |   | 22,020   |          
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            | Total assets               |                                                                   | $        | 1,384,848       |           |              | $      | 10,403      |        |   | $       | (3,631  | )      |   | $        | 1,391,620 |          
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          
|Accounts payable                                            |                            | $                                                                 | 46,816   |                 |           | $            |       |             |        | $ |        |         |        | $ | 46,816   |          
|Accrued liabilities                                         |                            |                                                                   | 225,317  |                 |           |              | 11,391 |             |        |   | 17,574  |         |        |   | 254,282  |          
|Deferred revenue                                            |                            |                                                                   | 151,566  |                 |           |              |        |             |        |   |        |         |        |   | 151,566  |          
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            | Total current liabilities  |                                                                   |          | 423,699         |           |              |        | 11,391      |        |   |         | 17,574  |        |   |          | 452,664   |          
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          
|Deferred taxes                                              |                            |                                                                   | 7,971    |                 |           |              |       |             |        |   |        |         |        |   | 7,971    |          
|Deferred revenue, less current portion                      |                            |                                                                   | 26,592   |                 |           |              |       |             |        |   |        |         |        |   | 26,592   |          
|Convertible debentures                                      |                            |                                                                   | 396,336  |                 |           |              |       |             |        |   |        |         |        |   | 396,336  |          
|Long term debt and other liabilities                        |                            |                                                                   | 532      |                 |           |              |       |             |        |   |        |         |        |   | 532      |          
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            | Total liabilities          |                                                                   |          | 855,130         |           |              |        | 11,391      |        |   |         | 17,574  |        |   |          | 884,095   |          
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          
|Minority interest                                           |                            |                                                                   | 11,067   |                 |           |              |       |             |        |   |        |         |        |   | 11,067   |          
|                                                           
|Common stock                                                |                            |                                                                   | 1,381    |                 |           |              |       |             |        |   |        |         |        |   | 1,381    |          
|Treasury stock                                              |                            |                                                                   | (23,186  | )               |           |              |       |             |        |   |        |         |        |   | (23,186  | )        
|Additional paid in capital                                  |                            |                                                                   | 685,423  |                 |           |              |       |             |        |   |        |         |        |   | 685,423  |          
|Accumulated other comprehensive loss                        |                            |                                                                   | (31,266  | )               |           |              |       |             |        |   |        |         |        |   | (31,266  | )        
|Accumulated deficit                                         |                            |                                                                   | (113,701 | )               |           |              | (988   | )           |        |   | (21,205 | )       |        |   | (135,894 | )        
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            | Total stockholders equity |                                                                   |          | 518,651         |           |              |        | (988        | )      |   |         | (21,205 | )      |   |          | 496,458   |          
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            |                            | Total liabilities, minority interest and
    stockholders equity |          | $               | 1,384,848 |              |        | $           | 10,403 |   |         | $       | (3,631 | ) |          | $         | 1,391,620 | 
|                                                            |                            |                                                                   |          |                 |           |              |        |             |        |   |         |         |        |   |          |          

69



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Statement of Operations for the Year Ended
December 31, 2000

|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |          |          |  
|---------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------- | ------- | ------------ | -------- | ----------------- | ----- | --------------- | ------- | - | - | ------- | ------- | - | ------- | -------- | -------- | -
|                                               |                                                                  | As Previously                      |         |              |          | EITF No. 01-09    |       | As Restated and
|                                               |                                                                  | Reported                           |         | Inaccuracies |          | Reclassifications |       | Reclassified   
|                                               |                                                                  |                                    |         |              |          |                   |       |                
|Net revenue:                                   |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               | Product                                                          |                                    | $       | 505,914      |          |                   | $     | (15,288         | )       |   | $ | (32,662 | )       |   | $       | 457,964  |         
|                                               | Services and support                                             |                                    |         | 239,778      |          |                   |       |                |         |   |   |        |         |   |         | 239,778  |         
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               |                                                                  | Total net revenue                  |         |              | 745,692  |                   |       |                 | (15,288 | ) |   |         | (32,662 | ) |         |          | 697,742  |  
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|Cost of net revenue:                           |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               | Product                                                          |                                    |         | 114,394      |          |                   |       | (1,000          | )       |   |   |        |         |   |         | 113,394  |         
|                                               | Services and support                                             |                                    |         | 42,301       |          |                   |       |                |         |   |   |        |         |   |         | 42,301   |         
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               |                                                                  | Total cost of net revenue          |         |              | 156,695  |                   |       |                 | (1,000  | ) |   |         |        |   |         |          | 155,695  |  
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|Operating costs and expenses:                  |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               | Research and development                                         |                                    |         | 173,468      |          |                   |       | (500            | )       |   |   |        |         |   |         | 172,968  |         
|                                               | Marketing and sales                                              |                                    |         | 400,863      |          |                   |       | 8,800           |         |   |   | (32,662 | )       |   |         | 377,001  |         
|                                               | General and administrative                                       |                                    |         | 84,567       |          |                   |       | 497             |         |   |   |        |         |   |         | 85,064   |         
|                                               | Provision for doubtful accounts, net                             |                                    |         | 15,784       |          |                   |       | (5,860          | )       |   |   |        |         |   |         | 9,924    |         
|                                               | Amortization of intangibles                                      |                                    |         | 66,282       |          |                   |       |                |         |   |   |        |         |   |         | 66,282   |         
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               |                                                                  | Total operating costs and expenses |         |              | 740,964  |                   |       |                 | 2,937   |   |   |         | (32,662 | ) |         |          | 711,239  |  
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               |                                                                  | Loss from operations               |         |              | (151,967 | )                 |       |                 | (17,225 | ) |   |         |        |   |         |          | (169,192 | )
|Interest and other income                      |                                                                  |                                    | 42,024  |              |          |                   | 2,600 |                 |         |   |  |         |         |   | 44,624  |         
|Interest expense                               |                                                                  |                                    | (18,169 | )            |          |                   |      |                 |         |   |  |         |         |   | (18,169 | )       
|Gain (loss) on investments, net                |                                                                  |                                    | 40,361  |              |          |                   |      |                 |         |   |  |         |         |   | 40,361  |         
|Write down of strategic and other investments  |                                                                  |                                    | (10,000 | )            |          |                   |      |                 |         |   |  |         |         |   | (10,000 | )       
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               | Loss before provision for income taxes and
    minority interest |                                    |         | (97,751      | )        |                   |       | (14,625         | )       |   |   |        |         |   |         | (112,376 | )       
|Provision for income taxes                     |                                                                  |                                    | 9,924   |              |          |                   | 6,580 |                 |         |   |  |         |         |   | 16,504  |         
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               | Net loss before minority interest                                |                                    |         | (107,675     | )        |                   |       | (21,205         | )       |   |   |        |         |   |         | (128,880 | )       
|Minority interest in consolidated subsidiaries |                                                                  |                                    | 4,954   |              |          |                   |      |                 |         |   |  |         |         |   | 4,954   |         
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               | Net loss                                                         |                                    | $       | (102,721     | )        |                   | $     | (21,205         | )       |   | $ |        |         |   | $       | (123,926 | )       
|                                               |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|Basic and diluted net loss per share:          |                                                                  |                                    |         |              |          |                   |       |                 |         |   |   |         |         |   |         |         
|                                               | Net loss per share  basic                                       |                                    | $       | (0.74        | )        |                   |       |                 |         |   |   |         |         |   | $       | (0.90    | )       
|                                               | Net loss per share  diluted                                     |                                    | $       | (0.74        | )        |                   |       |                 |         |   |   |         |         |   | $       | (0.90    | )       
|Basic shares                                   |                                                                  |                                    | 138,072 |              |          |                   |       |                 |         |   |   |         |         |   | 138,072 |         
|Diluted shares                                 |                                                                  |                                    | 138,072 |              |          |                   |       |                 |         |   |   |         |         |   | 138,072 |         

70



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Statement of Operations for the Year Ended
December 31, 1999

|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |          |          |  
|---------------------------------------------------------------- | --------------------------------------- | ---------------------------------- | -------- | ------------ | -------- | ----------------- | ------- | --------------- | ------- | - | - | ------- | ------- | - | -------- | -------- | -------- | -
|                                                                 |                                         | As Previously                      |          |              |          | EITF No. 01-09    |         | As Restated and
|                                                                 |                                         | Reported                           |          | Inaccuracies |          | Reclassifications |         | Reclassified   
|                                                                 |                                         |                                    |          |              |          |                   |         |                
|Net revenue:                                                     |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 | Product                                 |                                    | $        | 474,097      |          |                   | $       | (28,224         | )       |   | $ | (44,460 | )       |   | $        | 401,413  |         
|                                                                 | Services and support                    |                                    |          | 209,571      |          |                   |         |                |         |   |   |        |         |   |          | 209,571  |         
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 |                                         | Total net revenue                  |          |              | 683,668  |                   |         |                 | (28,224 | ) |   |         | (44,460 | ) |          |          | 610,984  |  
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|Cost of net revenue:                                             |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 | Product                                 |                                    |          | 88,729       |          |                   |         |                |         |   |   |        |         |   |          | 88,729   |         
|                                                                 | Services and support                    |                                    |          | 42,094       |          |                   |         |                |         |   |   |        |         |   |          | 42,094   |         
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 |                                         | Total cost of net revenue          |          |              | 130,823  |                   |         |                 |        |   |   |         |        |   |          |          | 130,823  |  
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|Operating costs and expenses:                                    |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 | Research and development                |                                    |          | 152,728      |          |                   |         |                |         |   |   |        |         |   |          | 152,728  |         
|                                                                 | Marketing and sales                     |                                    |          | 370,086      |          |                   |         | 534             |         |   |   | (44,460 | )       |   |          | 326,160  |         
|                                                                 | General and administrative              |                                    |          | 83,753       |          |                   |         | 966             |         |   |   |        |         |   |          | 84,719   |         
|                                                                 | Provision for doubtful accounts, net    |                                    |          | 44,809       |          |                   |         |                |         |   |   |        |         |   |          | 44,809   |         
|                                                                 | Amortization of intangibles             |                                    |          | 58,400       |          |                   |         |                |         |   |   |        |         |   |          | 58,400   |         
|                                                                 | Acquisition and other related
    costs |                                    |          | (18,732      | )        |                   |         |                |         |   |   |        |         |   |          | (18,732  | )       
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 |                                         | Total operating costs and expenses |          |              | 691,044  |                   |         |                 | 1,500   |   |   |         | (44,460 | ) |          |          | 648,084  |  
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 |                                         | Loss from operations               |          |              | (138,199 | )                 |         |                 | (29,724 | ) |   |         |        |   |          |          | (167,923 | )
|Interest and other income                                        |                                         |                                    | 30,678   |              |          |                   |        |                 |         |   |  |         |         |   | 30,678   |         
|Interest expense                                                 |                                         |                                    | (17,332  | )            |          |                   |        |                 |         |   |  |         |         |   | (17,332  | )       
|Gain (loss) on investments, net                                  |                                         |                                    | (6,145   | )            |          |                   |        |                 |         |   |  |         |         |   | (6,145   | )       
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|Loss before provision for income taxes and
    minority interest |                                         |                                    | (130,998 | )            |          |                   | (29,724 | )               |         |   |  |         |         |   | (160,722 | )       
|Provision for (benefit from) taxes                               |                                         |                                    | 29,243   |              |          |                   | (32,740 | )               |         |   |  |         |         |   | (3,497   | )       
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 | Net loss before minority interest       |                                    |          | (160,241     | )        |                   |         | 3,016           |         |   |   |        |         |   |          | (157,225 | )       
|Minority interest in loss of consolidated
    subsidiary         |                                         |                                    | 340      |              |          |                   |        |                 |         |   |  |         |         |   | 340      |         
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 | Net loss                                |                                    | $        | (159,901     | )        |                   | $       | 3,016           |         |   | $ |        |         |   | $        | (156,885 | )       
|                                                                 |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|Basic and diluted net loss per share:                            |                                         |                                    |          |              |          |                   |         |                 |         |   |   |         |         |   |          |         
|                                                                 | Net loss per share  basic              |                                    | $        | (1.15        | )        |                   |         |                 |         |   |   |         |         |   | $        | (1.13    | )       
|                                                                 | Net loss per share  diluted            |                                    | $        | (1.15        | )        |                   |         |                 |         |   |   |         |         |   | $        | (1.13    | )       
|Basic shares                                                     |                                         |                                    | 138,695  |              |          |                   |         |                 |         |   |   |         |         |   | 138,695  |         
|Diluted shares                                                   |                                         |                                    | 138,695  |              |          |                   |         |                 |         |   |   |         |         |   | 138,695  |         

71



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Business
Combinations and Other

Networks Associates, Inc. made no material
acquisitions during 2001, 2000 and 1999.

During 2000, McAfee.com completed two
acquisitions (Signal 9 Solutions Canada, Inc. and Tufans, Inc.)
for a total purchase price of $22.6 million, including the
issuance of approximately 550,000 shares of its Class A
common stock, valued at approximately $19.6 million, cash
of approximately $2.2 million and acquisition related
expenses of $0.8 million. The value of the stock issued was
based on the average of the market price of McAfee.com stock
five days before and after the date agreements were reached on
the acquisition. The acquisitions were accounted for using the
purchase method of accounting and McAfee.com analyzed the
intangible assets to determine whether any amount should be
recorded as in-process research and development. McAfee.com
determined that the acquired technologies and products are
largely dependent on the core technology and that new versions
are released frequently and contain incremental rather than
fundamental improvements. Based on this analysis,
$22.3 million was recorded as goodwill and purchased
technology, and is being amortized on a straight-line basis over
three years. A summary of the fair value of the assets acquired
as a result of these transactions, is as follows (in thousands):

|                                                                                    |  |   |        |  
|----------------------------------------------------------------------------------- |  | - | ------ | -
|Assets Acquired                                                                     |  |   |        |  
|Tangible assets, primarily cash, accounts
    receivable and property and equipment |  | $ | 654    |  
|Goodwill and purchased technology                                                   |  |   | 22,304 |  
|Liabilities assumed                                                                 |  |   | (378   | )
|                                                                                    |  |   |        |  
|Total                                                                               |  | $ | 22,580 |  
|                                                                                    |  |   |        |  

The results of each of these acquisitions have
been included in the results of McAfee.com and the consolidated
results of the Company since the dates of acquisition. The
historical operations of these acquisitions were not material to
the Companys financial position, results of operations, or
cash flows.

In December 2000, McAfee.com performed a
review of the carrying value of the goodwill associated with one
of its acquisitions and recognized an impairment charge of
$3.6 million. McAfee.com performed a review of the carrying
value of the goodwill as it had been assessed that McAfee.com
would not use the technology purchased as part of the original
acquisition. Accordingly, the full value of the unamortized
goodwill was written off.

Capital
Transactions

In February 2000, the Company sold less than
5% of its interest in its Japanese subsidiary, Network
Associates Company Limited (NAI Japan) generating
proceeds of approximately $11.9 million. The transaction,
which was with several unrelated third parties, resulted in a
gain of approximately $11.9 million, based on the
difference between the proceeds of sale and the Companys
basis of its investment in NAI Japan. As NAI Japan was not a
newly formed non-operating entity and had a successful history
of marketing and selling the Companys products in the
Japanese market, the Company recorded this gain in the statement
of operations.

Due to a change in business strategy, the Company
repurchased this minority interest in NAI Japan in
June 2001 for approximately $10.7 million. The Company
accounted for this repurchase using the purchase method of
accounting and accordingly performed an allocation of the
purchase price paid for this minority interest. As a result
approximately $10.3 million of the purchase price was
allocated to goodwill, which is being amortized over its useful
economic life of 5 years. The full results of operations of
NAI Japan have been included with those of the Company since the
date of acquisition of the minority interest.

72



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Marketable
Securities and Cash and Cash Equivalents

Marketable securities, which are classified as
available-for-sale, are summarized as follows as of
December 31 (in thousands):

|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|------------------------------- |  | --------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | ---- | - |  | - | ------- | 
|                                |  | Purchase/ |         | Gross      |  | Gross      |       |           
|                                |  | Amortized |         | Unrealized |  | Unrealized |       | Aggregate 
|2001                            |  | Cost      |         | Gains      |  | Losses     |       | Fair Value
|                                |  |           |         |            |  |            |       |           
|U.S. Government debt securities |  | $         | 205,418 |            |  | $          | 2,228 |            |  | $ | (42  | ) |  | $ | 207,604 | 
|Municipal debt securities       |  |           | 12,013  |            |  |            | 28    |            |  |   |     |   |  |   | 12,041  | 
|Corporate debt securities       |  |           | 652,024 |            |  |            | 1,637 |            |  |   | (88  | ) |  |   | 653,573 | 
|Equity securities               |  |           | 1,153   |            |  |            | 1,037 |            |  |   |     |   |  |   | 2,190   | 
|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|                                |  | $         | 870,608 |            |  | $          | 4,930 |            |  | $ | (130 | ) |  | $ | 875,408 | 
|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 

|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|------------------------------- |  | --------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | ---- | - |  | - | ------- | 
|                                |  | Purchase/ |         | Gross      |  | Gross      |       |           
|                                |  | Amortized |         | Unrealized |  | Unrealized |       | Aggregate 
|2000                            |  | Cost      |         | Gains      |  | Losses     |       | Fair Value
|                                |  |           |         |            |  |            |       |           
|U.S. Government debt securities |  | $         | 180,523 |            |  | $          | 1,185 |            |  | $ | (63  | ) |  | $ | 181,645 | 
|Municipal debt securities       |  |           | 36,882  |            |  |            | 25    |            |  |   | (68  | ) |  |   | 36,839  | 
|Corporate debt securities       |  |           | 354,133 |            |  |            | 479   |            |  |   | (180 | ) |  |   | 354,432 | 
|Equity securities               |  |           | 14,548  |            |  |            | 1,472 |            |  |   |     |   |  |   | 16,020  | 
|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|                                |  | $         | 586,086 |            |  | $          | 3,161 |            |  | $ | (311 | ) |  | $ | 588,936 | 
|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 

At December 31, 2001 and 2000, all
marketable debt securities had scheduled maturities of less than
three years. Marketable debt securities totaling
$545.3 million in 2001, and $170.3 million in 2000,
have maturities of less than 3 months and are classified as
cash equivalents.

The following table summarizes the components of
the cash and cash equivalents balance at December 31 (in
thousands):

|                                                                       |  |      |         |      |  |   |         | 
|---------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                       |  | 2001 |         | 2000
|                                                                       |  |      |         |     
|Cash and money market funds, at cost which
    approximates fair value |  | $    | 394,551 |      |  | $ | 201,151 | 
|Corporate debt securities, primarily commercial
    paper              |  |      | 218,281 |      |  |   | 74,388  | 
|                                                                       |  |      |         |      |  |   |         | 
|Total cash and cash
    equivalents                                    |  | $    | 612,832 |      |  | $ | 275,539 | 
|                                                                       |  |      |         |      |  |   |         | 

The following table summarizes the gross realized
gains (losses) for the years ending December 31 (in
thousands):

|                             |  |      |       |      |  |      |        |   |  |   |        |  
|---------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                             |  | 2001 |       | 2000 |  | 1999
|                             |  |      |       |      |  |     
|Realized gains               |  | $    | 7,921 |      |  | $    | 40,634 |   |  | $ |       |  
|Realized losses              |  |      | (641  | )    |  |      | (273   | ) |  |   | (6,145 | )
|                             |  |      |       |      |  |      |        |   |  |   |        |  
|Net realized gain
    (loss) |  | $    | 7,280 |      |  | $    | 40,361 |   |  | $ | (6,145 | )
|                             |  |      |       |      |  |      |        |   |  |   |        |  

6.     Derivatives

The Company conducts business globally. As a
result, it is exposed to movements in foreign currency exchange
rates. The Company enters into forward exchange contracts to
reduce exposures associated with nonfunctional currency accounts
receivable and accounts payable denominated in Euros, Canadian
and Australian dollars and several European currencies. The
forward contracts range from one to three months in original
maturity. In general, the Company does not hedge anticipated
foreign currency cash flows nor does

73



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Company enter into forward contracts for
trading purposes. The Company does not use any derivatives for
trading or speculative purposes.

The forward contracts do not qualify for hedge
accounting and accordingly are marked to market at the end of
each reporting period with any unrealized gain or loss being
recognized in the statement of operations.

The forward contracts outstanding and their
unrealized gains (losses) are presented below as of
December 31 (in thousands):

|                          |  |            |     |                |  |   |     | 
|------------------------- |  | ---------- | --- | -------------- |  | - | --- | 
|                          |  |           
|                          |  | 2001      
|                          |  |           
|                          |  | Fair Value |     | Carrying Value
|                          |  |            |     |               
|Australian Dollar         |  | $          | 5   |                |  | $ | 5   | 
|Canadian Dollar           |  |            | 7   |                |  |   | 7   | 
|Other European Currencies |  |            | 90  |                |  |   | 90  | 
|                          |  |            |     |                |  |   |     | 
|                          |  | $          | 102 |                |  | $ | 102 | 
|                          |  |            |     |                |  |   |     | 

|                          |  |            |     |                |  |   |     |  
|------------------------- |  | ---------- | --- | -------------- |  | - | --- | -
|                          |  |           
|                          |  | 2000      
|                          |  |           
|                          |  | Fair Value |     | Carrying Value
|                          |  |            |     |               
|Australian Dollar         |  | $          | (8  | )              |  | $ | (8  | )
|Canadian Dollar           |  |            | 27  |                |  |   | 27  |  
|Euro                      |  |            | (50 | )              |  |   | (50 | )
|Other European Currencies |  |            | (1  | )              |  |   | (1  | )
|                          |  |            |     |                |  |   |     |  
|                          |  | $          | (32 | )              |  | $ | (32 | )
|                          |  |            |     |                |  |   |     |  

The carrying value is based on the fair value of
the underlying contracts based on quoted market values.

74



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7.     Balance Sheet
Detail (in thousands):

|                                  |                                                                              |              |          |          |   |   |          |          |  
|--------------------------------- | ---------------------------------------------------------------------------- | ------------ | -------- | -------- | - | - | -------- | -------- | -
|                                  |                                                                              |             
|                                  |                                                                              | December 31,
|                                  |                                                                              |             
|                                  |                                                                              | 2001         |          | 2000    
|                                  |                                                                              |              |          |         
|Fixed assets:                     |                                                                              |              |          |          |   |   |          |         
|                                  | Furniture and fixtures (useful lives of
    5 years)                         |              | $        | 20,580   |   |   | $        | 18,837   |  
|                                  | Computers and equipment (useful lives of
    3 years)                        |              |          | 143,210  |   |   |          | 145,558  |  
|                                  | Leasehold improvements (shorter of 5 years
    or the term of the lease)     |              |          | 21,360   |   |   |          | 20,068   |  
|                                  |                                                                              |              |          |          |   |   |          |         
|                                  |                                                                              |              | 185,150  |          |   |   | 184,463  |         
|                                  |                                                                              |              |          |          |   |   |          |         
|                                  | Accumulated depreciation furniture and fixtures                              |              |          | (13,541  | ) |   |          | (10,840  | )
|                                  | Accumulated depreciation computers and equipment                             |              |          | (100,009 | ) |   |          | (93,321  | )
|                                  | Accumulated depreciation leasehold improvements                              |              |          | (7,560   | ) |   |          | (4,803   | )
|                                  |                                                                              |              |          |          |   |   |          |         
|                                  |                                                                              |              | (121,110 | )        |   |   | (108,964 | )       
|                                  |                                                                              |              |          |          |   |   |          |         
|                                  |                                                                              | $            | 64,040   |          |   | $ | 75,499   |         
|                                  |                                                                              |              |          |          |   |   |          |         
|Land                              |                                                                              | $            | 4,414    |          |   | $ |         |         
|                                  |                                                                              |              |          |          |   |   |          |         
|Intangibles assets:               |                                                                              |              |          |          |   |   |          |         
|                                  | Goodwill (useful lives of 4 to 8 years)                                      |              | $        | 357,842  |   |   | $        | 343,029  |  
|                                  | Purchased technology (useful lives of 4 to
    5 years)                      |              |          | 43,954   |   |   |          | 43,636   |  
|                                  | Trademarks, patents and other intangibles (useful
    lives of 4 to 5 years) |              |          | 48,351   |   |   |          | 36,551   |  
|                                  |                                                                              |              |          |          |   |   |          |         
|                                  |                                                                              |              | 450,147  |          |   |   | 423,216  |         
|                                  |                                                                              |              |          |          |   |   |          |         
|                                  | Accumulated amortization of goodwill                                         |              |          | (200,912 | ) |   |          | (149,309 | )
|                                  | Accumulated amortization of purchased technology                             |              |          | (40,050  | ) |   |          | (36,077  | )
|                                  | Accumulated amortization of trademarks, patents
    and other intangibles    |              |          | (24,131  | ) |   |          | (17,575  | )
|                                  |                                                                              |              |          |          |   |   |          |         
|                                  |                                                                              |              | (265,093 | )        |   |   | (202,961 | )       
|                                  |                                                                              |              |          |          |   |   |          |         
|                                  |                                                                              | $            | 185,054  |          |   | $ | 220,255  |         
|                                  |                                                                              |              |          |          |   |   |          |         
|Accrued liabilities, as restated: |                                                                              |              |          |          |   |   |          |         
|                                  | Accrued taxes                                                                |              | $        | 156,949  |   |   | $        | 146,365  |  
|                                  | Accrued compensation                                                         |              |          | 52,050   |   |   |          | 36,649   |  
|                                  | Accrued marketing costs                                                      |              |          | 11,035   |   |   |          | 22,899   |  
|                                  | Accrued inventory costs                                                      |              |          | 6,377    |   |   |          | 6,830    |  
|                                  | Accrued legal and accounting fees                                            |              |          | 7,988    |   |   |          | 6,670    |  
|                                  | Other accrued expenses                                                       |              |          | 59,184   |   |   |          | 34,869   |  
|                                  |                                                                              |              |          |          |   |   |          |         
|                                  |                                                                              | $            | 293,583  |          |   | $ | 254,282  |         
|                                  |                                                                              |              |          |          |   |   |          |         

Depreciation expense for 2001, 2000 and 1999 was
$43.9 million, $23.8 million and $23.1 million,
respectively. Amortization expense was $64.2 million,
$66.3 million and $58.4 million for 2001, 2000 and
1999, respectively.

75



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Restructuring

On October 9, 2001, the board of directors
of the Company approved a plan to integrate certain activities
of the Companys PGP product group into its McAfee and
Sniffer product groups and dispose of other product lines. In
connection with this process, the Company recorded a
restructuring charge of approximately $3.8 million during
the fourth quarter of 2001. The restructuring charge consists of
the costs related to severance packages for 100 affected
employees, of which 79 were employed in the United States, 16 in
EMEA, 3 in Japan, and 2 in Latin America.

The following table sets forth the Companys
restructuring accrual established in 2001 and the activity
against the accrual during 2001 (in thousands):

|                           |  |       |      |              |  |              |        |       |  |   |      |   |  |   |        |  
|-------------------------- |  | ----- | ---- | ------------ |  | ------------ | ------ | ----- |  | - | ---- | - |  | - | ------ | -
|                           |  |       |      |              |  | Non-cash     |        |      
|                           |  |       |      |              |  | Stock Based  |        |      
|                           |  | Other |      | Severance    |  | Compensation |        |      
|                           |  | Costs |      | and Benefits |  | Charge       |        | Total
|                           |  |       |      |              |  |              |        |      
|Balance, October 9, 2001   |  | $     | 116  |              |  | $            | 3,186  |       |  | $ | 519  |   |  | $ | 3,821  |  
|Paid out/non-cash          |  |       | (116 | )            |  |              | (3,186 | )     |  |   | (519 | ) |  |   | (3,821 | )
|                           |  |       |      |              |  |              |        |       |  |   |      |   |  |   |        |  
|Balance, December 31, 2001 |  | $     |     |              |  | $            |       |       |  | $ |     |   |  | $ |       |  
|                           |  |       |      |              |  |              |        |       |  |   |      |   |  |   |        |  

Severance and other benefits and other
transaction costs were paid in cash during 2001.

9.     Commitments

Leases

The Company leases its operating facilities under
non-cancelable operating leases, which expire at various times
ranging from the year 2002 through 2017. A description of the
Companys significant operating leases is as follows:

|                        |                            |              |                                  |                |  |      |               |      | 
|----------------------- | -------------------------- | ------------ | -------------------------------- | -------------- |  | ---- | ------------- | ---- | 
|                        |                            | Lease Expiry |                                  | Renewal Option
|                        |                            |              |                                  |               
|Corporate Headquarters, |                            |              |                                  |                |  |      |               |     
|                        | Santa Clara, California    |              |                                  | March 2013     |  |      |               | none | 
|Dallas, Texas           |                            |              | February 2003                    |                |  |      | 5 year period |     
|Slough, England         |                            |              | December 2017                    |                |  |      | none          |     
|European Headquarters,  |                            |              |                                  |                |  |      |               |     
|                        | Amsterdam, The Netherlands |              | Various dates through April 2007 |                |  | none |              
|Tokyo, Japan            |                            |              | February 2004                    |                |  |      | none          |     

In addition, the Company has leased certain
equipment with various lease expiration dates through 2005.

Future minimum payments under non cancelable
operating leases are as follows as of December 31 (in
thousands):

|                    |  |   |         | 
|------------------- |  | - | ------- | 
|2002                |  | $ | 20,550  | 
|2003                |  |   | 14,924  | 
|2004                |  |   | 12,673  | 
|2005                |  |   | 11,802  | 
|2006                |  |   | 10,296  | 
|2007 and thereafter |  |   | 61,606  | 
|                    |  |   |         | 
|                    |  | $ | 131,851 | 
|                    |  |   |         | 

76



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Rent expense for 2001, 2000 and 1999 amounted to
$ 25.5 million, $18.4 million and $15.1 million,
respectively. Future rental income to be received under
non-cancelable subleases amounted to $1.5 million as of
December 31, 2001. Rental income from subleases for 2001,
2000 and 1999 amounted to $3.3 million, $5.6 million
and $5.7 million, respectively.

10.     Convertible
Debt

Convertible debt comprises the following amounts
as of December 31 (in thousands):

|                                                             |                      |                        |         |          |         |  |         |          |         | 
|------------------------------------------------------------ | -------------------- | ---------------------- | ------- | -------- | ------- |  | ------- | -------- | ------- | 
|                                                             |                      | 2001                   |         | 2000    
|                                                             |                      |                        |         |         
|Zero Coupon Convertible Subordinated Debentures
    due 2018 |                      |                        |         |          |         |  |         |         
|                                                             | Face Value           |                        | $       | 498,500  |         |  | $       | 885,500  |        
|                                                             | Unamortized Discount |                        |         | (264,650 | )       |  |         | (489,164 | )      
|                                                             |                      |                        |         |          |         |  |         |         
|                                                             |                      |                        | 233,850 |          |         |  | 396,336 |         
|                                                             |                      |                        |         |          |         |  |         |         
|5.25% Convertible Subordinated Notes due 2006                |                      |                        |         |          |         |  |         |         
|                                                             | Face Value           |                        |         | 345,000  |         |  |         |         |        
|                                                             | Unamortized Discount |                        |         |         |         |  |         |         |        
|                                                             |                      |                        |         |          |         |  |         |         
|                                                             |                      |                        | 345,000 |          |         |  |        |         
|                                                             |                      |                        |         |          |         |  |         |         
|                                                             |                      | Total convertible debt |         | $        | 578,850 |  |         | $        | 396,336 | 
|                                                             |                      |                        |         |          |         |  |         |         

Zero Coupon
Convertible Debentures due 2018

On February 13, 1998, the Company completed
a private placement of zero coupon convertible subordinated
debentures due in 2018 (the Debentures). The
Debentures, with an aggregate face amount at maturity of
$885.5 million, generated net proceeds to the Company of
approximately $337.6 million. The initial price to the
public for the debentures was $391.06 per $1,000 of face amount
at maturity, which equates to a yield to maturity over the term
of the Debentures of 4.75% (on a semi-annual Debentures
equivalent basis).

The Debentures are convertible into common stock
at the rate of 8.538 shares per $1,000 of face amount at
maturity, which equates to an initial conversion price of $45.80
per share. The Debentures are subordinated in right of payment
to all existing and future Senior Indebtedness (as defined in
the related indenture) and effectively subordinated in right of
payment to all indebtedness and other liabilities of the
Companys subsidiaries. The Debentures may be redeemed for
cash at the option of the Company beginning on February 13,
2003. At the option of the holder, the Company will purchase the
Debentures on February 13, 2003, February 13, 2008 and
February 13, 2013 at purchase prices (to be paid in cash or
common stock or any combination thereof, at the election of the
Company and subject to certain conditions) equal to the initial
issue price plus the accretion of the discount on the Debentures
to such dates. The Debentures may also be redeemed at the option
of the holder if there is a Fundamental Change (as defined in
the related indenture) at a price equal to the issue price plus
the accretion of the discount on the debenture to the date of
redemption, subject to adjustment. The accretion of the discount
on the Debentures is calculated using the effective interest
method.

In 2001, the Company redeemed Debentures, which
had an aggregate face amount at maturity of $387.0 million,
at a net price of $173.7 million, which was financed from
the Companys investment portfolio. In connection with the
redemption, the Company recognized an extraordinary gain of
approximately $1.7 million, net of approximately
$1.2 million in taxes. The gain was calculated as the
difference between the accreted value of the debt, net of
unamortized issuance costs, and the cost of redemption.

77



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 31, 2001, the Companys
aggregate cash, cash equivalents and marketable securities were
approximately $943.0 million, including $102.5 million
held by McAfee.com. Assuming that as of February 13, 2003
all currently outstanding zero coupon convertible subordinated
debentures are redeemed, the aggregate redemption price would
equal approximately $246.5 million.

5.25%
Convertible Subordinated Note due 2006

On August 17, 2001, the Company issued 5.25%
convertible subordinated notes (Notes) due 2006 with
an aggregate principal amount of $345.0 million. The
issuance generated net proceeds (after deducting fees and
expenses) of approximately $335.1 million. The amortization
of the issuance costs related to the Notes is calculated using
the effective interest method. The Notes mature on
August 15, 2006, unless earlier redeemed by the Company at
its option or converted at the holders option. Interest is
payable in cash semi-annually in arrears on February 15 and
August 15 of each year, commencing February 15, 2002.
At the option of the holder, Notes may be converted into the
Companys common stock at any time, unless previously
redeemed, at a conversion price of $18.07 per share. The Notes
may also be redeemed at the option of the holder in the event of
a Change of Control (as defined in the related indenture). The
Company may redeem all or a portion of the Notes for cash at any
time on or after August 20, 2004 at a redemption price of
101.3125% of the principal amount, between August 20, 2004
and August 14, 2005 and 100.0% of the principal amount
after August 14, 2005. The Notes are unsecured and are
subordinated to all existing and future Senior Indebtedness (as
defined in the related indenture), and are pari passu with
respect to the Debentures.

Aggregate maturities of the value of the
long-term debt outstanding at December 31, 2001 are as
follows (in thousands):

|                    |  |             |         |              |  |       |         |  |  |   |         | 
|------------------- |  | ----------- | ------- | ------------ |  | ----- | ------- |  |  | - | ------- | 
|                    |  |             |         | 5.25%        |  |      
|                    |  | Zero Coupon |         | Convertible  |  |      
|                    |  | Convertible |         | Subordinated |  |      
|                    |  | Debentures  |         | Notes due    |  |      
|                    |  | due 2018(1) |         | 2006(2)      |  | Total
|                    |  |             |         |              |  |      
|2002                |  | $           |        |              |  | $     |        |  |  | $ |        | 
|2003                |  |             | 246,501 |              |  |       |        |  |  |   | 246,501 | 
|2004                |  |             |        |              |  |       |        |  |  |   |        | 
|2005                |  |             |        |              |  |       |        |  |  |   |        | 
|2006                |  |             |        |              |  |       | 345,000 |  |  |   | 345,000 | 
|2007 and thereafter |  |             |        |              |  |       |        |  |  |   |        | 
|                    |  |             |         |              |  |       |         |  |  |   |         | 
|                    |  | $           | 246,501 |              |  | $     | 345,000 |  |  | $ | 591,501 | 
|                    |  |             |         |              |  |       |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In February 2003, the Company may be required to
    use a significant portion of its cash balance to redeem its
    outstanding Debentures. The redemption value corresponds to the
    aggregate face value outstanding of $498.5 million less the
    related unamortized discount of $252.0 million on
    February 13, 2003.
|   
|(2) | In 2002, 2003, 2004, 2005 and 2006, the Company
    will make interest payments of $18.1 million.                                                                                                                                                                                                                                

The fair value of the Companys long-term
debt outstanding is as follows (in thousands):

|                                              |  |                    |         |      |  |   |         | 
|--------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | 
|                                              |  |                   
|                                              |  | As of December 31,
|                                              |  |                   
|                                              |  | 2001               |         | 2000
|                                              |  |                    |         |     
|Zero Coupon Convertible Debentures due 2018   |  | $                  | 228,587 |      |  | $ | 318,178 | 
|5.25% Convertible Subordinated Notes due 2006 |  |                    | 567,111 |      |  |   |        | 
|                                              |  |                    |         |      |  |   |         | 
|                                              |  | $                  | 795,698 |      |  | $ | 318,178 | 
|                                              |  |                    |         |      |  |   |         | 

78



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11.     Employee
Benefit Plans

Company
401(k) and Profit Sharing Plan

The Companys 401(k) and Profit Sharing Plan
cover substantially all Company full-time employees, including
McAfee.com employees. Under the Companys 401(k) and Profit
Sharing Plans, the board of directors, at its discretion, can
match employee contributions in an amount not to exceed 20% of
total compensation. Annual amounts contributed by the Company
under the plan are $4.5 million, $4.2 million and
$2.9 million in 2001, 2000 and 1999, respectively.

Company
Employee Stock Purchase Plan

Under the 1994 Employee Qualified Stock Purchase
Plan (the 1994 ESPP), the Company may grant stock
purchase rights to all eligible employees during one year
offering periods with exercise dates approximately every six
months (beginning each August and February). The Company has
reserved 3.8 million shares of common stock for issuance
under the plan. Shares are purchased through employees
payroll deductions at exercise prices equal to 85% of the lesser
of the fair value of the Companys common stock at either
the first day of an offering period or the last day of such
offering period. No participant may purchase more than $25,000
worth of common stock in any one calendar year.

As of December 31, 2001 the Company expects
that there will be a shortfall in the number of shares available
to meet the requirements of open purchase periods. Accordingly,
the Company expects to reduce by a pro rata amount the shares
available for purchase by plan participants for the purchase
period ending January 31, 2002.

McAfee.com
Employee Stock Purchase Plan

In September 1999, McAfee.coms board of
directors adopted McAfee.coms Employee Stock Purchase Plan
(the 1999 Purchase Plan). A total of 500,000 shares
of McAfee.com Class A common stock have been reserved for
issuance under the 1999 Purchase Plan, plus annual increases
equal to the lesser of: (a) 1.0 million shares; (b) 3%
of McAfee.coms outstanding shares on such date; or
(c) an amount determined by McAfee.coms board of
directors. All McAfee.com full-time employees are eligible to
participate in the 1999 Purchase Plan. The 1999 Purchase Plan is
comprised of two year offering periods with exercise dates
approximately every six months (beginning each August and
February), with the exception of the first offering period,
which commenced on December 2, 1999, with the first
exercise date on January 31, 2000. Shares are purchased
through McAfee.com employees payroll deductions at
exercise prices equal to 85% of the lesser of the fair market
value of McAfee.coms Class A common stock at either
the first day of an offering period or the last day of such
offering period. No participant may purchase more than $25,000
worth of Class A common stock in any one calendar year and
the maximum number of shares a participant may purchase during a
single purchase period is 2,500 shares. Purchase periods occur
twice yearly and each offering effectively contains a 6, 12, 18
and 24-month option. In 2001, 128,000 shares were issued under
the 1999 Purchase Plan at weighted average purchase price of
$5.30. At December 31, 2001, 2.2 million shares were
reserved for future issuance under the 1999 Purchase Plan.

12.     McAfee.com

McAfee.com is a security ASP delivering security
applications software and related services through an Internet
browser. The McAfee.com applications allow users to detect and
eliminate viruses on their PCs, repair their PCs from damage
caused by viruses, optimize their hard drives and update their
PCs virus protection system with current software patches
and upgrades. McAfee.com also offers customers access to
McAfee.com Personal Firewall, McAfee.com Wireless Security
Center and McAfee.com Internet Privacy Service.

79



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the terms of the Companys license
agreement with McAfee.com, McAfee.coms business has
historically been targeted exclusively at consumers. In March
2001, the Company entered into a reseller agreement with
McAfee.com allowing it to expand its product offerings with
McAfee.com for Business. McAfee.com for Business is a new
website serving the security needs for small and medium-sized
businesses delivering managed applications services that allow
businesses to provide anti-virus and firewall security for their
desktop PCs.

As of December 31, 2001, the Company owned
36.0 million shares of McAfee.com Class B common
stock, entitled to three votes per share and representing
approximately 76% of McAfee.coms outstanding common stock
and 90% of its total voting power.

The Company accounts for transactions involving
the issuance by McAfee.com of its stock as capital transactions
and include its portion of the proceeds of issuance in
Additional Paid in Capital.

13.     Stockholders
Equity

Preferred
Stock

The Company has authorized 5.0 million
shares of preferred stock, par value $0.01 per share. The
Companys board of directors has authority to provide for
the issuance of the shares of preferred stock in series, to
establish from time to time the number of shares to be included
in each such series and to fix the designation, powers,
preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof, without any
further vote or action by the shareholders.

At December 31, 1998, there was one share of
Series A preferred stock outstanding, which was issued in
connection with the 1996 acquisition of FSA. The share of
Series A preferred stock had no preferential rights other
than the right to cast a number of votes equal to the number of
common shares issuable in exchange for certain exchangeable non
voting shares of FSA. During 1999, that single preferred share
was converted into 437,589 of the Companys common stock.
At December 31, 2001, there was no preferred stock
outstanding.

Company Stock
Option Plans

Under the amended 1997 Plan, the Company has
reserved 16.5 million shares for issuance to employees,
officers, directors, third party contractors and consultants.
The plan provides for an option price no less than 100% of the
fair value of the Companys common stock on the date of
grant for incentive stock options granted to employees and
officers (including directors who are also employees) or 85% of
the fair value on the date of grant for all others. The options
may be exercisable immediately, or over time, but generally
become exercisable 25% one year after commencing employment or
from date of grant and thereafter in monthly increments over
three years. All options under the option plan expire ten years
after grant.

Under the Stock Option Plan for Outside
Directors, the Company has reserved 1.1 million shares of
its common stock for issuance to certain members of its board of
directors who are not employees of the Company or any affiliated
corporation. The plan provides for an option price at fair value
of the Companys common stock on the date of grant. The
initial grant to each outside director generally vests ratably
over a three year period. Subsequent option grants will become
exercisable after three years from the date of grant. All
options under the option plan expire ten years after grant.

In December 1999, the board of directors approved
the 2000 Nonstatutory Stock Option Plan. Under the plan, as
amended in January 2001, the Company has reserved
8.5 million shares of its common stock for issuance to
employees, officers, directors, third party contracts and
consultants. The plan provides for an option price at fair value
of the Companys common stock on the date of grant. The
options become exercisable over a period of four years: 25% vest
one year from the date of grant and the remaining become
exercisable ratably in monthly increments over three years. All
options under the option plan expire ten years after grant.

80



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Aggregate activity under the Companys stock
option plans is as follows (in thousands, except per share data):

|                            |  |                  |         |                     |  |                 |         |                 |  |       |                 |  |  |   |          |   |  |   |       | 
|--------------------------- |  | ---------------- | ------- | ------------------- |  | --------------- | ------- | --------------- |  | ----- | --------------- |  |  | - | -------- | - |  | - | ----- | 
|                            |  |                  |         |                    
|                            |  |                  |         | Outstanding Options
|                            |  |                  |         |                    
|                            |  |                  |         |                     |  | Weighted       
|                            |  |                  |         |                     |  | Average        
|                            |  | Shares Available |         | Number of           |  |                 |         | Exercise       
|                            |  | For Grant        |         | Shares              |  | Price Per Share |         | Aggregate Price |  | Price
|                            |  |                  |         |                     |  |                 |         |                 |  |      
|Balances, December 31, 1998 |  |                  | 2,283   |                     |  |                 | 19,320  |                 |  | $     | 0.06 - $121.80  |  |  | $ | 584,154  |   |  | $ | 30.24 | 
|Additional options reserved |  |                  | 9,200   |                     |  |                 |        |                 |  |       |                 |  |  |   |         |   |  |   |      | 
|Options granted             |  |                  | (16,882 | )                   |  |                 | 16,882  |                 |  | $     | 11.00 - $ 56.00 |  |  |   | 242,970  |   |  | $ | 14.39 | 
|Options exercised           |  |                  |        |                     |  |                 | (1,196  | )               |  | $     | 0.06 - $ 44.00  |  |  |   | (18,414  | ) |  | $ | 15.40 | 
|Options canceled            |  |                  | 14,922  |                     |  |                 | (14,922 | )               |  | $     | 0.48 - $121.80  |  |  |   | (482,452 | ) |  | $ | 32.33 | 
|                            |  |                  |         |                     |  |                 |         |                 |  |       |                 |  |  |   |          |   |  |   |       | 
|Balances, December 31, 1999 |  |                  | 9,523   |                     |  |                 | 20,084  |                 |  | $     | 0.06 - $ 56.00  |  |  |   | 326,258  |   |  | $ | 16.24 | 
|Additional options reserved |  |                  | 6,000   |                     |  |                 |        |                 |  |       |                 |  |  |   |         |   |  |   |      | 
|Option plan expirations     |  |                  | (1,808  | )                   |  |                 |        |                 |  |       |                 |  |  |   |         |   |  |   |      | 
|Options granted             |  |                  | (8,478  | )                   |  |                 | 8,478   |                 |  | $     | 3.31 - $ 36.69  |  |  |   | 184,852  |   |  | $ | 21.80 | 
|Options exercised           |  |                  |        |                     |  |                 | (3,036  | )               |  | $     | 0.48 - $ 28.17  |  |  |   | (32,296  | ) |  | $ | 10.64 | 
|Options canceled            |  |                  | 5,272   |                     |  |                 | (5,272  | )               |  | $     | 0.65 - $ 56.00  |  |  |   | (100,372 | ) |  | $ | 19.04 | 
|                            |  |                  |         |                     |  |                 |         |                 |  |       |                 |  |  |   |          |   |  |   |       | 
|Balances, December 31, 2000 |  |                  | 10,509  |                     |  |                 | 20,254  |                 |  | $     | 0.23 - $ 44.58  |  |  |   | 378,442  |   |  | $ | 18.68 | 
|Additional options reserved |  |                  | 13,500  |                     |  |                 |        |                 |  |       |                 |  |  |   |         |   |  |   |      | 
|Option plan expirations     |  |                  | (155    | )                   |  |                 |        |                 |  |       |                 |  |  |   |         |   |  |   |      | 
|Options granted             |  |                  | (18,487 | )                   |  |                 | 18,487  |                 |  | $     | 0.01 - $ 27.20  |  |  |   | 127,401  |   |  | $ | 6.89  | 
|Options exercised           |  |                  |        |                     |  |                 | (3,233  | )               |  | $     | 0.01 - $ 24.50  |  |  |   | (29,444  | ) |  | $ | 9.11  | 
|Options canceled            |  |                  | 3,737   |                     |  |                 | (3,737  | )               |  | $     | 4.19 - $ 44.50  |  |  |   | (54,906  | ) |  | $ | 14.69 | 
|                            |  |                  |         |                     |  |                 |         |                 |  |       |                 |  |  |   |          |   |  |   |       | 
|Balances, December 31, 2001 |  |                  | 9,104   |                     |  |                 | 31,771  |                 |  | $     | 0.23 - $ 48.72  |  |  | $ | 421,493  |   |  | $ | 13.27 | 
|                            |  |                  |         |                     |  |                 |         |                 |  |       |                 |  |  |   |          |   |  |   |       | 

At December 31, 2001, approximately
10.9 million options to purchase common stock of the
Company were exercisable at an average exercise price of $20.01.
During 2001, the Company used approximately 3.2 million
shares of treasury stock to fulfill employee option exercises
and shares issued under the employee stock purchase plan.

At December 31, 2000, approximately
9.2 million outstanding options to purchase common stock of
the Company were exercisable at an average exercise price of
$17.93. During 2000, the Company used approximately
3.7 million shares of treasury stock to fulfill employee
option exercises and shares issued under the employee stock
purchase plan.

At December 31, 1999, approximately
8.1 million outstanding options to purchase common stock of
the Company were exercisable at an average exercise price of
$16.98.

81



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For various price ranges, weighted average
characteristics of outstanding stock options of the Company at
December 31, 2001 were as follows (in thousands, except per
share data):

|                |                |                     |  |                     |           |          |  |             |     |          |  |   |       |  |  |  |        |  |  |   |       | 
|--------------- | -------------- | ------------------- |  | ------------------- | --------- | -------- |  | ----------- | --- | -------- |  | - | ----- |  |  |  | ------ |  |  | - | ----- | 
|                |                |                     |  |                     |           |         
|                |                | Options Outstanding |  |                    
|                |                |                     |  | Options Exercisable
|                |                |                     |  | Weighted            |           |          |  |            
|                |                |                     |  | Average             |           | Weighted |  |             |     | Weighted
|                |                |                     |  | Remaining           |           | Average  |  |             |     | Average 
|Range of        |                | Number              |  | Contractual         |           | Exercise |  | Number      |     | Exercise
|Exercise Prices |                | Outstanding         |  | Life (Yrs)          |           | Price    |  | Exercisable |     | Price   
|                |                |                     |  |                     |           |          |  |             |     |         
|                | $ 0.01  $12.  |                     |  |                     | 18 18,005 |          |  |             | 8.3 |          |  | $ | 6.21  |  |  |  | 3,643  |  |  | $ | 9.83  | 
|                | $12.19  $24.3 |                     |  |                     | 6 7,130   |          |  |             | 8.5 |          |  | $ | 17.76 |  |  |  | 2,179  |  |  | $ | 18.09 | 
|                | $24.37  $36.5 |                     |  |                     | 4 6,422   |          |  |             | 4.2 |          |  | $ | 27.67 |  |  |  | 4,920  |  |  | $ | 27.59 | 
|                | $36.55  $48.7 |                     |  |                     | 2 214     |          |  |             | 6.4 |          |  | $ | 42.95 |  |  |  | 172    |  |  | $ | 43.00 | 
|                |                |                     |  |                     |           |          |  |             |     |          |  |   |       |  |  |  |        |  |  |   |       | 
|                |                |                     |  |                     | 31,771    |          |  |             |     |          |  |   |       |  |  |  | 10,914 |  |  |   |       | 
|                |                |                     |  |                     |           |          |  |             |     |          |  |   |       |  |  |  |        |  |  |   |       | 

McAfee.com
Stock Option Plans

In January 1999, the McAfee.coms board of
directors approved the 1999 Stock Plan (the McAfee
Plan), as amended June 19, 1999. Under the McAfee
Plan, McAfee.com has reserved 10.9 million shares of its
Class A common stock for issuance to employees, officers,
directors and consultants. The McAfee Plan also provides for
automatic annual increases to be added at the annual
stockholders meeting, equal to the lower of:
(a) 2.5 million shares of Class A common stock,
(b) 5% of the outstanding shares of all Class A common
stock on that date, or (c) an amount determined by the
McAfee.coms board of directors. The McAfee Plan provides
for an option price no less than 100% of the fair market value
of McAfee.coms common stock on the date of grant for
incentive stock options granted to employees and officers
(including directors who are also employees) or 85% of the fair
market value on the date of grant for all others. The options
may be exercisable immediately, or become exercisable over time,
generally 25% one year after commencing employment or from date
of grants and thereafter in monthly increments over three years.
All options under the McAfee Plan expire ten years after grant.
Unvested options on termination of employment are canceled and
returned to the McAfee Plan.

In September 1999, McAfee.com adopted the 1999
Director Option Plan. McAfee.com has reserved 150,000 shares of
its Class A common stock for issuance under the plan to
certain members of its board of directors who are not employees
of McAfee.com or any affiliated corporation. Under this plan the
number of shares reserved will automatically increase at the
date of the McAfee.com Annual Stockholders Meeting by the
number of shares required to restore the reserve available for
new options to 150,000 shares. Each outside director will
automatically be granted an option to purchase 40,000 shares of
McAfee.coms Class A common stock on the date at which
they become a director. Each anniversary thereafter, each
outside director will automatically be granted an option to
purchase 10,000 shares of McAfee.coms Class A common
stock. Both the initial and subsequent grants become exercisable
at a rate of 25% after one year and  1/48 each month
thereafter. All options under granted expire ten years after
grant. Unvested options on termination of employment are
canceled and returned to the Director Option Plan. Aggregate
activity under the McAfee.com stock option plans is as follows
(in thousands, except per share data):

82



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                   |  |                     |        |           |  |                 |        |           |  |          |               |  |  |   |         |   |  |   |       | 
|-------------------------------------------------- |  | ------------------- | ------ | --------- |  | --------------- | ------ | --------- |  | -------- | ------------- |  |  | - | ------- | - |  | - | ----- | 
|                                                   |  |                    
|                                                   |  | Outstanding Options
|                                                   |  |                    
|                                                   |  | Shares              |        |           |  | Weighted       
|                                                   |  | Available           |        |           |  | Average        
|                                                   |  | for                 |        | Number of |  |                 |        | Aggregate |  | Exercise
|                                                   |  | Grant               |        | Shares    |  | Price Per Share |        | Price     |  | Price   
|                                                   |  |                     |        |           |  |                 |        |           |  |         
|Balances, Inception                                |  |                     |        |           |  |                 |        |           |  |          |               |  |  |   |         |   |  |   |       | 
|Additional options reserved                        |  |                     | 8,538  |           |  |                 |       |           |  |          |               |  |  | $ |        |   |  |   |       | 
|Options granted  company employees                |  |                     | (3,482 | )         |  |                 | 3,482  |           |  | $        | 3.67  $44.00 |  |  |   | 18,806  |   |  | $ | 5.40  | 
|Options granted  NAI officers and
    employees   |  |                     | (3,809 | )         |  |                 | 3,809  |           |  | $        | 3.67  $12.00 |  |  |   | 15,295  |   |  | $ | 4.02  | 
|Options exercised  company employees              |  |                     |       |           |  |                 |       |           |  |          |               |  |  |   |        |   |  |   |       | 
|Options exercised  NAI officers and
    employees |  |                     |       |           |  |                 | (19    | )         |  |          | $ 6.55        |  |  |   | (123    | ) |  | $ | 6.55  | 
|Options canceled  company employees               |  |                     | 227    |           |  |                 | (227   | )         |  | $        | 4.64  $12.00 |  |  |   | (1,464  | ) |  | $ | 6.46  | 
|Options canceled  NAI officers and
    employees  |  |                     | 1,710  |           |  |                 | (1,710 | )         |  |          | $4.00         |  |  |   | (6,270  | ) |  | $ | 3.67  | 
|                                                   |  |                     |        |           |  |                 |        |           |  |          |               |  |  |   |         |   |  |   |       | 
|Balances, December 31, 1999                        |  |                     | 3,184  |           |  |                 | 5,335  |           |  | $        | 3.67  $44.00 |  |  |   | 26,244  |   |  | $ | 4.92  | 
|Additional options reserved                        |  |                     | 2,335  |           |  |                 |       |           |  |          |               |  |  |   |        |   |  |   |       | 
|Options granted  company employees                |  |                     | (1,295 | )         |  |                 | 1,295  |           |  | $        | 3.13  $50.38 |  |  |   | 24,026  |   |  | $ | 18.55 | 
|Options exercised  company employees              |  |                     |       |           |  |                 | (321   | )         |  | $        | 4.64  $ 6.55 |  |  |   | (1,499  | ) |  | $ | 4.67  | 
|Options exercised  NAI officers and
    employees |  |                     |       |           |  |                 | (384   | )         |  | $        | 3.67  $12.00 |  |  |   | (1,962  | ) |  | $ | 5.11  | 
|Options canceled  company employees               |  |                     | 816    |           |  |                 | (816   | )         |  | $        | 4.64  $50.38 |  |  |   | (10,022 | ) |  | $ | 12.28 | 
|Options canceled  NAI officers and
    employees  |  |                     | 7      |           |  |                 | (7     | )         |  | $        | 6.55  $12.00 |  |  |   | (54     | ) |  | $ | 7.71  | 
|                                                   |  |                     |        |           |  |                 |        |           |  |          |               |  |  |   |         |   |  |   |       | 
|Balances, December 31, 2000                        |  |                     | 5,047  |           |  |                 | 5,102  |           |  | $        | 3.13  $50.38 |  |  |   | 36,733  |   |  | $ | 7.20  | 
|Additional options reserved                        |  |                     | 2,110  |           |  |                 |       |           |  |          |               |  |  |   |        |   |  |   |       | 
|Options granted  company employees                |  |                     | (1,968 | )         |  |                 | 1,968  |           |  | $        | 4.75  $35.13 |  |  |   | 16,593  |   |  | $ | 8.44  | 
|Options exercised  company employees              |  |                     |       |           |  |                 | (833   | )         |  | $        | 3.67  $28.81 |  |  |   | (5,744  | ) |  | $ | 6.89  | 
|Options exercised  NAI officers and
    employees |  |                     |       |           |  |                 | (1,615 | )         |  | $        | 3.67  $12.00 |  |  |   | (6,363  | ) |  | $ | 3.94  | 
|Options canceled  company employees               |  |                     | 769    |           |  |                 | (769   | )         |  | $        | 3.13  $49.06 |  |  |   | (6,408  | ) |  | $ | 8.34  | 
|Options canceled  NAI officers and
    employees  |  |                     | 33     |           |  |                 | (33    | )         |  | $        | 6.55  $12.00 |  |  |   | (234    | ) |  | $ | 7.09  | 
|                                                   |  |                     |        |           |  |                 |        |           |  |          |               |  |  |   |         |   |  |   |       | 
|Balances, December 31, 2001                        |  |                     | 5,991  |           |  |                 | 3,820  |           |  | $        | 3.13  $49.06 |  |  | $ | 34,577  |   |  | $ | 8.58  | 
|                                                   |  |                     |        |           |  |                 |        |           |  |          |               |  |  |   |         |   |  |   |       | 

At December 31, 2001, 2000 and 1999,
approximately 778,000, 2.5 million and 2.1 million
McAfee.com options were exercisable at weighted average exercise
prices per share of $7.22, $4.39 and $4.28.

83



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For various price ranges, weighted average
characteristics of outstanding stock options of McAfee.com at
December 31, 2001 were as follows (in thousands, except per
share data):

|                |                |                     |  |                     |           |          |  |             |      |          |  |   |       |  |  |  |     |  |  |   |       | 
|--------------- | -------------- | ------------------- |  | ------------------- | --------- | -------- |  | ----------- | ---- | -------- |  | - | ----- |  |  |  | --- |  |  | - | ----- | 
|                |                |                     |  |                     |           |         
|                |                | Options Outstanding |  |                    
|                |                |                     |  | Options Exercisable
|                |                |                     |  | Weighted            |           |          |  |            
|                |                |                     |  | Average             |           | Weighted |  |             |      | Weighted
|                |                |                     |  | Remaining           |           | Average  |  |             |      | Average 
|Range of        |                | Number              |  | Contractual         |           | Exercise |  | Number      |      | Exercise
|Exercise Prices |                | Outstanding         |  | Life (Yrs)          |           | Price    |  | Exercisable |      | Price   
|                |                |                     |  |                     |           |          |  |             |      |         
|                | $ 0.01  $ 3   |                     |  |                     | .13 192   |          |  |             | 8.99 |          |  | $ | 3.13  |  |  |  | 48  |  |  | $ | 3.13  | 
|                | $ 3.14  $ 3   |                     |  |                     | .67 704   |          |  |             | 7.04 |          |  | $ | 3.67  |  |  |  | 460 |  |  | $ | 3.67  | 
|                | $ 3.68  $ 4   |                     |  |                     | .64 268   |          |  |             | 7.57 |          |  | $ | 4.64  |  |  |  | 20  |  |  | $ | 4.64  | 
|                | $ 4.65  $ 7   |                     |  |                     | .88 1,518 |          |  |             | 8.76 |          |  | $ | 5.66  |  |  |  | 133 |  |  | $ | 6.74  | 
|                | $ 7.89  $16.  |                     |  |                     | 80 511    |          |  |             | 9.34 |          |  | $ | 12.79 |  |  |  | 17  |  |  | $ | 13.31 | 
|                | $16.81  $25.0 |                     |  |                     | 0 365     |          |  |             | 8.78 |          |  | $ | 21.31 |  |  |  | 72  |  |  | $ | 20.93 | 
|                | $25.01  $48.0 |                     |  |                     | 9 262     |          |  |             | 9.35 |          |  | $ | 29.04 |  |  |  | 28  |  |  | $ | 37.72 | 
|                |                |                     |  |                     |           |          |  |             |      |          |  |   |       |  |  |  |     |  |  |   |       | 
|                |                |                     |  |                     | 3,820     |          |  |             |      |          |  |   |       |  |  |  | 778 |  |  |   |       | 
|                |                |                     |  |                     |           |          |  |             |      |          |  |   |       |  |  |  |     |  |  |   |       | 

Proforma
Stock Compensation Disclosure

The fair value of options granted by the Company
and McAfee.com has been calculated using the Black-Scholes
option pricing model using the multiple option approach. A
typical option grant vests over a four-year period. Parameters
for the option analysis are listed below.

|             |                         |      |  |      |   |      |  |      |   |  |  |      |  
|------------ | ----------------------- | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|             |                         | 2001 |  | 2000 |   | 1999
|             |                         |      |  |      |   |     
|The Company: |                         |      |  |      |   |      |  |      |   |  |  |     
|             | Risk free interest rate |      |  | 4.24 | % |      |  | 6.31 | % |  |  | 5.47 | %
|             | Expected life (years)   |      |  | 4    |   |      |  | 4    |   |  |  | 4    |  
|             | Volatility              |      |  | 0.84 |   |      |  | 0.91 |   |  |  | 0.97 |  
|             | Dividend yield          |      |  |     |   |      |  |     |   |  |  |     |  

The weighted average expected life of the option
grants was estimated based on examination of previously
exercised options over the life of the program. Volatility for
the Company was estimated on a monthly basis since the Company
became public in October of 1992. The average volatility for the
48 month period from January 1998 through December 2001 was
94.6%. The Company has not paid a dividend, and has no plans to
do so.

The weighted average fair value of options
granted by the Company at fair value in 2001, 2000 and 1999 was
$4.86, $16.07 and $10.11, respectively.

The weighted average fair value of options
granted by the Company to employees below fair value during 1999
was $9.52. No options were granted to employees below fair value
during 2001 and 2000.

84



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

McAfee.com:

|                        |  |                    |      |                    |  |      |      |      |  |      |      |      |  |  |      |   |  |  |   |  |  |  |      |  
|----------------------- |  | ------------------ | ---- | ------------------ |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | - |  |  |  | ---- | -
|                        |  |                    |      |                   
|                        |  | Options Granted to |      | Options Granted to
|                        |  | Employees          |      | Non-employees     
|                        |  |                    |      |                   
|                        |  | 2001               |      | 2000               |  | 1999 |      | 2001 |  | 2000 |      | 1999
|                        |  |                    |      |                    |  |      |      |      |  |      |      |     
|Risk free interest rate |  |                    | 4.49 | %                  |  |      | 5.23 | %    |  |      | 5.40 | %    |  |  | 5.25 | % |  |  |  |  |  |  | 5.40 | %
|Expected life (yrs)     |  |                    | 5.0  |                    |  |      | 5.0  |      |  |      | 5.0  |      |  |  | 10.0 |   |  |  |  |  |  |  | 0.9  |  
|Volatility              |  |                    | 167  | %                  |  |      | 201  | %    |  |      | 85   | %    |  |  | 167  | % |  |  |  |  |  |  | 76   | %
|Dividend yield          |  |                    |     |                    |  |      |     |      |  |      |     |      |  |  |     |   |  |  |  |  |  |  |     |  

The weighted average expected life of the option
grants was estimated based on historical exercise patterns. For
1999, volatility for McAfee.com was estimated based on the
weighted average volatility of five public companies in similar
business to McAfee.com. McAfee.com has not paid a dividend and
has no plans to do so.

The weighted average grant date fair value of
options granted by McAfee.com to employees in 2001 and 2000 were
$8.44 and $17.54, respectively.

The Company and McAfee.com have also estimated
the fair value of purchase rights issued under their employee
stock purchase plans. Rights under these plans were also valued
using the Black-Scholes option pricing model. Parameters for the
purchase rights analysis are listed below:

The
Company:

|                        |  |          |            |        |  |          |            |        |  |          |            |        |  |  |            |   |  |  |            |   |  |  |            |  
|----------------------- |  | -------- | ---------- | ------ |  | -------- | ---------- | ------ |  | -------- | ---------- | ------ |  |  | ---------- | - |  |  | ---------- | - |  |  | ---------- | -
|                        |  | February |            | August |  | February |            | August |  | February |            | August
|                        |  | 2001     |            | 2001   |  | 2000     |            | 2000   |  | 1999     |            | 1999  
|                        |  |          |            |        |  |          |            |        |  |          |            |       
|Risk Free Interest Rate |  |          | 4.28       | %      |  |          | 3.08       | %      |  |          | 6.31       | %      |  |  | 6.31       | % |  |  | 4.52       | % |  |  | 5.01       | %
|Expected Life           |  |          | 6, 12 mos. |        |  |          | 6, 12 mos. |        |  |          | 6, 12 mos. |        |  |  | 6, 12 mos. |   |  |  | 6, 12 mos. |   |  |  | 6, 12 mos. |  
|Volatility              |  |          | 0.84       |        |  |          | 0.84       |        |  |          | 0.91       |        |  |  | 0.91       |   |  |  | 0.66       |   |  |  | 0.66       |  
|Dividend Yield          |  |          |           |        |  |          |           |        |  |          |           |        |  |  |           |   |  |  |           |   |  |  |           |  

The weighted average fair value of rights issued
pursuant to the Companys employee stock purchase plans in
2001, 2000, and 1999, was $7.75, $9.44, and $21.43, respectively.

McAfee.com:

|                        |  |      |          |      |  |      |          |   |  |  |          |  
|----------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                        |  | 2001 |          | 2000 |  | 1999
|                        |  |      |          |      |  |     
|Risk free interest rate |  |      | 3.27     | %    |  |      | 6.03     | % |  |  | 5.40     | %
|Expected life (yrs)     |  |      | 6 months |      |  |      | 6 months |   |  |  | 6 months |  
|Volatility              |  |      | 145      | %    |  |      | 201      | % |  |  | 85       | %
|Dividend yield          |  |      |         |      |  |      |         |   |  |  |         |  

The weighted average fair value of rights issued
by McAfee.com pursuant to its employee stock purchase plan in
2001 was $5.30.

85



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For pro forma purposes, the compensation costs
for the 1997 Plan, the Stock Option Plan for Outside Directors,
the 2000 Nonstatutory Stock Option Plan, the 1994 ESPP, the
McAfee Plan, the McAfee Director Option Plan and 1999 Purchase
Plan has been determined based on fair value at the grant date
for awards from 1997 through 2001 consistent with the provisions
of SFAS No. 123, the Companys net loss, basic and
diluted loss per share would have been as follows:

|                                                       |  |      |          |              |  |              |          |   |  |   |          |  
|------------------------------------------------------ |  | ---- | -------- | ------------ |  | ------------ | -------- | - |  | - | -------- | -
|                                                       |  | 2001 |          | 2000         |  | 1999        
|                                                       |  |      |          |              |  |             
|                                                       |  |      |          | (As Restated |  | (As Restated
|                                                       |  |      |          | See Note 3)  |  | See Note 3) 
|Net loss  pro forma (thousands)                       |  | $    | (224,125 | )            |  | $            | (242,518 | ) |  | $ | (203,651 | )
|Net loss per share  basic and
    diluted  pro forma |  | $    | (1.63    | )            |  | $            | (1.76    | ) |  | $ | (1.47    | )

The impact on pro forma loss per share and net
loss in the table above may not be indicative of the effect in
future years as options vest over several years and the Company
continues to grant stock options to new employees. This policy
may or may not continue.

Stock
Repurchase Plan and Put Options

In May 1999, the board of directors authorized
the Company to repurchase up to $100 million of its common
stock in the open market. In July 2000, the board of directors
authorized the Company to repurchase additional common stock of
up to $50.0 million in the open market. Through
December 31, 2001, the Company repurchased 5.0 million
shares of its common stock bringing total cash outlay to date to
approximately $112.9 million. The timing and size of any
future stock repurchases are subject to market conditions, stock
prices, the Companys cash position and other cash
requirements. Such repurchases are intended to cover the
Companys reissuances under the Employee Stock Purchase
Plan (ESPP), the 1997 Plan, and issuances related to potential
mergers and acquisitions.

On August 2, 1999, February 16, 2000
and May 31, 2000, the Company sold European
style put options for 3 million shares of the
Companys common stock as part of its stock repurchase
plan. On August 3, 2000, put options sold on August 2,
1999 for 1.0 million shares were exercised in the
Companys stock. In February 2001, the Company settled the
remaining put options, which resulted in the purchase of
2.0 million shares of the Companys stock for
approximately $53.8 million.

Preferred
Shares Rights Agreement

On October 19, 1998, pursuant to a Preferred
Shares Rights Agreement between the Company and BankBoston, N.A.
as Rights Agent, the Board of Directors of the Company announced
that it had declared a dividend distribution of one preferred
share purchase right (a Right) on each outstanding
share of the Companys common stock. Each Right will
entitle stockholders to buy one one-thousandth of a share of the
Companys Series B Participating Preferred Stock at an
exercise price of $200.00. The Rights will become exercisable
following the tenth day after a person or group announces the
acquisition of 15% or more of the Companys common stock or
announces commencement of a tender or exchange offer, the
consummation of which would result in ownership by the person or
group of 15% or more of the common stock of the Company. The
Company will be entitled to redeem the Rights at $0.01 per Right
at any time on or before the tenth day following acquisition by
a person or group of 15% or more of the Companys common
stock. The dividend distribution was made on November 3, 1998,
payable to the stockholders of record on November 3, 1998.
The Rights will expire on October 20, 2008.

86



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     Provision for
Income Taxes

Loss before income taxes, minority interest and
extraordinary item was earned in the following jurisdictions (in
thousands):

|         |  |      |          |              |  |              |          |   |  |   |          |  
|-------- |  | ---- | -------- | ------------ |  | ------------ | -------- | - |  | - | -------- | -
|         |  | 2001 |          | 2000         |  | 1999        
|         |  |      |          |              |  |             
|         |  |      |          | (As Restated |  | (As Restated
|         |  |      |          | See Note 3)  |  | See Note 3) 
|Domestic |  | $    | (104,972 | )            |  | $            | (83,822  | ) |  | $ | (249,520 | )
|Foreign  |  |      | 13,589   |              |  |              | (28,554  | ) |  |   | 88,798   |  
|         |  |      |          |              |  |              |          |   |  |   |          |  
|         |  | $    | (91,383  | )            |  | $            | (112,376 | ) |  | $ | (160,722 | )
|         |  |      |          |              |  |              |          |   |  |   |          |  

Significant components of the provision
(benefit) for income taxes attributable to continuing
operations are as follows (in thousands):

|                           |            |                          |        |              |        |              |        |         |         |   |        |         |         |  
|-------------------------- | ---------- | ------------------------ | ------ | ------------ | ------ | ------------ | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                           |            |                         
|                           |            | Years Ended December 31,
|                           |            |                         
|                           |            | 2001                     |        | 2000         |        | 1999        
|                           |            |                          |        |              |        |             
|                           |            |                          |        | (As Restated |        | (As Restated
|                           |            |                          |        | See Note 3)  |        | See Note 3) 
|Federal:                   |            |                          |        |              |        |              |        |         |         |   |        |        
|                           | Current(1) |                          | $      | 4,333        |        |              | $      | 2,949   |         |   | $      | 30,565  |        
|                           | Deferred   |                          |        | (11,971      | )      |              |        | (18,594 | )       |   |        | (68,659 | )      
|                           |            |                          |        |              |        |              |        |         |         |   |        |        
|                           |            | Total Federal            |        |              | (7,638 | )            |        |         | (15,645 | ) |        |         | (38,094 | )
|State:                     |            |                          |        |              |        |              |        |         |         |   |        |        
|                           | Current(2) |                          |        | 482          |        |              |        | 275     |         |   |        | 216     |        
|                           | Deferred   |                          |        | (1,663       | )      |              |        | (4,465  | )       |   |        | (5,160  | )      
|                           |            |                          |        |              |        |              |        |         |         |   |        |        
|                           |            | Total State              |        |              | (1,181 | )            |        |         | (4,190  | ) |        |         | (4,944  | )
|Foreign:                   |            |                          |        |              |        |              |        |         |         |   |        |        
|                           | Current    |                          |        | 14,356       |        |              |        | 39,423  |         |   |        | 47,569  |        
|                           | Deferred   |                          |        | 5,872        |        |              |        | (3,084  | )       |   |        | (8,028  | )      
|                           |            |                          |        |              |        |              |        |         |         |   |        |        
|                           |            | Total Foreign            |        |              | 20,228 |              |        |         | 36,339  |   |        |         | 39,541  |  
|                           |            |                          |        |              |        |              |        |         |         |   |        |        
|Provision for income taxes |            | $                        | 11,409 |              |        | $            | 16,504 |         |         | $ | (3,497 | )      
|                           |            |                          |        |              |        |              |        |         |         |   |        |        



---



|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net of tax benefit from utilization of net
    operating losses carry forward of $11.3 million in 2001 and
    zero in 2000 and 1999.
|   
|(2) | Net of tax benefit from utilization of net
    operating losses carry forward of $5.0 million in 2001 and
    zero in 2000 and 1999. 

87



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant components of net deferred tax assets
are as follows (in thousands):

|                                   |  |                          |          |              |  |   |          |  
|---------------------------------- |  | ------------------------ | -------- | ------------ |  | - | -------- | -
|                                   |  |                         
|                                   |  | Years Ended December 31,
|                                   |  |                         
|                                   |  | 2001                     |          | 2000        
|                                   |  |                          |          |             
|                                   |  | (As Restated             |          | (As Restated
|                                   |  | See Note 3)              |          | See Note 3) 
|Deferred revenue                   |  | $                        | 76,543   |              |  | $ | 25,372   |  
|State taxes                        |  |                          |         |              |  |   | 110      |  
|Accrued liabilities and allowances |  |                          | 63,410   |              |  |   | 61,290   |  
|Depreciation and amortization      |  |                          | 89,100   |              |  |   | 83,327   |  
|Tax credits                        |  |                          | 108,683  |              |  |   | 90,524   |  
|Net operating loss carryover       |  |                          | 25,102   |              |  |   | 68,386   |  
|                                   |  |                          |          |              |  |   |          |  
|                                   |  |                          | 362,838  |              |  |   | 329,009  |  
|Valuation allowance                |  |                          | (135,570 | )            |  |   | (121,977 | )
|                                   |  |                          |          |              |  |   |          |  
|                                   |  |                          | 227,268  |              |  |   | 207,032  |  
|Deferred liability                 |  |                          | 20,445   |              |  |   | 7,971    |  
|                                   |  |                          |          |              |  |   |          |  
|Net deferred tax asset             |  | $                        | 206,823  |              |  | $ | 199,061  |  
|                                   |  |                          |          |              |  |   |          |  
|Current portion                    |  | $                        | 142,869  |              |  | $ | 86,771   |  
|Noncurrent portion                 |  |                          | 63,954   |              |  |   | 112,290  |  
|                                   |  |                          |          |              |  |   |          |  
|                                   |  | $                        | 206,823  |              |  | $ | 199,061  |  
|                                   |  |                          |          |              |  |   |          |  

Realization of net deferred tax assets of
$206.8 million as of December 31, 2001 is dependent on
generating sufficient future taxable income, which is not
assured. The amount of the deferred tax asset realizable,
however, could be reduced in the near term if estimates of
future taxable income are reduced. A valuation allowance has
been recorded as a result of uncertainties related to certain
deferred tax asset, primarily foreign tax credits.

At December 31, 2001, the Company has
available net operating loss carry-forwards for income tax
purposes of approximately $69.8 million; U.S. federal
losses of approximately $59.6 million, which expire from
2009 to 2021, and foreign losses of approximately
$10.2 million, which have no expiration.

U.S. income taxes were not provided for on a
cumulative total of approximately $25.2 million of
undistributed earnings for certain non-U.S. subsidiaries. The
Company intends to reinvest these earnings indefinitely in
operations outside the United States.

The Companys effective tax rate on income
before income taxes differs from the U.S. Federal statutory
regular tax rate as follows:

|                                                                 |  |                          |         |              |  |              |         |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------------------ | ------- | ------------ |  | ------------ | ------- | - |  | - | ------- | -
|                                                                 |  |                         
|                                                                 |  | Years Ended December 31,
|                                                                 |  |                         
|                                                                 |  | 2001                     |         | 2000         |  | 1999        
|                                                                 |  |                          |         |              |  |             
|                                                                 |  |                          |         | (As Restated |  | (As Restated
|                                                                 |  |                          |         | See Note 3)  |  | See Note 3) 
|U.S. Federal income tax benefit at statutory rate                |  | $                        | (31,984 | )            |  | $            | (39,332 | ) |  | $ | (56,253 | )
|State benefit                                                    |  |                          | (3,681  | )            |  |              | (4,790  | ) |  |   | (6,597  | )
|Non deductible acquisition and other costs                       |  |                          | 12,063  |              |  |              | 13,733  |   |  |   | 43,371  |  
|Foreign earnings taxed at rates different than
    the U.S. rate |  |                          | 15,473  |              |  |              | (337    | ) |  |   | 8,462   |  
|Goodwill and other permanent differences                         |  |                          | 24,853  |              |  |              | 25,354  |   |  |   | 21,020  |  

88



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                 |  |                          |        |              |  |              |        |   |  |   |         |  
|-------------------------------- |  | ------------------------ | ------ | ------------ |  | ------------ | ------ | - |  | - | ------- | -
|                                 |  |                         
|                                 |  | Years Ended December 31,
|                                 |  |                         
|                                 |  | 2001                     |        | 2000         |  | 1999        
|                                 |  |                          |        |              |  |             
|                                 |  |                          |        | (As Restated |  | (As Restated
|                                 |  |                          |        | See Note 3)  |  | See Note 3) 
|Tax credits                      |  |                          | (5,315 | )            |  |              | (4,583 | ) |  |   | (13,500 | )
|Subsidiary losses not benefitted |  |                          |       |              |  |              | 26,459 |   |  |   |        |  
|                                 |  |                          |        |              |  |              |        |   |  |   |         |  
|                                 |  | $                        | 11,409 |              |  | $            | 16,504 |   |  | $ | (3,497  | )
|                                 |  |                          |        |              |  |              |        |   |  |   |         |  

The tax benefit associated with stock option
exercises from employee stock plans reduced taxes currently
payable for 2001 by $5.4 million. Such benefit was recorded
to additional paid-in capital.

15.     Net Loss Per
Share

A reconciliation of the numerator and denominator
of basic and diluted net loss per share is provided as follows
(in thousands, except per share amounts):

|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |          |          |         | 
|--------------------- | ----------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------- | ------------ | -------- | ------------ | - | -------- | -------- | ------- | - | -------- | -------- | ------- | 
|                      |                                                                         |                                                 
|                      |                                                                         | Years Ended December 31,                        
|                      |                                                                         |                                                 
|                      |                                                                         | 2001                                             |                                 | 2000         |          | 1999        
|                      |                                                                         |                                                  |                                 |              |          |             
|                      |                                                                         |                                                  |                                 | (As Restated |          | (As Restated
|                      |                                                                         |                                                  |                                 | See Note 3)  |          | See Note 3) 
|Numerator  Basic     |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|                      | Loss before extraordinary item                                          |                                                  | $                               | (102,381     | )        |              | $ | (123,926 | )        |         | $ | (156,885 | )       
|                      | Extraordinary item  gain on redemption
    of debt, net of tax         |                                                  |                                 | 1,731        |          |              |   |         |          |         |   |         |         
|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|                      |                                                                         | Net loss                                         |                                 | $            | (100,650 | )            |   | $        | (123,926 | )       |   | $        | (156,885 | )      
|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|Numerator  Diluted   |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|                      | Loss before extraordinary item                                          |                                                  | $                               | (102,381     | )        |              | $ | (123,926 | )        |         | $ | (156,885 | )       
|                      | Interest on convertible debentures(1)                                   |                                                  |                                 |             |          |              |   |         |          |         |   |         |         
|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|                      |                                                                         | Loss before extraordinary item, adjusted         |                                 |              | (102,381 | )            |   |          | (123,926 | )       |   |          | (156,885 | )      
|                      | Extraordinary item  gain on redemption
    of debt, net of tax         |                                                  |                                 | 1,731        |          |              |   |         |          |         |   |         |         
|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|                      |                                                                         | Net loss, adjusted                               |                                 | $            | (100,650 | )            |   | $        | (123,926 | )       |   | $        | (156,885 | )      
|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|Denominator  Basic   |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|                      | Weighted average shares of common stock
    outstanding                 |                                                  |                                 | 138,172      |          |              |   | 138,072  |          |         |   | 138,695  |         
|                      | Less: weighted average shares of common stock
    subject to repurchase |                                                  |                                 | (325         | )        |              |   |         |          |         |   |         |         
|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|                      |                                                                         | Basic weighted average common shares outstanding |                                 |              | 137,847  |              |   |          | 138,072  |         |   |          | 138,695  |        
|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|Denominator  Diluted |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|                      | Basic weighted average common shares outstanding                        |                                                  |                                 | 137,847      |          |              |   | 138,072  |          |         |   | 138,695  |         
|                      | Effective of dilutive securities:                                       |                                                  |                                 |              |          |              |   |          |          |         |   |          |         
|                      |                                                                         | Common stock options(2)                          |                                 |              |         |              |   |          |         |         |   |          |         |        
|                      |                                                                         | Warrants(3)                                      |                                 |              |         |              |   |          |         |         |   |          |         |        
|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         
|                      |                                                                         |                                                  | Diluted weighted average shares |              |          | 137,847      |   |          |          | 138,072 |   |          |          | 138,695 | 
|                      |                                                                         |                                                  |                                 |              |          |              |   |          |          |         |   |         

89



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                            |                                                                   |                              |   |              |       |              |   |       |       |   |   |       |       |  
|--------------------------- | ----------------------------------------------------------------- | ---------------------------- | - | ------------ | ----- | ------------ | - | ----- | ----- | - | - | ----- | ----- | -
|                            |                                                                   |                             
|                            |                                                                   | Years Ended December 31,    
|                            |                                                                   |                             
|                            |                                                                   | 2001                         |   | 2000         |       | 1999        
|                            |                                                                   |                              |   |              |       |             
|                            |                                                                   |                              |   | (As Restated |       | (As Restated
|                            |                                                                   |                              |   | See Note 3)  |       | See Note 3) 
|Basic net loss per share:   |                                                                   |                              |   |              |       |              |   |       |       |   |   |      
|                            | Loss before extraordinary item                                    |                              | $ | (0.74        | )     |              | $ | (0.90 | )     |   | $ | (1.13 | )    
|                            | Extraordinary item  gain on redemption
    of debt, net of taxes |                              |   | .01          |       |              |   |      |       |   |   |      |      
|                            |                                                                   |                              |   |              |       |              |   |       |       |   |   |      
|                            |                                                                   | Net loss per share  Basic   |   | $            | (0.73 | )            |   | $     | (0.90 | ) |   | $     | (1.13 | )
|                            |                                                                   |                              |   |              |       |              |   |       |       |   |   |      
|Diluted net loss per share: |                                                                   |                              |   |              |       |              |   |       |       |   |   |      
|                            | Loss before extraordinary item                                    |                              | $ | (0.74        | )     |              | $ | (0.90 | )     |   | $ | (1.13 | )    
|                            | Extraordinary item  gain on redemption
    of debt, net of taxes |                              |   | 0.01         |       |              |   |      |       |   |   |      |      
|                            |                                                                   |                              |   |              |       |              |   |       |       |   |   |      
|                            |                                                                   | Net loss per share  Diluted |   | $            | (0.73 | )            |   | $     | (0.90 | ) |   | $     | (1.13 | )
|                            |                                                                   |                              |   |              |       |              |   |       |       |   |   |      



---



|    |                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Convertible debt interest and related as-if
    converted shares were excluded from the calculation since the
    effect was anti-dilutive. The total number of shares excluded
    from the calculation related to as-if converted shares was
    23.3 million for 2001 and 7.6 million for 2000 and
    1999.
|   
|(2) | At December 31, 2001, 2000 and 1999,
    31.8 million, 20.3 million and 20.1 million
    options to purchase common stock, respectively, were excluded
    from the calculation since the effect was anti-dilutive.                                                                                            
|   
|(3) | At December 31, 2001, warrants to purchase
    254,167 shares of the Companys common stock were excluded
    from the determination of diluted net loss per share as the
    effect of such warrants is anti-dilutive.                                                                                        

16.     Business
Segment and Major Customer Information

The Company has concluded that it has two
businesses consisting of the Infrastructure business
(Infrastructure) and McAfee.com. The Infrastructure
business markets and sells computer security, management and
availability software and hardware for corporate and government
users. McAfee.com markets and sells PC security and management
software on the Internet to consumers and small to medium-sized
businesses. Management measures profitability based on these two
businesses; however, within the Infrastructure business the
Companys operating segments are defined by six geographic
regions. The segments are evidence of the operating structure of
the Companys internal organization. The Company operates
in one industry: computer security, management, and availability
software, hardware and related services for, primarily,
corporate and government users.

The Infrastructure business markets and sells,
through its geographic segments, anti-virus and security
software, hardware and services; network management software,
hardware and services; and help desk software and services.
These products and services are marketed and sold through a
direct sales force to corporate and government users, as well
as, through resellers, distributors, systems integrators and
retailers, worldwide. In addition, the Infrastructure business
includes managed security and availability applications to
corporations and governments on the Internet.

McAfee.com is an application service provider
targeted at consumers and small to medium-sized businesses. The
McAfee.com web site provides a suite of online products and
services personalized for the user based on the users PC
configuration, attached peripherals and resident software.

Following is the summary of the Companys
revenue and operating income (losses) by business and by
geographic segment. The accounting policies of the businesses
and geographic segments are the same as

90



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

disclosed in Note 2 to these Notes to
Consolidated Financial Statements. To reconcile to the
consolidated financial statements, where applicable,
Corporate represents costs and expenses associated
with corporate activities. Corporate activities include general
and administrative expenses; corporate marketing expenses of
$48.6 million and $52.0 million in 2001 and 2000,
respectively; amortization of intangibles; stock-based
compensation charges; and acquisition, restructuring and other
related costs. These corporate expenses are not considered
attributable to any specific geographic segment. Summarized
financial information concerning the Companys net revenue
and operating income (losses) by business and geographic segment
is as follows (in thousands):

|                                        |                               |                          |          |              |         |   |          |          |          |  
|--------------------------------------- | ----------------------------- | ------------------------ | -------- | ------------ | ------- | - | -------- | -------- | -------- | -
|                                        |                               |                         
|                                        |                               | Years Ended December 31,
|                                        |                               |                         
|                                        |                               | 2001                     |          | 2000        
|                                        |                               |                          |          |             
|                                        |                               |                          |          | (As Restated
|                                        |                               | (As                      |          | and         
|                                        |                               | Reclassified             |          | Reclassified
|                                        |                               | See Note 3)              |          | See Note 3) 
|Net revenue by segment:                 |                               |                          |          |              |         |   |          |         
|United States                           |                               | $                        | 467,522  |              |         | $ | 383,772  |         
|Europe                                  |                               |                          | 189,040  |              |         |   | 161,214  |         
|Japan                                   |                               |                          | 28,597   |              |         |   | 40,343   |         
|Canada                                  |                               |                          | 24,017   |              |         |   | 17,496   |         
|Asia-Pacific (excluding Japan)          |                               |                          | 23,353   |              |         |   | 31,598   |         
|Latin America                           |                               |                          | 16,421   |              |         |   | 16,453   |         
|                                        |                               |                          |          |              |         |   |          |         
|                                        | Infrastructure net revenue    |                          |          | 748,950      |         |   |          | 650,876  |         
|                                        | McAfee.com net revenue        |                          |          | 62,024       |         |   |          | 46,866   |         
|                                        |                               |                          |          |              |         |   |          |         
|                                        |                               | Net revenue              |          | $            | 810,974 |   |          | $        | 697,742  |  
|                                        |                               |                          |          |              |         |   |          |         
|Operating income (loss) by
    segment: |                               |                          |          |              |         |   |          |         
|United States                           |                               | $                        | 64,508   |              |         | $ | (5,328   | )       
|Europe                                  |                               |                          | 54,461   |              |         |   | 35,387   |         
|Japan                                   |                               |                          | (2,815   | )            |         |   | 14,979   |         
|Canada                                  |                               |                          | 11,090   |              |         |   | 7,809    |         
|Asia-Pacific (excluding Japan)          |                               |                          | 2,924    |              |         |   | 7,879    |         
|Latin America                           |                               |                          | 4,777    |              |         |   | 2,432    |         
|Corporate                               |                               |                          | (216,719 | )            |         |   | (200,379 | )       
|                                        |                               |                          |          |              |         |   |          |         
|                                        | Infrastructure operating loss |                          |          | (81,774      | )       |   |          | (137,221 | )       
|                                        | McAfee.com operating loss     |                          |          | (192         | )       |   |          | (31,971  | )       
|                                        |                               |                          |          |              |         |   |          |         
|                                        |                               | Operating loss           |          | $            | (81,966 | ) |          | $        | (169,192 | )
|                                        |                               |                          |          |              |         |   |          |         

Net revenue and operating expenses for geographic
segments are not presented for 1999 as it is impracticable to do
so. However, 1999 net revenues for the Infrastructure business
and McAfee.com were $586.5 million and $24.5 million,
respectively, and 1999 operating losses for the Infrastructure
business and McAfee.com were $139.6 million and
$28.3 million, respectively. For 1999, revenue by domestic
(United States) and international amounted to
$340.4 million and $270.6 million, respectively.

Following is a summary of the Companys
long-lived assets and total assets by business and by geographic
segment. Long-lived assets are capital expenditures, including
land purchases, and do not include intangibles. Assets purchased
to support Infrastructure general and administrative activities,
including land purchases, are included in Corporate
in the Long-lived assets table below. Assets
purchased to support Infrastructure

91



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

general and administrative activities, including
land purchases, and Infrastructure intangibles are included in
Corporate in the Total assets table,
below. These corporate assets are not assigned to any specific
geographic segment. Summarized financial information concerning
the Companys long-lived assets and total assets by
business and geographic segment is as follows (in thousands):

|                                          |                                  |                         |           |           |           |   |         |           |           | 
|----------------------------------------- | -------------------------------- | ----------------------- | --------- | --------- | --------- | - | ------- | --------- | --------- | 
|                                          |                                  |                        
|                                          |                                  | December 31,           
|                                          |                                  |                        
|                                          |                                  | 2001                    |           | 2000     
|                                          |                                  |                         |           |          
|Total long-lived assets by segment:       |                                  |                         |           |           |           |   |         |          
|United States                             |                                  | $                       | 15,203    |           |           | $ | 16,651  |          
|Europe                                    |                                  |                         | 6,143     |           |           |   | 8,957   |          
|Japan                                     |                                  |                         | 3,652     |           |           |   | 2,669   |          
|Canada                                    |                                  |                         | 246       |           |           |   | 307     |          
|Asia-Pacific (excluding Japan)            |                                  |                         | 1,866     |           |           |   | 1,806   |          
|Latin America                             |                                  |                         | 231       |           |           |   | 198     |          
|Corporate                                 |                                  |                         | 34,936    |           |           |   | 36,869  |          
|                                          |                                  |                         |           |           |           |   |         |          
|                                          | Infrastructure long-lived assets |                         |           | 62,277    |           |   |         | 67,457    |          
|                                          | McAfee.com long-lived assets     |                         |           | 6,177     |           |   |         | 8,042     |          
|                                          |                                  |                         |           |           |           |   |         |          
|                                          |                                  | Total long-lived assets |           | $         | 68,454    |   |         | $         | 75,499    | 
|                                          |                                  |                         |           |           |           |   |         |          
|Total assets by segment, as
    restated: |                                  |                         |           |           |           |   |         |          
|United States                             |                                  | $                       | 1,099,802 |           |           | $ | 823,164 |          
|Europe                                    |                                  |                         | 166,380   |           |           |   | 172,250 |          
|Japan                                     |                                  |                         | 20,906    |           |           |   | 38,669  |          
|Canada                                    |                                  |                         | 4,990     |           |           |   | 5,787   |          
|Asia-Pacific (excluding Japan)            |                                  |                         | 4,844     |           |           |   | 3,976   |          
|Latin America                             |                                  |                         | 5,440     |           |           |   | 5,275   |          
|Corporate                                 |                                  |                         | 207,098   |           |           |   | 244,367 |          
|                                          |                                  |                         |           |           |           |   |         |          
|                                          | Infrastructure assets            |                         |           | 1,509,460 |           |   |         | 1,293,488 |          
|                                          | McAfee.com assets                |                         |           | 124,444   |           |   |         | 98,132    |          
|                                          |                                  |                         |           |           |           |   |         |          
|                                          |                                  | Total assets            |           | $         | 1,633,904 |   |         | $         | 1,391,620 | 
|                                          |                                  |                         |           |           |           |   |         |          

92



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue information on a product and service
basis is as follows for the years ended December 31 (in
thousands):

|                     |       |                  |         |              |  |              |         |         |  |   |         |         | 
|-------------------- | ----- | ---------------- | ------- | ------------ |  | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                     |       | 2001             |         | 2000         |  | 1999        
|                     |       |                  |         |              |  |             
|                     |       | (As Reclassified |         | (As Restated |  | (As Restated
|                     |       | See Note 3)      |         | and          |  | and         
|                     |       |                  |         | Reclassified |  | Reclassified
|                     |       |                  |         | See Note 3)  |  | See Note 3) 
|Software licenses    |       | $                | 372,316 |              |  | $            | 305,822 |         |  | $ | 270,064 |        
|Maintenance          |       |                  | 177,720 |              |  |              | 160,662 |         |  |   | 157,887 |        
|Hardware             |       |                  | 84,185  |              |  |              | 80,755  |         |  |   | 42,189  |        
|Retail               |       |                  | 67,221  |              |  |              | 58,444  |         |  |   | 76,786  |        
|Consulting           |       |                  | 39,766  |              |  |              | 34,578  |         |  |   | 27,311  |        
|Training             |       |                  | 19,161  |              |  |              | 18,542  |         |  |   | 22,255  |        
|Hosting arrangements |       |                  | 40,789  |              |  |              | 25,996  |         |  |   | 2,118   |        
|Other                |       |                  | 9,816   |              |  |              | 12,943  |         |  |   | 12,374  |        
|                     |       |                  |         |              |  |              |         |         |  |   |         |        
|                     | Total |                  | $       | 810,974      |  |              | $       | 697,742 |  |   | $       | 610,984 | 
|                     |       |                  |         |              |  |              |         |         |  |   |         |        

At December 31, 2001, one customer had an
accounts receivable balance greater than 10% of the
Companys total accounts receivable balance. At
December 31, 2000, two customers had accounts receivable
balances greater than 10% of the Companys total accounts
receivable balance. During 2001 and 2000, one customer accounted
for 28% and 21%, respectively, of the total revenue for each
year. The revenue derived from this customer is reported in the
Infrastructure business, mainly in the United States and Europe
segments. No customer accounted for more than 10% of the total
revenue in 1999.

During 2001, 2000 and 1999, the Company sold
receivables aggregating approximately zero, $12.7 million
and $48.0 million, respectively. These receivables were
sold at a customary discount of up to 3.5% of face amount
without recourse to the Company. The discounts were recorded as
an operating expense. As of December 31, 2000 and 1999, no
receivables sold in 2000 or 1999, as applicable, remained
outstanding.

17.     Litigation

General

From time to time, the Company has been subject
to litigation including the pending litigation described below.
The Companys current estimated range of liability related
to some of the pending litigation below is based on claims for
which management can estimate the amount and range of loss. The
Company has recorded the minimum estimated liability related to
those claims, where there is a range of loss. Because of the
uncertainties related to both the amount and range of loss on
the remaining pending litigation, management is unable to make a
reasonable estimate of the liability that could result from an
unfavorable outcome. As additional information becomes
available, the Company will assess its potential liability and
revise its estimates. Pending or future litigation could be
costly, could cause the diversion of managements attention
and could upon resolution, have a material adverse effect on the
our business, results of operations, financial condition and
cash flow.

In addition, the Company is engaged in certain
legal and administrative proceedings incidental to our normal
business activities and believes that these matters will not
have a material adverse effect on our financial position,
results of operations or cash flow.

93



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Securities
Cases

Between December 29, 2000 and
February 7, 2001, the Company and certain of its current
and former officers and directors were named in securities class
action lawsuits filed in the United States District Court for
the Northern District of California. On September 24, 2001,
a consolidated class action complaint was filed which asserts
claims against the Company, William Larson, Prabhat Goyal and
Peter Watkins on behalf of a putative class of persons who
purchased the Companys stock between July 19 and
December 26, 2000. The complaint assert causes of action
(and seeks unspecified damages) for alleged violations of
Exchange Act Section 10(b)/ SEC Rule 10b-5 and
Exchange Act Section 20(a). In particular, the complaint
alleges that defendants engaged in improper practices designed
to increase the Companys revenues and earnings and that,
as a result of those practices, the Companys class period
financial statements were false and misleading and failed to
comply with Generally Accepted Accounting Principles (GAAP).
Defendants filed a motion to dismiss plaintiffs
consolidated complaint on October 29, 2001 and plaintiff
filed its opposition to the motion to dismiss on
December 21, 2001.

On February 5, 2001, the Company was
nominally sued in a derivative lawsuit filed in the Superior
Court in Santa Clara County. The lawsuit, encaptioned Mean
Ann Krim v. William L. Larson, et al., Case
No. CV795734, asserts claims against William Larson, Peter
Watkins, Prabhat Goyal, Leslie Denend, Virginia Gemmell, Edwin
Harper, Enzo Torresi, and others for breach of fiduciary duty,
unjust enrichment. In particular, the complaints allege that the
defendants engaged in a course of conduct by which they
improperly accounted for revenue from software license sales,
and that, as a result of their actions, certain of the
Companys financial statements were false and misleading
and not in compliance with GAAP. The complaint seeks an
unspecified amount of damages. Nominal defendant the Company
filed a demurrer to the complaint on May 21, 2001. A
hearing on the demurrer was held on June 29, 2001. On
July 24, 2001, the Court sustained the demurrer with leave
to amend. By Order dated August 21, 2001, the Court granted
plaintiff limited discovery for purposes of amending the
complaint to meet the demand futility test imposed by Delaware
law. The Courts Order set a deadline of October 26,
2001 for the filing of the amended complaint. On
December 26, 2001, plaintiff filed an amended complaint. By
stipulation, nominal defendant the Companys demurrer is
due on January 30, 2002.

Other
Litigation

Crawford v. Digital River, Inc. et al., Case
No. 1:01CV01770 RWR; United States District Court, District
of Columbia.On August 21, 2001,
Christopher Crawford filed a complaint for patent infringement
of US Patent 6,014,651. The complaint alleges that
seven different defendants, including the Company, infringe
US Patent 6,014,651. The complaint alleges that the
Company infringes the patent through several web sites,
including the websites at www.nai.com and www.mcafee.com. The
Company answered the complaint on September 12, 2001 in
which the alleged patent infringement was denied. The other
defendants have answered the complaint. An initial scheduling
conference is scheduled for November 27, 2001, and prior to
that date, counsel for plaintiff and defendants will meet and
confer according to the courts rules.

Foremost Systems v. Network Associates,
No. CV 777301 (Santa Clara County).A former agent of the Company in
India, Foremost Systems Pvt. Ltd., filed this action on
October 14, 1998, in California State court and filed a
Second Amended Complaint on February 18, 2000. The Company
removed the action to the United States District Court, Northern
District of California, San Jose Division. The Second Amended
Complaint alleges that the Company wrongly terminated Foremost
Systems in breach of their agency agreement and, in addition,
contains counts for breach of oral contract, promissory
estoppel, intentional and negligent misrepresentation, breach of
fiduciary duty, tortious interference with contractual
relations, unfair competition, and racketeering in violation of
18 U.S.C. 1962 et seq. The parties held a
preliminary mediation session in this matter on April 5,
2000 and attended a full session on March 12, 2001.
Discovery is ongoing.

94



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ESniff.On
June 5, 2001, eSniff, Inc. (eSniff) filed a
complaint in U.S. District Court for the District of
Colorado, Case No. 01-D-1024, seeking a declaratory
judgment that its use of the ESNIFF trade name and trademark
does not infringe the Companys SNIFFER mark. On
June 13, 2001, the Company and Networks Associates
Technology, Inc. filed a complaint in the U.S. District Court in
the Northern District of California, Case No. C01-20537
PVT, against eSniff for trademark infringement, trademark
dilution, and unfair competition under federal and California
state law related to use of the ESNIFF name and mark. On
November 26, 2001, while both motions were pending, the
parties reached a settlement of both lawsuits. As part of the
settlement, eSniff acknowledged that SNIFFER is a strong,
famous, and distinctive mark and agreed to discontinue its use
of ESNIFF.

Homenexus Inc. f/k/a HomeRun Network, Inc. v.
DirectWeb, Inc., et al, No. 99-CV-2316 (CRW) (E.D. Pa.).In this action, filed in federal court
in the Eastern District of Pennsylvania on May 5, 1999,
plaintiff Homenexus alleges that DirectWeb successfully
conspired with all defendants, including the Company and William
Larson, to wrongly misappropriate plaintiffs purported
proprietary business plan and to deliberately infringe
plaintiffs purported trade dress in its alleged web-site.
The complaint further alleges that all defendants conspired to
commit, and did commit, the torts of conversion and unfair
competition. Plaintiff filed an amended complaint on
June 21, 2000, adding a new defendant, Riaz Karamali.

18.     Related Party
Transactions

The Company purchased 3,948,199 shares of
Series A Preferred Stock of DirectWeb, Inc. for
$2.5 million, and 4,615,385 shares of Series B
Preferred Stock for $6.0 million in 1999. In connection
with the formation of DirectWeb, the Company received a warrant
to acquire 3,175,000 shares of DirectWeb common stock for total
consideration of $317.50. Prior to the transactions described
below, on an as converted basis and excluding shares that may be
acquired upon exercise of its warrant, the Companys total
DirectWeb investment represented approximately 12.3% of
DirectWebs outstanding capital stock. With respect to this
balance, approximately 35.2% was owned by William L. Larson, a
DirectWeb founder and the Companys former Chief Executive
Officer; 35.4% was owned by Dennis Cline, a DirectWeb founder
and the Companys former Vice President of Worldwide Sales;
and 17.1% was owned by unrelated third party investors who,
along with the Company, invested in DirectWebs
Series A and Series B Preferred Stock.

In November 1999, the Company sold its 12.3%
ownership to Dennis Cline, resulting in a net loss of
$2.5 million to the Company. At the time, the Company also
agreed to exchange its warrant to acquire 3,175,000 shares of
DirectWeb common stock for a warrant to acquire $2 million
worth of DirectWeb Series C preferred stock at the same
price per share as paid by the Series C preferred stock
investors. William L. Larson sold approximately 83.0% of his
stake in DirectWeb to Dennis Cline in November 1999. He retained
an approximately 5.9% ownership interest in DirectWeb.

19.     Stock-Based
Compensation

The Company has recorded stock based compensation
charges of $24.7 million, $8.7 million and
$15.6 million in 2001, 2000 and 1999 respectively.
Stock-based compensation charges relate to the repricing of
employee stock options and the issuance of McAfee.com stock
options to the Companys executives and employees, as well
as non-recurring stock compensation charges primarily related to
executive compensation.

95



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock based compensation charges are made up of
the following for the years presented (in thousands):

|                                                                         |  |                          |        |      |  |      |       |  |  |   |        | 
|------------------------------------------------------------------------ |  | ------------------------ | ------ | ---- |  | ---- | ----- |  |  | - | ------ | 
|                                                                         |  |                         
|                                                                         |  | Years Ended December 31,
|                                                                         |  |                         
|                                                                         |  | 2001                     |        | 2000 |  | 1999
|                                                                         |  |                          |        |      |  |     
|Repriced options                                                         |  | $                        | 17,396 |      |  | $    | 8,714 |  |  | $ | 8,834  | 
|McAfee.com options and shares issued to Network
    Associates personnel |  |                          |       |      |  |      |      |  |  |   | 6,736  | 
|Warrants to outside consultants                                          |  |                          | 1,049  |      |  |      |      |  |  |   |       | 
|Former executives                                                        |  |                          | 2,668  |      |  |      |      |  |  |   |       | 
|New executives                                                           |  |                          | 3,080  |      |  |      |      |  |  |   |       | 
|PGP restructuring                                                        |  |                          | 519    |      |  |      |      |  |  |   |       | 
|                                                                         |  |                          |        |      |  |      |       |  |  |   |        | 
|Total stock-based compensation                                           |  | $                        | 24,712 |      |  | $    | 8,714 |  |  | $ | 15,570 | 
|                                                                         |  |                          |        |      |  |      |       |  |  |   |        | 

Repriced Options.On
April 22, 1999, the Company offered to substantially all of
its employees, excluding executive officers, the right to cancel
certain outstanding stock options and receive new options with
an exercise price of $11.063, the then current fair market value
of the stock. Options to purchase a total of 10.3 million
shares were cancelled and the same number of new options were
granted. These new options vest at the same rate that they would
have vested under previous option plans and are subject to
variable accounting. Accordingly, the Company has and will
continue to remeasure compensation cost for the repriced options
until these options are exercised, canceled, or forfeited
without replacement. The first valuation period began
July 1, 2000.

Subsequent to April 22, 1999, some
employees, who received repriced options became employees of
McAfee.com. In connection with this transfer their repriced
options were canceled and replaced with options for McAfee.com
stock. Variable plan accounting as described above, also applies
to these replacement options and variable charges will be
recorded based on the movements in the fair value of McAfee.com
common stock from July 1, 2000.

The amount of stock compensation recorded has and
will be based on any excess of the closing stock price at the
end of the reporting period or date of exercise, forfeiture or
cancellation without replacement, if earlier, over the fair
value of the Companys or McAfee.coms common stock on
July 1, 2000, which was $20.375 and $26.063, respectively.
The resulting compensation charge to earnings will be recorded
over the remaining vesting period, using the accelerated method
of amortization discussed in FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans. When options are
fully vested, the charge will be recorded to earnings
immediately. At December 31, 2001 these options are
substantially fully vested. Depending upon movements in the
market value of the Companys common stock, this accounting
treatment may result in significant additional stock-based
compensation charges in future periods.

During 2001 and 2000, the Company incurred
charges to earnings of approximately $15.6 million and
$2.0 million related to options subject to variable plan
accounting. For 2001 and 2000, the Companys stock
compensation charges related to options subject to variable plan
accounting were based on a year end per share price of the
Companys stock of $25.85 and $4.19, respectively and a per
share price of McAfee.com stock of $33.91 and $5.00,
respectively. As of December 31, 2001 the Company and
McAfee.com had options to purchase 2.2 million shares and
0.2 million shares respectively, which were outstanding and
subject to variable plan accounting.

The Company also incurred a stock-based
compensation charge in connection with the initial issuance of
the repriced options. This charge was calculated based on the
difference between the exercise price of the new

96



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

options and their market value on the date of
acceptance by employees. Approximately $1.8 million,
$6.7 million and $8.8 million was expensed during
2001, 2000 and 1999, respectively.

McAfee.com Options and Shares Issued to
Network Associates Personnel.During
1999, McAfee.com granted 1.7 million options to purchase
shares of its Class A common stock and 379,000 shares of
its Class A common stock to executives and employees of
Network Associates. In connection with these grants, McAfee.com
recorded a stock based compensation charge of $6.7 million.

Warrants to Outside Consultants.In January 2001, upon completion of
the search for the Companys chief executive officer, the
Company issued warrants to a retained executive search firm for
services performed. The warrants, if exercised, can be exchanged
for 166,667 shares of the Companys common stock. The
weighted-average exercise price of the underlying shares is
$2.97 per share. The warrants are immediately exercisable and
expire in January 2004. The combined fair value of the warrants
was determined to be approximately $530,000 and was estimated
using the Black-Scholes model with the following assumptions:
risk free interest rate of 4.82%; contractual life of
3 years; dividend yield of 0%; and expected volatility of
91%. The fair market value of the warrants was included as stock
compensation during 2001 and included in general and
administrative expenses in the accompanying statement of
operations.

In April 2001, upon completion of the search for
the Companys chief financial officer, the Company issued
warrants to a retained executive search firm for services
performed. The warrants, if exercised, can be exchanged for
66,667 shares of the Companys common stock. The
weighted-average exercise price of the underlying shares is
$4.50 per share. The warrants are immediately exercisable and
expire in April 2004. The combined fair value of the warrants
was determined to be approximately $280,000 and was estimated
using the Black-Scholes model with the following assumptions:
risk free interest rate of 4.27%; contractual life of
3 years; dividend yield of 0%; and expected volatility of
91%. The fair market value of the warrants was included as a
stock compensation charge during 2001 and included in general
and administrative expenses in the accompanying statement of
operations.

In November 2001, upon completion of the search
for two executives for international operations, the Company
issued warrants to a retained executive search firm for services
performed. The warrants, if exercised, can be exchanged for
20,833 shares of the Companys common stock. The
weighted-average exercise price of the underlying shares is
$19.64 per share. The warrants are immediately exercisable and
expire in 2004. The combined fair value of the warrants was
determined to be approximately $239,000 and was estimated using
the Black-Scholes model with the following assumptions: risk
free interest rate of 4.36%; contractual life of 3 years;
dividend yield of 0%; and expected volatility of 84%. The fair
market value of the warrants was included as a stock
compensation charge during 2001 and included in general and
administrative expenses in the accompanying statement of
operations.

All the above warrants have been included in
Stockholders Equity.

Former Executives.In January 2001, the Companys
board of directors appointed the Companys new chief
executive officer and president. Effective January 2001, the
Companys former chief executive officer, former chief
financial officer, and former president and chief operating
officer, became special advisors. Options held by these
individuals continue to vest during 2001 while they each served
during their one-year terms as special advisors. As a result,
the Company recorded a one-time stock compensation charge of
approximately $603,000 during 2001.

In December 2001, the Company terminated the
employment of three sales executives. Upon termination, the
options held by these executives were modified. As a result, the
Company recorded a one-time stock compensation charge of
$2.1 million during 2001.

New Executives.On
January 3, 2001, the Company entered into an employment
agreement with George Samenuk to become the Companys chief
executive officer. In accordance with the terms of the
agreement, the

97



---



##### 



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company issued 400,000 shares of restricted stock
to Mr. Samenuk. The price of the underlying shares is $0.01
per share. The shares will vest and the Companys right to
repurchase such shares will lapse as follows: 12.5% on the first
four quarterly anniversaries of Mr. Samenuks
employment with the Company with the remaining 50% on the second
year anniversary of Mr. Samenuks employment with the
Company. The fair value of the restricted stock was determined
to be approximately $1.7 million and was estimated based on
the difference between the exercise price of the restricted
stock and the fair market value of the Companys common
stock on Mr. Samenuks employment commencement date.
During 2001, the Company recorded approximately $836,000 related
to stock compensation associated with Mr. Samenuks
restricted stock.

On April 3, 2001 the Company entered into an
employment agreement with Stephen C. Richards to become
executive vice president and chief financial officer. In
accordance with the terms of the agreement, the Company issued
50,000 shares of common stock to Mr. Richards for $0.01 per
share. During 2001, the Company recorded approximately $350,000
related to stock compensation associated with
Mr. Richards stock.

On October 30, 2001 the Company entered into
an employment agreement with Arthur R. Matin to become executive
the president of the Companys McAfee product group. In
accordance with the terms of the agreement, the Company issued
100,000 shares of common stock to Mr. Matin for $0.01 per
share. During 2001, the Company recorded approximately
$1.9 million related to stock compensation associated with
Mr. Matins stock.

PGP Restructuring.In connection with the integration of
the PGP product group the Company accelerated the vesting of
45,600 options to purchase the Companys common stock held
by the 100 employees terminated during 2001. As a result of this
modification, the Company recorded a stock based compensation
charge of $519,000 within restructuring expense in the statement
of operations. The charge was calculated based on the intrinsic
value of the modified options on the date the acceleration was
approved by the Board of Directors. (See Note 8 to these
Notes to Consolidated Financial Statements).

20.     Fixed Assets
Sale-Leaseback

On September 20, 1999, the Company sold
approximately $6.5 million of fixed assets, consisting
mostly of computer equipment, to a third party and leased them
back under an operating lease. The initial term of the lease is
12 months, with an option to renew the lease for an
additional 12 months. In October 2000, the Company
repurchased the fixed assets for approximately $5.2 million.

21.     Subsequent
Events

On January 15, 2002, the Companys
board of directors approved a grant of 50,000 shares of
restricted stock to George Samenuk, the Companys chief
executive officer. The price of the underlying shares is $0.01
per share. The Companys right to repurchase such shares
will lapse on January 15, 2005. The fair value of the
restricted stock was determined to be approximately
$1.4 million and was estimated based on the difference
between the exercise price of the restricted stock and the fair
market value of the Companys common stock on
January 15, 2002. This amount will be recorded as
compensation expense over the period the Companys right to
repurchase lapses.

98



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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, in the City of Santa
Clara, State of California, on the 28 day of June, 2002.



| |                          
| | -------------------------
| | NETWORKS ASSOCIATES, INC.
|
| | /s/ GEORGE SAMENUK       
| |                          
| | George Samenuk           
| | Chief Executive Officer  

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below on
June 28, 2002 by the following persons on behalf of the
Registrant and in the capacities indicated.

|                                             |  |                                                                                     |  |               |  | 
|-------------------------------------------- |  | ----------------------------------------------------------------------------------- |  | ------------- |  | 
|                                             |  |                                                                                     |  |              
|Signature                                    |  | Title                                                                               |  | Date         
|                                             |  |                                                                                     |  |              
|                                            
|/s/ GEORGE SAMENUK(George Samenuk)           |  | Chief Executive Officer
    (Principal Executive Officer) and Chairman of the Board |  | June 28, 2002
|                                            
|/s/ STEPHEN C. RICHARDS(Stephen C. Richards) |  | Chief Operating Officer and Chief Financial
    Officer                             |  | June 28, 2002
|                                            
|/s/ LESLIE G. DENEND(Leslie G. Denend)       |  | Director                                                                            |  | June 28, 2002
|                                            
|/s/ ROBERT DUTKOWSKY(Robert Dutkowsky)       |  | Director                                                                            |  | June 28, 2002
|                                            
|/s/ ROBERT PANGIA(Robert Pangia)             |  | Director                                                                            |  | June 28, 2002
|                                            
|/s/ LIANE WILSON(Liane Wilson)               |  | Director                                                                            |  | June 28, 2002

99



---



##### 



SCHEDULE II

NETWORKS ASSOCIATES, INC.

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
AT DECEMBER 31, 2001

(In Thousands)


|                             |                                              |              |   |               |  |               |   |            |   |  |   |        |  |  |   |        | 
|---------------------------- | -------------------------------------------- | ------------ | - | ------------- |  | ------------- | - | ---------- | - |  | - | ------ |  |  | - | ------ | 
|                             |                                              |              |   | Provision for |  | Write-offs    |   |           
|                             |                                              | Balance at   |   | Doubtful      |  | of Previously |   | Balance at
|                             |                                              | Beginning of |   | Accounts,     |  | Provided      |   | End of    
|                             |                                              | Period       |   | Net(1)        |  | Accounts      |   | Period    
|                             |                                              |              |   |               |  |               |   |           
|Year Ended December 31, 2001 |                                              |              |   |               |  |               |   |            |   |  |   |        |  |  |   |       
|                             | Allowance for Doubtful Accounts              |              | $ | 15,332        |  |               | $ | (9,673     | ) |  | $ | 2,735  |  |  | $ | 8,394  | 
|Year Ended December 31, 2000 |                                              |              |   |               |  |               |   |            |   |  |   |        |  |  |   |       
|                             | Allowance for Doubtful Accounts, as restated |              | $ | 16,249        |  |               | $ | 9,924      |   |  | $ | 10,841 |  |  | $ | 15,332 | 
|Year Ended December 31, 1999 |                                              |              |   |               |  |               |   |            |   |  |   |        |  |  |   |       
|                             | Allowance for Doubtful Accounts, as restated |              | $ | 11,682        |  |               | $ | 44,809     |   |  | $ | 40,242 |  |  | $ | 16,249 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Provision for Doubtful Accounts,
    Net.The provision for doubtful
    accounts, net consists of our estimates with respect to the
    uncollectability of our receivables, net of recoveries of
    amounts previously written off. Our management must make
    estimates of the uncollectability of our accounts receivables.
    Management specifically analyzes accounts receivable and
    analyzes historical bad debts, customer concentrations, customer
    credit-worthiness, current economic trends and changes in our
    customer payment terms when evaluating the adequacy of the
    allowance for doubtful accounts. Our accounts receivable balance
    was $136.4 million, net of allowance for doubtful accounts
    of $8.4 million as of December 31, 2001.

|                             |                                           |              |   |               |  |            |   |            |  |  |   |         |  |  |   |        | 
|---------------------------- | ----------------------------------------- | ------------ | - | ------------- |  | ---------- | - | ---------- |  |  | - | ------- |  |  | - | ------ | 
|                             |                                           |              |   | Provision for |  | Actual     |   |           
|                             |                                           | Balance at   |   | Sales Returns |  | Returns    |   | Balance at
|                             |                                           | Beginning of |   | and Other     |  | and        |   | End of    
|                             |                                           | Period       |   | Allowances(2) |  | Allowances |   | Period    
|                             |                                           |              |   |               |  |            |   |           
|Year Ended December 31, 2001 |                                           |              |   |               |  |            |   |            |  |  |   |         |  |  |   |       
|                             | Sales Returns and Allowances              |              | $ | 51,080        |  |            | $ | 125,868    |  |  | $ | 144,363 |  |  | $ | 32,585 | 
|Year Ended December 31, 2000 |                                           |              |   |               |  |            |   |            |  |  |   |         |  |  |   |       
|                             | Sales Returns and Allowances, as restated |              | $ | 72,298        |  |            | $ | 100,202    |  |  | $ | 121,420 |  |  | $ | 51,080 | 
|Year Ended December 31, 1999 |                                           |              |   |               |  |            |   |            |  |  |   |         |  |  |   |       
|                             | Sales Returns and Allowances, as restated |              | $ | 85,631        |  |            | $ | 178,118    |  |  | $ | 191,451 |  |  | $ | 72,298 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Provision for Sales Returns and
    Allowances.The provision for
    sales returns and allowances consists of our estimates of
    potential future product returns related to current period
    product revenue, and specific provisions for distributor,
    reseller, and retailer sales incentives (allowances)
    that are reductions in the revenue to be realized. Management
    analyzes historical returns, current economic trends, and
    changes in customer demand and acceptance of our products when
    evaluating the adequacy of the sales returns and allowances.
    Significant management judgments and estimates must be made and
    used in connection with establishing the sales returns and
    allowances in any accounting period. Material differences may
    result in the amount and timing of our revenue for any period if
    management made different judgments or utilized different
    estimates. The provision for sales returns and allowances
    amounted to $125.9 million in 2001. The balance at
    December 31, 2001, of $32.6 million includes the
    estimate of potential future product returns amounting to
    $9.3 million and specific allowances for distributor,
    reseller, and retailer sales incentives amounting to
    $23.3 million.

100



---



##### 



EXHIBIT INDEX

|        |    |     |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | -- | --- |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|Number  |    |     |  | Description
|        |    |     |  |            
|        | 2  | .1  |  |             |  | Agreement and Plan of Reorganization, dated
    October 13, 1997, among McAfee Associates, Inc., Mystery
    Acquisition Corp. and Network General Corporation, as amended by
    the First Amendment dated as of October 22, 1997.(1)                                                                                                                                                                                                                                                                                     
|        | 2  | .2  |  |             |  | Combination Agreement dated August 16, 1996
    among the Registrant, FSA Combination Corp., FSA Corporation and
    Daniel Freedman.(2)                                                                                                                                                                                                                                                                                                                                                                                   
|        | 2  | .3  |  |             |  | Stock Exchange Agreement dated January 13,
    1997 among the Registrant, FSA Combination Corp., Kabushiki
    Kaisha Jade and the shareholders of Jade.(3)                                                                                                                                                                                                                                                                                                                                                                
|        | 2  | .4  |  |             |  | Agreement and Plan of Reorganization dated
    December 1, 1997 between the Registrant, Helix Software
    Company and DNA Acquisition Corp.(4)                                                                                                                                                                                                                                                                                                                                                                            
|        | 2  | .5  |  |             |  | Agreement and Plan of Reorganization dated
    December 1, 1997 between the Registrant, PGP and PG
    Acquisition Corp.(5)                                                                                                                                                                                                                                                                                                                                                                                                
|        | 2  | .6  |  |             |  | Agreement and Plan of Reorganization dated
    February 22, 1998, between the Registrant, TIS and Thor
    Acquisition Corp.(6)                                                                                                                                                                                                                                                                                                                                                                                            
|        | 2  | .7  |  |             |  | Agreement and Plan of Reorganization by and among
    the Registrant, Magic Solutions International, Inc., Merlin
    Acquisition Corp. and Igal Lichtman dated March 2, 1998.
    Amendment Agreement by and among the Registrant, Magic Solutions
    International, Inc., Merlin Acquisition Corp., and Igal Lichtman
    dated March 24, 1998. Second Amendment Agreement by and among
    the Registrant, Magic Solutions International, Inc., Merlin
    Acquisition Corp., and Igal Lichtman dated April 1, 1998.(7)
|        | 2  | .8  |  |             |  | Stock Purchase Agreement, dated as of
    February 26, 1998, by and between FSA Combination Corp.,
    and Brenda Joyce Cook.(8)                                                                                                                                                                                                                                                                                                                                                                                           
|        | 2  | .9  |  |             |  | Share Purchase Agreement, dated as of
    March 30, 1998, among FSA Combination Corp., and Irina
    Karlsson and Jarmo Rouvinen.(8)                                                                                                                                                                                                                                                                                                                                                                                       
|        | 2  | .10 |  |             |  | Stock Purchase Agreement, dated as of
    May 10, 1998, among FSA Combination Corp., and Secure
    Networks, Inc.(8)                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 2  | .11 |  |             |  | Transaction Agreement, dated June 9, 1998,
    by and between the Registrant and Dr. Solomons Group
    Plc.(16)                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 2  | .12 |  |             |  | Agreement and Plan of Merger, dated July 28,
    1998, by and between the Registrant and CyberMedia, Inc.(17)                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 3  | .1  |  |             |  | Second Restated Certificate of Incorporation of
    the Registrant, as amended on December 1, 1997.(6)                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 3  | .2  |  |             |  | Restated Bylaws of the Registrant.(23)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 3  | .3  |  |             |  | Certificate of Designation of Series A
    Preferred Stock of the Registrant.(9)                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 3  | .4  |  |             |  | Certificate of Designation of Series B
    Participating Preferred Stock of the Registrant.(18)                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 4  | .1  |  |             |  | Indenture dated as of February 13, 1998
    between the Registrant and State Street Bank and Trust Company
    of California, N.A., as Trustee.(10)                                                                                                                                                                                                                                                                                                                                                                        
|        | 4  | .2  |  |             |  | Resale Registration Rights Agreement, dated as of
    August 17, 2001, by and between the Registrant and Lehman
    Brothers, Inc.(24)                                                                                                                                                                                                                                                                                                                                                                                     
|        | 4  | .3  |  |             |  | Indenture dated as of August 17, 2001
    between the Registrant and State Street Bank and Trust Company
    of California.(24)                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .1  |  |             |  | Lease Assignment dated November 17, 1997 for
    facility at 3965 Freedom Circle, Santa Clara, California by and
    between Informix Corporation and McAfee Associates, Inc.(4)                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .2  |  |             |  | Consent to Assignment Agreement dated
    December 19, 1997 by and among Birk S. McCandless, LLC,
    Guaranty Federal Bank, F.S.B., Informix Corporation and the
    Registrant.(4)                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .3  |  |             |  | Subordination, Nondisturbance and Attornment
    Agreement dated December 18, 1997, between Guaranty Federal
    Bank, F.S.B., the Registrant and Birk S. McCandless, LLC.(4)                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .4  |  |             |  | Lease dated November 22, 1996 by and between
    Birk S. McCandless, LLC and Informix Corporation for facility at
    3965 Freedom Circle, Santa Clara, California.(4)                                                                                                                                                                                                                                                                                                                                                     

101



---



##### 



|        |    |      |  |             |  |                                                                                                                                                                                                                                                                             
|------- | -- | ---- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .5   |  |             |  | Quota Purchase Agreement, dated as of
    April 14, 1997 by and among McAfee Associates, Inc. and
    McAfee Do Brasil Ltda., Compusul-Consultoria E Comercio De
    Informatica Ltda., and the stockholders of Compusul-Consultoria
    E Comercio De Informatica Ltda.(12)
|        | 10 | .6*  |  |             |  | 1997 Stock Incentive Plan, as Amended.(11)                                                                                                                                                                                                                                  
|        | 10 | .7*  |  |             |  | Stock Option Plan for Outside Directors.(13)                                                                                                                                                                                                                                
|        | 10 | .8*  |  |             |  | 2000 Nonstatutory Stock Option Plan.(21)                                                                                                                                                                                                                                    
|        | 10 | .9*  |  |             |  | Change in control agreement between the
    Registrant and Peter Watkins dated May 11, 1999.(19)                                                                                                                                                                            
|        | 10 | .10* |  |             |  | Change in control agreement between the
    Registrant and William L. Larson dated May 11, 1999.(19)                                                                                                                                                                        
|        | 10 | .11* |  |             |  | Change in control agreement between the
    Registrant and Prabhat K. Goyal dated May 11, 1999.(19)                                                                                                                                                                         
|        | 10 | .12* |  |             |  | Change in control agreement between the
    Registrant and Zachary Nelson, dated May 11, 1999.(19)                                                                                                                                                                          
|        | 10 | .13  |  |             |  | Corporate Management Services Agreement between
    the Registrant and McAfee.com Corporation, dated as of
    January 1, 1999.(20)                                                                                                                                         
|        | 10 | .14  |  |             |  | Technology Cross License Agreement between the
    Registrant and McAfee.com Corporation dated as of
    January 1, 1999.(20)                                                                                                                                               
|        | 10 | .15  |  |             |  | Registration Rights Agreement between the
    Registrant and McAfee.com Corporation, dated as of July 20,
    1999.(20)                                                                                                                                                     
|        | 10 | .16  |  |             |  | Asset Contribution and Receivables Settlement
    Agreement between the Registrant and McAfee.com Corporation,
    dated as of January 1, 1999.(20)                                                                                                                         
|        | 10 | .17  |  |             |  | Intercompany Revolving Loan Agreement between the
    Registrant and McAfee.com Corporation, dated as of
    January 1, 1999.(20)                                                                                                                                           
|        | 10 | .18  |  |             |  | Tax Sharing Agreement between the Registrant and
    McAfee.com dated as of January 1, 1999.(20)                                                                                                                                                                            
|        | 10 | .19  |  |             |  | Indemnification and Voting Agreement between the
    Registrant and McAfee.com Corporation, dated as of
    August 20, 1999.(20)                                                                                                                                            
|        | 10 | .20* |  |             |  | Joint Cooperation and Master Services Agreement
    between the Registrant and McAfee.com Corporation, dated as of
    January 1, 1999.(20)                                                                                                                                 
|        | 10 | .21* |  |             |  | Amended and Restated Employment Agreement between
    George Samenuk and the Registrant, dated October 9, 2001(26)                                                                                                                                                          
|        | 10 | .22* |  |             |  | Agreement between the Registrant and William
    Larson, dated January 2, 2001.(21)                                                                                                                                                                                         
|        | 10 | .23  |  |             |  | Agreement between the Registrant and Prabhat
    Goyal, dated January 2, 2001.(21)                                                                                                                                                                                          
|        | 10 | .24* |  |             |  | Agreement between the Registrant and Peter
    Watkins, dated December 26, 2000.(21)                                                                                                                                                                                        
|        | 10 | .25* |  |             |  | Agreement between the Registrant and Zachary
    Nelson, dated January 1, 2001.(22)                                                                                                                                                                                         
|        | 10 | .26* |  |             |  | Reseller agreements between the Registrant and
    McAfee.com, dated March 31, 2001.(22)                                                                                                                                                                                    
|        | 10 | .27* |  |             |  | Employment agreement between Stephen C. Richards
    and Registrant, dated April 3, 2001.(22)                                                                                                                                                                               
|        | 10 | .28  |  |             |  | 1st Amendment to Lease dated March 20, 1998
    between Birk S. McCandless, LLC and the Registrant.(25)                                                                                                                                                                     
|        | 10 | .29  |  |             |  | Confirmation, Amendment and Notice of Security
    Agreement dated March 20, 1998 among Informix Corporation,
    Birk S. McCandless, LLC and the Registrant.(25)                                                                                                           
|        | 10 | .30  |  |             |  | Second Amendment to Lease dated September 1,
    1998 among Informix Corporation, Birk S. McCandless, LLC and the
    Registrant.(25)                                                                                                                                       
|        | 10 | .31  |  |             |  | Subordination, Nondisturbance and Attornment
    Agreement dated June 21, 2000, among Column Financial,
    Inc., Informix Corporation, Birk S. McCandless, LLC, and the
    Registrant.(25)                                                                                
|        | 10 | .32  |  |             |  | Lease Agreement dated November 14, 1996
    between Blue Lake Partners and McAfee Associates, Inc.(25)                                                                                                                                                                      

102



---



##### 



|        |    |      |  |             |  |                                                                                                     
|------- | -- | ---- |  | ----------- |  | ----------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .33  |  |             |  | Lease Amendment dated November 24, 1997
    between Blue Lake Partners and McAfee Software, Inc.(25)
|        | 10 | .34  |  |             |  | Lease Amendment dated March 17, 1998 between
    Blue Lake Partners and McAfee Software, Inc.(25)   
|        | 10 | .35  |  |             |  | Lease Amendment dated March 27, 1998 between
    Blue Lake Partners and McAfee Software, Inc.(25)   
|        | 10 | .36  |  |             |  | Lease Amendment dated June 4, 1998 between
    Blue Lake Partners and McAfee Software, Inc.(25)     
|        | 10 | .37  |  |             |  | Lease Amendment dated July 21, 1998 between
    Blue Lake Partners and McAfee Software, Inc.(25)    
|        | 10 | .38  |  |             |  | Lease Amendment dated November 20, 1998
    between Blue Lake Partners and McAfee Software, Inc.(25)
|        | 10 | .39  |  |             |  | Lease Amendment dated March 18, 1999 between
    Blue Lake Partners and McAfee Software, Inc.(25)   
|        | 10 | .40  |  |             |  | Lease Amendment dated June 3, 1999 between
    Blue Lake Partners and McAfee Software, Inc.(25)     
|        | 10 | .41  |  |             |  | Lease Amendment dated October 7, 1999
    between Blue Lake Partners and McAfee Software, Inc.(25)  
|        | 10 | .42  |  |             |  | Lease Amendment dated March 25, 2000 between
    Daltex Centre LP and the Registrant.(25)           
|        | 10 | .43  |  |             |  | Lease Amendment dated July 31, 2000 between
    Daltex Centre LP and the Registrant.(25)            
|        | 10 | .44  |  |             |  | Lease Amendment dated January 24, 2001
    between Daltex Centre LP and the Registrant.(25)         
|        | 10 | .45  |  |             |  | Lease Amendment dated May 31, 2001 between
    Daltex Centre LP and the Registrant.(25)             
|        | 10 | .46* |  |             |  | Employment Agreement between Bakulesh A. Mehta
    and the Registrant, dated October 9, 2001(26)    
|        | 10 | .47* |  |             |  | Employment Agreement between Kent H. Roberts and
    the Registrant, dated October 9, 2001(26)      
|        | 10 | .48* |  |             |  | Employment Agreement between Arthur R. Matin and
    the Registrant, dated October 30, 2001(26)     
|        | 10 | .49* |  |             |  | Employment Contract between Michele Fitzpatrick
    and the Registrant, dated September 26, 2001(26)
|        | 10 | .50* |  |             |  | Employment Agreement between Vernon Gene Hodges
    and the Registrant, dated December 3, 2001(26)  
|        | 12 | .1   |  |             |  | Calculation of Ratio of Earnings to Fixed Charges                                                   
|        | 23 | .1   |  |             |  | Consent of PricewaterhouseCoopers LLP,
    independent accountants                                  



---



| |     |                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference from the
    Registrants Registration Statement on Form S-4 filed
    with the Commission on October 31, 1997.  
|
| | (2) | Incorporated by reference from the
    Registrants Current Report on Form 8-K filed with the
    Commission on September 24, 1996.        
|
| | (3) | Incorporated by reference from the
    Registrants Current Report on Form 8-K filed with the
    Commission on March 14, 1997.            
|
| | (4) | Incorporated by reference from the
    Registrants Registration Statement on Form S-3, filed
    with the Commission on February 11, 1998.
|
| | (5) | Incorporated by reference from the
    Registrants Report on Form 8-K filed with the
    Commission on December 11, 1997.                 
|
| | (6) | Incorporated by reference from the
    Registrants Registration Statement on Form S-4 filed
    with the Commission on March 25, 1998.    
|
| | (7) | Incorporated by reference from the
    Registrants Report on Form 8-K filed with the
    Commission on April 2, 1998.                     

103



---



##### 





| |     |                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (8) | Incorporated by reference from the
    Registrants Registration Statement on Form S-3 filed
    with the Commission on May 26, 1998.                                   
|
| | (9) | Incorporated by reference from the
    Registrants Report on Form 10-Q for the quarter ended
    September 30, 1996, filed with the Commission on
    November 4, 1996.



|     |                                                                                                                                                                                                                            
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the
    Registrants Registration Statement on Form S-3 filed
    with the Commission on May 6, 1998.                                                                                       
|    
|(11) | Incorporated by reference from the
    Registrants Registration Statement on Form S-8 filed
    with the Commission on July 21, 2000.                                                                                     
|    
|(12) | Incorporated by reference from the
    Registrants Report on Form 10-Q for the quarter ended
    March 31, 1997 filed with the Commission on May 15,
    1997.                                                            
|    
|(13) | Incorporated by reference from the
    Registrants Registration Statement filed on Form S-8
    filed with the Commission on December 2, 1997.                                                                            
|    
|(14) | Incorporated by reference from the
    Registrants Report on Form 10-Q for the quarter ended
    June 30, 1996, filed with the Commission on August 13,
    1996.                                                         
|    
|(15) | Incorporated by reference from the
    Registrants Report on Form 10-Q for the quarter ended
    March 31, 1998, filed with the Commission on May 15,
    1998.                                                           
|    
|(16) | Incorporated by reference from the
    Registrants Report on Form 8-K filed with the
    Commission on June 16, 1998.                                                                                                     
|    
|(17) | Incorporated by reference from CyberMedia
    Inc.s Schedule 13D filed by the Registrant with the
    Commission on August 7, 1998. CyberMedia Inc.s
    filings with the Commission were made under File Number 0-21289.
|    
|(18) | Incorporated by reference from the
    Registrants Report on Form 8-A filed with the
    Commission on October 22, 1998.                                                                                                  
|    
|(19) | Incorporated by reference from the
    Registrants report on Form 10-Q for the quarter ended
    March 31, 1999, filed with the Commission on May 13,
    1999.                                                           
|    
|(20) | Incorporated by reference from the Form S-1
    filed by McAfee.com Corporation with the Commission on
    September 23, 1999, under File Number 333-87609.                                                                
|    
|(21) | Incorporated by reference from the
    Registrants report on Form 10-K for the year ended
    December 31, 2000, filed with the Commission on
    April 2, 2001.                                                          
|    
|(22) | Incorporated by reference from the
    Registrants report on Form 10-Q for the quarter ended
    March 31, 2001, filed with the Commission on May 15,
    2001.                                                           
|    
|(23) | Incorporated by reference from the
    Registrants report on Form 10-Q for the quarter ended
    June 30, 2001 filed with the Commission on August 6,
    2001.                                                           
|    
|(24) | Incorporated by reference from the
    Registrants Registration Statement on Form S-3 filed
    with the Commission on November 9, 2001.                                                                                  
|    
|(25) | Incorporated by reference from the
    Registrants report on Form 10-Q for the quarter ended
    September 30, 2001, filed with the Commission on
    November 13, 2001.                                                  
|    
|(26) | Incorporated by reference from the
    Registrants Report on Form 10-K for the year ended
    December 31, 2001, filed with Commission on
    February 8, 2002.                                                           



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| | * | Management contracts or compensatory plans or
    arrangements covering executive officers or directors of
    Networks Associates, Inc.

104