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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2002                                             
|  
|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, together
with associated Rights


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 o          No þ

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 or any
amendment to this
Form 10-K.     o

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

The aggregate market value of the voting stock
held by non-affiliates of the issuer as of June 30, 2003
was approximately $2.0 billion. The number of shares
outstanding of the issuers common stock as of
October 27, 2003 was 160,329,178.



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DOCUMENTS INCORPORATED BY REFERENCE

NONE



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TABLE OF CONTENTS



|                                                            |                                                                                               |  |  |  |  |  |  | 
|----------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                     
|                                                            | Item 1. Business                                                                             
|                                                            | Item 3. Legal Proceedings                                                                    
|Item 4. Submission of Matters to a Vote of Security Holders
|PART II                                                    
|                                                            | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|                                                            | Item 6. Selected Financial Data                                                              
|                                                            | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                            | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                           
|                                                            | Item 8. Financial Statements and Supplementary Data                                          
|                                                            | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III                                                   
|                                                            | Item 10. Directors and Officers of the Registrant                                            
|                                                            | Item 11. Executive Compensation                                                              
|                                                            | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                            | Item 13. Certain Relationships and Related Transactions                                      
|                                                            | Item 14. Controls and Procedures                                                             
|PART IV                                                    
|                                                            | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                                 
|EX-3.2 Amended/Restated Bylaws                             
|EX-10.7 Amended/Restated 1993 Stock Option Plan            
|EX-10.33 Summary of Pay for Performance Plan               
|EX-12.1 Calculation of Ratio of Earnings                   
|EX-21.1 Subsidiaries of the Registrant                     
|EX-23.1 Consent of PricewaterhouseCoopers LLC              
|EX-31.1 Certification of CEO & CFO to Section 302          
|EX-32.1 Certification of CEO & CFO to Section 906          



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##### Table of Contents



NETWORKS ASSOCIATES INC.

FORM 10-K

For the fiscal year ended December 31,
2002

TABLE OF CONTENTS

|           |  |                                                                           |     |      |    | 
|---------- |  | ------------------------------------------------------------------------- | --- | ---- | -- | 
|           |  |                                                                           |     | Page
|           |  |                                                                           |     |     
|PART I    
|Item 1.    |  | Business                                                                  |     |      | 2  | 
|Item 2.    |  | Properties                                                                |     |      | 25 | 
|Item 3.    |  | Legal Proceedings                                                         |     |      | 26 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                   |     |      | 26 | 
|PART II   
|Item 5.    |  | Market for Registrants Common Equity and
    Related Stockholder Matters |     |      | 26 | 
|Item 6.    |  | Selected Financial Data                                                   |     |      | 28 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition           |     |      |    | 
|           |  | and Results of Operations                                                 |     |      | 29 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosure about
    Market Risk             |     |      | 53 | 
|Item 8.    |  | Financial Statements and Supplementary Data                               |     |      | 54 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting           |     |      |    | 
|           |  | and Financial Disclosure                                                  |     |      | 56 | 
|PART III  
|Item 10.   |  | Directors and Officers of the Registrant                                  |     |      | 56 | 
|Item 11.   |  | Executive Compensation                                                    |     |      | 59 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management        |     |      | 65 | 
|Item 13.   |  | Certain Relationships and Related Transactions                            |     |      | 66 | 
|Item 14.   |  | Controls and Procedures                                                   |     |      | 67 | 
|PART IV   
|Item 15.   |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K       |     |      | 67 | 
|Signatures |  |                                                                           | 134 |     

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PART I






|        |         
|------- | --------
|Item 1. | Business

The filing of this Annual Report on
Form 10-K for the year ended December 31, 2002 with
the U.S. Securities and Exchange Commission, or the SEC,
was delayed to permit us to restate our consolidated financial
statements for certain prior periods. In addition to the
description of our business, this Part I includes, among
other things, (i) a chronology of events leading up to our
decision to restate our financial statements for certain prior
periods and (ii) an overview of the impact of this
restatement on our previously filed financial results. For a
more complete description of the current restatement and the
impact on specific periods, see note 3 to the consolidated
financial statements contained in this Form 10-K and
note 3 to the consolidated financial statements contained
in Amendment No. 2 to our Form 10-K for the year ended
December 31, 2000.

Restatement Chronology

In the first quarter of 2002, the SEC commenced a
Formal Order of Private Investigation into our
accounting practices. In the first quarter of 2003, we became
aware that the U.S. Department of Justice (DOJ)
had commenced an investigation into our consolidated financial
statements for 2000 and years prior.

In April 2002, we announced our intention to
file, and in June 2002 we filed with the SEC, restated
consolidated financial statements for 2000, 1999 and 1998, years
which precede our current managements tenure with the
company. This previous restatement (i) corrected certain
inaccuracies found in our accounts for 1998 through 2000 and
(ii) gave retroactive effect to our adoption of EITF 01-09
Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendors
Products(EITF 01-09). EITF 01-09 required that
our consolidated financial statements prior to 2000, the year of
adoption, that are presented for comparative purposes be
reclassified to comply with the income statement display
requirement. Many of the previous accounting inaccuracies
pertained to amounts that were reclassified from tax liability
accounts to our general and liability accounts, thereby causing
our expenses to be understated. Other previous accounting
inaccuracies included reclassification of tax liability accounts
to the sales return allowance account, reclassification of
amounts from a general and administrative liability account to a
marketing liability account, and the recording of payments to a
distributor in a balance sheet tax liability account instead of
reducing net revenue. Our results of operations for 2001 and the
interim periods of 2002 were not impacted by the previous
restatement. However, to give effect to accumulated prior-period
adjustments and their related tax impacts, we previously
restated our December 31, 2001 and March 31, 2002
consolidated balance sheets.

As a result of information obtained in connection
with the SEC and DOJ investigations, in March 2003, we concluded
we would restate our consolidated financial statements for 1998
through 2000 to properly reflect sales to distributors on a
sell-through basis. In the course of preparing these
consolidated financial statements, we identified additional
items and errors for which accounting adjustments were necessary.

As more fully described in note 3 to our
consolidated financial statements for 2000 through 2002
(contained in this Form 10-K) and in note 3 to our
consolidated financial statements for 1998 through 2000
(contained in our filing of Amendment No. 2 to our
Form 10-K for year ended December 31, 2000), the
revenue restatement adjustments primarily resulted in revenue
being deferred and recognized in subsequent periods, although
certain adjustments resulted in permanent reductions in revenue.
The adjustments include (i) amounts deferred and recognized
in subsequent periods as a result of (A) our conversion
from a sell-in basis to the sell-through basis of accounting for
revenue from distributors and resellers to properly report
revenue on these sales and (B) correction of errors
previously made in the application of the revenue recognition
principles under Statement of Position (SOP) 97-2,
Software Revenue Recognition
(SOP 97-2), and (ii) permanent reductions
in revenue as a result of the presence of concurrent investments
in customers and errors due to misclassifications between
revenue and expense. We have determined that, excluding the
effect of currency related adjustments, the aggregate amount of
net revenue was not reduced as a result of (i) our
restatement to the sell-through method of accounting for
distributor sales in 1998 through 2000 (which is how we have
accounted for these sales since 2001) or (ii) changes
related to SOP 97-2

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revenue recognition principles. These adjustments
had the effect of deferring revenue from earlier periods to be
recognized in later periods.


We previously announced, and furnished with the
SEC on Form 8-K, preliminary unaudited operating results
for 2002. The net effect of these revenue adjustments is to
increase previously announced or previously reported total
revenue by $101.2 million, $259.2 million,
$11.6 million and $49.4 million in 2002, 2001, 2000
and 1999, respectively, and to decrease total revenue by
$533.9 million in 1998. For the five-year period 1998
through 2002, these adjustments correspond to a
$112.6 million reduction to net revenue. Net revenue for
2003 and 2004 is also expected to be increased by
$5.7 million and $0.3 million, respectively, as a
result of these adjustments.

We also made certain deferrals and adjustments to
our expenses and other accounts in connection with these revenue
adjustments and have made certain other adjustments to our
expenses. The net effect of these expense and other account
adjustments is to increase 2002 expenses by
$2.9 million, increase 2001 expenses by
$20.7 million, decrease 2000 expenses by
$28.7 million, increase 1999 expenses by
$16.2 million and reduce 1998 expenses by
$15.7 million. As a result of these adjustments to our
revenues and expenses and other accounts, we are also making
certain income tax related adjustments, which decrease
(increase) our tax expense by $9.7 million,
$(54.6) million, $(24.4) million, $(28.2) million
and $166.7 million in 2002, 2001, 2000, 1999 and 1998,
respectively.

The consolidated statement of operations impact
of all of these adjustments discussed above is to increase
2002 net income by $38.1 million, restate our
previously reported 2001 net loss of $100.6 million to
net income of $83.3 million, reduce 2000 net loss by
$15.9 million, reduce 1999 net loss by
$4.9 million and restate our previously reported net income
of $32.4 million in 1998 to a net loss of
$319.1 million.

The foregoing restatement adjustments required an
evaluation of a number of complex criteria and significant
accounting judgments by us.

Impact on Our SEC Filings

As a result of our decision to restate certain
prior period financial results, the filings of our 2002
Form 10-K and Form 10-Qs for first and second quarters
of 2003 were delayed. Pending filing of these reports, we
furnished to the SEC on Form 8-K unaudited results for 2002
and unreviewed results for the first and second quarters of 2003
and conducted regular earnings calls with respect to these
preliminary operating results. We are filing contemporaneously
this Form 10-K and the Form 10-Qs for the first and
second quarters of 2003 containing our audited consolidated
financial statements for 2000 through 2002 and the reviewed
quarterly condensed consolidated financial statements,
respectively. We are also filing Amendment No. 2 to our
2000 Form 10-K containing the restated consolidated
financial statements for 1998 through 2000. Other than these
documents, we have not amended and do not intend to amend our
previously filed annual reports on Form 10-K or quarterly
reports on Form 10-Q for the periods affected by the
restatements or adjustments. For this reason, the consolidated
financial statements and related financial information contained
in such previously-filed reports should no longer be relied upon.

General

This Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties.
The statements contained in the Report on Form 10-K 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 are based on information available to us on the
date hereof. 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,
could, expects, plans,
anticipates, believes,
estimates, predicts,
potential, targets, goals,
projects, continue, or variations of
such words, similar expressions, or the negative of these terms
or other comparable terminology. Although we believe that the
expectations reflected in the

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forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements. Therefore, actual results may differ materially
and adversely from those expressed in any forward-looking
statements. Neither we nor any other person can assume
responsibility for the accuracy and completeness of
forward-looking statements. Important factors that may cause
actual results to differ from expectations include, but are not
limited to, those discussed in Risk Factors
beginning on page 11 in this document. We undertake no
obligation to revise or update publicly any forward-looking
statements for any reason.


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. In September 2002, we
repurchased the 25% minority interest in McAfee.com and merged
McAfee.com into Networks Associates, Inc. McAfee Associates,
Inc. was incorporated in 1992 and Network General Corporation
was incorporated in 1987.

This report includes registered trademarks and
trade names of Network Associates and other corporations.
Trademarks or trade names owned by Network Associates and/or its
affiliates include: Network Associates, Magic
Solutions, McAfee and Sniffer.

Networks Associates, Inc. is headquartered at
3965 Freedom Circle, Santa Clara, California, 95054, and
the telephone number at that location is (408) 988-3832. The
Network Associates web site is www.networkassociates.com.

OVERVIEW

We are a leading supplier of computer security
solutions designed to prevent intrusions on networks and protect
computer systems from the next generation of blended attacks and
threats. We offer two families of products, McAfee System
Protection Solutions and McAfee Network Protection Solutions.
Our computer security solutions are offered primarily to large
enterprises, governments, small and medium-sized businesses and
consumer users. We operate our business in five geographic
regions: North America; Europe, Middle East and Africa, or EMEA;
Japan; Asia-Pacific and Latin America. See note 18 to the
condensed consolidated financial statements.

We recently launched our McAfee
Protection-in-Depth Strategy, designed to provide a complete set
of system and network protection solutions differentiated by
intrusion prevention technology that can detect and block known
and unknown attacks. To more effectively market our products in
our various geographic sales regions, as more fully described
below, we have combined complementary products into separate
product groups as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | McAfee System Protection Solutions, which
    delivers anti-virus and security products and services designed
    to protect systems such as desktops and servers. McAfee System
    Protection Solutions also includes our Magic Service Desk family
    of products designed to offer management and visibility of
    desktop and server systems; and
|
| |  | McAfee Network Protection Solutions, which offers
    products designed to maximize the performance and security of
    networks, including Sniffer Technologies network analysis and
    availability technologies, network intrusion prevention with
    McAfee IntruShield and InfiniStream Security Forensics.                                      

The majority of our net revenue has historically
been derived from our McAfee Security anti-virus products and
our Sniffer Technologies network fault identification and
application performance management products. In addition to
these two flagship products, we have focused our efforts on
building a full line of complementary network and system
protection solutions. On the system protection side, we
strengthened our anti-virus lineup by adding complementary
products in the anti-spam and host intrusion prevention
categories. On the network protection side, we built upon our
Sniffer Technologies line by adding products in the network

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monitoring, network reporting, network
application performance monitoring, network intrusion prevention
and forensics categories. We continuously seek to expand our
product lines.


In 2002, our net revenue was
$1,043.0 million and net income was $128.3 million.

McAfee System Protection Solutions

McAfee System Protection Solutions helps
enterprises, small businesses, consumers and government agencies
assure the availability and security of their desktops,
application servers and web service engines. The McAfee System
Protection Solutions portfolio features a range of products
including anti-virus, managed services, McAfee SpamKiller
anti-spam solutions, McAfee ThreatScan vulnerability assessment
and McAfee Entercept for host-based intrusion prevention. Each
is backed by the McAfee Anti-Virus Emergency Response Team, a
leading threat research organization.

McAfee System Protection Solutions also includes
McAfee Consumer Security, offering both traditional retail
products and our on-line subscription services. Our consumer
retail and on-line subscription applications allow users to
protect their PCs from malicious code and other attacks, repair
PCs from damage caused by viruses and block spam and other
undesirable content. Our retail products are sold through retail
outlets, including Best Buy, CompUSA, Dixons and Staples, to
single users and small home offices in the form of traditional
boxed product. These products include free and for-fee software
updates and technical support services. Our on-line subscription
services are delivered through the use of an Internet browser at
our McAfee.com web site and through multiple on-line service
providers.

McAfee System Protection Solutions also include
our Magic Service Desk family of products offering management
and visibility of desktop and server systems. Magic Service Desk
is a modularized workflow engine for collecting, tracking,
managing and reporting. This product is primarily used to manage
service items, people resources and assets, as well as assist in
tracking successful change within an organization. Magic Service
Desk is complimented by solutions allowing for remote
diagnostics and asset discovery. Customers for these products
are corporate, governmental and educational organizations.

McAfee Network Protection Solutions

McAfee Network Protection Solutions helps
enterprises, small businesses, government agencies, educational
organizations and service providers maximize the availability,
performance and security of their network infrastructure. The
McAfee Network Protection Solutions portfolio features a range
of products including Sniffer and the nPO Solution for network
management. Sniffers products capture data, monitor
network traffic and collect and report on key network
statistics. These products are also designed to optimize network
and application performance and increase network reliability by
uncovering and analyzing network problems and network security
vulnerabilities and recommending solutions to such problems.
Other McAfee Network Protection Solutions products include
InfiniStream Security Forensics for security forensics and
McAfee IntruShield for network intrusion detection and
prevention. Customers for these products are enterprises and
government agencies, as well as service providers.

Expert Services and Technical
Support

We have established Expert Services and Technical
Support to provide professional assistance in the design,
installation, configuration and implementation of our
customers networks and acquired products. Expert Services
is focused on two service markets: Consulting Services and
Education Services.

Consulting Services support product integrations
and deployment with an array of standardized and custom
offerings. Consulting Services also offer other services in both
the security and networking areas, including early assessment
and design work, as well as emergency outbreak and network
troubleshooting assistance. Our consulting services organization
is organized around our product groups.

Education Services 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.

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The PrimeSupport program provides our customers
on-line 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 on-line KnowledgeCenter or the telephone-based Connect,
Priority and Enterprise. All PrimeSupport programs include
software updates and upgrades. PrimeSupport is available to all
customers worldwide 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 on-line KnowledgeCenter.                                                                                                                                                                                   
|
| |  | PrimeSupport Priority  Provides
    support with priority, unlimited, toll-free telephone access to
    technical support 24 hours a day, 7 days a week and
    access to the on-line KnowledgeCenter.                                                                                                                                            
|
| |  | PrimeSupport Enterprise  Offers
    proactive, personalized service and includes an assigned
    technical support engineer from our Enterprise support team,
    proactive support contact (telephone or email) with
    customer-defined frequency, election of five designated customer
    contacts and access to the on-line KnowledgeCenter.

In addition, we also offer our consumer users
technical support services made available at our McAfee.com
website on both a free and fee-based basis, depending on the
support level required.

Network Associates Labs

Network Associates Labs, or NAI Labs, is our
research and development organization dedicated to advanced
network and host system intrusion detection and protection and
security technology. NAI Labs currently conducts research in the
areas of host intrusion protection, network intrusion
protection, wireless intrusion protection, malicious code
defense, security policy and management, high-performance
assurance and forensics and threats, attacks, vulnerabilities
and architectures. NAI Labs has ongoing projects funded through
the U.S. Defense Advanced Research Projects Agency, the
U.S. Intelligence Community Advanced Research &
Development Activity, Air Force, Navy, Army, NSA and other
Department of Defense and U.S. government agencies. NAI
Labs focuses on exploiting government research to advance the
capabilities of our product-line offerings.

Strategic Alliances

From time to time, we enter into strategic
alliances with third parties to serve as a catalyst for our
future growth. These relationships may include joint technology
development and integration, research cooperation, co-marketing
activities and sell-through arrangements. For example, we have
an alliance with America Online under which, among other things,
we offer our on-line PC anti-virus services to AOL members as a
co-branded premium service and provide our host-based email
scanning services and personal firewall services as a
value-added service. We also have alliances with, among others,
Cox Communications, Dell, Microsoft, MSN, NEC, NTT DoCoMo,
Phoenix Technologies and Telefonica.

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. As the software licenses or
maintenance contracts near expiration, we contact customers to
renew their licenses or maintenance contracts, as applicable.
Typically, our maintenance contracts are sold on an annual basis.

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.

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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 may result in
significantly higher up-front revenue and lower recurring and
future revenues. We typically sell perpetual licenses in
connection with sales of our hardware-based products in which
software is bundled with the hardware platform. Magic Service
DeskSolutions sales are primarily on a perpetual license basis
while allowing customers to purchase annual maintenance renewals.

On-Line Subscriptions and Managed
Applications

For our on-line subscription services, customers
essentially rent the use of our software. Because
our on-line subscription services are version-less,
or self-updating, customers subscribing to these services are
assured of using the most recent version of the software
application, eliminating the need to purchase product updates or
upgrades. Our on-line subscription consumer products and
services are found at our McAfee.com web site where consumers
using their Internet browser 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.
Our McAfee.com web site also offers customers access to McAfee
Personal Firewall Plus, McAfee SpamKiller and McAfee Internet
Privacy Service, as well as combinations of these services
through suites.

Similarly, our corporate on-line subscription
products and services, or our ASaP offerings, provide corporate
customers the most up-to-date anti-virus software. Our ASaP
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 Desktop Firewall ASaP, which blocks unauthorized
network access and stops known network threats.

We also make our on-line subscription products
and services available over the Internet in what we refer to as
a managed environment. Unlike our on-line subscription service
solutions, these managed service providers, or MSP, solutions
are customized, monitored and updated by networking
professionals for a specific customer. We also allow
intermediaries, such as Internet service providers, to sell and
host our products and services in a managed environment.

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, small and
medium-sized accounts, as well as resellers, distributors,
system integrators, internet service providers and Original
Equipment Manufacturers worldwide through the channels listed
below.



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

Our United States direct sales force, comprising
the majority of our total sales force, is organized by market
segment. The direct field force consists of strategic account
executives that call upon our large enterprise, and in some
cases, global accounts. Their focus is to promote our vision and
strategy as well as increase the penetration of our products.
Our major account managers have similar responsibilities but are
focused on our next tier of large U.S. customers and
provide sales leadership and promote all of our product
offerings. Our other named accounts are covered by territory
account managers. These accounts are large enough to require
face-to-face sales coverage and are led by account managers with
McAfee System Protection Solutions or McAfee Network Protection
Solutions backgrounds. The small and medium-sized business
segment is comprised of accounts not serviced by territory
account managers. These accounts are serviced primarily by our
telesales representatives and channel partners. We have made a
significant investment in our channel partner programs to
increase sales and ultimately drive growth in this market
segment. The small office, home office and consumer segments are
the focus of our McAfee Consumer team.

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

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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. Our account teams are also
responsible for maintaining and nurturing long-term customer
relationships.




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

We have sales and support operations in EMEA,
Japan, North America, Asia-Pacific and Latin America. In 2002,
2001, and 2000 international revenues based upon product
destination accounted for approximately 37%, 35%, and 32% of our
net revenues, respectively. We are continuing to significantly
expand our international sales activities. Within our
international sales regions, sales forces are organized by
country when and where local demand and sales force
considerations make it advisable.



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

To complement our direct sales efforts, we market
many of our products through corporate resellers, retailers and,
indirectly, through distributors. In addition, our channel
efforts include strategic alliances with complementary
manufacturers and publishers to expand our reach and scale. We
currently utilize corporate resellers, including ASAP Software,
CDW, Dell, Insight, Softmart, Software House International and
Software Spectrum, as well as network integrators who offer our
solutions and sell site licenses of our software to corporate,
small business and government customers.

Independent software distributors who currently
supply our products include Digital River, Ingram Micro, Merisel
America, MOCA and Tech Data. These distributors supply our
products primarily to large retailers, value-added resellers, or
VARs, mail order and telemarketing companies. Both through our
authorized distributors and directly with certain retail
resellers through a consignment model, we sell our retail
packaged products to several of the larger computer and software
retailers in the United States, including Best Buy, CompUSA,
Dixons, Office Depot, Office Max and Staples. Members of our
channel sales force work closely with our major reseller and
distributor accounts to manage demand generating activities,
training, order flow, and affiliate relationship management.

Our top ten distributors typically account for
between 40% and 45% of our net sales in any 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.

We utilize 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

OEMs license our products and bundle them with PC
hardware or software. For example, we are the preferred
anti-virus provider for PC hardware manufacturers such as Apple,
Dell, NEC, Phoenix Technologies and Sony. 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, or revenue share with, our OEMs.



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

Channel marketing is the means by which we
market, promote, train, and incent our resellers and
distributors to promote our products to their end-user
customers. We offer our resellers and distributors

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technical and sales training classes, marketing
and sales assistance kits. We also provide specific cooperative
marketing programs for end-user seminars, catalogs, demand
creation and sales events.


One of the principal means of marketing our
products and services is through the Internet. In addition to
the www.networkassociates.com website, each of our product
groups has 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
on-line subscription products and services. We also promote our
products and services through advertising activities in trade
publications, 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.

We also market our products through the use of
rebate programs. Within most countries we typically offer two
types of rebate programs, volume incentive rebates to channel
partners and promotional rebates to end-users. The channel
partner earns a volume incentive rebate primarily based upon
their sale of our products to end-users. From time to time, we
also make rebates available to individual users of various
products purchased at major retailers.

Customers

We primarily market our products to large
corporate and government customers through our direct sales
organization and indirectly through resellers and distributors.
A majority of our products are distributed indirectly through
resellers and distributors. During 2002, two distributors,
Ingram Micro and Tech Data, accounted for more than 10% of our
net revenue each and together accounted for approximately 35% of
our net revenue.

We primarily market our products to individual
home office and consumers directly through on-line distribution
channels and indirectly through traditional distribution
channels, such as retail stores. McAfee Consumer is responsible
for on-line distribution of our products sold to individual
consumers over the Internet or for Internet-based products,
including products distributed by our on-line partners, and for
the licensing of technology to strategic distribution partners
for sale to individual consumers, with certain exceptions.

Product Development, Investments, and
Acquisitions

We believe that our ability to maintain our
competitiveness depends 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 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.

For 2002, 2001 and 2000, we expensed
$148.8 million, $146.7 million and $164.2 million
(or, excluding stock based compensation charges (credits),
$144.8 million, $142.1 million and
$162.3 million), respectively, on research and development.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations.

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,
IntruShield and E-ppliance products. We use a limited number of
third-party manufacturers for these manufacturing operations.
Reliance on third-party manufacturers, including software
replicators, involves a number of risks, including the lack of
control

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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 that are supplied by a
limited number of parties and greater obsolescence risks.


Competition

The markets for our products are intensely
competitive and are subject to rapid changes in technology. We
also expect competition to increase in the near-term. We believe
that the principal competitive factors affecting the markets for
our products include, but are not limited to:



| |   |                                   
| | - | ----------------------------------
| |  | 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, stronger relationships with channel partners,
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 markets with their network security and
management products.

Anti-Virus.Our
principal competitors in the anti-virus market are Symantec and
Computer Associates. Trend Micro remains the strongest
competitor in the Asian anti-virus market. Sophos, Fsecure,
Panda, and Dr. Ahns are also showing growth in their
respective markets. As a result of its GeCAD Software
acquisition, at some point we may also compete directly against
Microsoft in the consumer market.

Network Security and Intrusion Detection and
Protection.Our principal competitors
in the security market vary by product type. For intrusion
detection and prevention products, we compete with Cisco
Systems, Computer Associates, Fortinet, Internet Security
Systems, NetScreen, Sourcefire, Symantec and TippingPoint
Technologies. 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 Fault Identification and Application
Performance Management.Our principal
competitors in the network fault identification and application
performance management market are NetScout and WildPackets.
Other competitors include Agilent, Cisco Systems, Compuware
Corporation, Concord Communications, Finisar, Fluke Networks,
Network Instruments and Niksun.

Service Management.Our principal competitors in the
service desk market are BMC/ Remedy, Computer Associates,
FrontRange Solutions and Peregrine Systems.

Other Competitors.In addition to competition from large
technology companies such as HP, IBM, Intel, Microsoft, and
Novell that may offer network and system protection products as
enhancements to their

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operating systems, we also face competition from
smaller companies and shareware authors that may develop
competing products.


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. Often, we
do not obtain signed license agreements from customers who
license products from us. In these cases, we include an
electronic version of an end-user 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.

Employees

As of December 31, 2002, we employed
approximately 3,800 individuals worldwide including
approximately 900 in research and development, approximately
2,100 in sales and marketing, and approximately 800 in finance
and administration. Approximately 1,500 employees are in
locations outside the United States. With limited exceptions,
none of our employees are represented by a labor union. We
consider the relationships with our employees to be positive.
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. To date, we believe that we have been successful in
recruiting qualified employees, but there is no assurance that
we will continue to be successful in the future.

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.

Our revenues and operating results have varied
significantly in the past. We expect fluctuations in our
operating results to continue. As a result, we may not sustain
profitability. Also, we believe that period-to-period
comparisons of our financial results should not be relied upon
as an indicator of our future results. Our expenses 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 period to period, include, but are not limited to:



| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | volume, size, timing and contractual terms 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 services we offer
    and whether (i) our products are sold directly by us or
    indirectly through distributors, resellers and others,
    (ii) the product is hardware or software based and

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| |   |                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | (iii) 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 acquisition of the publicly held
    shares of McAfee.com in September 2002 and our recent
    acquisitions of Entercept Security Technologies and IntruVert
    Networks in 2003 and the dispositions of our PGP and Gauntlet
    product lines in 2002;         
|
| |  | the components of our revenue that are deferred,
    including our on-line subscriptions and that portion of our
    perpetual and subscription software licenses attributable to
    support and maintenance; and                                                                                                                                
|
| |  | stock-based compensation charges and other costs
    related to extraordinary events, including litigation,
    reductions in force, relocation of personnel and restatement of
    our consolidated financial statements, and factors that lead to
    substantial drops in estimated values of long-lived assets below
    their carrying value.



| |                                       
| | --------------------------------------
| | Seasonal and Macroeconomic
    Factors

Our net revenue is typically lower in the first
quarter when many businesses experience lower sales, flat in the
summer months, particularly in the European market, and higher
in the fourth quarter as customers typically complete annual
budgetary cycles. In recent periods, continued poor economic
conditions throughout the world have hurt our business.

It Is Difficult for Us to Estimate Operating
Results Prior to the End of a Quarter.

Because we do not maintain significant levels 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.

We Face Risks Related to the Pending Formal
Securities and Exchange Commission and Department of Justice
Investigations and Our Accounting Restatements.

In the first quarter of 2002, the SEC commenced a
Formal Order of Private Investigation into our
accounting practices. In the first quarter of 2003, we became
aware that the DOJ had commenced an investigation into our
consolidated financial statements. In April and May 2002, we
announced our intention to file, and in June 2002 we filed with
the SEC, restated consolidated financial statements for 2000,
1999 and 1998 to correct certain discovered inaccuracies for
these periods.

As a result of information obtained in connection
with the ongoing SEC and DOJ investigations, we concluded we
would restate our consolidated financial statements to, among
other things, reflect revenue on sales to our distributors for
1998 through 2000 on a sell-through basis (which is how we
reported sales to distributors since the beginning of 2001).
Although we have filed these restated consolidated financial
statements, the SEC and DOJ inquiries have resulted, and may
continue to result in, a diversion of managements
attention and resources and may contribute to current and future
stock price volatility.

The filing of our restated consolidated financial
statements does not resolve the pending SEC inquiry into our
accounting practices. We are engaged in ongoing discussions
with, and continue to provide information to, the SEC regarding
our consolidated financial statements for calendar year 2000 and
prior periods. The resolution of the SEC inquiry into our prior
accounting practices could require the filing of additional
material restatements of our prior consolidated financial
statements or require that we take other actions not presently
contemplated, including actions resulting from the SECs
inquiry into the nature and manner of our recent restatement.

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We Are Subject to Intense Competition in the
System and Network Protection 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. 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.

We face competition in specific product markets.
Principal competitors include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in the anti-virus product market, Symantec and
    Computer Associates. Trend Micro remains the strongest
    competitor in the Asian anti-virus market. Sophos, Fsecure,
    Panda, and Dr. Ahns are also showing growth in their
    respective markets. As a result of its GeCAD Software
    acquisition, at some point we may also compete directly against
    Microsoft in the consumer market;
|
| |  | in the network fault identification and
    application performance management product market, Netscout and
    WildPackets, with other competitors including Agilent, Cisco
    Systems, Compuware Corporation, Concord Communications, Finisar,
    Fluke Networks, Network Instruments and Niksun;                                                                                                  
|
| |  | in the market for our other intrusion detection
    and protection products, Cisco Systems, Computer Associates,
    Internet Security Systems, Netscreen, Sourcefire, Symantec and
    TippingPoint Technologies; and                                                                                                                                                                                 
|
| |  | in the service desk market, BMC/ Remedy, Computer
    Associates, FrontRange Solutions and Peregrine Systems.                                                                                                                                                                                                                                                                                          

Other competitors for our various products could
include large technology companies. We also face competition
from numerous smaller companies and shareware authors that may
develop competing products.

Increasingly, our competitors are large vendors
of hardware or operating system software. These competitors are
continuously developing or incorporating system and network
protection functionality into their products. For example,
through its acquisition of Okena, Cisco Systems may incorporate
functionality that competes with our content filtering and
anti-virus products. Similarly, following its acquisition of
GeCAD Software, Microsoft indicated its plans to boost security
of its Windows platform. The widespread inclusion of products
that perform the same or similar functions as our products
within computer hardware or other companies software
products could reduce the perceived need for our products or
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. In addition, the
software industry is currently undergoing consolidation as firms
seek to offer more extensive suites and broader arrays of
software products, as well as integrated software and hardware
solutions. This consolidation may negatively impact our
competitive position.

We Face Risks Related to the Recent Product
Reorganization.

Following our IntruVert and Entercept
acquisitions, we reorganized our products into our McAfee System
Protection Solutions and McAfee Network Protection Solutions
product groups. Our organizational structure is intended to
better leverage the McAfee brand to position us as a provider of
a complete set of system and network protection solutions
differentiated by intrusion prevention technology. Risks related
to our reorganization include:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may be unable to successfully expand our
    McAfee brand beyond our anti-virus products;                                                                                                
|
| |  | our strategic positioning may result in our
    competing more directly with larger, more established
    competitors, such as Cisco Systems and Microsoft;                                 
|
| |  | many of our network and system protection
    products were recently acquired and the income potential for
    these products is unproven and the market for these products is
    volatile;
|
| |  | our sales force requires additional specialized
    training to sell a number of our products; and                                                                                          
|
| |  | there may be customer confusion around our
    strategy.                                                                                                                                    

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We Face Risks Associated With Past and Future
Acquisitions.

We may buy or make investments in complementary
companies, products and technologies. In addition to our
acquisition of the publicly traded shares of McAfee.com, in the
last 12 months, we completed a number of strategic
acquisitions, including Deersoft, Entercept, IntruVert and
Traxess, and we acquired two of our resellers in Central and
South America, BySupport and BySecure. Also, McAfee.com acquired
certain software assets from Novasoft in 2002 prior to our
acquisition of the minority interest in McAfee.com.



| |            
| | -----------
| | Integration

Integration of an acquired company or technology
is 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,
    research and development, 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.



| |                     
| | --------------------
| | Open Source Software

Products or technologies acquired by us may
include so-called open source software. Open source
software is typically licensed for use at no initial charge, but
imposes on the user of the open source software certain
requirements to license to others both the open source software
as well as the software that relates to, or interacts with, the
open source software. Our ability to commercialize products or
technologies incorporating open source code or otherwise fully
realize the anticipated benefits of any such acquisition may be
restricted because, among other reasons:



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | open source license terms may be ambiguous and
    may result in unanticipated obligations regarding our products;                                                                             
|
| |  | competitors will have improved access to
    information that may help them develop competitive products;                                                                                      
|
| |  | open source software cannot be protected under
    trade secret law;                                                                                                                           
|
| |  | it may be difficult for us to accurately
    determine the developers of the open source code and whether the
    acquired software infringes third party intellectual property
    rights; and
|
| |  | open source software potentially increases
    customer support costs because licensees can modify the software
    and potentially introduce errors.                                          



| |                           
| | --------------------------
| | Use of Cash and Securities

Our available cash and securities may be used to
acquire or invest in companies or products, possibly resulting
in significant acquisition-related charges to earnings and
dilution to our stockholders. For example, in the 12-month
period ended June 30, 2003, we used approximately
$334.3 million of cash to make various acquisitions,
including approximately $216.0 million in net cash used to
acquire IntruVert and Entercept.

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Moreover, if we acquire a company, we may have to
incur or assume that companys liabilities, including
liabilities that may not be fully known at the time of
acquisition.


We Have Recently Experienced Significant
Additions to Our Senior Management and Changes in Our Sales
Organization.

Several members of our senior management were
only added in the last year, and we may add new members to
senior management. In July 2003, we reorganized our sales
organization and, among other actions, we elevated Kevin Weiss
to the newly created position of executive vice president of
worldwide sales. Also, in September 2003, we named James
Lewandowski executive vice president of North American sales and
Donna Troy executive vice president of worldwide channels.
Towards the end of 2002, William Kerrigan joined us as senior
vice president of our McAfee consumer division, Gregory
Jorgensen joined as our senior vice president of marketing and
Raymond J. Smets joined as president of Sniffer Technologies.
Changes in management and our sales organization 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, in addition to senior management
personnel, technically qualified and highly-skilled sales,
consulting, technical and marketing personnel. Competition for
qualified individuals is intense. To attract and retain critical
personnel, we believe that we must provide a competitive
compensation package, including stock options. Increases in
shares available for issuance under our stock option plans
require stockholder approval. Institutional stockholders, or our
stockholders generally, may not approve future increases.

Through our 2003 acquisitions, we hired a number
of new employees. We also hired a significant number of new
employees in 2002 and 2001, including a large number in
Bangalore, India, in connection with the relocation of a
significant portion of our research and development operations.
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 additions or hires are
trained and otherwise assimilate and adapt to our organization
and culture. In addition, we may face difficulties in
recruiting, hiring and training qualified employees for our
Bangalore facility.

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 management or
other critical personnel. It could be difficult, time consuming
and expensive to replace any key management member or other
critical personnel, particularly if the individual is highly
skilled. Integrating new management and other key personnel also
may be difficult and costly. The loss of management or other
critical personnel may be disruptive to our business and might
also result in our loss of unique skills and the departure of
existing employees and/or customers.

We Face Risks Related to Our International
Operations.

For the first six months of 2003 and for 2002,
2001, and 2000, net revenue from international sales based upon
product destination represented approximately 37%, 37%, 35%, and
32%, respectively, of our net revenue. We intend to focus on
international growth and expect international revenue to remain
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;
|
| |  | the acceptance of the reorganization of our
    international sales forces by regions;                                          

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| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the ability to successfully localize software
    products for a significant number of international markets;                                                                                                                      
|
| |  | uncertainties relative to regional economic
    circumstances, including the continued economic weakness
    throughout Asia and Latin America and pricing pressures
    associated with weak economic conditions in these regions;
|
| |  | our ability to adapt to sales practices and
    customer requirements in different cultures;                                                                                                                                       
|
| |  | currency fluctuations and risks related to
    hedging strategies;                                                                                                                                                                 
|
| |  | political instability in both established and
    emerging markets;                                                                                                                                                                
|
| |  | tariffs, trade barriers and export
    restrictions; and                                                                                                                                                                           
|
| |  | a high incidence of software piracy in some
    countries.                                                                                                                                                                         

Additionally, our sales forces are organized by
geographic region. This structure may lead to sales force
competition for sales to multinational customers and may reduce
our ability to effectively market our products to multinational
customers.

We May Incur Significant Stock-Based
Compensation Charges Related to Repriced Options, Assumed
McAfee.com and IntruVert Options and Compensation Expenses
Related to the Entercept Retention Payments.

We may incur stock-based compensation charges
related to (i) employee options repriced in April 1999
(Repriced Options), (ii) McAfee.com options we
assumed in the acquisition of the publicly traded McAfee.com
shares in September 2002 (McAfee.com Options)
(iii) unvested IntruVert options we assumed in May 2003
related to this acquisition (the IntruVert Options),
and (iv) unvested IntruVert restricted stock we assumed in
May 2003 related to this acquisition (the IntruVert
Restricted Stock). The size of the charges related to the
Repriced Options and McAfee.com Options could be significant
depending on the movements in the market value of our common
stock. As a result of Financial Accounting Standards Board
Interpretation No. 44, effective July 1, 2000,
Repriced Options and McAfee.com Options are subject to variable
accounting treatment. The stock-based compensation charge (or
credit) for the Repriced Options is determined by the excess of
our closing stock price at the end of a reporting period over
the fair value of our common stock on July 1, 2000,
equivalent to $20.375. The stock-based compensation charge (or
credit) for the McAfee Options is determined by the excess of
our closing stock price over the exercise price of the option
minus $11.85 payable upon exercise of the option. Remeasurement
of the charge continues until the earlier of the date of
exercise, forfeiture or cancellation without replacement. The
resulting compensation charge (or credit) to earnings will be
recorded over the remaining life of the options subject to
variable accounting treatment.

For the six months ended June 30, 2003,
stock-based compensation charges of approximately
$2.2 million were recorded for McAfee.com Options. No stock
based compensation charges were recorded for the Repriced
Options. For the year ended December 31, 2002, stock-based
compensation charges of approximately $16.1 million were
recorded for the McAfee.com Options, and credits of
approximately $5.5 million were recorded for the Repriced
Options. During the remaining life of both the McAfee.com
Options and Repriced Options we may record additional
stock-based compensation charges or credits. We estimate that a
$1 increase in our stock price at June 30, 2003 would
increase our future stock compensation charge by approximately
$0.5 million.

For the IntruVert Options, we will recognize a
stock-based compensation expense as those options vest. For the
IntruVert Restricted Stock, we will recognize a stock-based
compensation expense as the restricted stock vests over the next
three to four years. For 2003, we expect the expense to be
approximately $1.9 million with respect to the IntruVert
Options and Restricted Stock.

We may also incur significant compensation
payments under the Entercept Retention Plan (the Retention
Plan Payments). For the Retention Plan Payments, we will
recognize a compensation expense as the required service periods
for the retention payments expire over one year. The Retention
Plan Payments

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were funded at the time of the Entercept
acquisition, and amounts not paid to the Retention Plan
participants will be paid to the former Entercept stockholders.
For 2003, we expect the expense to be approximately
$1.7 million.


We Depend on Revenue from Our Flagship
Anti-Virus and Sniffer Products.

We have historically derived a majority of our
net revenue from our flagship McAfee anti-virus software
products and our Sniffer network fault identification and
application performance management products. These products are
expected to continue to account for a significant portion of our
net revenues. 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. In
recent periods, our Sniffer-based revenues have been adversely
impacted by, among other things, customer budgetary constraints
and a slowing in network infrastructure deployments. We expect
this trend to continue for at least the near-term.

Customers May Cancel or Delay
Purchases.

Weakening economic conditions, new product
introductions and expansions of our business may increase the
time necessary to sell our products and services and require us
to spend more on our sales efforts. Our products and services
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 typically represent approximately 40% to 45% of our
net sales in any quarter. Our two largest distributors, Ingram
Micro and Tech Data, together accounted for approximately 35% of
net revenue in 2002 and the first six months of 2003,
respectively.



| |                      
| | ---------------------
| | 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.



| |                     
| | --------------------
| | 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 $3.7 million at June 30, 2003,
$6.6 million at December 31, 2002 and
$8.4 million at December 31, 2001. We regularly review
the collectibility and credit-worthiness of our distributors to
determine an appropriate allowance for doubtful accounts. Our
uncollectible accounts could exceed our current or future
allowances.

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We Face the Risk of Future 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. For the
six months ended June 30, 2003, the year ended
December 31, 2002 and 2001, our amortization charge for
purchased technology and other intangibles was approximately
$8.7 million, $13.9 million and $12.9 million,
respectively. In addition, we must evaluate our intangible
assets, including goodwill and purchased technology, at least
annually for impairment according to the guidance provided by
SFAS 142. We completed the initial impairment review during
the second quarter of 2002 and subsequently completed our annual
impairment review during the fourth quarter of 2002. As a result
of these reviews, the intangible assets were determined not to
be impaired. If we determine that these items are impaired, we
will be required to take a related non-recurring charge to
earnings.

We Face Risks Related to the Recent
Reorganization of Our Expert Services Organization.

Historically, our professional service
organization was organized by product group. In October 2002, we
announced the formation of our Expert Services organization.
This organization will be located in each of our geographical
regions. The Expert Services organization combines the
professional service teams from our network protection and
system protection product groups to serve as our professional
services and educational organization. Risks related to this
reorganization include:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the failure to identify and close upon
    significant consulting opportunities;                                                                                
|
| |  | the integration of our professional services
    teams may prove to be unsuccessful, might take more time than
    anticipated or might cost more than expected;
|
| |  | the highly discretionary nature of consulting
    expenditures;                                                                                                 
|
| |  | integration of the professional services teams
    and related activities may divert managements
    attention; and                                            
|
| |  | integration of the professional services teams
    may be disruptive to pre-existing customer relationships.                                                    

We Face Risks Related to Our Strategic
Alliances.

We may not realize the desired benefits from our
strategic alliances on a timely basis or at all. We face a
number of risks relating to our strategic alliances, including
the following:



| |   |                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our strategic alliances are generally terminable
    by either party with no or minimal notice or penalties. We may
    expend significant time, money and resources to further
    strategic alliances that are thereafter terminated.                                                                                                      
|
| |  | Business interests may diverge over time, which
    might result in conflict, termination or a reduction in
    collaboration. For example, our alliance with Internet Security
    Systems was terminated following the announcement of our
    acquisition of Entercept and IntruVert.                                                     
|
| |  | Strategic alliances require significant
    coordination between the parties involved. To be successful, our
    alliances may require the integration of other companies
    products with our products, which may involve significant time
    and expenditure by our technical staff and the technical staff
    of our strategic allies.
|
| |  | Our sales and marketing force may require
    additional training to market products that result from our
    strategic alliances. The marketing of these products may require
    additional sales force efforts and may be more complex than the
    marketing of our own products.                                                        
|
| |  | The integration of products from different
    companies may be more difficult than we anticipate, and the risk
    of integration difficulties, incompatible products and
    undetected programming errors or bugs may be higher than that
    normally associated with new products.                                                      

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| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our strategic alliances may involve providing
    professional services, which might require significant
    additional training of our professional services personnel and
    coordination between our professional services personnel and
    other third-party professional service personnel.
|
| |  | Due to the complex nature of our products and of
    those parties with whom we have strategic alliances, it may take
    longer then we anticipate to successfully integrate and market
    our respective products.                                                                             

We Face Product Development Risks Associated
with Rapid Technological Changes in Our Market.

The markets for our products are 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 and system
    protection 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 product development
as we have at times in the past. Complex 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 that meet
our customers needs. We believe that our ability to
provide these upgrades and updates frequently and at low cost is
key to our success.

We Face Risks Related to Our On-Line
Subscription Services Strategy.

McAfee System Protection Solutions offers on-line
subscription services to corporate customers, and our McAfee.com
website 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 on-line subscription services may fail to maintain or
increase market acceptance. The growth, market acceptance and
ultimate profitability of our on-line subscription 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 with Our
On-Line Subscription Services Strategy.

We also make our on-line subscription services
available over the Internet in what we refer to as a managed
environment. Unlike with our on-line subscription services,
managed service provider, or MSP,

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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.                                                                                                                                                              

Our 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 network protection and
system protection products. We expect the number of our
hardware-based products and our reliance on third-party
manufacturers to increase as software-only network and system
security solutions become less viable. Reliance on third-party
manufacturers, including software replicators, 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 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 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

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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. We may be unable in the future
to gain the necessary access from Microsoft to its product
development activities, particularly in light of
Microsofts recent acquisition of GeCAD Software, an
anti-virus software provider.


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. In recent periods, the Linux operating
system has gained broader market acceptance at the expense of
Unix operating systems. As a result, we placed our anti-virus
products for Sun Microsystems Solaris Unix operating
system into a maintenance only mode. If we fail to adequately
support the Linux operating system or if the Unix versions
supported by us are disproportionately affected by the success
of Linux, our product sales may be adversely impacted.

We Face Risks Related to Customer Outsourcing
to System Integrators.

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

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 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. Certain
jurisdictions may not provide adequate legal infrastructure for
effective protection of our intellectual property rights.
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.

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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, notwithstanding measures taken by our
competitors or us to protect our competitors intellectual
property, exposure to infringement claims increases if we employ
or hire software engineers previously employed by competitors.
Further, to the extent we utilize open source
software we face risks. For example, the scope and requirements
of the most common open source software license, the GNU General
Public License (GPL), have not been interpreted in a court of
law. Use of GPL software could subject certain portions of our
proprietary software to the GPL requirements. Other forms of
open source software licensing present license
compliance risks, which could result in litigation or loss of
the right to use this software.

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 and determine that it is probable, 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. We recently entered into a memorandum
agreement of settlement resolving the litigation for
$70.0 million. The settlement is subject to final court
approval and may not be approved.

Our Stock Price Has Been Volatile and Is
Likely to Remain Volatile.

During the 12-month period ended June 30,
2003, our stock price was highly volatile ranging from a per
share high of $20.28 to a low of $8.45. On October 15,
2003, our stocks closing price per share price was $15.35.
Announcements, business developments, such as a material
acquisition, 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. Certain types of investors may choose not to
invest in stocks with this level of stock price volatility.
Further, we may not discover, or be able to confirm, revenue or
earnings shortfalls until the end of a quarter. This could
result in an immediate drop in our stock price. Securities class
action litigation has been instituted following previous periods
of volatility.

Product Liability and Related Claims May Be
Asserted Against Us.

Our products are used to protect and manage
computer systems and networks that may be critical to
organizations. Because of the complexity of the environments in
which our products operate, an error, failure or bug in our
products could disrupt or cause damage to the networks of our
customers, including disruption of legitimate network traffic by
our intrusion prevention products. Failure of our products to
perform to specifications, disruption of our customers
network traffic or damages to our customers networks
caused by our products could result in product liability damage
claims by our customers. 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.

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 anti-virus 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

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information requests eventually causing the
website to overload, resulting in 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.

We Face New Risks Related to Our Anti-Spam
Software Products.

Our anti-spam products may falsely identify
e-mails as unwanted spam, reducing the adoption of
these products, or alternatively fail to properly identify
unwanted e-mails, particularly as spam e-mails are often
designed to circumvent anti-spam products. Parties whose e-mails
are blocked by our products may also seek redress against us for
labeling them as spammers or for interfering with their business.

Business Interruptions May Impede Our
Operations and the Operations of Our Customers.

We and our customers face a number of potential
business interruption risks that are beyond our respective
control. Natural disasters or other events could interrupt our
business or the business of our customers, and each of us is
reliant on external infrastructure that may be antiquated. For
example, many parts of the United States and Canada experienced
a widespread power blackout in August 2003, adversely impacting
business in those areas. Our corporate headquarters are 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.

The U.S. Military Global Presence and
Potential Terrorist Attacks Could Have a Material Adverse Effect
on the U.S. and Global Economies and Could Adversely Impact The
Internet and Our Products and Business.

The U.S. military global presence, coupled
with the possibility of potential terrorist attacks, could have
a continued adverse effect upon an already weakened world
economy and could cause U.S. and foreign businesses to slow
spending on products and services, delay sales cycles and
otherwise negatively impact consumer and business confidence.
Terrorists may also seek to interfere with the operation of the
Internet, the operation of our customers computer systems
and networks, and the operation of our systems and networks,
particularly given our status as an American company providing
security products. Any significant interruption of the Internet
could adversely impact our ability to rapidly and efficiently
provide anti-virus and other product updates to our customers.

We Face Risks Associated with Governmental
Contracting.

Our customers include the U.S. government
and a significant number of other U.S. state and local
governments or agencies. We are also currently engaged in
several research and development contracts with
U.S. government agencies.

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| |            
| | -----------
| | Procurement

Contracting with public sector customers is
highly competitive and can be expensive and time-consuming,
often requiring that we incur significant upfront time and
expense without any assurance that we will win a contract.
Public sector customers may also change the way they procure new
contracts and may adopt new rules or regulations governing
contract procurement, including required competitive bidding or
use of open source products, where available.



| |           
| | ----------
| | Fee Awards

Minimum fee awards for companies entering into
U.S. government contracts are generally between 3% and 7%
of the costs incurred by them in performing their duties under
the related contract. However, these fees may be as low as 1% of
contract costs.



| |                                     
| | ------------------------------------
| | Budgetary Constraints and
    Cycles

Demand and payment for our products and services
are impacted by public sector budgetary cycles and funding
availability, with funding reductions or delays adversely
impacting public sector demand for our products and services.



| |                                              
| | ---------------------------------------------
| | Modification or Cancellation of
    Contracts

Public sector customers often have contractual or
other legal rights to terminate current contracts for
convenience or due to a default. If a contract is cancelled for
convenience, which can occur if the customers product
needs change, we may only be able to collect for products and
services delivered prior to termination. If a contract is
cancelled because of default, we may only be able to collect for
products and services delivered, and we may be forced to pay any
costs incurred by the customer for procuring alternative
products and services. The U.S. government may also
terminate contracts with us if we come under foreign government
control or influence, require that we disclose our pricing data
during the course of negotiations, ban us from doing business
with any government entity and require us to prevent access to
classified data.



| |                    
| | -------------------
| | Governmental Audits

U.S. government and other state and local
agencies routinely investigate and audit government
contractors administrative processes. They may audit our
performance and pricing and review our compliance with
applicable rules and regulations. If they find that we have
improperly allocated costs, they may require us to refund those
costs or may refuse to pay us for outstanding balances related
to the improper allocation. An unfavorable audit could result in
a reduction of revenue, and may result in civil or criminal
liability if the audit uncovers improper or illegal activities.



| |                    
| | -------------------
| | Security Clearances

Some agencies within the U.S. government
require some or all of our personnel to obtain proper security
clearance. If our key personnel are unable to obtain or retain
this clearance, we may be unable to bid for or retain some
government contracts.

We May Not Realize the Anticipated Benefits
from Our Strategic Investments.

We have made a number of venture and minority
investments in private companies with complementary products,
services and technologies. During 2002 and 2001, we recorded
impairment charges of $0.2 million and $20.6 million,
respectively, in connection with these investments. We may make
additional strategic investments. These investments are
speculative in value, and we may lose all or part of the money
invested.

Cryptography Contained in Our Technology Is
Subject to Export Restrictions.

Some of our computer security solutions,
particularly those incorporating encryption, may be subject to
export restrictions. As a result, some products may not be
exported to international customers without prior

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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.


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 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 the
perception that such sales could occur, may adversely affect
prevailing market prices for our common stock.

Our Charter Documents and Delaware Law and Our
Rights Plan 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 or 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. For example, any stockholder
wishing to make a stockholder proposal (including director
nominations) at our 2004 annual meeting, must meet the
qualifications and follow the procedures specified under both
the Exchange Act of 1934 and our bylaws, which our board most
recently amended in July 2003 and which are filed with the SEC.
Among other requirements, a stockholder proposal for our 2004
annual meeting must be validly submitted to us by
December 31, 2003.



| |                
| | ---------------
| | Our Rights Plan

Our board of directors has adopted a
stockholders 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.



|        |           
|------- | ----------
|Item 2. | Properties

Our headquarters currently occupy approximately
135,000 square feet in facilities located in
Santa Clara, California under leases expiring in 2013.
Worldwide, we lease facilities with approximately 840,000 total
square feet, with leases that expire at various times. Our
primary international facilities are located in Australia,
Brazil, Germany, India, Japan, the Netherlands and the United
Kingdom. Other significant domestic sites include California,
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. Construction began on the
approximately 170,000 square feet facility in March 2002
and was completed in January 2003. The new facility supports
approximately 1,000 Networks

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Associates employees working in our customer
support, engineering, finance, information technology, internal
audit, legal, and telesales groups.







|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Information with respect to this item is
incorporated by reference to note 19 to the notes to
consolidated financial statements included in this
Form 10-K.






|        |                                                        
|------- | -------------------------------------------------------
|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, 2002.




PART II






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

Price Range of Common Stock

From our initial public offering on
October 6, 1992 to February 11, 2002, our common stock
traded on the NASDAQ National Market. After the combination with
Network General Corporation on December 1, 1997, our common
stock traded under the symbol NETA. Prior thereto, our common
stock traded under the symbol MCAF. Effective February 12,
2002, our common stock commenced trading on the New York
Stock Exchange (NYSE) under the symbol NET.

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 NYSE or
NASDAQ, as applicable. The prices appearing in the table below
do not reflect retail mark-up, mark-down or commission and, for
the periods prior to February 12, 2002, when the stock was
listed on the NYSE, reflect over the counter market quotations
and may not necessarily represent actual transactions.

|                             |                |      |   |       |  |  |   |       | 
|---------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                             |                | High |   | Low  
|                             |                |      |   |      
|Year Ended December 31, 2002 |                |      |   |       |  |  |   |      
|                             | First Quarter  |      | $ | 30.26 |  |  | $ | 22.23 | 
|                             | Second Quarter |      |   | 25.81 |  |  |   | 16.29 | 
|                             | Third Quarter  |      |   | 19.60 |  |  |   | 10.10 | 
|                             | Fourth Quarter |      |   | 18.83 |  |  |   | 8.45  | 
|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 | 

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.

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Holders of Common Stock

As of September 30, 2003, there were
approximately 1,143 record owners of our common stock.

Public Filings

Our Internet address is
www.networkassociates.com. We make available free of charge
through our Internet website current and archived press releases
and presentations, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or
furnished pursuant to Sections 13(a) or 15(d) of the
Securities and Exchange Act, as amended, as soon as reasonably
practicable after we electronically file such material with the
SEC.

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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

Concurrent with the filing of this Form 10-K
containing restated financial statements for 2000 and 2001, we
are filing Amendment No. 2 to our 2000 Form 10-K
containing restated financial statements for 1998 through 2000.
You should read the following selected financial data with the
consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Conditions and Results of Operations appearing elsewhere
in this Form 10-K. For a description of events in
connection with the restatement of our 1998 and 1999 operating
results, you should read Amendment No. 2 to our 2000 10-K,
including note 3 to the consolidated financial statements
contained therein.

|                                                                                              |                                                                 |                                              |           |           |  |           |           |           |  |           |          |       |   |   |          |       |   |   |          |       |  
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | -------------------------------------------- | --------- | --------- |  | --------- | --------- | --------- |  | --------- | -------- | ----- | - | - | -------- | ----- | - | - | -------- | ----- | -
|                                                                                              |                                                                 |                                             
|                                                                                              |                                                                 | Years Ended December 31,                    
|                                                                                              |                                                                 |                                             
|                                                                                              |                                                                 | 2002                                         |           | 2001      |  | 2000      |           | 1999      |  | 1998     
|                                                                                              |                                                                 |                                              |           |           |  |           |           |           |  |          
|                                                                                              |                                                                 |                                             
|                                                                                              |                                                                 | (In thousands, except for per share amounts)
|                                                                                              |                                                                 |                                              |           |          
|                                                                                              |                                                                 |                                              |           | (As       |  | (As       |           | (As       |  | (As      
|                                                                                              |                                                                 |                                              |           | Restated) |  | Restated) |           | Restated) |  | Restated)
|Statement of Operations Data                                                                  |                                                                 |                                              |           |           |  |           |           |           |  |           |          |       |   |   |          |       |   |   |          |      
|Net revenue                                                                                   |                                                                 | $                                            | 1,043,044 |           |  | $         | 1,071,660 |           |  | $         | 709,372  |       |   | $ | 660,337  |       |   | $ | 427,767  |      
|Income (loss) from operations                                                                 |                                                                 |                                              | 114,727   |           |  |           | 153,483   |           |  |           | (136,291 | )     |   |   | (136,725 | )     |   |   | (402,826 | )    
|Income (loss) before provision for income taxes,
    minority interest and extraordinary item |                                                                 |                                              | 129,907   |           |  |           | 146,405   |           |  |           | (70,924  | )     |   |   | (127,776 | )     |   |   | (386,211 | )    
|Income (loss) before extraordinary item                                                       |                                                                 |                                              | 128,286   |           |  |           | 81,522    |           |  |           | (108,014 | )     |   |   | (151,964 | )     |   |   | (319,074 | )    
|Extraordinary item, gain on repurchase of debt,
    net of taxes                              |                                                                 |                                              | 26        |           |  |           | 1,731     |           |  |           |         |       |   |   |         |       |   |   |         |      
|Net income (loss)                                                                             |                                                                 |                                              | 128,312   |           |  |           | 83,253    |           |  |           | (108,014 | )     |   |   | (151,964 | )     |   |   | (319,074 | )    
|                                                                                              | Income (loss) per share, before extraordinary
    item, basic   |                                              | $         | 0.86      |  |           | $         | 0.59      |  |           | $        | (0.78 | ) |   | $        | (1.10 | ) |   | $        | (2.40 | )
|                                                                                              | Income (loss) per share, before extraordinary
    item, diluted |                                              | $         | 0.80      |  |           | $         | 0.52      |  |           | $        | (0.78 | ) |   | $        | (1.10 | ) |   | $        | (2.40 | )
|Extraordinary item, basic                                                                     |                                                                 | $                                            |          |           |  | $         | 0.01      |           |  | $         |         |       |   | $ |         |       |   | $ |         |      
|Extraordinary item, diluted                                                                   |                                                                 | $                                            |          |           |  | $         | 0.01      |           |  | $         |         |       |   | $ |         |       |   | $ |         |      
|Net income (loss) per share, basic                                                            |                                                                 | $                                            | 0.86      |           |  | $         | 0.60      |           |  | $         | (0.78    | )     |   | $ | 1.10     |       |   | $ | (2.40    | )    
|Net income (loss) per share, diluted                                                          |                                                                 | $                                            | 0.80      |           |  | $         | 0.53      |           |  | $         | (0.78    | )     |   | $ | 1.10     |       |   | $ | (2.40    | )    
|Shares used in per share calculation 
    basic                                              |                                                                 |                                              | 149,441   |           |  |           | 137,847   |           |  |           | 138,072  |       |   |   | 138,695  |       |   |   | 133,075  |      
|Shares used in per share calculation 
    diluted                                            |                                                                 |                                              | 176,249   |           |  |           | 164,363   |           |  |           | 138,072  |       |   |   | 138,695  |       |   |   | 133,075  |      

|                                     |  |                          |           |           |  |           |           |           |  |           |           |  |  |   |           |  |  |   |           | 
|------------------------------------ |  | ------------------------ | --------- | --------- |  | --------- | --------- | --------- |  | --------- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                     |  |                         
|                                     |  | Years Ended December 31,
|                                     |  |                         
|                                     |  | 2002                     |           | 2001      |  | 2000      |           | 1999      |  | 1998     
|                                     |  |                          |           |           |  |           |           |           |  |          
|                                     |  |                         
|                                     |  | (In thousands)          
|                                     |  |                          |           |          
|                                     |  |                          |           | (As       |  | (As       |           | (As       |  | (As      
|                                     |  |                          |           | Restated) |  | Restated) |           | Restated) |  | Restated)
|Balance Sheet Data                   |  |                          |           |           |  |           |           |           |  |           |           |  |  |   |           |  |  |   |           | 
|Cash and cash equivalents            |  | $                        | 674,226   |           |  | $         | 612,832   |           |  | $         | 275,539   |  |  | $ | 329,732   |  |  | $ | 418,899   | 
|Working capital                      |  |                          | 312,203   |           |  |           | 443,035   |           |  |           | 79,591    |  |  |   | 64,560    |  |  |   | 159,856   | 
|Total assets                         |  |                          | 2,045,487 |           |  |           | 1,658,093 |           |  |           | 1,465,622 |  |  |   | 1,510,387 |  |  |   | 1,461,936 | 
|Deferred revenue and taxes           |  |                          | 329,195   |           |  |           | 404,826   |           |  |           | 531,555   |  |  |   | 446,778   |  |  |   | 349,590   | 
|Long term debt and other liabilities |  |                          | 356,458   |           |  |           | 579,243   |           |  |           | 400,456   |  |  |   | 382,517   |  |  |   | 375,234   | 
|Total equity                         |  |                          | 770,168   |           |  |           | 341,493   |           |  |           | 222,923   |  |  |   | 355,938   |  |  |   | 378,994   | 

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

Forward-Looking Statements and Factors That
May Affect Future Results

This Managements Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements that involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be
materially different from any future results, levels of
activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among
others things, those risk factors set forth in this section and
elsewhere in this report. We identify forward-looking statements
by words such as may, will,
should, could, expects,
plans, anticipates,
believes, estimates,
predicts, potential, or
continue or similar terms that refer to the future.
We cannot guarantee future results, levels of activity,
performance or achievements. Therefore, actual results may
differ materially and adversely from those expressed in any
forward-looking statements. We undertake no obligation to revise
or update publicly any forward-looking statements for any reason.

Overview

We are a leading supplier of computer security
solutions designed to prevent intrusions on networks and protect
computer systems from the next generation of blended attacks and
threats. We offer two families of products, McAfee System
Protection Solutions and McAfee Network Protection Solutions.
Our computer security solutions are offered primarily to large
enterprises, governments, small and medium sized business and
consumer users. We operate our business in five geographic
regions: North America, EMEA, Japan, Asia-Pacific and Latin
America.

Recent Significant Acquisitions &
Divestitures

On October 9, 2001, our board of directors
approved a plan to integrate the activities of our PGP product
group into our other product groups. In addition to the
integration plan, we began to look for a buyer for the PGP
desktop encryption and Gauntlet firewall product. On
February 13, 2002, we announced the sale of Gauntlet
firewall/ VPN product to Secure Computing. As a result of the
transaction, we received common shares of Secure Computing in
exchange for the Gauntlet assets. We recorded a gain on sale of
net assets of $6.7 million. On August 19, 2002, we
announced the sale of PGP desktop encryption to PGP Corporation,
a new venture funded company, for $2.0 million in cash and
assumed net liabilities of $1.1 million. As a result of the
transaction, we recorded a gain on sale of net assets of
$2.6 million.

In September 2002, we repurchased the 25%
minority interest in our McAfee.com subsidiary for approximately
$219.9 million in cash and stock increasing our ownership
of McAfee.com to a 100% interest. We issued 8.3 million
shares of our common stock valued at $14.62 per share,
which corresponds to the average market price of our common
stock two days before and after the date the terms of the
acquisition were established. The acquisition was an effort to
reduce or eliminate customer, market and brand confusion due to
the similarity in our products, names and web addresses and to
reduce or eliminate actual and potential conflicts between the
companies and their sales forces, and related senior management
distraction, due to confusion over market boundaries.

During the year ended December 31, 2002, we
also completed several other acquisitions that resulted in our
acquiring a 100% interest in Traxess, a provider of forensic
software; BySupport, one of our South American resellers;
BySecure, one of our Central American resellers; and Deersoft, a
provider of anti-spam software. See Note 4 to the
consolidated financial statements.

In the second quarter of 2003, we purchased
IntruVert and Entercept using approximately $216 million in
cash, net of cash acquired.

Critical Accounting Policies

In preparing our consolidated financial
statements, we make estimates, assumptions and judgments that
can have a significant impact on our net revenue, operating
income (loss) and net income (loss), as well as on

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the value of certain assets on our consolidated
balance sheet. The application of our critical accounting
policies requires an evaluation of a number of complex criteria
and significant accounting judgments by us. See Summary of
Significant Accounting Policies beginning on
page      in the consolidated
financial statements for more information about these critical
accounting policies, as well as descriptions of other
significant 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 goodwill, valuation of finite-lived
    intangibles and long-lived assets; 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 on-line subscription
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 on-line subscription 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 setup fees.

We apply the provisions of Statement of Position
97-2, Software Revenue Recognition,
(SOP 97-2) 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
(SAB 101). 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 on-line software
subscription services.

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 or 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 or
determinable and whether or not collection is reasonably
assured. We assess whether the fee is fixed or 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 or 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 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.

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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 Networks 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. This assessment generally
includes analyses of the variability of renewal rates by product
and region and determination of whether a majority of renewals
supports our estimated fair value of the maintenance and support
obligations. In cases where renewal rates are not quoted in the
initial sales contracts, our assessment is critical because if
an estimated fair value cannot be established through separate
sales then the fee for the entire arrangement (e.g. delivered
software and undelivered maintenance and support obligations) is
deferred until delivery occurs which for maintenance would be
ratably over the service period. 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, recognition 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. We monitor
sales returns and record specific allowances for all identified
returns and we assess the historical trend of sales returns that
occur after the period end to develop an estimate of additional
allowances. The provision for sales returns and other sales
incentive allowances amounted to $130.2 million and
$134.8 million in 2002 and 2001, respectively. At
December 31, 2002, $32.3 million total allowance
includes the estimate of potential future product returns
amounting to $6.7 million and specific allowances for
distributor, reseller and retailer sales incentives amounting to
$25.6 million. At December 31, 2001,
$32.6 million total allowance includes the estimate of
potential future product returns amounting to $8.7 million
and specific allowances for distributor, reseller, and retailer
sales incentives amounting to $23.9 million. If our sales
returns experience rating were to increase by an additional 1%
of license revenues, our allowance for sales returns at
December 31, 2002 would increase by approximately
$4.6 million. Similarly, our management must make estimates
of the uncollectibility 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

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customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. We specifically
reserve for any account receivable for which there are
identified collection issues and analyze historical write-offs
to estimate additional allowances, which historically has
averaged to 2% of accounts receivable. Our accounts receivable
balance was $160.2 million, net of allowance for doubtful
accounts of $6.6 million and provision for sales returns
and other allowances of $32.3 million as of
December 31, 2002. At December 31, 2001, our accounts
receivable balance was $136.3 million, net of allowance for
doubtful accounts of $8.4 million and provision for sales
returns and other allowances of $32.6 million.


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 as there
is no better point of estimate. 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.

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 $75.7 million as of
December 31, 2002, 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, 2002 was $313.6 million, net of a
valuation allowance of $75.7 million.

Valuation of Goodwill, Intangibles, and
Long-lived Assets.We account for
goodwill and other indefinite-lived intangible assets in
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires, among
other things, the discontinuance of amortization for goodwill
and indefinite-lived intangibles and at least an annual test for
impairment. An impairment review may be performed more
frequently in the event circumstances indicate that the carrying
value may not be recoverable. The goodwill impairment review
involves a two-step process as described in note 2 to the
consolidated financial statements.

We account for finite-lived intangibles and
long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. Under this standard we will record an
impairment charge on finite-lived intangibles or long-lived
assets to be held and used when we determine that the carrying
value of intangibles and long-lived assets may not be
recoverable.

Based upon the existence of one or more
indicators of impairment, we measure any impairment of
intangibles or long-lived assets 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. Our

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estimates of cash flows require significant
judgment based on our historical results and anticipated results
and are subject to many of the factors, noted below as
triggering factors, which may change in the near term.


Factors considered important which could trigger
an impairment review include, but are not limited to:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | significant under performance 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 declines in our stock price for a
    sustained period; and                                          
|
| |  | our market capitalization relative to net book
    value.                                                        

Goodwill amounted to $273.9 million and
$128.1 million as of December 31, 2002 and 2001,
respectively. We did not hold any indefinite-lived intangibles
as of December 31, 2002 or 2001. Net finite-lived
intangible assets and long-lived assets amounted to
$182.8 million and $96.6 million as of
December 31, 2002 and 2001, respectively.

Determining Functional Currencies for the
Purpose of Consolidation.We have
several foreign subsidiaries which together account for
approximately 37% of our net revenues, 23% of our assets and 30%
of our total liabilities as of December 31, 2002.

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 $22.7 million and $11.0 million which
were included as part of accumulated other comprehensive income
(loss) within our consolidated balance sheet at
December 31, 2002 and 2001, respectively. During 2002,
2001, and 2000, translation gains (losses) of
$11.7 million, $7.1 million, and ($9.8) million,
respectively, were included under accumulated other
comprehensive income (loss). Had we determined that the
functional currency of our subsidiaries was the United States
dollar, these translation adjustments would have increased
(decreased) our results from operations 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 typically include

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the Japanese Yen, the Euro, the United Kingdom
Pound Sterling and Australian, Singapore and Canadian dollars.
Any future translation gains or losses could be significantly
higher than those noted in each of these years. In addition, if
we 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
Update



| |                                                
| | -----------------------------------------------
| | Accounting for Asset Retirement
    Obligations

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 143
Accounting for Asset Retirement Obligations
(SFAS 143). SFAS 143 addresses the
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 applies to
legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction,
development and/or normal use of the assets, including lease
restoration obligations. SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of the fair value can be made. The fair value of the
liability is added to the carrying amount of the associated
asset, and this additional carrying amount is expensed over the
life of the asset. We adopted SFAS 143 effective
January 1, 2003. The adoption of SFAS 143 did not have
a material impact on our consolidated financial condition,
results of operations or cash flows.



| |                                                                   
| | ------------------------------------------------------------------
| | Accounting for Extraordinary Items and
    Discontinued Operations

In May 2002, the FASB issued
SFAS No. 145, Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS No. 13, and Technical
Corrections (SFAS 145). Among other
things, SFAS 145 rescinds various pronouncements regarding
early extinguishment of debt and allows extraordinary accounting
treatment for early extinguishment only when the provisions of
Accounting Principles Board Opinion (APB)
No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions are
met. SFAS 145 provisions regarding early extinguishment of
debt are generally effective for fiscal years beginning after
May 15, 2002 and requires retroactive application. Upon
adoption of this Standard, we will not classify the losses
related to the repurchases of our outstanding debt as
extraordinary.



| |                                               
| | ----------------------------------------------
| | Accounting for Exit or Disposal
    Activities

In July 2002, the FASB issued
SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities
(SFAS 146). SFAS 146 addresses the
recognition, measurement and reporting of costs associated with
exit and disposal activities (i.e., restructuring activities),
including costs related to terminating a contract that is not a
capital lease and termination benefits due to employees who are
involuntarily terminated under the terms of a one-time benefit
arrangement.

SFAS 146 supersedes the Emerging Issues Task
Force (EITF) Issue No. 94-3 Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring) (EITF 94-3) and EITF
Issue No. 88-10 Costs Associated with Lease
Modification or Termination (EITF 88-10).
Accordingly, SFAS 146 prohibits recognition of a liability
based solely on an entitys commitment to a plan to exit an
activity. SFAS 146 requires that: (i) liabilities
associated with exit and disposal activities be measured at fair
value and changes in the fair value of the liability at each
reporting period be measured using an interest allocation
approach; (ii) one-time termination benefits be expensed at
the date the entity notifies the employee, unless the employee
must provide future service, in which case the benefits are
expensed ratably over the future service period;
(iii) liabilities to terminate a contract be recorded at
fair value when the contract is terminated;
(iv) liabilities related to an existing operating
lease/contract, unless terminated, be recorded at fair value,
less estimated sublease income, and measured when the contract
does not have any future economic benefit to the entity (i.e.,
the entity ceases

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to utilize the rights conveyed by the contract);
and (v) all other costs related to an exit or disposal
activity be expensed as incurred.


SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002. We adopted
SFAS 146 during the fourth quarter of 2002. The adoption of
SFAS 146 will not impact our restructuring obligations
recognized in 2002 as these obligations must continue to be
accounted for in accordance with EITF 94-3 and other
applicable pre-existing guidance.



| |                                                    
| | ---------------------------------------------------
| | Accounting for Stock-Based Compensation
    Charges

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure
(SFAS 148). SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. SFAS 148 also requires that disclosures of
the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed
more prominently and in a tabular format. Additionally,
SFAS 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual
disclosure requirements of SFAS 148 are effective for
fiscal years ended after December 15, 2002. The interim
disclosure requirements are effective for interim periods
beginning after December 15, 2002. As the adoption of this
standard involves disclosures only, there was no material impact
on our consolidated financial statements.



| |                                                                 
| | ----------------------------------------------------------------
| | Accounting for Derivative Instruments and
    Hedging Activities

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS 149). SFAS 149 (i) clarifies
under what circumstances a contract with an initial net
investment meets the characteristics of a derivative discussed
in SFAS 133, (ii) clarifies when a derivative contains
a financing component and (iii) amends the definition of an
underlying to conform it to language in FIN 45.
SFAS 149 is generally effective for contracts entered into
or modified after June 30, 2003. We have adopted the
provisions of SFAS 149 which did not have a material impact
on our consolidated financial position, results of operations or
cash flows.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Accounting for Certain Financial
    Instruments with Characteristics of both Liabilities and
    Equity

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity (SFAS 150). SFAS 150
establishes standards for how companies classify and measure
certain financial instruments with characteristics of both
liabilities and equity. It requires companies classify a
financial instrument that is within its scope as a liability (or
an asset in some circumstances) as defined in SFAS 150. We
have adopted the provisions of SFAS 150 which did not have
a material impact on our consolidated financial position,
results of operations or cash flows based on the types of
financial instruments we have currently issued.



| |                                                             
| | ------------------------------------------------------------
| | Accounting for Multiple Deliverable Revenue
    Arrangements

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Multiple Deliverable Revenue
Arrangements (EITF 00-21). EITF 00-21
addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple
revenue-generating activities. It also addresses when and how an
arrangement involving multiple deliverables should be divided
into separate units of accounting. The guidance in EITF 00-21 is
effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003, with early
application permitted. Companies may elect to report the change
in accounting as a cumulative effect of a change in accounting
principle in accordance with APB Opinion 20, Accounting
Changes and SFAS 3, Reporting
Accounting Changes in Interim Financial Statements (an amendment
of APB Opinion No. 28). We will adopt the
provisions of EITF 00-21 for transactions to which SOP 97-2
does not apply, such as sales of hardware without software and
on-line subscriptions in the quarter ended June 30, 2003.
The adoption of EITF 00-21 did not have a significant impact on
our consolidated financial position, results of operations or
cash flows.

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| |                              
| | -----------------------------
| | Accounting for Reimbursements

In November 2001, the FASB discussed Topic D-103,
recharacterized as EITF Issue No. 01-14, Income
Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred. This
issue deals with classification in the statement of operations
of incidental expenses, that in practice are commonly referred
to as out-of-pocket expenses, incurred by entities
that provide services as part of their central on-going
operations. The EITF reached a consensus that reimbursements
received for out-of-pocket expenses incurred should be
characterized as revenue in the statement of operations. This
issue is effective for fiscal years which began after
December 15, 2001. During the quarter ended March 31,
2002, we adopted EITF 01-14. As a result, we reclassified a
total amount of $1.5 million from cost of revenue to
revenue for the year ended December 31, 2001. This
reclassification has not been performed for 2000, as it is
impracticable to do so.



| |                                                   
| | --------------------------------------------------
| | Accounting for Retroactive Insurance
    Contracts

In May 2003, the EITF reached a consensus on
Issue No. 03-03, Accounting for Retroactive
Insurance Contracts Purchased by Entities Other Than Insurance
Enterprises to Claims-Made Insurance Policies
(EITF 03-03). The consensus requires the insured
company to determine if their claims-made policy is retroactive,
prospective, or both and account for the policy accordingly. A
policy has a retroactive provision if it covers a specific known
claim(s) that was reportable before the policys effective
date. The continued applicability of FASB Interpretation
No. 39, Offsetting of Amounts Related to Certain
Contracts, to the recording of liabilities and the
related insurance recoverables is also addressed. Since
FIN 39 does not allow for offsetting the insurance
liability with the recoverable, regardless of whether the
company is recording the insurance policy as prospective or
retroactive, there will likely be a balance sheet gross-up for
all covered losses. EITF 03-03 is applicable to all claims-made
insurance arrangements entered into beginning in a
companys next reporting period following ratification,
which is June 30, 2003 for us. We are continuing to assess
the potential impact of EITF 03-03 on our consolidated financial
position, results of operations and cash flows.



| |                                                
| | -----------------------------------------------
| | Accounting for and Disclosure of
    Guarantees

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 requires that a liability
(at fair value) be recorded in the guarantors balance
sheet upon issuance of a guarantee or indemnification. In
addition, FIN 45 requires disclosures about the guarantees
and indemnifications that an entity has issued, including a
reconciliation of changes in the entitys product warranty
liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis
to guarantees and indemnifications issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. We have adopted FIN 45, which did not have
a material impact on our consolidated financial position,
results of operations or cash flows.



| |                                                               
| | --------------------------------------------------------------
| | Accounting for Consolidation of Variable
    Interest Entities

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB
No. 51 (FIN 46). FIN 46
requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors
in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. The original
effective date of FIN 46 was delayed to the first reporting
period after December 15, 2003 (December 31, 2003 for
our company) for any variable interest entities or potential
variable interest entities created before February 1, 2003.
We are studying the impact of FIN 46 on our consolidated
financial position, results of operations and cash flows.

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Impact of Restatement on Consolidated
Financial Statements

This Managements Discussion and Analysis of
Financial Condition and Results of Operations gives effect to
the restatement of our financial statements for 1998 through
2001 and should be read in conjunction with (i) the
consolidated financial statements and related notes contained in
this Form 10-K and (ii) the consolidated financial
statements for 1998 through 2000 and related notes contained in
Amendment No. 2 to our 2000 Form 10-K/ A, including in
each case, note 3 to the respective consolidated financial
statements describing the restatement. Certain restatement
adjustments made in 1998 through 2000 related to our recognition
of revenue under SOP 97-2 impact favorably previously
reported operating results in 2000 and 2001 and previously
announced unaudited operating results in 2002 and subsequent
interim periods.

Among others, the more significant categories of
restatement adjustments were recorded:



| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to properly reflect sales to our distributors and
    resellers on the sell-through basis for 1998 through 2000, which
    is how we have accounted for these sales since 2001; and      
|
| |  | to correct certain errors previously made in the
    application of the revenue recognition principles under
    SOP 97-2 to multi-element revenue transactions in 1998
    through 2000.

We sell certain of our products through retail
distribution channels and other resellers. Through December
2000, revenue transactions with our distributors and resellers
were believed to require payment within a customary collection
period and include limited return rights under specific
circumstances with revenue being recognized on a sell-in basis,
net of allowances for estimated returns. Under the provisions of
SFAS No. 48, Revenue Recognition When
Right-of-Return Exists, or SFAS No. 48, specific
criteria must be met for revenue to be recognized upon shipment
when the buyer has the explicit or implicit right to return the
product. In error, we previously concluded that these criteria
had been satisfied. We subsequently determined that in 1998,
1999 and 2000 we did not meet the criteria requiring that the
vendors obligation to the buyer be complete and the fees
be fixed or determinable at the time of product shipment. We
provided concessions, including return rights and stock rotation
rights, outside the contractual terms, and in some instances
facilitated the resale of our products by our distributors. In
addition, in some cases, distributors and resellers were not
obligated to pay for delivered inventory until they had sold the
inventory. Excluding the effect of foreign currency adjustments,
we have concluded no revenue was lost as a result of this
change. The total restatement adjustments required in connection
with the recognition of revenue on the sell-through basis
resulted in previously reported or previously announced
(2002) net revenue increasing in 2000, 2001 and 2002 by
$49.4 million, $82.4 million and $25.2 million,
respectively.

The accounting treatment with respect to certain
revenue arrangements in 1998 through 2000 with multiple elements
was adjusted to correct certain errors. For our multi-element
products, we unbundle and defer revenue from the undelivered PCS
element and recognize revenue with respect to the delivered
license element. For one-year and two-year term software
licenses, amounts were allocated based on the list price of the
license and the PCS element in 1998 through 2000. In other
instances, we allocated revenue to the PCS element based on the
amount invoiced to the customer in 1998 through 2000. Further,
when we offered our customers a discount on the list price of
bundled licenses and PCS, the discount was allocated
proportionately based on list price to the license and PCS in
1998 through 2000. We have determined that these discounts
should have been allocated entirely to the delivered license
elements. In addition, we reevaluated whether our methods for
allocating revenues to the PCS element was supported by
sufficient evidence of the fair value of the PCS based on prices
for which PCS was sold separately in 1998 through 2000. For some
products, we determined that sufficient evidence of fair value
did not exist in 1998 through 2000. For other products in 1998
through 2000, evidence of fair value existed, but the amount of
deferred revenue should have been greater. These correcting
adjustments cumulatively resulted in or will result in the
recognition of service and support revenue of
$139.5 million, $46.0 million, and none in 2001, 2002
and 2003, respectively, which was deferred from 1998 through
2000.

Upon review of maintenance and support agreements
included with the sale of retail licenses in 1998 through 2000,
we also determined we had inappropriately established the fair
value for the PCS element (updates to virus definition files) of
these arrangements. As we did not sell the PCS separately until
late 2000,

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all license and PCS revenue under the arrangement
should have been deferred and recognized over the three-year
estimated life of the retail license or until evidence of fair
value of the PCS was established. In the fourth quarter of 2000,
we established the VSOE of fair value for PCS based on an annual
renewal rate for the PCS element included with our retail
licenses.


Excluding the effects of foreign currency related
adjustments, overall adjustments to multi-element revenue
arrangements in 1998 through 2000, including those described
above, resulted in the same amount of revenue recognized in
total. However, there was a significant increase in deferred
revenue for PCS offset by a commensurate decrease in product
revenue in 1998 through 2000. This deferred PCS revenue is
generally recognized in later periods as service and support
revenue. The total restatement adjustments required regarding
allocation of revenue in multiple-element arrangements resulted
in net revenue decreasing by $161.7 million,
$77.9 million and $9.0 million in 1998, 1999 and 2000,
respectively and net revenue increasing in 2001 and 2002 by
$157.6 million and $71.2 million, respectively. In
addition, net revenue in 2003 and 2004 is expected to be
increased by approximately $6.5 million and
$0.3 million in connection with the multi-element revenue
related adjustments.

Results of Operations



| |                                                  
| | -------------------------------------------------
| | Years Ended December 31, 2002, 2001,
    and 2000

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



| |             
| | ------------
| | Net Revenue:

|                                        |                                                             |                           |    |               |     |               |    |    |     |  |    |     |     | 
|--------------------------------------- | ----------------------------------------------------------- | ------------------------- | -- | ------------- | --- | ------------- | -- | -- | --- |  | -- | --- | --- | 
|                                        |                                                             |                          
|                                        |                                                             | Years Ended December 31, 
|                                        |                                                             |                          
|                                        |                                                             | 2002                      |    | 2001          |     | 2000         
|                                        |                                                             |                           |    |               |     |              
|                                        |                                                             |                           |    | (As Restated) |     | (As Restated)
|Net Revenue:                            |                                                             |                           |    |               |     |               |    |    |     |  |    |    
|                                        | Product                                                     |                           |    | 61            | %   |               |    | 57 | %   |  |    | 62  | %  
|                                        | Services and support                                        |                           |    | 39            |     |               |    | 43 |     |  |    | 38  |    
|                                        |                                                             |                           |    |               |     |               |    |    |     |  |    |    
|                                        |                                                             | Total net revenue         |    |               | 100 |               |    |    | 100 |  |    |     | 100 | 
|Cost of net revenue:                    |                                                             |                           |    |               |     |               |    |    |     |  |    |    
|                                        | Product                                                     |                           |    | 10            |     |               |    | 11 |     |  |    | 17  |    
|                                        | Services and support                                        |                           |    | 6             |     |               |    | 5  |     |  |    | 6   |    
|                                        |                                                             |                           |    |               |     |               |    |    |     |  |    |    
|                                        |                                                             | Total cost of net revenue |    |               | 16  |               |    |    | 16  |  |    |     | 23  | 
|Operating costs:                        |                                                             |                           |    |               |     |               |    |    |     |  |    |    
|                                        | Research and development                                    |                           |    | 14            |     |               |    | 14 |     |  |    | 23  |    
|                                        | Marketing and sales                                         |                           |    | 38            |     |               |    | 39 |     |  |    | 51  |    
|                                        | General and administrative                                  |                           |    | 11            |     |               |    | 10 |     |  |    | 13  |    
|                                        | Provision for (recovery from) doubtful accounts,
    net    |                           |    |              |     |               |    | 1  |     |  |    | 1   |    
|                                        | Litigation settlement                                       |                           |    | 7             |     |               |    |   |     |  |    |    |    
|                                        | Amortization of intangibles                                 |                           |    | 1             |     |               |    | 5  |     |  |    | 8   |    
|                                        | Acquisition related costs not subject to
    capitalization |                           |    | 2             |     |               |    |   |     |  |    |    |    
|                                        | Restructuring costs                                         |                           |    |              |     |               |    |   |     |  |    |    |    
|                                        |                                                             |                           |    |               |     |               |    |    |     |  |    |    
|                                        |                                                             | Total operating costs     |    |               | 73  |               |    |    | 69  |  |    |     | 96  | 
|                                        |                                                             |                           |    |               |     |               |    |    |     |  |    |    
|                                        | Income (loss) from operations                               |                           |    | 11            |     |               |    | 15 |     |  |    | (19 | )  
|Interest and other income               |                                                             |                           | 3  |               |     |               | 3  |    |     |  | 6  |    
|Interest and other expense              |                                                             |                           | (2 | )             |     |               | (2 | )  |     |  | (3 | )  
|Gain on sale of assets and product line |                                                             |                           | 1  |               |     |               |   |    |     |  |   |    

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|                                                                 |                                                                                                |                          |   |               |   |               |    |    |   |  |   |     |   
|---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------ | - | ------------- | - | ------------- | -- | -- | - |  | - | --- | --
|                                                                 |                                                                                                |                         
|                                                                 |                                                                                                | Years Ended December 31,
|                                                                 |                                                                                                |                         
|                                                                 |                                                                                                | 2002                     |   | 2001          |   | 2000         
|                                                                 |                                                                                                |                          |   |               |   |              
|                                                                 |                                                                                                |                          |   | (As Restated) |   | (As Restated)
|Gain on investments, net                                         |                                                                                                |                          |  |               |   |               | 1  |    |   |  | 5 |    
|Impairment of strategic and other investments                    |                                                                                                |                          |  |               |   |               | (2 | )  |   |  |  |    
|                                                                 |                                                                                                |                          |   |               |   |               |    |    |   |  |   |    
|                                                                 | Income (loss) before provision for income taxes,
    minority interest, and extraordinary item |                          |   | 13            |   |               |    | 15 |   |  |   | (11 | ) 
|Provision for income taxes                                       |                                                                                                |                          |  |               |   |               | 6  |    |   |  | 6 |    
|                                                                 |                                                                                                |                          |   |               |   |               |    |    |   |  |   |    
|                                                                 | Income (loss) before minority interest and
    extraordinary item                              |                          |   | 13            |   |               |    | 9  |   |  |   | (17 | ) 
|Minority interest in loss of consolidated
    subsidiary         |                                                                                                |                          |  |               |   |               |   |    |   |  | 1 |    
|                                                                 |                                                                                                |                          |   |               |   |               |    |    |   |  |   |    
|                                                                 | Income (loss) before extraordinary item                                                        |                          |   | 13            |   |               |    | 9  |   |  |   | (16 | ) 
|Extraordinary item, gain on repurchase of debt,
    net of taxes |                                                                                                |                          |  |               |   |               |   |    |   |  |  |    
|                                                                 |                                                                                                |                          |   |               |   |               |    |    |   |  |   |    
|                                                                 | Net income (loss)                                                                              |                          |   | 13            | % |               |    | 9  | % |  |   | (16 | )%
|                                                                 |                                                                                                |                          |   |               |   |               |    |    |   |  |   |    

Results of Operations

Net Revenue.Net
revenue decreased 3% to $1,043.0 million in 2002 from
$1,071.7 million in 2001. Net revenue increased 51% to
$1,071.7 million in 2001 from $709.4 million in 2000.

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,
|                     |             |             
|                     |             | 2002         |    | 2001          |   | 2000
|                     |             |              |    |               |   |     
|                     |             |              |    |              
|                     |             |              |    | (As Restated)
|Product              |             |              | 61 | %             |   |      | 57 | %   |   |  | 62 | %  
|Services and support |             |              | 39 |               |   |      | 43 |     |   |  | 38 |    
|                     |             |              |    |               |   |      |    |     |   |  |    |    
|                     | 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,
|                      |                 |             
|                      |                 | 2002         |    | 2001          |   | 2000
|                      |                 |              |    |               |   |     
|                      |                 |              |    |              
|                      |                 |              |    | (As Restated)
|Subscription licenses |                 |              | 29 | %             |   |      | 32 | %   |   |  | 42 | %  
|Perpetual licenses    |                 |              | 44 |               |   |      | 30 |     |   |  | 23 |    
|Hardware              |                 |              | 15 |               |   |      | 14 |     |   |  | 18 |    
|Retail                |                 |              | 10 |               |   |      | 21 |     |   |  | 14 |    
|Royalties and other   |                 |              | 2  |               |   |      | 3  |     |   |  | 3  |    
|                      |                 |              |    |               |   |      |    |     |   |  |    |    
|                      | Product revenue |              |    | 100           | % |      |    | 100 | % |  |    | 100 | %
|                      |                 |              |    |               |   |      |    |     |   |  |    |    

Product revenue includes revenue from software
licenses, hardware, our retail product and royalties. Product
revenue remained flat at $631.6 million in 2002 from
$611.0 million in 2001. Product revenue increased 39% to
$611.0 million in 2001 from $438.5 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.

The software component of most of our Sniffer and
Magic products and a number of our enterprise McAfee anti-virus
software products, targeted at enterprise customers are licensed
on a perpetual basis. We

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continuously monitor our sales activities to
ensure we have an appropriate mix of subscription and perpetual
license revenues. 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 may result in significantly higher up-front revenue
with little recurring revenue other than support revenue.


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,
|                                  |                              |             
|                                  |                              | 2002         |    | 2001          |   | 2000
|                                  |                              |              |    |               |   |     
|                                  |                              |              |    |              
|                                  |                              |              |    | (As Restated)
|Support and maintenance           |                              |              | 75 | %             |   |      | 78 | %   |   |  | 71 | %  
|Consulting                        |                              |              | 9  |               |   |      | 9  |     |   |  | 13 |    
|Training                          |                              |              | 3  |               |   |      | 4  |     |   |  | 7  |    
|On-line subscription arrangements |                              |              | 13 |               |   |      | 9  |     |   |  | 9  |    
|                                  |                              |              |    |               |   |      |    |     |   |  |    |    
|                                  | Services and support revenue |              |    | 100           | % |      |    | 100 | % |  |    | 100 | %
|                                  |                              |              |    |               |   |      |    |     |   |  |    |    

Services and support revenues include revenues
from software support and maintenance contracts, consulting,
training and on-line subscription arrangements. Service and
support revenues decreased 11% to $411.5 million in 2002
from $460.6 million in 2001. In 2001, $93.5 million
more of service and support revenue was recognized as compared
to 2002 due to the deferral of services and support revenue from
1998 through 2000 with respect to multi-element revenue
contracts. Excluding this difference, service and support
revenue increased by $44.4 million, reflecting growth of
our installed customer base, an overall increase in maintenance
pricing year over year and a $11.0 million increase in
on-line subscription revenue generated by our McAfee.com
consumer site. Service and support revenues increased 70% to
$460.6 million in 2001 from $270.9 million in 2000.
The increase in services and support revenues from 2000 to 2001
resulted from a $17.5 million increase in on-line
subscription revenue generated by our McAfee.com consumer site;
a $189.7 million increase in support and maintenance
revenue, principally due to $139.5 million being recognized
in 2001 due to the deferral of services and support revenue from
1998 through 2000 with respect to multi-element contracts, the
growth of our installed customer base and the resulting renewal
of support and maintenance contracts, as well as an increase of
$8.3 million in consulting and training revenue.

Our future profitability and rate of growth, if
any, will be directly affected by increased price competition
and the size of our revenue base. 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 based upon product
destination accounted for approximately 37%, 35% and 32%, of net
revenue for 2002, 2001 and 2000, respectively. The increase in
international revenue as a percentage of net revenue from 2001
to 2002 was due to the positive effects of revamping our sales
management and marketing strategies in the European and Asia
Pacific markets. 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.

We have announced our intentions to increase
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, currency fluctuations and difficulties
staffing and managing foreign operations. These factors may have
a material adverse effect on our future international revenue.

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Cost of Net Revenue.Cost of net revenue was
$161.6 million or 16% of net revenue in 2002 compared to
$171.5 million or 16% of net revenue in 2001. Cost of net
revenue was $171.5 million or 16% of net revenue in 2001
compared to $160.1 million or 23% of net revenue in 2000.

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 was $104.0 million or
16% of net product revenue in 2002 compared to
$114.9 million or 18% of net product revenue in 2001. The
increase in the cost of product revenue as a percent of net
product revenue from 2001 to 2002 relates to a reduction in
material cost for hardware products along with a greater portion
of software products sold which has a lower relative cost of
product. Cost of product revenues was $114.9 million or 18%
of net product revenue in 2001 compared to $117.8 million
or 27% of net product revenue 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 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 was $57.5 million or 14% of
services and support revenue in 2002 compared to
$56.5 million or 12% of service and support revenue in
2001. The increase in the cost of service and support as a
percent of revenue from 2001 to 2002 was due to the cost of
services and support revenue remaining relatively flat while
services and support revenue decreased 11%. The cost of services
and support revenue was $56.5 million or 12% of service and
support revenue in 2001 compared to $42.3 million or 16% of
revenue in 2000. The increase from 2000 to 2001 in absolute
dollars was due almost exclusively to additional technical
support and customer service personnel hired during 2001 to meet
our customers technical support needs. We anticipate that
cost of service revenue will increase in absolute dollars, but
will continue to fluctuate as a percent of net revenue.

Set forth below for the indicated periods are our
operating costs, including and excluding stock based
compensation (in thousands). Our management believes that a
presentation of operating costs excluding stock-based
compensation provides investors a meaningful basis of evaluating
our underlying cost and expense levels.

The size and amount of our stock based charges
has varied, and in the future 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.

Including Stock-Based Compensation (in thousands):

|                                                            |                                                                              |                          |         |               |  |               |         |         |  |   |         |         | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------ | ------- | ------------- |  | ------------- | ------- | ------- |  | - | ------- | ------- | 
|                                                            |                                                                              |                         
|                                                            |                                                                              | Years Ended December 31,
|                                                            |                                                                              |                         
|                                                            |                                                                              | 2002                     |         | 2001          |  | 2000         
|                                                            |                                                                              |                          |         |               |  |              
|                                                            |                                                                              |                          |         | (As Restated) |  | (As Restated)
|Research and development                                    |                                                                              | $                        | 148,801 |               |  | $             | 146,701 |         |  | $ | 164,218 |        
|Marketing and sales                                         |                                                                              |                          | 397,747 |               |  |               | 421,583 |         |  |   | 358,295 |        
|General and administrative                                  |                                                                              |                          | 118,277 |               |  |               | 111,106 |         |  |   | 91,277  |        
|Provision for (recovery from) doubtful accounts             |                                                                              |                          | (219    | )             |  |               | 7,449   |         |  |   | 4,785   |        
|Litigation settlement                                       |                                                                              |                          | 70,000  |               |  |               |        |         |  |   |        |        
|Amortization of intangibles                                 |                                                                              |                          | 13,895  |               |  |               | 56,064  |         |  |   | 58,236  |        
|Acquisition related costs not subject to
    capitalization |                                                                              |                          | 17,142  |               |  |               |        |         |  |   |        |        
|Restructuring charges                                       |                                                                              |                          | 1,116   |               |  |               | 3,821   |         |  |   |        |        
|                                                            |                                                                              |                          |         |               |  |               |         |         |  |   |         |        
|                                                            | Total operating costs, including the effects of
    stock-based compensation |                          | $       | 766,759       |  |               | $       | 746,724 |  |   | $       | 676,811 | 
|                                                            |                                                                              |                          |         |               |  |               |         |         |  |   |         |        

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Excluding Stock-Based Compensation (in thousands):

|                                                            |                                                                              |                          |         |               |  |               |         |         |  |   |         |         | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------ | ------- | ------------- |  | ------------- | ------- | ------- |  | - | ------- | ------- | 
|                                                            |                                                                              |                         
|                                                            |                                                                              | Years Ended December 31,
|                                                            |                                                                              |                         
|                                                            |                                                                              | 2002                     |         | 2001          |  | 2000         
|                                                            |                                                                              |                          |         |               |  |              
|                                                            |                                                                              |                          |         | (As Restated) |  | (As Restated)
|Research and development(1)                                 |                                                                              | $                        | 144,838 |               |  | $             | 142,097 |         |  | $ | 162,324 |        
|Marketing and sales(2)                                      |                                                                              |                          | 395,767 |               |  |               | 411,229 |         |  |   | 353,725 |        
|General and administrative(3)                               |                                                                              |                          | 101,816 |               |  |               | 101,712 |         |  |   | 87,625  |        
|Provision for (recovery from) doubtful accounts             |                                                                              |                          | (219    | )             |  |               | 7,449   |         |  |   | 4,785   |        
|Litigation settlement                                       |                                                                              |                          | 70,000  |               |  |               |        |         |  |   |        |        
|Amortization of intangibles                                 |                                                                              |                          | 13,895  |               |  |               | 56,064  |         |  |   | 58,236  |        
|Acquisition related costs not subject to
    capitalization |                                                                              |                          | 17,142  |               |  |               |        |         |  |   |        |        
|Restructuring charges(4)                                    |                                                                              |                          | 1,116   |               |  |               | 3,302   |         |  |   |        |        
|                                                            |                                                                              |                          |         |               |  |               |         |         |  |   |         |        
|                                                            | Total operating costs, excluding the effects of
    stock-based compensation |                          | $       | 744,355       |  |               | $       | 721,853 |  |   | $       | 666,695 | 
|                                                            |                                                                              |                          |         |               |  |               |         |         |  |   |         |        



---



|    |                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------
|(1) | Excludes stock-based compensation charge of
    $3,963, $4,604, and $1,894 for 2002, 2001, and 2000,
    respectively. 
|   
|(2) | Excludes stock-based compensation charge of
    $1,980, $10,354, and $4,570 for 2002, 2001, and 2000,
    respectively.
|   
|(3) | Excludes stock-based compensation charge of
    $16,461, $9,394, and $3,652 for 2002, 2001, and 2000,
    respectively.
|   
|(4) | Excludes stock-based compensation charge of $0,
    $519, and $0 for 2002, 2001, and 2000, 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 $4.0 million and
$4.6 million in 2002 and 2001, respectively, research and
development expenses remained relatively flat at
$144.8 million in 2002 versus $142.1 million in 2001.

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 12% to
$142.1 million in 2001 from $162.3 million in 2000. Of
the total decrease, approximately $15.1 million was
attributable to the discontinuance of certain previously
out-sourced development efforts with the remaining attributable
to the conversion of temporary personnel into full-time
employees; and due to overall efficiencies achieved by our
research and development group.

As a percentage of net revenue, research and
development expenses were 14%, 14%, and 23% in 2002, 2001, and
2000, respectively. Excluding stock-based compensation charges,
as a percentage of net revenue, research and development
expenses were 14%, 13%, and 23% in 2002, 2001, and 2000,
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.

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
$2.0 million and $10.4 million in 2002 and 2001,
respectively, marketing and sales expenses decreased 4% to
$395.8 million in 2002 from $411.2 million in 2001
primarily due to a decrease in commissions.

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 16% to
$411.2 million in 2001 from $353.7 million in

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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.


As a percentage of net revenue, marketing and
sales expenses were 38%, 39%, and 51% in 2002, 2001, and 2000,
respectively. Excluding stock-based compensation charges, as a
percentage of net revenue, marketing and sales expense was 38%,
38%, and 50% in 2002, 2001, and 2000, respectively. We
anticipate that marketing and sales expenses will increase in
absolute dollars, but will continue to fluctuate as a percentage
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 effects of
stock-based compensation of $16.5 million and
$9.4 million for 2002 and 2001, respectively, general and
administrative expenses remained relatively flat at
$101.8 million and $101.7 million for 2002 and 2001.

Excluding the effect of stock-based compensation
of $9.4 million and $3.7 million for 2001 and 2000,
respectively, general and administrative expenses increased 16%
to $101.7 million in 2001 from $87.6 million in 2000.
Of the total increase approximately $9.9 million related to
an increase in legal fees and litigation related charges;
approximately $2.2 million related to severance for our
former executives; and 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.

As a percentage of net revenues, general and
administrative expenses were 11%, 10%, and 13% in 2002, 2001,
and 2000, respectively. Excluding stock-based compensation
charges, as a percentage of net revenue, general and
administrative expenses, were 10% 9%, and 12% in 2002, 2001, and
2000, respectively. We expect our general and administrative
expenses to remain generally flat as we implement cost control
measures.

Provision for (Recovery from) Doubtful
Accounts, Net.Provision for doubtful
accounts consists of our estimates for the uncollectibility of
receivables, net of recoveries of amounts previously written
off. The recovery for doubtful accounts was $0.2 million in
2002. The provision for doubtful accounts was $7.4 million
and $4.8 million in 2001 and 2000, respectively.

Litigation Settlement.We agreed to settle our pending class
action litigation, subject to court approval, in September 2003.
The $70.0 million litigation charge is being recorded in
2002 because our agreement to settle, which established the
liability to be probable and estimable, occurred prior to the
publication of our 2002 consolidated financial statements.

Amortization of Intangibles.We expensed $13.9 million,
$56.1 million, and $58.2 million of amortization
related to intangibles in 2002, 2001, and 2000, respectively.
Intangibles consist of purchased goodwill, purchased technology
and other identifiable intangible assets. The decrease in
amortization in 2002 was largely a result of the implementation
of SFAS 142 under which we ceased amortizing goodwill and
realized a decrease in the annual amortization of
$51.2 million. Additionally, certain technology and other
intangible assets were fully amortized in 2002, resulting in a
decrease of $2.7 million. These amounts were offset by an
increase in amortization of $3.7 million related to
technology and other intangibles acquired in 2002. The decrease
in amortization in 2001 was a result of certain purchased
technology and other intangible assets becoming 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.

Acquisition Related Costs not Subject to
Capitalization.Acquisition costs not
subject to capitalization consist primarily of expenses incurred
by McAfee.com related to our exchange offer for all outstanding
publicly held shares of McAfee.com class A common stock. As
of December 31, 2002, these charges totaled
$17.1 million or 2% of net revenue. No additional costs are
expected to be incurred.

Restructuring Costs.On October 9, 2001, our board of
directors approved a plan to integrate the activities of our PGP
product group into our McAfee Security and Sniffer Technologies
product groups. In

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addition to the integration plan, we began to
look for a buyer for the PGP desktop encryption and Gauntlet
firewall product.


During the fourth quarter of 2001, we recorded a
restructuring charge of approximately $3.8 million in
connection with the PGP integration and planned disposition. The
restructuring charge consisted of the costs related to severance
packages for 100 affected employees. The following table sets
forth the activity against the 2001 accrual (in thousands):

|                           |  |             |      |           |  |              |        |       |  |   |      |   |  |   |        |  
|-------------------------- |  | ----------- | ---- | --------- |  | ------------ | ------ | ----- |  | - | ---- | - |  | - | ------ | -
|                           |  |             |      |           |  | Non-Cash     |        |      
|                           |  | Direct      |      | Severance |  | Stock Based  |        |      
|                           |  | Transaction |      | and       |  | 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.

A restructuring charge of approximately
$1.1 million was also recorded during the first quarter of
2002 consisting of costs of severance packages for 44 employees
and related legal and outplacement services.

The following table sets forth the activity
against the 2002 accrual during the twelve months ended
December 31, 2002 (in thousands):

|                           |  |       |      |           |  |       |      |   |  |   |        |  
|-------------------------- |  | ----- | ---- | --------- |  | ----- | ---- | - |  | - | ------ | -
|                           |  |       |      | Severance |  |      
|                           |  | Other |      | and       |  |      
|                           |  | Costs |      | Benefits  |  | Total
|                           |  |       |      |           |  |      
|Balance, February 2002     |  | $     | 190  |           |  | $     | 926  |   |  | $ | 1,116  |  
|Paid out                   |  |       | (190 | )         |  |       | (926 | ) |  |   | (1,116 | )
|                           |  |       |      |           |  |       |      |   |  |   |        |  
|Balance, December 31, 2002 |  | $     |     |           |  | $     |     |   |  | $ |       |  
|                           |  |       |      |           |  |       |      |   |  |   |        |  

Interest and Other Income.Interest and miscellaneous income was
$26.6 million in 2002, $28.0 million in 2001 and
$43.0 million in 2000. Interest and other income decreased
from 2001 to 2002 primarily due to an overall decrease in
average yields on our marketable securities despite higher cash
balances available for investment. 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 Expenses.Interest and other expense increased
to $25.1 million in 2002 from $24.7 million in 2001
and from $18.2 million in 2000. Interest and other expense
during 2002 increased $12.7 million due to the recognition
of a full twelve months of interest and expense on the
5.25% convertible subordinated notes due 2006 issued in
August 2001. This was offset by a $7.3 million reduction in
interest and expense due to the partial repurchase of
$140.0 million and $387.0 million face value of
zero-coupon convertible debt issued in 1998 during 2002 and
2001, respectively. Additionally, we entered into an interest
rate swap in July 2002 related to the 5.25% convertible
subordinated notes resulting in interest and expense savings
during 2002 of $4.2 million over the stated rate. In
addition, we recorded $0.8 million of capitalized interest
in 2002 related to the construction of the Plano, Texas office
facility. Interest and other expense increased during 2001 due
to the issuance in August 2001 of our 5.25% convertible
subordinated notes due 2006.

Gain on Sale of Assets and Product Line.We recognized a $6.7 million and
$2.6 million gain on the sale of the PGP Gauntlet product
line in February 2002, and the PGP Desktop/ Encryption assets
and technology in July 2002, respectively.

Gain on Investments, Net.In 2002, we recognized a
$4.6 million gain on the sale of equity and debt
securities. In 2001, we recognized a $10.2 million gain on
the sale of equity and debt securities. In 2000, we recognized a
net gain of $28.7 million on the sale of our venture and
strategic investments and a gain of $11.9 million on the
sale of shares of Networks Associates Company Limited (Japan).

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Impairment of Strategic and Other Investments.For the year ended December 31,
2002 and 2001, we recorded impairment charges of
$0.2 million and $20.6 million, respectively, related
to an other than temporary decline in the value of our venture
and strategic investments.

Provision for (benefit from) Income Taxes.The provision for (benefit from)
income taxes was $(0.3) million, $66.0 million and
$40.9 million in 2002, 2001 and 2000, respectively. Tax
expense was 0% and 45% of earnings before income taxes and
minority interest for 2002 and 2001, respectively. Tax expense
for 2000 was 58% respectively, of loss before provision for
income taxes, minority interest and extraordinary item. The
decrease in the effective tax rate from 2001 to 2002 was
primarily attributable to the utilization of tax attributes
along with more income being derived in lower tax jurisdictions.
Each year, our tax expense is mainly influenced by the mix of
income between geographic jurisdictions, including taxable
income in certain foreign countries.

The valuation allowance for our deferred tax
assets decreased from 2001 to 2002. The decrease was primarily
due to the release of the valuation allowance associated with
deferred tax assets related to McAfee.com. The valuation
allowance for our deferred tax assets increased from 2000 to
2001. The increase was due to uncertainty of our ability to
utilize some of our deferred tax assets, primarily foreign tax
credits.

Extraordinary Gain.In 2002 and 2001, we redeemed portions
of our zero coupon convertible subordinated debentures due 2018
for approximately $66.2 million and $173.7 million,
respectively. The aggregate accreted value of the debentures
were $67.3 and $179.7 million, respectively, which resulted
in an extraordinary gain of $26,000 and $1.7 million, net
of $17,000 and $1.2 million in taxes, in 2002 and 2001,
respectively.

Stock-Based Compensation

We recognized stock-based compensation expense of
$22.4 million, $24.9 million and $10.1 million in
2002, 2001 and 2000, respectively. Stock-based compensation
charges relate primarily to the exchange of McAfee.com options
in connection with our acquisition of the publicly traded
minority interest in McAfee.com, non-recurring stock
compensation charges primarily related to executive compensation
and the repricing of employee stock options. We expect
significant future stock-based compensation charges related to
the exchange of McAfee.com options and repriced employee stock
options.

As more fully described in note 21 to our
consolidated financial statements, our stock-based compensation
charges are made up of the following for the years presented (in
thousands):

|                                                                    |                                |                          |        |               |  |               |        |        |  |   |       |        | 
|------------------------------------------------------------------- | ------------------------------ | ------------------------ | ------ | ------------- |  | ------------- | ------ | ------ |  | - | ----- | ------ | 
|                                                                    |                                |                         
|                                                                    |                                | Years Ended December 31,
|                                                                    |                                |                         
|                                                                    |                                | 2002                     |        | 2001          |  | 2000         
|                                                                    |                                |                          |        |               |  |              
|                                                                    |                                |                          |        | (As Restated) |  | (As Restated)
|Exchange of McAfee.com options                                      |                                | $                        | 16,101 |               |  | $             |       |        |  | $ |      |       
|Former executives                                                   |                                |                          | 10,118 |               |  |               | 2,668  |        |  |   |      |       
|New and existing executives                                         |                                |                          | 1,478  |               |  |               | 3,230  |        |  |   |      |       
|Extended vesting term of options                                    |                                |                          | 193    |               |  |               |       |        |  |   |      |       
|Shares purchased outside Employee Stock Purchase
    Plan and other |                                |                          | 62     |               |  |               | 9      |        |  |   |      |       
|Repriced options                                                    |                                |                          | (5,548 | )             |  |               | 17,396 |        |  |   | 8,714 |       
|Warrants to outside consultants                                     |                                |                          |       |               |  |               | 1,049  |        |  |   |      |       
|PGP restructuring                                                   |                                |                          |        |               |  |               | 519    |        |  |   |      |       
|Options issued below fair market value                              |                                |                          |       |               |  |               |       |        |  |   | 1,402 |       
|                                                                    |                                |                          |        |               |  |               |        |        |  |   |       |       
|                                                                    | Total stock-based compensation |                          | $      | 22,404        |  |               | $      | 24,871 |  |   | $     | 10,116 | 
|                                                                    |                                |                          |        |               |  |               |        |        |  |   |       |       

Exchange of McAfee.com
Options.On September 13, 2002,
we acquired the minority interest in McAfee.com. In exchange for
each McAfee.com option, holders received options for 0.675 of a
share of our common stock plus $8.00 in cash, which will be paid
to the option holder only upon exercise of the option and

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without interest. McAfee.com options to purchase
4.1 million shares were converted into options to purchase
2.8 million shares of our common stock. Because McAfee.com
was our consolidated subsidiary and these options were repriced
in conjunction with the acquisition of the minority interest,
these options were accounted for under the variable method of
accounting which requires that a compensation charge be
remeasured at the end of every reporting period using fair
market value.


During 2002, we recorded a charge of
approximately $16.1 million related to exchanged options
subject to variable accounting. Our stock-based compensation
charge related to exchanged options subject to variable
accounting was based on our closing share price of $16.09 on
December 31, 2002. As of December 31, 2002, we had
outstanding exchanged options to acquire approximately
1.2 million of our shares subject to this variable
accounting.

Former Executives.Stock-based compensation charges
related to former executives include:

Effective January 2001, William Larson, our
former chief executive officer, Prabhat Goyal, our former chief
financial officer, and Peter Watkins, our 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 October 2002, we terminated the employment of
four former McAfee.com executives. These executives held
McAfee.com options, which were exchanged for options to acquire
our common stock. These options are subject to variable
accounting as discussed above. Upon the executives
termination, the options held by these individuals were modified
in accordance with existing change in control agreements and
became fully vested. As a result, we recorded a stock
compensation charge of $9.9 million during 2002. We will
continue to value these options until the earlier of the date of
exercise, forfeiture or cancellation without replacement.

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

New and Existing 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. During 2002 and 2001, we recorded
approximately $1.1 million and $0.8 million,
respectively, related to stock compensation associated with
Mr. Samenuks 2001 restricted stock grant based on the
related vesting schedule.

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
$0.4 million 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 the
president of our McAfee Security product group. In accordance
with the terms of the agreement, we 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 based on the related vesting schedule.

On January 15, 2002, our board of directors
approved a grant of 50,000 shares of restricted stock to
Mr. Samenuk. The price of the underlying shares is
$0.01 per share. During 2002, we recorded approximately
$0.5 million related to stock-based compensation associated
with Mr. Samenuks 2002 restricted stock grant based
on the related vesting schedule.

Extended Vesting Term of Options.During the three months ended
June 30, 2002, we recorded a one-time stock-based
compensation charge of $0.2 million as a result of the
modification of the terms of the options previously granted to
certain employees.

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Shares Purchased Outside Employee Stock
Purchase Plan.On January 31,
2002, we experienced a shortfall in the number of shares
available under the 1994 Employee Qualified Stock Purchase Plan
to meet the requirements of the open purchase period. Although
we reduced the number of shares plan participants could purchase
by a pro rata amount, additional shares were required to be
purchased outside of the plan in order to meet this shortfall.
As a result, we recorded a one-time stock-based compensation
charge of approximately $60,000 in 2002 to account for the
difference between the fair value of the shares purchased
outside of the plan and the price the shares were sold to plan
participants.

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 equivalent to the fair market value of our
stock at the time of grant. 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
on July 1, 2000. At December 31, 2002, these options
were substantially fully vested. Depending upon movements in the
market value of our common stock, this accounting treatment may
result in additional stock-based compensation charges in future
periods.

During 2002, 2001 and 2000, we incurred charges
(credits) to earnings of approximately ($6.5) million,
$15.6 million and $2.0 million related to options
subject to variable plan accounting. As of December 31,
2002, options to purchase 1.1 million shares of the company
were outstanding and subject to variable accounting.

We also incurred an initial stock-based
compensation charge in connection with the initial issuance of
the repriced options. Approximately $1.0 million,
$1.8 million and $6.7 million was expensed during
2002, 2001 and 2000, respectively.

Warrants to Outside Consultants.In connection with the retention of
our chief executive officer, chief financial officer and two
executive officers for our international operations, in 2001 we
issued to a retained executive search firm warrants to acquire
approximately 250,000 shares of our common stock. We
recognized a related $1.0 million aggregate stock-based
compensation charge based on the aggregate estimated value of
the common stock warrants on the respective grant dates.

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 $0.5 million 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.

Options Issued Below Fair Market Value.In January 2000, we issued fully
vested options to consultants. As a result, we recorded a
stock-based compensation of approximately $1.4 million
based on the Black-Scholes model.

Liquidity and Capital Resources

At December 31, 2002, we had
$674.2 million in cash and cash equivalents and
$339.5 million in marketable securities, for a combined
total of $1,013.7 million.

Net cash provided by operating activities was
$195.1 million, $146.0 million and $7.6 million
in 2002, 2001 and 2000, respectively.

Net cash provided by operating activities in 2002
was impacted primarily from non-cash charges including
depreciation and amortization, recovery from doubtful accounts,
interest on our convertible debentures, stock-based
compensation, deferred taxes, gain (loss) on investments,
extraordinary item, minority interest, gains on sales of assets
and technology and change in the fair value of the derivatives.
Additional cash was used to fund an increase of
$61.3 million in deferred revenue offset by a increase of
$15.8 million in our accounts receivable, an increase in
our accounts payable and accrued liabilities of

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$78.8 million, a decrease in prepaid
expenses and other assets of $9.7 million and a
$46.0 million tax benefit from the exercise of
non-qualified stock options.


Net cash provided by operating activities in 2001
was impacted primarily from non-cash charges including
depreciation and amortization, recovery of doubtful accounts,
interest on our convertible debentures, stock-based
compensation, deferred taxes, gains (loss) on investments,
minority interest, gains on sales of assets and technology and
change in the fair value of the derivatives. Additional cash was
used to fund an increase of $18.1 million in our accounts
receivable and a decrease of $144.2 million in deferred
revenue, offset by an decrease of $4.0 million in our
accounts payable and accrued liabilities balance, a decrease of
$35.0 million in prepaid expenses, income taxes and other
assets and a $5.4 million tax benefit from the exercise of
non-qualified stock options.

Net cash provided by operating activities in 2000
was impacted primarily from non-cash charges including
depreciation and amortization, provision for doubtful accounts,
impairment of our strategic investments, interest on our zero
coupon convertible debentures, stock-based compensation charges,
deferred taxes, net gains on investments and extraordinary item
and minority interest. Additional cash was used to fund an
increase of $22.5 million in our accounts receivable and an
increase of $24.1 million in prepaid expenses and other
assets offset by an increase of $93.2 million in deferred
revenue and an increase of $0.7 million in our accounts
payable and accrued liabilities balance.

To the extent that the non-cash items increase or
decrease our future operating results, there will be no
corresponding impact on our cash flows. After excluding the
effects of these non-cash charges the primary changes in the
operating activities relate to changes in working capital. Our
primary source of operating cash flows is the collection of
accounts receivable from our customers and the timing of
payments to our vendors and service providers.

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 value-added resellers, 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.

Our operating cash flows will be impacted in the
future based on the timing of payments to our vendors for
accounts payable. We generally pay our vendors and service
providers in accordance with the invoice terms and conditions.
The timing of cash payments in the future periods will be
impacted by the nature of accounts payable arrangements and
managements assessment of our cash inflows.

Net cash provided by (used in) investing
activities was ($183.6) million, $20.7 million, and
$(3.7) million in 2002, 2001, and 2000, respectively. In
2002, net cash used in investing activities includes
$98.4 million for the purchase of the minority interest in
McAfee.com, $59.4 million for the purchase of property and
equipment, $19.1 million for acquisitions net of cash
acquired, and $21.7 million being designated as restricted
cash in connection with our interest rate swap (described below)
and amounts held at escrow related to our other acquisitions.
These cash usages were offset by the proceeds from our
marketable securities portfolio of $8.7 million, from the
sale of Secure Computing shares and the related collar of
$5.1 million, and sale of assets and technology of
$2.0 million.

In 2001, the activity in the portfolio of our
investment in marketable securities generated net cash proceeds
of $20.7 million. These proceeds were offset by our
purchase of shares of our Japanese subsidiary owned by minority
stockholders for $10.7 million and by our purchases of
property and equipment and technologies totaling
$31.4 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 property and equipment, technologies and other
investments for a total of $87.5 million were partly offset
by net cash proceeds of $37.1 million from the activity in
our investment portfolio.

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Net cash provided by (used in) financing
activities was $43.7 million, $158.9 million and
($52.6) million in 2002, 2001, and 2000, respectively. Net
cash provided by financing activities in 2002 amounted to
$43.7 million, consisting of cash generated from the
issuance of common stock under our stock option plans and
employee stock purchase plan of $109.9 million offset by
cash used in the repurchase of a portion of our zero coupon
debentures of $66.2 million.

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 plans 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 $50.0 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 $63.9 million.

During 2002, a significant portion of our cash
inflows was 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
|                    |  |                |         |              |  |            |         |      
|2003                |  | $              | 177,248 |              |  |            |        |       |  | $ | 18,899 |  |  | $ | 196,147 | 
|2004                |  |                |        |              |  |            |        |       |  |   | 14,681 |  |  |   | 14,681  | 
|2005                |  |                |        |              |  |            |        |       |  |   | 13,443 |  |  |   | 13,443  | 
|2006                |  |                |        |              |  |            | 345,000 |       |  |   | 10,990 |  |  |   | 355,990 | 
|2007                |  |                |        |              |  |            |        |       |  |   | 9,129  |  |  |   | 9,129   | 
|2008 and thereafter |  |                |        |              |  |            |        |       |  |   | 8,738  |  |  |   | 8,738   | 
|                    |  |                |         |              |  |            |         |       |  |   |        |  |  |   |         | 
|                    |  | $              | 177,248 |              |  | $          | 345,000 |       |  | $ | 75,880 |  |  | $ | 598,128 | 
|                    |  |                |         |              |  |            |         |       |  |   |        |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In February 2003, we redeemed substantially all
    of our outstanding zero coupon debentures. As of June 30,
    2003, there were no outstanding zero coupon debentures. The
    repurchase value set forth above corresponds to the aggregate
    face value outstanding of all of our zero coupon debentures of
    $358.5 million less the related unamortized discount of
    $181.2 million on February 13, 2003.                                                                                 
|   
|(2) | Under the terms of the notes, in 2003, 2004, 2005
    and 2006, we will make interest payments of $18.1 million
    to the note holders. Pursuant to a related interest rate swap,
    the swap counter parties are obligated to make regular payments
    to us with respect to these interest obligations based on the
    5.25% interest rate and, subject to quarterly resets, we are
    required to make regular payments to the counter parties based
    on a floating rate of LIBOR plus 1.66%.

Convertible Debt

On February 13, 1998, we issued zero coupon
convertible subordinated debentures due 2018 (the
Debentures) with an aggregate face amount at
maturity of $885.5 million and generating 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. (See
note 13 to the consolidated financial statements.) Through
a limited number of privately negotiated purchases, prior to
December 31, 2002, we repurchased zero coupon convertible
subordinated debentures with an aggregate face amount of
approximately $527.0 million,

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at a total price of $239.9 million. In
connection with these repurchases, we recognized extraordinary
gains of approximately $26,000 in 2002 and $1.7 million in
2001, net of taxes.


In accordance with their terms, at the option of
each holder, we were required to redeem the holders
Debentures as of February 13, 2003 at a purchase price
equal to the initial issue price plus the accretion of the
discount on the debentures to such date, or $494.52 per
$1,000 of principal amount at maturity. On February 13,
2003, we paid approximately $177.1 million in cash to
redeem approximately $358.0 million in face amount of the
Debentures. On June 9, 2003, we redeemed the remaining
Debentures with an aggregate face amount at maturity of
$0.5 million for a net price of $0.2 million. In
connection with these repurchases, we recognized a loss of
approximately $2.6 million and $0.1 million,
respectively, calculated as the difference between the accreted
value of the debt, net of unamortized issuance costs, and the
cost of repurchase.

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. At any time between August 20, 2004 and
August 14, 2005, we may redeem all or a portion of the
notes for cash at a repurchase price of 101.3125% of the
principal amount. After August 14, 2005, the repurchase
price is 100.0% of the principal amount. The notes are unsecured
and are subordinated to all of our existing and future Senior
Indebtedness (as defined in the related Indenture).

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.

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.



| |                      
| | ---------------------
| | Foreign Currency Risk

As a global concern, we face exposure to
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 Japanese Yen,

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Canadian dollar, Australian dollar, the Euro, the
British Pound, and certain other 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.


To reduce exposures associated with nonfunctional
net monetary asset positions in various currencies, we enter
into spot, forward and swap foreign exchange contracts. Our
foreign exchange contracts range from one to three months in
original maturity. In general, we have not hedged anticipated
foreign currency cash flows nor do we enter into forward
contracts for trading purposes. We do not use any derivatives
for speculative purposes. Our existing 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 consolidated statement of
operations.

The unrealized gain (loss) of forward foreign
currency contracts outstanding are presented below as of
December 31 (in thousands):

|                       |  |      |       |      |  |   |     |  
|---------------------- |  | ---- | ----- | ---- |  | - | --- | -
|                       |  | 2002 |       | 2001
|                       |  |      |       |     
|Euro                   |  | $    | 488   |      |  | $ | (1  | )
|British Pound Sterling |  |      | 774   |      |  |   | 91  |  
|Singapore Dollar       |  |      | 15    |      |  |   |    |  
|Australian Dollar      |  |      | 155   |      |  |   | 5   |  
|Canadian Dollar        |  |      | 354   |      |  |   | 7   |  
|                       |  |      |       |      |  |   |     |  
|                       |  | $    | 1,786 |      |  | $ | 102 |  
|                       |  |      |       |      |  |   |     |  

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

Net realized gains and losses arising from
settlement of our forward foreign exchange contracts were not
significant in 2002, 2001, and 2000.



| |                   
| | ------------------
| | Interest Rate Risk

In July 2002, we entered into interest rate swap
transactions (the Transactions) with two investment
banks (the Banks), to hedge the interest rate risk
of its outstanding 5.25% Convertible Subordinated Note due
2006 (the Notes) (See note 13 to the
consolidated financial statements).

The notional amount of the Transactions was
$345.0 million to match the entire principal amount of the
Notes. We will receive from the Banks fixed payments equal to
5.25% percent of the notional amount, payable on
February 15 and August 15 starting on August 15,
2002. In exchange, we will pay to the Banks floating rate
payments based upon the London InterBank Offered Rate
(LIBOR) plus 1.66% multiplied by the notional amount
of the Transactions with the LIBOR resetting every three months
beginning August 15, 2002.

The Transactions will terminate on
August 15, 2006 (Termination Date), subject to
certain early termination provisions if on or after
August 20, 2004 and prior to August 15, 2006 the
twenty-day average closing price of our common stock equals or
exceeds $22.59.

The Transactions qualified and were designated as
a fair value hedge under SFAS 133, Accounting for
Derivative Instruments and Hedging Activities to hedge
against movements in the fair value of the Notes due to changes
in the benchmark interest rate. Under the fair value hedge
model, the derivative is recognized at fair value on the balance
sheet with an offsetting entry to the income statement. In
addition, changes in fair value of the Notes due to changes in
the benchmark interest rate are recognized as a basis adjustment
to the carrying amount of the Notes with an offsetting entry to
the income statement. The gain or loss from the change in fair
value of the Transaction and the offsetting change in the fair
value of the Notes are recognized as interest and other expense.
The net gain recorded as of December 31, 2002 was
approximately $1.4 million.

To test effectiveness of the hedges, regression
analysis has and will be performed at least quarterly comparing
the change in fair value of the Transactions and the Notes. The
fair values of the Transactions and the Notes are calculated at
least quarterly as the present value of the contractual cash
flows to the expected

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maturity date, where the expected maturity date
is based on probability-weighted analysis of interest rates
relating to the five-year LIBOR curve and our stock prices. For
the year ended December 31, 2002, the hedge was highly
effective and therefore, the ineffective portion did not have a
material impact on earnings.


In support of our obligation under the
Transactions, we are required to maintain with the Banks a
minimum level of cash and investment collateral of
$20.0 million and periodically adjust the overall level of
collateral depending on the fair market value of the
Transactions. This minimum amount of collateral is presented as
restricted cash in our financial statements.

The following table presents the hypothetical
changes in fair values of the interest rate swaps held at
December 31, 2002 assuming the following shifts in the
yield curve at December 31, 2002. Beginning fair values
represent the fair value of the swaps at December 31, 2002
(in millions).

|                |       |                                 |       |           |  |                                 |       |       |  |        |       |         |  |         |      |       |  |   |      |       |  |   |      |      |  |   |      |      | 
|--------------- | ----- | ------------------------------- | ----- | --------- |  | ------------------------------- | ----- | ----- |  | ------ | ----- | ------- |  | ------- | ---- | ----- |  | - | ---- | ----- |  | - | ---- | ---- |  | - | ---- | ---- | 
|                |       |                                 |       |           |  |                                
|                |       | Valuation of Interest Rate Swap |       |           |  | Valuation of Interest Rate Swap
|                |       | Given an Interest Rate Decrease |       | No        |  | Given an Interest Rate Increase
|                |       | of X Basis Points               |       | Change in |  | of X Basis Points              
|                |       |                                 |       | Interest  |  |                                
|Issuer          |       | 150 BPS                         |       | 100 BPS   |  | 50 BPS                          |       | Rate  |  | 50 BPS |       | 100 BPS |  | 150 BPS
|                |       |                                 |       |           |  |                                 |       |       |  |        |       |         |  |        
|JP Morgan       |       | $                               | 15.00 |           |  | $                               | 12.80 |       |  | $      | 10.50 |         |  | $       | 8.30 |       |  | $ | 6.10 |       |  | $ | 4.10 |      |  | $ | 2.00 |     
|Lehman Brothers |       |                                 | 17.35 |           |  |                                 | 14.80 |       |  |        | 12.14 |         |  |         | 9.60 |       |  |   | 7.06 |       |  |   | 4.74 |      |  |   | 2.31 |     
|                |       |                                 |       |           |  |                                 |       |       |  |        |       |         |  |         |      |       |  |   |      |       |  |   |      |      |  |   |      |     
|                | Total |                                 | $     | 32.35     |  |                                 | $     | 27.60 |  |        | $     | 22.64   |  |         | $    | 17.90 |  |   | $    | 13.16 |  |   | $    | 8.84 |  |   | $    | 4.31 | 
|                |       |                                 |       |           |  |                                 |       |       |  |        |       |         |  |         |      |       |  |   |      |       |  |   |      |      |  |   |      |     

The following table presents the hypothetical
changes in the value of our 5.25% Convertible debt as of
December 31, 2002 assuming the following shifts in the
yield curve at December 31, 2002 and does not take into
consideration the embedded equity conversion option of the bond.
The beginning value represents the value of the debt at
December 31, 2002 (in millions).

|                                              |  |                                           |        |           |  |                                           |        |      |  |        |        |         |  |         |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|--------------------------------------------- |  | ----------------------------------------- | ------ | --------- |  | ----------------------------------------- | ------ | ---- |  | ------ | ------ | ------- |  | ------- | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                              |  |                                           |        |           |  |                                          
|                                              |  | Valuation of 5.25% Debt Given an Interest |        | No        |  | Valuation of 5.25% Debt Given an Interest
|                                              |  | Rate Decrease of X Basis Points           |        | Change in |  | Rate Increase of X Basis Points          
|                                              |  |                                           |        | Interest  |  |                                          
|                                              |  | 150 BPS                                   |        | 100 BPS   |  | 50 BPS                                    |        | Rate |  | 50 BPS |        | 100 BPS |  | 150 BPS
|                                              |  |                                           |        |           |  |                                           |        |      |  |        |        |         |  |        
|5.25% Convertible Subordinated Notes due 2006 |  | $                                         | 397.53 |           |  | $                                         | 392.19 |      |  | $      | 386.91 |         |  | $       | 381.75 |  |  | $ | 376.72 |  |  | $ | 376.72 |  |  | $ | 366.99 | 
|                                              |  |                                           |        |           |  |                                           |        |      |  |        |        |         |  |         |        |  |  |   |        |  |  |   |        |  |  |   |        | 



| |                     
| | --------------------
| | Cash Management Risk

We maintain balances in cash, cash-equivalents
and investment securities. We maintain our investment securities
in portfolio holdings of various issuers, types and maturities
including money market, government, agency, and corporate bonds.
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, we held minority
venture investments totaling $2.4 million at estimated fair
value. The $2.4 million in minority venture investments
included investments in public and private companies, totaling
$2.2 million and $200,000, respectively. During 2001, we
recorded a $20.6 million impairment charge in connection
with these investments. During 2002, we disposed of our shares
in a majority of these investments. As of December 31,
2002, the minority investments we continue to hold totaled
$1.6 million at estimated fair value. These investments
were in public companies.

The following tables present the hypothetical
changes in fair values in the securities held at
December 31, 2002 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),

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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, 2002. 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 Increase
|                                      |       | Given an Interest Rate Decrease |        |           |  |                                
|                                      |       |                                 |        | No        |  |                                
|                                      |       | of X Basis Points               |        | Change in |  | 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       |       | $                               | 323.14 |           |  | $                               | 322.51 |        |  | $      | 321.83 |         |  | $       | 321.13 |        |  | $ | 320.39 |        |  | $ | 319.66 |        |  | $ | 318.94 |       
|Municipal notes and bonds             |       |                                 | 4.84   |           |  |                                 | 4.83   |        |  |        | 4.83   |         |  |         | 4.82   |        |  |   | 4.82   |        |  |   | 4.81   |        |  |   | 4.81   |       
|Corporate notes, bonds and preferreds |       |                                 | 170.94 |           |  |                                 | 170.84 |        |  |        | 170.74 |         |  |         | 170.64 |        |  |   | 170.54 |        |  |   | 170.44 |        |  |   | 170.36 |       
|                                      |       |                                 |        |           |  |                                 |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                      | Total |                                 | $      | 498.92    |  |                                 | $      | 498.18 |  |        | $      | 497.40  |  |         | $      | 496.59 |  |   | $      | 495.75 |  |   | $      | 494.91 |  |   | $      | 494.11 | 
|                                      |       |                                 |        |           |  |                                 |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |       

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 Decrease |        |           |  | Given an Interest Rate Increase
|                                      |       |                                 |        | No        |  |                                
|                                      |       | of X Basis Points               |        | Change in |  | 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       |       | $                               | 324.94 |           |  | $                               | 324.52 |        |  | $      | 324.11 |         |  | $       | 323.67 |        |  | $ | 323.25 |        |  | $ | 322.83 |        |  | $ | 322.42 |       
|Municipal notes and bonds             |       |                                 | 4.85   |           |  |                                 | 4.85   |        |  |        | 4.85   |         |  |         | 4.86   |        |  |   | 4.86   |        |  |   | 4.86   |        |  |   | 4.87   |       
|Corporate notes, bonds and preferreds |       |                                 | 171.42 |           |  |                                 | 171.52 |        |  |        | 171.62 |         |  |         | 171.73 |        |  |   | 171.84 |        |  |   | 171.94 |        |  |   | 172.09 |       
|                                      |       |                                 |        |           |  |                                 |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                      | Total |                                 | $      | 501.21    |  |                                 | $      | 500.89 |  |        | $      | 500.58  |  |         | $      | 500.26 |  |   | $      | 499.95 |  |   | $      | 499.63 |  |   | $      | 499.38 | 
|                                      |       |                                 |        |           |  |                                 |        |        |  |        |        |         |  |         |        |        |  |   |        |        |  |   |        |        |  |   |        |       






|         |                                                              
|-------- | -------------------------------------------------------------
|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.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Quarterly Operating Results
(Unaudited)

|                                                                                              |  |                                       |         |               |  |               |         |               |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | - | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                                              |  |                                      
|                                                                                              |  | Three Months Ended                   
|                                                                                              |  |                                      
|                                                                                              |  | December 31,                          |         | September 30, |  | June 30,      |         | March 31,     |  | December 31,  |         | September 30, |  |               |         | March 31,    
|                                                                                              |  | 2002                                  |         | 2002          |  | 2002          |         | 2002          |  | 2001          |         | 2001          |  | June 30, 2001 |         | 2001         
|                                                                                              |  |                                       |         |               |  |               |         |               |  |               |         |               |  |               |         |              
|                                                                                              |  |                                      
|                                                                                              |  | (In thousands, except per share data)
|                                                                                              |  | (As Restated)                         |         | (As Restated) |  | (As Restated) |         | (As Restated) |  | (As Restated) |         | (As Restated) |  | (As Restated) |         | (As Restated)
|Statement of Operations and Other
    Data:                                                   |  |                                       |         |               |  |               |         |               |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|Net revenues                                                                                  |  | $                                     | 269,525 |               |  | $             | 254,430 |               |  | $             | 263,441 |               |  | $             | 255,648 |               |  | $ | 306,076 |  |  | $ | 265,010 |  |  | $ | 262,893 |  |  | $ | 237,681 | 
|Gross margin                                                                                  |  |                                       | 230,627 |               |  |               | 214,829 |               |  |               | 222,334 |               |  |               | 213,696 |               |  |   | 264,568 |  |  |   | 219,945 |  |  |   | 219,105 |  |  |   | 196,589 | 
|Income (loss) from operations                                                                 |  |                                       | (15,680 | )             |  |               | 26,863  |               |  |               | 55,675  |               |  |               | 47,869  |               |  |   | 59,649  |  |  |   | 50,219  |  |  |   | 40,210  |  |  |   | 3,405   | 
|Income (loss) before provision for income taxes,
    minority interest and extraordinary item |  |                                       | (11,176 | )             |  |               | 31,385  |               |  |               | 56,130  |               |  |               | 53,568  |               |  |   | 58,147  |  |  |   | 51,664  |  |  |   | 30,238  |  |  |   | 6,356   | 
|Income (loss) before extraordinary item                                                       |  |                                       | (11,204 | )             |  |               | 34,067  |               |  |               | 53,779  |               |  |               | 51,647  |               |  |   | 31,802  |  |  |   | 28,210  |  |  |   | 16,794  |  |  |   | 4,716   | 
|Extraordinary item, gain (loss) on repurchase of
    debt, net of taxes                       |  |                                       |        |               |  |               | 57      |               |  |               | (31     | )             |  |               |        |               |  |   | 654     |  |  |   | 1,077   |  |  |   |        |  |  |   |        | 
|Net income (loss)                                                                             |  |                                       | (11,204 | )             |  |               | 34,124  |               |  |               | 53,748  |               |  |               | 51,644  |               |  |   | 32,456  |  |  |   | 29,287  |  |  |   | 16,794  |  |  |   | 4,716   | 
|Extraordinary item per share                                                                  |  | $                                     |        |               |  | $             |        |               |  | $             |        |               |  | $             |        |               |  | $ |        |  |  | $ |         |  |  | $ |        |  |  | $ |        | 
|Basic income (loss) per share                                                                 |  | $                                     | (0.07   | )             |  | $             | 0.23    |               |  | $             | 0.37    |               |  | $             | 0.36    |               |  | $ | 0.23    |  |  | $ | 0.21    |  |  | $ | 0.12    |  |  | $ | 0.04    | 
|Diluted income (loss) per share                                                               |  | $                                     | (0.07   | )             |  | $             | 0.21    |               |  | $             | 0.33    |               |  | $             | 0.31    |               |  | $ | 0.21    |  |  | $ | 0.18    |  |  | $ | 0.12    |  |  | $ | 0.04    | 

We believe that period-to-period comparisons of
our financial results should not be relied upon as an indication
of future performance.

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, the
portion of our licensing fees deferred and recognized as support
and maintenance revenue, 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. For example,
the quarters in 2001 versus the quarters in 2002 benefit from a
greater amount of revenue from multi-element revenue
arrangements deferred from 1998 through 2000 to later periods.
In addition, net income for the quarter ended December 31,
2002, reflects a $70.0 million charge related to our
pending class action suit which we have agreed to settle,
subject to court approval. 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).

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The following table presents selected as reported
and as restated quarterly results of operation information for
the two year period ending December 31, 2002 with
reconciliation of the Companys as reported net revenue and
net income (loss) to the restated net revenue and net income
(loss) (in thousands). Please see note 3 to our
consolidated financial statements for a description of the
various adjustments (unaudited):

|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |         |         |         | 
|----------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------- | ------------------------- | ------------- | ------- | -------- | ------- | --------- | ------ | ------------ | ------- | ------------- | ------ | -------- | ------- | --------- | ------ | ------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                                            |                                                                |                                      
|                                                                                                            |                                                                | Three Months Ended                   
|                                                                                                            |                                                                |                                      
|                                                                                                            |                                                                | December 31,                          |                           | September 30, |         | June 30, |         | March 31, |        | December 31, |         | September 30, |        | June 30, |         | March 31,
|                                                                                                            |                                                                | 2002                                  |                           | 2002          |         | 2002     |         | 2002      |        | 2001         |         | 2001          |        | 2001     |         | 2001     
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |          
|                                                                                                            |                                                                |                                      
|                                                                                                            |                                                                | (In thousands, except per share data)
|                                                                                                            |                                                                | (As Restated)                        
|Statements of Operations and Other Data:                                                                    |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|Net revenue, as reported                                                                                    |                                                                | $                                     | 255,996                   |               |         | $        | 232,190 |           |        | $            | 232,959 |               |        | $        | 220,712 |           |        | $       | 258,130 |        |         | $       | 205,645 |         |         | $       | 192,817 |         |         | $       | 155,892 |        
|Revenue adjustments:                                                                                        |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                                                            | Conversion to sell-out revenue recognition policy              |                                       |                           | 3,129         |         |          |         | 5,686     |        |              |         | 7,302         |        |          |         | 9,058     |        |         |         | 13,520 |         |         |         | 18,176  |         |         |         | 23,039  |         |         |         | 27,649  |        
|                                                                                                            | Allocation of revenue in multi-element
    arrangements        |                                       |                           | 11,144        |         |          |         | 15,690    |        |              |         | 22,439        |        |          |         | 21,916    |        |         |         | 30,377 |         |         |         | 41,044  |         |         |         | 46,627  |         |         |         | 39,515  |        
|                                                                                                            | Provision for doubtful accounts                                |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         | 354    |         |         |         | (545    | )       |         |         | 1,012   |         |         |         | 2,192   |        
|                                                                                                            | Business combinations and related restructuring
    charges    |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         |       |         |         |         |        |         |         |         |        |         |         |         |        |        
|                                                                                                            | Allowances for sales returns and other revenue
    adjustments |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         |       |         |         |         |        |         |         |         |        |         |         |         | 596     |        
|                                                                                                            | General and administrative expense                             |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         |       |         |         |         |        |         |         |         |        |         |         |         |        |        
|                                                                                                            | Reclassification for payments to distributors                  |                                       |                           |              |         |          |         | (146      | )      |              |         | (164          | )      |          |         | (165      | )      |         |         |       |         |         |         |        |         |         |         |        |         |         |         |        |        
|                                                                                                            | Investments in customers                                       |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         |       |         |         |         |        |         |         |         |        |         |         |         |        |        
|                                                                                                            | Other revenue adjustments                                      |                                       |                           | (744          | )       |          |         | 1,010     |        |              |         | 905           |        |          |         | 4,127     |        |         |         | 3,695  |         |         |         | 690     |         |         |         | (602    | )       |         |         | 11,837  |        
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                                                            |                                                                |                                       | Total revenue adjustments |               |         | 13,529   |         |           |        | 22,240       |         |               |        | 30,482   |         |           |        | 34,936  |         |        |         | 47,946  |         |         |         | 59,365  |         |         |         | 70,076  |         |         |         | 81,789  | 
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                                                            |                                                                |                                       | Net revenue, restated     |               | $       | 269,525  |         |           | $      | 254,430      |         |               | $      | 263,441  |         |           | $      | 255,648 |         |        | $       | 306,076 |         |         | $       | 265,010 |         |         | $       | 262,893 |         |         | $       | 237,681 | 
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|Gross margin, as reported                                                                                   |                                                                | $                                     | 217,706                   |               |         | $        | 193,477 |           |        | $            | 193,174 |               |        | $        | 180,076 |           |        | $       | 218,228 |        |         | $       | 162,851 |         |         | $       | 152,908 |         |         | $       | 118,909 |        
|Gross margin, as restated                                                                                   |                                                                |                                       | 230,627                   |               |         |          | 214,829 |           |        |              | 222,334 |               |        |          | 213,696 |           |        |         | 264,568 |        |         |         | 219,945 |         |         |         | 219,105 |         |         |         | 196,589 |        
|Income (loss) from operations, as reported                                                                  |                                                                |                                       | 41,399                    |               |         |          | 5,511   |           |        |              | 26,515  |               |        |          | 12,883  |           |        |         | 14,700  |        |         |         | (8,841  | )       |         |         | (27,960 | )       |         |         | (59,865 | )      
|Income (loss) from operations, as restated                                                                  |                                                                |                                       | (15,680                   | )             |         |          | 26,863  |           |        |              | 55,675  |               |        |          | 47,869  |           |        |         | 59,649  |        |         |         | 50,219  |         |         |         | 40,210  |         |         |         | 3,405   |        
|Income (loss) before provision for income Taxes,
    minority interest, and extraordinary item, as reported |                                                                |                                       | 45,906                    |               |         |          | 10,033  |           |        |              | 26,253  |               |        |          | 18,572  |           |        |         | 13,198  |        |         |         | (8,148  | )       |         |         | (37,930 | )       |         |         | (58,503 | )      
|Income (loss) before provision for income taxes,
    minority interest and extraordinary item, as restated  |                                                                |                                       | (11,176                   | )             |         |          | 31,385  |           |        |              | 56,130  |               |        |          | 53,568  |           |        |         | 58,147  |        |         |         | 51,664  |         |         |         | 30,238  |         |         |         | 6,356   |        
|Income (loss) before extraordinary item, as
    reported                                                    |                                                                |                                       | 44,202                    |               |         |          | 9,033   |           |        |              | 21,232  |               |        |          | 15,752  |           |        |         | (5,513  | )      |         |         | (12,328 | )       |         |         | (37,179 | )       |         |         | (47,361 | )      
|Income (loss) before extraordinary item, as
    restated                                                    |                                                                |                                       | (11,204                   | )             |         |          | 34,067  |           |        |              | 53,779  |               |        |          | 51,644  |           |        |         | 31,800  |        |         |         | 28,210  |         |         |         | 16,797  |         |         |         | 4,715   |        
|Net income (loss), as reported                                                                              |                                                                | $                                     | 44,202                    |               |         | $        | 9,090   |           |        | $            | 21,201  |               |        | $        | 15,752  |           |        | $       | (4,859  | )      |         | $       | (11,251 | )       |         | $       | (37,179 | )       |         | $       | (47,361 | )      
|Total revenue adjustments                                                                                   |                                                                |                                       | 13,530                    |               |         |          | 22,240  |           |        |              | 30,482  |               |        |          | 34,935  |           |        |         | 47,947  |        |         |         | 59,365  |         |         |         | 70,076  |         |         |         | 81,788  |        
|Expense adjustments:                                                                                        |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                                                            | Collection not reasonably assured                              |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         |       |         |         |         |        |         |         |         |        |         |         |         | (16,817 | )      
|                                                                                                            | Business combinations and related restructuring
    charges    |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         | 2,011  |         |         |         | 2,011   |         |         |         | 2,011   |         |         |         | 2,028   |        
|                                                                                                            | Income tax effect of restatement adjustments                   |                                       |                           | 1,670         |         |          |         | 3,217     |        |              |         | 3,350         |        |          |         | 1,507     |        |         |         | (7,916 | )       |         |         | (19,487 | )       |         |         | (14,594 | )       |         |         | (12,614 | )      
|                                                                                                            | General and administrative expense                             |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         |       |         |         |         |        |         |         |         |        |         |         |         |        |        
|                                                                                                            | Reclassification for payments to distributors                  |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         |       |         |         |         |        |         |         |         |        |         |         |         |        |        
|                                                                                                            | Investments in customers                                       |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         |       |         |         |         | 751     |         |         |         |        |         |         |         | 1,000   |        
|                                                                                                            | Cumulative translation adjustment                              |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         |          |        |         |         |       |         |         |         |        |         |         |         |        |         |         |         | (399    | )      
|                                                                                                            | Cost of revenue                                                |                                       |                           | (608          | )       |          |         | (888      | )      |              |         | (1,322        | )      |          |         | (1,316    | )      |         |         | (1,608 | )       |         |         | (2,271  | )       |         |         | (3,878  | )       |         |         | (4,108  | )      
|                                                                                                            | Stock-based compensation                                       |                                       |                           |              |         |          |         |          |        |              |         |              |        |          |         | 1,366     |        |         |         | (39    | )       |         |         | (45     | )       |         |         | (37     | )       |         |         | (38     | )      
|                                                                                                            | Other                                                          |                                       |                           | (69,998       | )       |          |         | 465       |        |              |         | 37            |        |          |         | (600      | )      |         |         | (3,330 | )       |         |         | (3      | )       |         |         | 169     |         |         |         | 1,930   |        
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                                                            |                                                                | Total expense adjustments             |                           |               | (68,936 | )        |         |           | 2,794  |              |         |               | 2,065  |          |         |           | 957    |         |         |        | (10,882 | )       |         |         | (19,044 | )       |         |         | (16,329 | )       |         |         | (29,018 | )      
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|Net restatement adjustments                                                                                 |                                                                |                                       | (55,406                   | )             |         |          | 25,034  |           |        |              | 32,547  |               |        |          | 35,892  |           |        |         | 37,065  |        |         |         | 40,321  |         |         |         | 53,747  |         |         |         | 52,770  |        
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|                                                                                                            |                                                                | Net income (loss) as restated         |                           | $             | (11,204 | )        |         | $         | 34,124 |              |         | $             | 53,748 |          |         | $         | 51,644 |         |         | $      | 32,456  |         |         | $       | 29,287  |         |         | $       | 16,794  |         |         | $       | 4,716   |        
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|Basic income (loss) per share                                                                               |                                                                | $                                     | (0.07                     | )             |         | $        | 0.23    |           |        | $            | 0.37    |               |        | $        | 0.36    |           |        | $       | 0.23    |        |         | $       | 0.21    |         |         | $       | 0.12    |         |         | $       | 0.04    |        
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|Diluted income (loss) per share                                                                             |                                                                | $                                     | (0.07                     | )             |         | $        | 0.21    |           |        | $            | 0.33    |               |        | $        | 0.31    |           |        | $       | 0.21    |        |         | $       | 0.18    |         |         | $       | 0.12    |         |         | $       | 0.04    |        
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|Basic shares                                                                                                |                                                                |                                       | 156,622                   |               |         |          | 149,344 |           |        |              | 147,222 |               |        |          | 144,436 |           |        |         | 139,616 |        |         |         | 137,750 |         |         |         | 136,879 |         |         |         | 137,140 |        
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        
|Diluted shares                                                                                              |                                                                |                                       | 156,622                   |               |         |          | 173,915 |           |        |              | 173,840 |               |        |          | 174,073 |           |        |         | 169,046 |        |         |         | 164,537 |         |         |         | 143,418 |         |         |         | 148,196 |        
|                                                                                                            |                                                                |                                       |                           |               |         |          |         |           |        |              |         |               |        |          |         |           |        |         |         |        |         |         |         |         |         |         |         |         |         |         |         |        

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

Nothing to report.




PART III






|         |                                             
|-------- | --------------------------------------------
|Item 10. | Directors and Officers of the
    Registrant

Directors

We have a classified board of directors which is
divided into three classes with staggered three-year terms. At
each annual meeting, the term of one class expires. Pursuant to
our bylaws, eight directors are authorized for our board of
directors. As of the date of this filing, our board of directors
will consist of seven serving directors with terms expiring in
the years indicated below, and one vacancy.

|                     |  |     |    |                      |  |                                                                                                 |  |          |      |  |  |  |      | 
|-------------------- |  | --- | -- | -------------------- |  | ----------------------------------------------------------------------------------------------- |  | -------- | ---- |  |  |  | ---- | 
|                     |  |     |    |                      |  | Year of                                                                                         |  |         
|                     |  |     |    |                      |  | Expiration                                                                                      |  | Director
|Name                 |  | Age |    | Principal Occupation |  | of Term                                                                                         |  | Since   
|                     |  |     |    |                      |  |                                                                                                 |  |         
|Class I Directors:   |  |     |    |                      |  |                                                                                                 |  |          |      |  |  |  |      | 
|Liane Wilson         |  |     | 60 |                      |  | Consultant                                                                                      |  |          | 2005 |  |  |  | 2002 | 
|Robert Bucknam       |  |     | 52 |                      |  | Senior Vice President, Cross Match Technologies,
    Inc.                                       |  |          | 2005 |  |  |  | 2003 | 
|Class II Directors:  |  |     |    |                      |  |                                                                                                 |  |          |      |  |  |  |      | 
|Leslie Denend        |  |     | 62 |                      |  | Director, Exponent, Inc., Rational Software Corp.
    and USAA                                  |  |          | 2003 |  |  |  | 1995 | 
|George Samenuk       |  |     | 48 |                      |  | Chairman of the Board and Chief Executive
    Officer, Networks Associates, Inc.                |  |          | 2003 |  |  |  | 2001 | 
|Class III Directors: |  |     |    |                      |  |                                                                                                 |  |          |      |  |  |  |      | 
|Robert Dutkowsky     |  |     | 48 |                      |  | Former Chairman of the Board, President and Chief
    Executive Officer, JD Edwards and Company |  |          | 2004 |  |  |  | 2001 | 
|Dennis OLeary       |  |     | 47 |                      |  | Private Investor                                                                                |  |          | 2004 |  |  |  | 2003 | 
|Robert Pangia        |  |     | 51 |                      |  | Partner, Ivy Capital Partners, LLC                                                              |  |          | 2004 |  |  |  | 2001 | 



| |            
| | -----------
| | Biographies

Liane Wilsonhas
been a director of the company since April 2002. Since March
2001, Ms. Wilson has been self-employed as a consultant.
From June 1999 to March 2001, Ms. Wilson served as vice
chairman of Washington Mutual, Inc. From February 1985 to March
2001, Ms. Wilson held a number of other senior level
positions with Washington Mutual, including executive vice
president for corporate operations and administration and senior
vice president of information systems. During her tenure at
Washington Mutual, she was responsible for corporate technology
and integration activities relating to mergers and acquisitions.

Robert Bucknamhas
been a director of the company since May 2003. Since April 2002,
Mr. Bucknam has served as senior vice president of federal
and international affairs with Cross Match Technologies, Inc., a
fingerprint identification provider. From 1993 to June 2001,
Mr. Bucknam was the chief of staff of the Federal Bureau of
Investigation. Prior to joining the FBI, Mr. Bucknam served
as deputy assistant attorney general with the US Department of
Justice and as deputy chief of the US Attorneys office in
the Southern District of New York.

Leslie Denendhas
been a director of the company since June 1995. From December
1997 to April 1998, Mr. Denend was president of the
company. From June 1993 to December 1997, Mr. Denend was
chief executive officer and president of Network General
Corporation. From February 1993 to June 1993,

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Mr. Denend was senior vice president of
Network General Corporation. Mr. Denend serves as a
director of Exponent, Inc, Rational Software Corp. and United
Services Automobile Association (USAA).


George Samenukhas
served as our chief executive officer since January 2001 and was
also appointed a director at that time. In April 2001,
Mr. Samenuk was named chairman of the board of directors.
From January 2000 to January 2001, Mr. Samenuk served as
president and chief executive officer of TradeOut, Inc., a
private on-line exchange company. From April 1999 to January
2000, Mr. Samenuk served as general manager, Americas at
IBM Corporation. From August 1996 to April 1999,
Mr. Samenuk was general manager, ASEAN/ South Asia at IBM
Corporation. From January 2001 to September 2002,
Mr. Samenuk served as a director of McAfee.com Corporation,
including serving as the chairman of its board from March 2001
until September 2002, when we purchased the minority interest in
McAfee.com Corporation and merged it into us.

Robert Dutkowskyhas
been a director of the company since April 2001. From January
2002 to July 2003 Mr. Dutkowsky served as president and CEO
of J.D. Edwards & Company, and also served as the
chairman of its board of directors from March 2002 until its
acquisition by PeopleSoft, Inc. in July 2003. From October 2001
to January 2002, Mr. Dutkowsky served as president of the
assembly test division of Teradyne, Inc. From April 2000 to
October 2001, Mr. Dutkowsky served as president and chief
executive officer of GenRad Inc., which was acquired by
Teradyne, Inc. in October 2001. From September 1999 to April
2000, Mr. Dutkowsky served as executive vice president,
Markets and Channels of EMC Corporation. From September 1997 to
September 1999, Mr. Dutkowsky served as president of Data
General, a division of EMC. Prior to joining EMC,
Mr. Dutkowsky spent 20 years with IBM Corporation in a
series of sales, marketing and senior management roles.

Denis OLearyhas been a director of the company since July 2003. From May
1993 to February 2003, Mr. OLeary was executive vice
president of J.P. Morgan Chase having joined the bank in
June 1978. During his career at J.P. Morgan
Chase & Co. Mr. OLeary held a number of
senior positions including director of finance, chief
information officer, and head of retail branch banking.

Robert Pangiahas
been a director of the company since April 2001. Since February
2003 Mr. Pangia has been a partner with Ivy Capital
Partners, LLC, a private equity fund. Prior to February 2003
Mr. Pangia was self-employed as a consultant. From April
1987 to December 1996, Mr. Pangia held a number of senior
level management positions at PaineWebber Incorporated,
including director of Investment Banking. Mr. Pangia
currently serves on the board of directors of
ICOS Corporation and IDEC Pharmaceuticals Corporation.

Executive Officers

|                            |                                                         |     |    |  | 
|--------------------------- | ------------------------------------------------------- | --- | -- |  | 
|Name and Principal Position |                                                         | Age
|                            |                                                         |    
|George Samenuk              |                                                         |     | 48 | 
|                            | Chairman of the Board and Chief Executive Officer       |     |    |  | 
|Stephen Richards            |                                                         |     | 49 | 
|                            | Chief Operating Officer and Chief Financial
    Officer |     |    |  | 
|Gene Hodges                 |                                                         |     | 52 | 
|                            | President                                               |     |    |  | 
|Arthur Matin                |                                                         |     | 47 | 
|                            | President, McAfee Security                              |     |    |  | 
|Kent Roberts                |                                                         |     | 46 | 
|                            | Executive Vice President and General Counsel            |     |    |  | 
|Raymond Smets               |                                                         |     | 40 | 
|                            | President, Sniffer Technologies                         |     |    |  | 

Stephen Richardshas
served as our executive vice president and chief financial
officer since April 2001. In November 2001, Mr. Richards
was also named chief operating officer. From April 1996 to
August 2000, Mr. Richards served in several senior level
executive positions with E*Trade Group, Inc., including chief

57



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financial officer. From October 1984 to March
1996, Mr. Richards served as managing director and chief
financial officer of the Correspondent Clearing Division of Bear
Stearns. He has also held management positions with A.G. Becker
Paribas, Jefferies Group, Inc. and Coopers & Lybrand
LLP. From April 2001 to September 2002 Mr. Richards served
as a director of McAfee.com Corporation until September 2002,
when we purchased the minority interest in McAfee.com
Corporation and merged it into us. Mr. Richards is a
director of TradeStation Group and serves on the Board of
Governors of the Pacific Stock Exchange.


Gene Hodgeshas
served as our president since October 2001. Mr. Hodges
served as president of the McAfee product group from January
2000 to October 2001, and from August 1998 to January 2000, he
served as vice president of security marketing. Mr. Hodges
joined Network Associates in 1995 and served in numerous other
management positions with the company. Prior to joining Network
Associates, Mr. Hodges was vice president of Marketing for
a wireless data startup and managed the Office Information
Systems business unit for Digital Equipment Corporation.

Arthur Matinhas
served as president of our McAfee Security group since October
2001. From May 2000 to October 2001, Mr. Matin was senior
vice president of worldwide sales and marketing at CrossWorlds
Software Inc. From January 2000 to May 2000, Mr. Matin
served as senior vice president of worldwide sales for
CrossWorlds. From January 1999 to January 2000, Mr. Matin
served as vice president of the industrial sector at IBM. From
1980 to 1999, Mr. Matin held various other management
positions at IBM, including general manager, Industries, Asia
Pacific, general manager, Product Management, Asia Pacific and
vice president of Sales, Manufacturing Industry.

Kent Robertshas
served as one of our executive vice president since July 2001
and as general counsel and secretary since January 2001.
Mr. Roberts served as vice president of legal affairs from
February 2000 to July 2001. From May 1998 to February 2000,
Mr. Roberts served as director of legal affairs for the
company. Prior to May 1998 Mr. Roberts practiced law in
Dallas, Texas representing among other clients McAfee
Associates, Inc., the predecessor of Network Associates.

Raymond Smetshas
served as president of our Sniffer Technologies group since
October 2002. From January 2001 to October 2002, Mr. Smets
served as vice president of network transformation and a
corporate officer at BellSouth Corporation. From January 1998 to
December 2000 Mr. Smets served as president of BellSouth
Corporations Internet business unit BellSouth.net. From
1986 to December 1997 Mr. Smets held various other
management positions at BellSouth Corporation and its
subsidiaries, including severing as president of BellSouth
Applied Technologies.

Our officers serve at the discretion of the board
of directors. There are no family relationships among any of our
directors and executive officers.

Compliance with Section 16(a) of the
Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act
of 1934, as amended (the exchange act), requires the
companys officers and directors, and persons who own more
than ten percent of a registered class of the companys
equity securities, to file certain reports of ownership with the
SEC. Such officers, directors and stockholders are also required
by SEC rules to furnish us with copies of all Section 16(a)
forms they file. All reports required to be filed during fiscal
year 2002 pursuant to Section 16(a) of the exchange act by
directors, executive officers and 10% beneficial owners were
filed on timely basis, except as follows: Mr. George
Samenuks option exercise for 3,000 shares in January
2002 was not reported in a timely manner to the SEC,
Mr. Arthur Matins option grant of 150,000 shares
in October 2002 was not reported to the SEC in a timely manner,
Mr. Stephen Richards sale of 25,000 shares in May 2002
was not reported to the SEC in a timely manner and
Ms. Virginia Gemmells option exercise and sale of
1,250 shares in January 2002 was not reported to the SEC in
a timely manner.

10b5-1 Trading Plans

Our Insider Trading Policy allows 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

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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 the filing
date of this report, George Samenuk, our Chairman and Chief
Executive Officer, 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 Arthur Matin, President of our McAfee
Security business, each a Section 16 officer, have adopted
Rule 10b5-1 trading plans. In addition, Amanda Hodges, the
wife of our President, has also adopted a 10b5-1 trading plan.
We believe that additional directors, officers and employees
have established or may establish such programs. As a result of
our March 2003 announced restatement of certain prior period
financial statements and the delay in the filing of our 2002
Form 10-K, all trades in our stock by our Section 16
officers, including trades pursuant to Rule 10b5-1 trading
plans, were suspended until such time as (i) such report on
Form 10-K and restated consolidated financial statements
and (ii) our reports on Form 10-Q for the quarters
ended March 31 and June 30, 2003, are each filed with
the SEC. All trades in our common stock made during the fourth
quarter of 2002 and during 2003, prior to such suspension, by
officers who have adopted Rule 10b5-1 trading plans were
made pursuant to the terms of such plans.







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

EXECUTIVE COMPENSATION AND OTHER
MATTERS

The following table summarizes the compensation
paid to our chief executive officer and our four other most
highly compensated executive officers as of December 31,
2002, based on salary and bonus figures.

SUMMARY COMPENSATION TABLE

|                            |                             |     |    |      |  |                     |      |              |  |              |         |            |      |              |         |         |  |   |        |           |      |  |         |           |  |   |         |         |     
|--------------------------- | --------------------------- | --- | -- | ---- |  | ------------------- | ---- | ------------ |  | ------------ | ------- | ---------- | ---- | ------------ | ------- | ------- |  | - | ------ | --------- | ---- |  | ------- | --------- |  | - | ------- | ------- | ----
|                            |                             |     |    |      |  |                     |      |             
|                            |                             |     |    |      |  | Annual Compensation |      |             
|                            |                             |     |    |      |  |                     |      |             
|                            |                             |     |    |      |  |                     |      | Securities   |  |             
|                            |                             |     |    |      |  |                     |      | Other Annual |  | Underlying   |         | All Other 
|Name and Principal Position |                             | Age |    | Year |  | Salary(1)           |      | Bonus(2)     |  | Compensation |         | Options(#) |      | Compensation
|                            |                             |     |    |      |  |                     |      |              |  |              |         |            |      |             
|George Samenuk              |                             |     | 48 |      |  |                     | 2002 |              |  | $            | 720,000 |            |      | $            | 900,000 |         |  | $ | 97,759 | (3)       |      |  | 470,000 |           |  | $ | 237,957 | (4)    
|                            | Chairman of the Board and   |     |    |      |  |                     |      | 2001         |  |              | $       | 714,922    | (5)  |              | $       | 540,000 |  |   | $      | 1,971,000 | (6)  |  |         | 1,600,000 |  |   | $       | 696,428 | (7) 
|                            | Chief Executive Officer     |     |    |      |  |                     |      |              |  |              |         |            |      |              |         |         |  |   |        |           |      |  |         |           |  |   |         |         |     
|Stephen Richards            |                             |     | 49 |      |  |                     | 2002 |              |  | $            | 349,999 |            |      | $            | 455,000 |         |  |   |       |           |      |  | 100,000 |           |  | $ | 810     | (8)    
|                            | Chief Operating Officer     |     |    |      |  |                     |      | 2001         |  |              | $       | 259,807    | (9)  |              | $       | 175,000 |  |   | $      | 299,500   | (10) |  |         | 650,000   |  |   | $       | 608     | (8) 
|                            | and Chief Financial Officer |     |    |      |  |                     |      |              |  |              |         |            |      |              |         |         |  |   |        |           |      |  |         |           |  |   |         |         |     
|Gene Hodges                 |                             |     | 52 |      |  |                     | 2002 |              |  | $            | 375,000 |            |      | $            | 445,312 |         |  |   |       |           |      |  |        |           |  | $ | 5,242   | (11)   
|                            | President                   |     |    |      |  |                     |      | 2001         |  |              | $       | 290,000    |      |              | $       | 108,596 |  |   |        |          |      |  |         | 600,000   |  |   | $       | 1,242   | (8) 
|                            |                             |     |    |      |  |                     |      | 2000         |  |              | $       | 205,295    |      |              | $       | 58,527  |  |   |        |          |      |  |         |          |  |   | $       | 643     | (8) 
|Arthur Matin                |                             |     | 47 |      |  |                     | 2002 |              |  | $            | 400,000 |            |      | $            | 249,062 |         |  |   |       |           |      |  | 150,000 |           |  | $ | 500,810 | (12)   
|                            | President, McAfee Security  |     |    |      |  |                     |      | 2001         |  |              | $       | 53,077     | (13) |              |         |        |  |   | $      | 1,894,000 | (14) |  |         | 600,000   |  |   | $       | 68      | (8) 
|Kent Roberts                |                             |     | 46 |      |  |                     | 2002 |              |  | $            | 282,765 |            |      | $            | 164,375 |         |  |   |       |           |      |  | 100,000 |           |  | $ | 4,810   | (15)   
|                            | Executive Vice President    |     |    |      |  |                     |      | 2001         |  |              | $       | 229,166    |      |              | $       | 99,147  |  |   |        |          |      |  |         | 150,000   |  |   | $       | 4,735   | (16)
|                            | and General Counsel         |     |    |      |  |                     |      | 2000         |  |              | $       | 153,529    |      |              | $       | 46,500  |  |   |        |          |      |  |         | 30,000    |  |   | $       | 3,681   | (17)



---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Salary includes amounts deferred under our 401(k)
    Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (2) | Bonus amounts for 2002 include amounts paid in
    January 2003 but earned in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (3) | Includes $81,540 which represents the difference
    between the market price of our common stock and the exercise
    price on Mr. Samenuks 3,000 share option on
    January 15, 2002, the date of exercise, multiplied by the
    number of shares exercised, and $16,219 which represents the
    incremental costs associated with Mr. Samenuks
    personal use of a corporate aircraft in which the Company owns a
    fractional interest, net of the voluntary reimbursement by
    Mr. Samenuk to the Company based on applicable IRS
    regulations for such travel.
|
| | (4) | Includes the payment of $200,000 of
    Mr. Samenuks $800,000 sign-on bonus awarded in 2001.
    Also includes relocation expenses of $5,545, group term life
    insurance coverage of $810, supplemental company paid life
    insurance of $27,602 and $4,000 of 401(k) contributions made by
    us.                                                                                                                                                                                                                                                                         

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| |     |                                                                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (5) | Mr. Samenuk joined us on January 3,
    2001. Mr. Samenuks 2001 earnings reflect an annual
    salary of $720,000.                                                                                                              
|
| | (6) | Represents the difference between the market
    price of our common stock and the exercise price of
    Mr. Samenuks 400,000 share option on
    January 3, 2001, the date of exercise, multiplied by the
    shares exercised.
|
| | (7) | Includes the payment of $600,000 of
    Mr. Samenuks $800,000 sign-on bonus with the balance
    paid in 2002. Also includes relocation benefits of $95,618 and
    group term life insurance coverage of $810.                 
|
| | (8) | Includes group term life insurance coverage.                                                                                                                                                                                     
|
| | (9) | Mr. Richards joined us on April 4,
    2001. Mr. Richards 2001 earnings reflect an annual
    base salary of $350,000.                                                                                                          



|     |                                                                                                                                                                                                                                 
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Represents the difference between the market
    price of our common stock and the exercise price of
    Mr. Richards 50,000 share option on
    April 4, 2001, the date of exercise, multiplied by the
    shares exercised.  
|    
|(11) | Includes group term life insurance coverage of
    $1,242 and $4,000 of 401(k) contributions made by us.                                                                                                                        
|    
|(12) | Includes payment of Mr. Matins
    $500,000 sign-on bonus in 2002, and also includes group term
    life insurance coverage of $810.                                                                                           
|    
|(13) | Mr. Matin joined us on October 30,
    2001. Mr. Matins 2001 earnings reflect an annual base
    salary of $400,000.                                                                                                           
|    
|(14) | Represents the difference between the market
    price of our common stock and the exercise price of
    Mr. Matins 100,000 share option on
    October 30, 2001, the date of exercise, multiplied by the
    shares exercised.
|    
|(15) | Includes group term life insurance coverage of
    $810 and $4,000 of 401(k) contributions made by us.                                                                                                                          
|    
|(16) | Includes group term life insurance coverage of
    $735 and $4,000 of 401(k) contributions made by us.                                                                                                                          
|    
|(17) | Includes group term life insurance coverage of
    $306 and $3,375 of 401(k) contributions made by us.                                                                                                                          

Mr. Raymond Smets joined us on
October 28, 2002 as the president of our Sniffer
Technologies group. In 2002, Mr. Smets received $63,717 in
salary (reflecting an annual base salary of $350,000), $112,500
in bonus (including a $50,000 sign-on bonus) and $81 of group
term life insurance. Mr. Smets also received 250,000
options for shares of our common stock.

Mr. Srivats Sampath served as the chief
executive officer of McAfee.com until September 2002 when we
acquired the minority interest in McAfee.com and merged
McAfee.com into us. In 2002, McAfee.com paid Mr. Sampath
$300,093 in salary, $123,562 in bonus, $350,000 as severance
under his change in control agreement, $4,000 of 401(k)
contributions made by McAfee.com and $405 of group term life
insurance.

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This table shows stock option grants made by
Network Associates to our chief executive officer and our four
other most highly compensated executive officers during the year
ended December 31, 2002:

OPTION GRANTS IN 2002

|                 |  |                   |         |            |  |           |      |          |  |            |       |                                  |  |    |       |     |  |  |         |  |  |   |           |  |  |   |           |  |  |   |            | 
|---------------- |  | ----------------- | ------- | ---------- |  | --------- | ---- | -------- |  | ---------- | ----- | -------------------------------- |  | -- | ----- | --- |  |  | ------- |  |  | - | --------- |  |  | - | --------- |  |  | - | ---------- | 
|                 |  |                   |         |            |  |           |      |          |  |            |       |                                 
|                 |  | Individual Grants |         |            |  |           |      |          |  |            |       |                                 
|                 |  |                   |         |            |  |           |      |          |  |            |       |                                 
|                 |  | Number            |         | % of Total |  |           |      |          |  |            |       |                                  |  |    |       |    
|                 |  | of                |         | Options    |  |           |      |          |  |            |       |                                 
|                 |  | Securities        |         | Granted    |  |           |      | Market   |  |            |       | Potential Realizable Value at   
|                 |  | Underlying        |         | to         |  |           |      | Price on |  |            |       | Assumed Annual Rates of Stock   
|                 |  | Options           |         | Employees  |  | Exercise  |      | Date of  |  |            |       | Appreciation for Option Terms(3)
|                 |  | Granted           |         | in Fiscal  |  | Price     |      | Grant    |  | Expiration |       |                                 
|Name             |  | (#)(1)            |         | Year       |  | ($/SH)(2) |      | ($/SH)   |  | Date       |       | 0%                               |  | 5% |       | 10%
|                 |  |                   |         |            |  |           |      |          |  |            |       |                                  |  |    |       |    
|George Samenuk   |  |                   | 420,000 |            |  |           | 4.22 | %        |  |            | 25.43 |                                  |  |    | 25.43 |     |  |  | 1/16/12 |  |  | $ |          |  |  | $ | 6,716,971 |  |  | $ | 17,022,126 | 
|                 |  |                   | 47,000  |            |  |           | .47  | %        |  |            | 0.01  |                                  |  |    | 27.19 |     |  |  | 1/15/12 |  |  | $ | 1,277,460 |  |  | $ | 2,081,143 |  |  | $ | 3,314,151  | 
|                 |  |                   | 3,000   |            |  |           | .03  | %        |  |            | 0.01  |                                  |  |    | 27.19 |     |  |  | 1/15/12 |  |  | $ | 81,540    |  |  | $ | 132,839   |  |  | $ | 211,542    | 
|Stephen Richards |  |                   | 100,000 |            |  |           | 1.00 | %        |  |            | 25.43 |                                  |  |    | 25.43 |     |  |  | 1/15/12 |  |  | $ |          |  |  | $ | 1,599,279 |  |  | $ | 4,052,887  | 
|Gene Hodges      |  |                   |        |            |  |           |     |          |  |            |      |                                  |  |    |      |     |  |  |        |  |  | $ |          |  |  | $ |          |  |  | $ |           | 
|Arthur Matin     |  |                   | 150,000 |            |  |           | 1.51 | %        |  |            | 8.45  |                                  |  |    | 8.45  |     |  |  | 10/8/12 |  |  | $ |          |  |  | $ | 797,124   |  |  | $ | 2,020,069  | 
|Kent Roberts     |  |                   | 100,000 |            |  |           | 1.00 | %        |  |            | 16.29 |                                  |  |    | 16.29 |     |  |  | 5/6/12  |  |  | $ |          |  |  | $ | 1,024,469 |  |  | $ | 2,596,206  | 



---



| |   |             
| | - | ------------
| | * | Less than 1%



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Except as noted below, all of the above options
    for Network Associates common stock granted in 2002 vest
    at the rate of one-fourth (or 25%) one year from the date of
    grant and 1/36th per month for the remaining 36 months
    of the vesting period. Mr. Samenuks option for
    3,000 shares was fully vested upon grant.
    Mr. Samenuks option for 47,000 shares will vest
    in full on January 15, 2005. Under the 1997 Stock Incentive
    Plan, the board of directors is allowed to modify the terms of
    outstanding options. The exercisability of options may be
    accelerated upon a change in control. Options are cancelled on
    an optionees termination of employment under certain
    specified circumstances.                                                                                                                                                                         
|   
|(2) | Other than options granted with exercise prices
    of $0.01 per share, all options were granted at an exercise
    price equal to the fair market value of the common stock on the
    date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(3) | These columns present hypothetical future values
    that might be realized on exercise of the options, less the
    exercise price. These values assume that the market price of our
    stock appreciates at a zero, five and ten percent compound
    annual rate over the term of the options. The five and ten
    percent rates of stock price appreciation are presented as
    examples pursuant to the SECs proxy rules and do not
    necessarily reflect managements assessment of our future
    stock price performance. The potential realizable values
    presented are not intended to indicate the value of the options.
    For options granted with an exercise price below the market
    price on the date of grant, the potential realizable values in
    the zero percent appreciation column reflect the difference
    between the option exercise price and the market price on the
    date of grant.

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The following table shows stock option exercises
and the value of unexercised stock options held by our chief
executive officer and our four other most highly compensated
executive officers during the year ended December 31, 2002:

AGGREGATE OPTION EXERCISES IN 2002

AND YEAR-END OPTION VALUES


|                    |  |             |         |             |  |                        |           |                              |  |             |         |               |  |  |         |  |  |   |            |  |  |   |           | 
|------------------- |  | ----------- | ------- | ----------- |  | ---------------------- | --------- | ---------------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | ---------- |  |  | - | --------- | 
|                    |  |             |         |             |  |                        |           |                              |  |            
|                    |  |             |         |             |  | Number of Securities   |           |                             
|                    |  |             |         |             |  | Underlying Unexercised |           | Value of Unexercised In-The-
|                    |  | Shares      |         |             |  | Options at 12/31/02(#) |           | Money Options at 12/31/02(1)
|                    |  | Acquired on |         | Value       |  |                        |           |                             
|Name                |  | Exercise(#) |         | Realized(2) |  | Exercisable            |           | Unexercisable                |  | Exercisable |         | Unexercisable
|                    |  |             |         |             |  |                        |           |                              |  |             |         |              
|George Samenuk(3)   |  |             | 303,000 |             |  | $                      | 6,626,290 |                              |  |             | 900,000 |               |  |  | 467,000 |  |  | $ | 10,035,000 |  |  | $ | 755,760   | 
|Stephen Richards(4) |  |             |        |             |  | $                      |          |                              |  |             | 600,000 |               |  |  | 100,000 |  |  | $ | 6,054,000  |  |  | $ |          | 
|Gene Hodges(5)      |  |             | 172,846 |             |  | $                      | 3,334,038 |                              |  |             | 223,193 |               |  |  | 390,418 |  |  | $ | 997,817    |  |  | $ | 1,969,820 | 
|Arthur Matin(6)     |  |             |        |             |  | $                      |          |                              |  |             | 500,000 |               |  |  | 150,000 |  |  | $ |           |  |  | $ | 1,146,000 | 
|Kent Roberts(7)     |  |             | 25,676  |             |  | $                      | 390,145   |                              |  |             | 103,488 |               |  |  | 198,336 |  |  | $ | 675,319    |  |  | $ | 800,601   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Calculated by taking the closing market price on
    December 31, 2002, of $16.09, less the exercise price,
    multiplied by the number of options exercisable or
    unexercisable. The amounts in these columns may not represent
    amounts actually realized by these executive officers.                                                                                                                                                                                                                     
|   
|(2) | Calculated by taking the market price on the date
    of exercise, less the exercise price, multiplied by the number
    of options exercised.                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | 1.2 million options were issued to
    Mr. Samenuk on January 3, 2001 and are immediately
    exercisable. 25% of these shares vested on January 3, 2002,
    the first anniversary of Mr. Samenuks employment
    commencement, and the remaining shares vest at a rate
    of  1/36th per month for the remaining 36 months of
    the vesting period. If Mr. Samenuk exercises these stock
    options with respect to the unvested shares, we have repurchase
    rights with respect to those unvested shares.
|   
|(4) | Mr. Richards holds 600,000 options that are
    immediately exercisable. 25% of the shares vested on
    April 4, 2002, the first anniversary of
    Mr. Richards employment commencement and the
    remaining shares vest at a rate of  1/36th per month for
    the remaining 36 months of the vesting period. If
    Mr. Richards exercises these stock options with respect to
    the unvested shares, we have repurchase rights with respect to
    those unvested shares.                                  
|   
|(5) | In 2002, Mr. Hodges exercised options for
    1,688 shares of McAfee.com. In connection with this
    exercise Mr. Hodges realized $31,971. These amounts are not
    included above.                                                                                                                                                                                                                                                                                                                               
|   
|(6) | Mr. Matin holds 500,000 options that are
    immediately exercisable. 25% of these shares vested on
    October 30, 2002, the first anniversary of
    Mr. Matins employment commencement and the remaining
    shares vest at a rate of  1/36th per month for the
    remaining 36 months of the vesting period. If
    Mr. Matin exercises the stock options with respect to the
    unvested shares, we have repurchase rights with respect to those
    unvested shares.                                       
|   
|(7) | In 2002, Mr. Roberts exercised options for
    1,500 shares of McAfee.com. In connection with this
    exercise Mr. Roberts realized $15,380. These amounts are
    not included above.                                                                                                                                                                                                                                                                                                                             

Employment and Change in Control
Arrangements

George Samenukentered into an agreement with us dated January 2, 2001
which was amended and restated on October 9, 2001, which
provides for his at will employment as our chief executive
officer. This agreement also provides that if Mr. Samenuk
is terminated other than for cause or resigns for good reason,
he will be entitled to the following severance benefits:
(i) twelve months of additional vesting for his initial
stock option grant and restricted stock grant,
(ii) 24 months of severance payments based on twice
Mr. Samenuks base salary and targeted bonus,
(iii) any unpaid amount of Mr. Samenuks sign-on
bonus, and (iv) continued health and other welfare and
fringe benefits through the earlier of (x) 18 months
from termination or (y) until

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Mr. Samenuk is covered by similar plans by a
new employer. If Mr. Samenuk is terminated other than for
cause, or resigns with good reason after (i) the occurrence
of a transaction where our stockholders do not own at least 50%
of the stock of the surviving corporation; (ii) there has
been a change in our directors occurring within a two year
period as a result of which fewer than a majority of our
directors (x) were directors as of the date of the
agreement or (y) were elected, or nominated for election,
to the board by a vote of at least a majority of the incumbent
directors at the time of such election or nomination;
(iii) the acquisition of more than 50% of our stock by
another party or (iv) the sale of substantially all of our
assets, Mr. Samenuk will be entitled to all of the
severance benefits noted above, all of his stock options will
become fully vested and any repurchase rights on his shares of
restricted stock will lapse.


Stephen Richardsentered into an agreement with us dated April 3, 2001,
which provides for his at will employment as our chief financial
officer. The agreement also provides that if Mr. Richards
is actually or constructively terminated other than for cause he
will be entitled to severance benefits equal to twelve months of
base salary and targeted bonus, plus twelve months of
accelerated vesting on all stock options. If Mr. Richards
is actually or constructively terminated other than for cause,
after (i) the occurrence of a transaction where our
stockholders do not own at least 50% of the stock of the
surviving corporation; (ii) there has been a change in our
directors occurring within a two year period as a result of
which fewer than a majority of our directors (x) were
directors as of the date of the agreement or (y) were
elected, or nominated for election, to the board by a vote of at
least a majority of the incumbent directors at the time of such
election or nomination; (iii) the acquisition of more than
50% of our stock by another party or (iii) the sale of
substantially all of our assets, Mr. Richards will be
entitled to the severance noted above, all of his stock options
will become fully vested, and he will be provided with continued
health care coverage through the earlier of twelve months from
termination or until he is covered by similar plans by a new
employer.

Gene Hodgesentered
into an agreement with us dated December 3, 2001, which
provides for his at will employment as our president. This
agreement provides that if Mr. Hodges is terminated for any
reason, he shall be entitled to a pro rata targeted bonus if the
relevant goals for the quarter are met, in addition to his
accrued salary and vacation pay. If Mr. Hodges is
terminated other than for cause or resigns for good reason, he
will be entitled to the following severance benefits:
(i) twelve months of severance payments based on
Mr. Hodges base salary and one-third of his targeted
bonus, (ii) continued health and other welfare and fringe
benefits through the earlier of (x) twelve months from
termination or (y) until Mr. Hodges is covered by
similar plans by a new employer and (iii) all of
Mr. Hodges shares of restricted stock, if any, and
all stock options will become fully vested and, if applicable,
any repurchase rights on his shares of restricted stock will
lapse. If Mr. Hodges is employed by us upon (i) the
occurrence of a transaction where our stockholders do not own at
least 50% of the stock of the surviving corporation;
(ii) there has been a change in our directors occurring
within a two year period as a result of which fewer than a
majority of our directors (x) were directors as of the date
of the agreement or (y) were elected, or nominated for
election, to the board by a vote of at least a majority of the
incumbent directors at the time of such election or nomination;
(iii) the acquisition of more than 50% of our stock by
another party; or (iv) the sale of substantially all of our
assets, all of Mr. Hodges shares of restricted stock,
if any, and all stock options held by him will become fully
vested and, if applicable, any repurchase rights on his shares
of restricted stock will lapse. Under this agreement, we will
indemnify Mr. Hodges for any parachute tax payments that
arise pursuant to the agreement.

Arthur Matinentered
into an agreement with us dated October 30, 2001, which
provides for his at will employment as the president of our
McAfee product group. This agreement also provides that if
Mr. Matin is terminated other than for cause or resigns for
good reason, he will be entitled to the following severance
benefits: (i) twelve months of additional vesting for stock
options, (ii) twelve months of severance payments based on
Mr. Matins base salary and targeted bonus and
(iii) continued health and other welfare and fringe
benefits through the earlier of (x) twelve months from
termination or (y) until Mr. Matin is covered by
similar plans by a new employer. If Mr. Matin is terminated
other than for cause, or resigns with good reason after
(i) the occurrence of a transaction where our stockholders
do not own at least 50% of the stock of the surviving
corporation; (ii) there has been a change in our directors
occurring within a two year period as a result of which fewer
than a majority of our directors (x) were directors as of
the date of the agreement or (y) were elected, or nominated
for election, to the board by a vote of at least a majority of
the incumbent

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directors at the time of such election or
nomination; (iii) the acquisition of more than 50% of our
stock by another party or (iv) the sale of substantially
all of our assets, Mr. Matin will be entitled to all of the
severance benefits noted above and all of his stock options will
become fully vested.


Kent Robertsentered
into an agreement with us dated October 9, 2001, which
provides for his at will employment as our executive vice
president and general counsel. This agreement also provides that
if Mr. Roberts is terminated other than for cause or
resigns for good reason, he will be entitled to the following
severance benefits: (i) twelve months of severance payments
based on Mr. Roberts base salary and one-third of his
targeted bonus, (ii) continued health and other welfare and
fringe benefits through the earlier of (x) twelve months
from termination or (y) until Mr. Roberts is covered
by similar plans by a new employer and (iii) all of
Mr. Roberts shares of restricted stock, if any, and
all stock options will become fully vested and, if applicable,
any repurchase rights on his shares will lapse. After
(i) the occurrence of a transaction where our stockholders
do not own at least 50% of the stock of the surviving
corporation; (ii) there has been a change in our directors
occurring within a two year period as a result of which fewer
than a majority of our directors (x) were directors as of
the date of the agreement or (y) were elected, or nominated
for election, to the board by a vote of at least a majority of
the incumbent directors at the time of such election or
nomination; (iii) the acquisition of more than 50% of our
stock by another party or (iv) the sale of substantially
all of our assets, all of Mr. Roberts shares of
restricted stock, if any, and all stock options held by him will
become fully vested and if applicable, any repurchase rights on
his shares will lapses. Under this agreement, we will indemnify
Mr. Roberts for any parachute tax payments that arise
pursuant to the agreement.

Raymond Smetsentered into an agreement with us dated October 7, 2002,
which provides for his at will employment as the president of
our Sniffer Technologies group. This agreement also provides
that if Mr. Smets is terminated other than for cause or
resigns for good reason, he will be entitled to the following
severance benefits: (i) six months of severance payments
based on Mr. Smets base salary and one-third of his
targeted bonus, and (ii) continued health and other welfare
and fringe benefits through the earlier of (x) six months
from termination or (y) until Mr. Smets is covered by
similar plans by a new employer. After (i) the occurrence
of a transaction where our stockholders do not own at least 50%
of the stock of the surviving corporation; (ii) there has
been a change in our directors occurring within a two year
period as a result of which fewer than a majority of our
directors (x) were directors as of the date of the
agreement or (y) were elected, or nominated for election,
to the board by a vote of at least a majority of the incumbent
directors at the time of such election or nomination;
(iii) the acquisition of more than 50% of our stock by
another party or (iv) the sale of substantially all of our
assets, all of Mr. Smets shares of restricted stock,
if any, and all stock options held by him will become fully
vested and if applicable, any repurchase rights on his shares
will lapses. Under this agreement, we will indemnify
Mr. Smets for any parachute tax payments that arise
pursuant to the agreement.

Compensation of Directors

Directors fees, paid only to directors who are
not employees, are as follows:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $40,000 annual retainer, payable in quarterly
    installments (an additional $10,000 annual retainer, payable in
    quarterly installments, is paid to the chairpersons of our board
    committees),
|
| |  | $1,500 for each board meeting attended,                                                                                                                                                                
|
| |  | $1,500 for each board committee meeting attended,                                                                                                                                                      
|
| |  | expenses of attending board and committee
    meetings, and                                                                                                                                            
|
| |  | medical insurance benefits for directors and
    their families.                                                                                                                                       

Under our current Stock Option Plan for Outside
Directors, non-employee directors are automatically granted an
option to purchase 45,000 shares of our common stock when
they first become a director. Each year after the initial grant,
they are entitled to receive an additional option grant to
purchase up to 20,000 shares of our common stock. All
options under this plan are granted at the fair market value on
the date of grant. The initial grant vests one-third each year
over three years from the date of grant. The

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subsequent grants vest in full three years from
the date of grant. All options granted under this plan become
fully exercisable in the event of certain mergers, sales of
assets or sales of the majority of our voting stock.


Our employee directors are eligible to receive
options and be issued shares of common stock directly under the
1997 Stock Incentive Plan and are eligible to participate in our
2002 Employee Stock Purchase Plan and, if an executive officer,
to participate in the Executive Bonus Plan.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The following table shows as of
September 30, 2003, the number of shares of our common
stock owned by (i) the chief executive officer,
(ii) each of the four other most highly compensated
executive officers during fiscal 2002, (iii) each of our
current directors and nominees, and (iv) each stockholder
known by us as of that date to be the beneficial owner of more
than 5% of our common stock.

|                                                                         |                                     |           |            |            |  |             |           |     |  |  |      |   | 
|------------------------------------------------------------------------ | ----------------------------------- | --------- | ---------- | ---------- |  | ----------- | --------- | --- |  |  | ---- | - | 
|                                                                         |                                     | Number of |            |            |  | Percent of 
|                                                                         |                                     | Shares    |            | Right to   |  | Outstanding
|Name and Address of Beneficial Owners                                    |                                     | Owned(1)  |            | Acquire(2) |  | Shares(3)  
|                                                                         |                                     |           |            |            |  |            
|George Samenuk(4)                                                        |                                     |           | 253,000    |            |  |             | 900,000   |     |  |  | *    |  
|Robert Bucknam                                                           |                                     |           |           |            |  |             |          |     |  |  | *    |  
|Leslie Denend                                                            |                                     |           | 6,297      |            |  |             | 41,875    |     |  |  | *    |  
|Robert Dutkowsky                                                         |                                     |           | 50         |            |  |             | 25,000    |     |  |  | *    |  
|Denis OLeary                                                            |                                     |           |           |            |  |             |          |     |  |  | *    |  
|Robert Pangia                                                            |                                     |           |           |            |  |             | 25,000    |     |  |  | *    |  
|Liane Wilson                                                             |                                     |           |           |            |  |             | 15,000    |     |  |  | *    |  
|Gene Hodges                                                              |                                     |           | 2,397      | (5)        |  |             | 402,022   | (6) |  |  | *    |  
|Arthur Matin(7)                                                          |                                     |           |           |            |  |             | 540,625   |     |  |  | *    |  
|Stephen Richards(8)                                                      |                                     |           | 1,176      |            |  |             | 595,833   |     |  |  | *    |  
|Kent Roberts                                                             |                                     |           |           |            |  |             | 186,822   |     |  |  | *    |  
|FMR Corp.(9)                                                             |                                     |           | 18,542,545 |            |  |             |          |     |  |  | 11.6 | %
|                                                                         | 82 Devonshire St., Boston, MA 02109 |           |            |            |  |             |           |     |  |  |      |   | 
|Massachusetts Financial Services Company(10)                             |                                     |           | 20,841,470 |            |  |             |          |     |  |  | 13.0 | %
|                                                                         | 500 Boylston St., Boston, MA 02116  |           |            |            |  |             |           |     |  |  |      |   | 
|All current executive officers and directors as a
    group (12 persons) |                                     |           | 262,920    |            |  |             | 2,799,885 |     |  |  | 1.7  | %



---



| |   |              
| | - | -------------
| | * | Less than 1%.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Ownership includes direct and indirect
    (beneficial) ownership, as defined by SEC rules. To our
    knowledge, each person has sole voting and investment power over
    the shares unless otherwise noted. The SEC rules for the
    determination of beneficial ownership are very complex.
    Generally, however, shares owned directly, plus those controlled
    (e.g., owned by members of their immediate families), are
    considered beneficially owned. Excludes shares that may be
    acquired through stock option exercises.
|
| | (2) | Consists of options that are currently
    exercisable or will become exercisable within 60 days of
    September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (3) | Based upon 160,329,178 shares outstanding as
    of September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (4) | Of the 900,000 options held by Mr. Samenuk
    that are exercisable within 60 days of September 30,
    2003, 400,000 of such options are immediately exercisable and
    subject to a right of repurchase (vesting 25,000 shares per
    month). If Mr. Samenuk exercises stock options with respect
    to unvested shares, we have repurchase rights with respect to
    those unvested shares.                                                                                                                                             
|
| | (5) | All of the shares are held by
    Mr. Hodges spouse and were acquired pursuant to the
    Companys employee stock purchase plan.                                                                                                                                                                                                                                                                                                                                                                                                             

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (6) | Includes 19,661 stock options held by
    Mr. Hodges spouse that are exercisable or that will
    become exercisable within 60 days of September 30,
    2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (7) | Of the 540,625 options held by Mr. Matin
    that are exercisable within 60 days of September 30,
    2003, 264,417 of such options are immediately exercisable and
    subject to a right of repurchase (vesting approximately
    10,417 shares per month). If Mr. Matin exercises these
    stock options with respect to unvested shares, we have
    repurchase rights with respect to those unvested shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (8) | Of the 595,833 options held by Mr. Richards
    that are exercisable within 60 days of September 30,
    2003, 237,500 of such options are immediately exercisable and
    subject to a right of repurchase (vesting 12,500 shares per
    month). If Mr. Richards exercises stock options with
    respect to unvested shares, we have repurchase rights with
    respect to those unvested shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (9) | According to amended Schedule 13G filed on
    February 14, 2003. FMR Corp., Edward C. Johnson 3d,
    Abigail P. Johnson and certain subsidiaries of FMR Corp. may be
    deemed to be members of a group as such term is
    defined in the rules promulgated by the SEC. FMR Corp. is the
    beneficial holder of our common stock as a result of the
    investment-related activities of certain subsidiaries of FMR
    Corp., members of the Edward C. Johnson 3d family and
    trusts for their benefit are the predominant owners of
    Class B Shares of common stock of FMR Corp., representing
    approximately 49% of its voting power. Mr. Johnson 3d, the
    chairman of FMR Corp., owns 12.0% of the aggregate outstanding
    voting stock of FMR Corp. and Ms. Johnson, a director of
    FMR Corp., owns 24.5% of the aggregate outstanding voting stock
    of FMR Corp. The number of shares of our common stock owned by
    the group at December 31, 2002 included 68,898 shares
    of common stock resulting from the assumed conversion of
    $1,245,000 principal amount of our 5.25% convertible
    subordinated notes due 2006.



|     |                                                                                                                                                                                                                                                                                                                                                                                                                            
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | According to Schedule 13G filed May 28,
    2003 by Massachusetts Financial Services Company
    (MFS). MFS is the beneficial holder of
    20,841,470 shares of our common stock, of which shares are
    also beneficially owned by certain other non-reporting entities
    as well as MFS. MFS has sole dispositive power over
    20,841,470 shares and has sole voting power with respect to
    19,977,730 shares.




Item 13.     Certain
Relationships and Related Transactions

Indebtedness of Management

Under the terms of Mr. Samenuks
employment agreement, we agreed to loan Mr. Samenuk the
funds necessary to pay the taxes due on each vesting date for
the 400,000 shares of stock subject to vesting granted to
Mr. Samenuk on January 3, 2001. We also agreed to loan
Mr. Samenuk the funds necessary to pay the taxes due on the
3,000 shares of stock granted to Mr. Samenuk on
January 15, 2002. In accordance with the provisions of the
Sarbanes-Oxley Act of 2002, no additional loans were made to
Mr. Samenuk after July 30, 2002. In 2001 and 2002 we
extended a total of five separate loans to Mr. Samenuk in
an aggregate amount of $1,079,028. Each outstanding loan had a
two-year maturity and bore interest at the applicable federal
rate. The loans were full recourse and secured by
Mr. Samenuks 400,000 shares of stock subject to
vesting and 3,000 shares of stock. The last remaining loan
was fully repaid in October 2003.

Under the terms of Mr. Matins
employment agreement, we agreed to loan Mr. Matin the funds
necessary to pay the taxes due upon the exercise of his
100,000 share option grant. In 2001, we extended a $864,413
loan to Mr. Matin. This loan had a two-year maturity and
bore interest at the applicable federal rate. The loan was full
recourse and secured by Mr. Matins
100,000 shares. The loan was fully repaid in June 2002.

Certain Transactions

During 2002, Ms. Amanda Hodges, the wife of
our president, Gene Hodges, was employed by us as senior
director of North American human resources. Ms. Hodges was
paid an aggregate salary of $137,499 and a discretionary bonus
of $31,750 for her services during the year. During 2002,
Ms. Hodges also received option grants totaling
12,500 shares.

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Officers and Directors Insurance

We maintain an insurance policy covering officers
and directors to cover any claims made against them for wrongful
acts that they may otherwise be required to pay or for which we
are required to indemnify them, subject to certain exclusions.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Our management evaluated, with the participation
of our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this quarterly report on
Form 10-Q. Based on this evaluation, our CEO and CFO have
concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms. There has been no change in our
internal control over financial reporting that occurred during
the period covered by this report on Form 10-K which
materially affected, or is reasonably likely to affect, our
internal control over financial reporting. Described below are
internal control over financial reporting changes made after the
period covered by this Form 10-K and described in our
Form 10-Qs for the first and second quarter of 2003 (filed
concurrently with this Form 10-K).

In March 2003, we identified the submission by
our personnel in Japan of inaccurate purchase orders relating to
approximately $0.5 million of revenue. We investigated the
relevant events and have taken corrective actions, including
ensuring that the related revenues have been accurately reported
in our financial statements. Also, in response, Network
Associates, including our internal audit function, have
conducted a finance personnel, business policies and internal
controls review for our Japanese and other international offices
(including our Latin American offices) and accelerated the
integration of our international offices into our enterprise
SAP IT system. The results of these reviews have been or
will be used to evaluate and improve our internal control over
financial reporting as it relates to international operations.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)(1) Financial Statements:

|                                                                           |                                               |        |    |    | 
|-------------------------------------------------------------------------- | --------------------------------------------- | ------ | -- | -- | 
|                                                                           |                                               | Page  
|                                                                           |                                               | Number
|                                                                           |                                               |       
|Report of Independent Auditors                                             |                                               |        | 69 |   
|Consolidated Balance Sheets:                                               |                                               |        |    |   
|                                                                           | December 31, 2002 and 2001                    |        |    | 70 | 
|Consolidated Statements of Operations and
    Comprehensive Income (Loss): |                                               |        |    |   
|                                                                           | Years ended December 31, 2002, 2001 and 2000  |        |    | 71 | 
|Consolidated Statements of Stockholders
    Equity:                       |                                               |        |    |   
|                                                                           | Years ended December 31, 2002, 2001 and 2000  |        |    | 72 | 
|Consolidated Statements of Cash Flows:                                     |                                               |        |    |   
|                                                                           | Years ended December 31, 2002, 2001, and 2000 |        |    | 74 | 
|Notes to Consolidated Financial Statements                                 |                                               |        | 76 |   

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(a)(2) Financial Statement Schedule

The following financial statement schedule of
Networks Associates, Inc. for the years ended December 31,
2002, 2001, and 2000 is filed as part of this Form 10-K and
should be read in conjunction with Networks Associates,
Inc.s Consolidated Financial Statements.

|                                                    |  |  |     | 
|--------------------------------------------------- |  |  | --- | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | 136 | 

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 137. 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: None.

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REPORT OF INDEPENDENT AUDITORS

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 15(a)(1) present fairly, in all material respects, the
financial position of Networks Associates, Inc. and its
subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 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 15(a)(2) 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 discussed in Note 10 to the accompanying
consolidated financial statements, the Company changed its
method of accounting for goodwill effective January 1,
2002, upon the adoption of Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible
Assets.

As indicated in Note 3 to the accompanying
consolidated financial statements, the Company has restated its
consolidated financial statements for the years ended
December 31, 2001 and 2000.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

October 31, 2003


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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |         |           | 
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------- | ------------- | --------- |  | -------- | ------- | --------- | 
|                                                    |                                                                                                                           |                                                                  
|                                                    |                                                                                                                           | December 31,                                                     
|                                                    |                                                                                                                           |                                                                  
|                                                    |                                                                                                                           | 2002                                                              |           | 2001         
|                                                    |                                                                                                                           |                                                                   |           |              
|                                                    |                                                                                                                           |                                                                   |           | (As Restated)
|                                                    |                                                                                                                           |                                                                  
|                                                    |                                                                                                                           | (In thousands,                                                   
|                                                    |                                                                                                                           | except share data)                                               
|ASSETS                                             
|Current assets:                                     |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    | Cash and cash equivalents                                                                                                 |                                                                   | $         | 674,226       |           |  | $        | 612,832 |          
|                                                    | Short-term marketable securities                                                                                          |                                                                   |           | 133,577       |           |  |          | 135,761 |          
|                                                    | Accounts receivable, net of allowance for
    doubtful accounts of $6,638 and $8,394, respectively                        |                                                                   |           | 160,159       |           |  |          | 136,346 |          
|                                                    | Prepaid expenses, income taxes and other current
    assets                                                               |                                                                   |           | 51,715        |           |  |          | 59,964  |          
|                                                    | Deferred taxes                                                                                                            |                                                                   |           | 174,469       |           |  |          | 167,378 |          
|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    |                                                                                                                           | Total current assets                                              |           |               | 1,194,146 |  |          |         | 1,112,281 | 
|Long-term marketable securities                     |                                                                                                                           |                                                                   | 205,906   |               |           |  | 194,357  |        
|Restricted cash                                     |                                                                                                                           |                                                                   | 21,734    |               |           |  |         |        
|Property and equipment, net                         |                                                                                                                           |                                                                   | 89,277    |               |           |  | 68,454   |        
|Deferred taxes                                      |                                                                                                                           |                                                                   | 139,091   |               |           |  | 82,576   |        
|Intangible assets, excluding goodwill, net          |                                                                                                                           |                                                                   | 93,551    |               |           |  | 28,124   |        
|Goodwill, net                                       |                                                                                                                           |                                                                   | 273,934   |               |           |  | 128,112  |        
|Other assets                                        |                                                                                                                           |                                                                   | 27,848    |               |           |  | 18,853   |        
|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    |                                                                                                                           | Total assets                                                      |           | $             | 2,045,487 |  |          | $       | 1,632,757 | 
|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |        
|LIABILITIES                                        
|Current liabilities:                                |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    | Accounts payable                                                                                                          |                                                                   | $         | 29,948        |           |  | $        | 26,367  |          
|                                                    | Accrued liabilities                                                                                                       |                                                                   |           | 383,458       |           |  |          | 288,652 |          
|                                                    | Deferred revenue                                                                                                          |                                                                   |           | 292,277       |           |  |          | 354,226 |          
|                                                    | Current portion of convertible debt                                                                                       |                                                                   |           | 176,260       |           |  |          |        |          
|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    |                                                                                                                           | Total current liabilities                                         |           |               | 881,943   |  |          |         | 669,245   | 
|Deferred revenue, less current portion              |                                                                                                                           |                                                                   | 36,918    |               |           |  | 25,265   |        
|Convertible debt, less current portion              |                                                                                                                           |                                                                   | 356,013   |               |           |  | 578,850  |        
|Other long term liabilities                         |                                                                                                                           |                                                                   | 445       |               |           |  | 393      |        
|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    |                                                                                                                           | Total liabilities                                                 |           |               | 1,275,319 |  |          |         | 1,273,753 | 
|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |        
|Commitments and contingencies (Notes 11 and
    19) |                                                                                                                           |                                                                   |           |               |           |  |          |        
|Minority interest                                   |                                                                                                                           |                                                                   |          |               |           |  | 17,511   |        
|STOCKHOLDERS EQUITY                               
|Preferred stock, $0.01 par value:                   |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    | Authorized: 5,000,000 shares; Issued and
    outstanding: none in 2002 and 2001                                           |                                                                   |           |              |           |  |          |        |          
|Common stock, $0.01 par value:                      |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    | Authorized: 300,000,000 shares; Issued and
    outstanding: 157,926,732 shares in 2002 and
    140,670,353 shares in 2001 |                                                                   |           | 1,579         |           |  |          | 1,406   |          
|Additional paid-in capital                          |                                                                                                                           |                                                                   | 1,050,288 |               |           |  | 752,439  |        
|Deferred stock-based compensation                   |                                                                                                                           |                                                                   | (5,736    | )             |           |  |         |        
|Accumulated other comprehensive income              |                                                                                                                           |                                                                   | 24,158    |               |           |  | 16,081   |        
|Accumulated deficit                                 |                                                                                                                           |                                                                   | (300,121  | )             |           |  | (428,433 | )      
|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    |                                                                                                                           | Total stockholders equity                                        |           |               | 770,168   |  |          |         | 341,493   | 
|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |        
|                                                    |                                                                                                                           | Total liabilities, minority interest and
    stockholders equity |           | $             | 2,045,487 |  |          | $       | 1,632,757 | 
|                                                    |                                                                                                                           |                                                                   |           |               |           |  |          |        

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

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)


|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |          |         | 
|------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------------- | --------- | ------------- | ------- | ------- | --------- |  | ------- | -------- | ------- | 
|                                                                    |                                                                                               |                                      
|                                                                    |                                                                                               | Years Ended December 31,             
|                                                                    |                                                                                               |                                      
|                                                                    |                                                                                               | 2002                                  |         | 2001          |           | 2000         
|                                                                    |                                                                                               |                                       |         |               |           |              
|                                                                    |                                                                                               |                                       |         | (As Restated) |           | (As Restated)
|                                                                    |                                                                                               |                                      
|                                                                    |                                                                                               | (In thousands, except per share data)
|Net revenue:                                                        |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Product                                                                                       |                                       | $       | 631,550       |           |               | $       | 611,030 |           |  | $       | 438,485  |        
|                                                                    | Services and support                                                                          |                                       |         | 411,494       |           |               |         | 460,630 |           |  |         | 270,887  |        
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    |                                                                                               | Total net revenue                     |         |               | 1,043,044 |               |         |         | 1,071,660 |  |         |          | 709,372 | 
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|Cost of net revenue:                                                |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Product                                                                                       |                                       |         | 104,039       |           |               |         | 114,917 |           |  |         | 117,801  |        
|                                                                    | Services and support                                                                          |                                       |         | 57,519        |           |               |         | 56,536  |           |  |         | 42,301   |        
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    |                                                                                               | Total cost of net revenue             |         |               | 161,558   |               |         |         | 171,453   |  |         |          | 160,102 | 
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|Operating costs:                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Research and development(1)                                                                   |                                       |         | 148,801       |           |               |         | 146,701 |           |  |         | 164,218  |        
|                                                                    | Marketing and sales(2)                                                                        |                                       |         | 397,747       |           |               |         | 421,583 |           |  |         | 358,295  |        
|                                                                    | General and administrative(3)                                                                 |                                       |         | 118,277       |           |               |         | 111,106 |           |  |         | 91,277   |        
|                                                                    | Amortization of intangibles                                                                   |                                       |         | 13,895        |           |               |         | 56,064  |           |  |         | 58,236   |        
|                                                                    | Litigation settlement                                                                         |                                       |         | 70,000        |           |               |         |        |           |  |         |         |        
|                                                                    | Provision for (recovery of) doubtful accounts, net                                            |                                       |         | (219          | )         |               |         | 7,449   |           |  |         | 4,785    |        
|                                                                    | Acquisition and other related costs                                                           |                                       |         | 17,142        |           |               |         |        |           |  |         |         |        
|                                                                    | Restructuring costs(4)                                                                        |                                       |         | 1,116         |           |               |         | 3,821   |           |  |         |         |        
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    |                                                                                               | Total operating costs                 |         |               | 766,759   |               |         |         | 746,724   |  |         |          | 676,811 | 
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Income (loss) from operations                                                                 |                                       |         | 114,727       |           |               |         | 153,483 |           |  |         | (127,541 | )      
|Interest and other income                                           |                                                                                               |                                       | 26,600  |               |           |               | 27,993  |         |           |  | 43,018  |         
|Interest and other expenses                                         |                                                                                               |                                       | (25,085 | )             |           |               | (24,682 | )       |           |  | (18,202 | )       
|Gain on sale of assets and product lines                            |                                                                                               |                                       | 9,301   |               |           |               |        |         |           |  |        |         
|Gain on investments, net                                            |                                                                                               |                                       | 4,562   |               |           |               | 10,242  |         |           |  | 31,801  |         
|Impairment of strategic and other investments                       |                                                                                               |                                       | (198    | )             |           |               | (20,631 | )       |           |  |        |         
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Income (loss) before provision for income taxes,
    minority interest and extraordinary item |                                       |         | 129,907       |           |               |         | 146,405 |           |  |         | (70,924  | )      
|Provision for (benefit from) income taxes                           |                                                                                               |                                       | (274    | )             |           |               | 66,020  |         |           |  | 40,944  |         
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Income (loss) before minority interest and
    extraordinary item                             |                                       |         | 130,181       |           |               |         | 80,385  |           |  |         | (111,868 | )      
|Minority interest in loss (income) of
    consolidated subsidiaries |                                                                                               |                                       | (1,895  | )             |           |               | 1,137   |         |           |  | 3,854   |         
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Income (loss) before extraordinary item                                                       |                                       |         | 128,286       |           |               |         | 81,522  |           |  |         | (108,014 | )      
|Extraordinary item, gain on repurchase of debt,
    net of taxes    |                                                                                               |                                       | 26      |               |           |               | 1,731   |         |           |  |        |         
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Net income (loss)                                                                             |                                       | $       | 128,312       |           |               | $       | 83,253  |           |  | $       | (108,014 | )      
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|Other comprehensive income (loss):                                  |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Unrealized gain (loss) on marketable securities
    net                                       |                                       | $       | (2,667        | )         |               | $       | 3,332   |           |  | $       | (318     | )      
|                                                                    | Foreign currency translation gain (loss)                                                      |                                       |         | 10,744        |           |               |         | 5,961   |           |  |         | (8,660   | )      
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Comprehensive income (loss)                                                                   |                                       | $       | 136,389       |           |               | $       | 92,546  |           |  | $       | (116,992 | )      
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|Basic net income(loss) per share:                                   |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Income (loss) before extraordinary item                                                       |                                       | $       | 0.86          |           |               | $       | 0.59    |           |  | $       | (0.78    | )      
|                                                                    | Extraordinary item, gain on repurchase of debt,
    net of taxes                              |                                       |         |              |           |               |         | 0.01    |           |  |         |         |        
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Net income (loss) per share  basic                                                           |                                       | $       | 0.86          |           |               | $       | 0.60    |           |  | $       | (0.78    | )      
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Shares used in per share calculation 
    basic                                              |                                       |         | 149,441       |           |               |         | 137,847 |           |  |         | 138,072  |        
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|Diluted net income(loss) per share:                                 |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Income (loss) before extraordinary item                                                       |                                       | $       | 0.80          |           |               | $       | 0.52    |           |  | $       | (0.78    | )      
|                                                                    | Extraordinary item, gain on repurchase of debt,
    net of taxes                              |                                       |         |              |           |               |         | 0.01    |           |  |         |         |        
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Net income (loss) per share  diluted                                                         |                                       | $       | 0.80          |           |               | $       | 0.53    |           |  | $       | (0.78    | )      
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         
|                                                                    | Shares used in per share calculation 
    diluted                                            |                                       |         | 176,249       |           |               |         | 164,363 |           |  |         | 138,072  |        
|                                                                    |                                                                                               |                                       |         |               |           |               |         |         |           |  |         |         



---



|    |                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------
|(1) | Includes stock-based compensation charge of
    $3,963, $4,604, and $1,894 in 2002, 2001, and 2000, respectively.     
|   
|(2) | Includes stock-based compensation charge of
    $1,980, $10,354, and $4,570 in 2002, 2001, and 2000,
    respectively.
|   
|(3) | Includes stock-based compensation charge of
    $16,461, $9,394, and $3,652 in 2002, 2001, and 2000,
    respectively.
|   
|(4) | Includes stock-based compensation charge of $0,
    $519, and $0 in 2002, 2001, and 2000, respectively.               

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

71



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(As Restated)


|                                         |                                                                                  |                |         |          |   |            |       |             |   |               |         |              |   |               |         |        |   |   |   |   |  |   |        |        |   |   |          |          |   |   |         |          |  
|---------------------------------------- | -------------------------------------------------------------------------------- | -------------- | ------- | -------- | - | ---------- | ----- | ----------- | - | ------------- | ------- | ------------ | - | ------------- | ------- | ------ | - | - | - | - |  | - | ------ | ------ | - | - | -------- | -------- | - | - | ------- | -------- | -
|                                         |                                                                                  |                |         |          |   |            |       |             |   |               |         | Accumulated  |   |               |         |       
|                                         |                                                                                  |                |         |          |   |            |       |             |   | Other         |         | Retained     |   |              
|                                         |                                                                                  | Common Stock   |         |          |   | Additional |       | Deferred    |   | Comprehensive |         | Earnings     |   | Total        
|                                         |                                                                                  |                |         | Treasury |   | Paid-In    |       | Stock-based |   | Income        |         | (Accumulated |   | Stockholders
|                                         |                                                                                  | Shares         |         | Amount   |   | Stock      |       | Capital     |   | Compensation  |         | (Loss)       |   | Deficit)      |         | Equity
|                                         |                                                                                  |                |         |          |   |            |       |             |   |               |         |              |   |               |         |       
|                                         |                                                                                  |               
|                                         |                                                                                  | (In thousands)
|Balances, December 31, 1999, As Restated |                                                                                  |                | 138,717 |          |   | $          | 1,387 |             |   | $             | (11,023 | )            |   | $             | 653,384 |        |   | $ |  |   |  | $ | 15,766 |        |   | $ | (303,576 | )        |   | $ | 355,938 |         
|                                         | 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 |                |         |         |   |            |       |            |   |               |         |             |   |               |         | 10,116 |   |   |   |  |  |   |        |       |   |   |          |         |   |   |         | 10,116   |  
|                                         | Issuance of stock by consolidated subsidiary for
    acquired company            |                |         |         |   |            |       |            |   |               |         |             |   |               |         | 19,600 |   |   |   |  |  |   |        |       |   |   |          |         |   |   |         | 19,600   |  
|                                         | Minority interest attributed to McAfee.com                                       |                |         |         |   |            |       |            |   |               |         |             |   |               |         | (6,385 | ) |   |   |  |  |   |        |       |   |   |          |         |   |   |         | (6,385   | )
|                                         | Foreign currency translation                                                     |                |         |         |   |            |       |            |   |               |         |             |   |               |         |       |   |   |   |  |  |   |        | (8,660 | ) |   |          |         |   |   |         | (8,660   | )
|                                         | Net increase (decrease) in unrealized gains on
    investments                   |                |         |         |   |            |       |            |   |               |         |             |   |               |         |       |   |   |   |  |  |   |        | (318   | ) |   |          |         |   |   |         | (318     | )
|                                         | Net loss (As Restated)                                                           |                |         |         |   |            |       |            |   |               |         |             |   |               |         |       |   |   |   |  |  |   |        |       |   |   |          | (108,014 | ) |   |         | (108,014 | )
|                                         |                                                                                  |                |         |          |   |            |       |             |   |               |         |              |   |               |         |        |   |   |   |   |  |   |        |        |   |   |          |          |   |   |         |         
|Balances, December 31, 2000              |                                                                                  |                | 138,072 |          |   |            | 1,381 |             |   |               | (23,186 | )            |   |               | 695,388 |        |   |   |  |   |  |   | 6,788  |        |   |   | (457,448 | )        |   |   | 222,923 |         
|                                         | 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 Plans                  |                |         | 1,376    |   |            |       | 14          |   |               |         | 35,411       |   |               |         | 705    |   |   |   |  |  |   |        |       |   |   |          | (26,612  | ) |   |         | 9,516    |  
|                                         | Repurchase of common stock                                                       |                |         | (2,000   | ) |            |       | (2          | ) |               |         | (53,800      | ) |               |         |       |   |   |   |  |  |   |        |       |   |   |          |         |   |   |         | (53,800  | )
|                                         | Compensation charge due to repricing of stock
    options                        |                |         |         |   |            |       |            |   |               |         |             |   |               |         | 24,871 |   |   |   |  |  |   |        |       |   |   |          |         |   |   |         | 24,871   |  
|                                         | Tax benefit from exercise of nonqualified stock
    options                      |                |         |         |   |            |       |            |   |               |         |             |   |               |         | 5,389  |   |   |   |  |  |   |        |       |   |   |          |         |   |   |         | 5,389    |  
|                                         | Issuance of stock by consolidated subsidiary                                     |                |         |         |   |            |       |            |   |               |         |             |   |               |         | 5,523  |   |   |   |  |  |   |        |       |   |   |          |         |   |   |         | 5,523    |  
|                                         | Minority interest attributed to McAfee.com                                       |                |         |         |   |            |       |            |   |               |         |             |   |               |         | (7,026 | ) |   |   |  |  |   |        |       |   |   |          |         |   |   |         | (7,026   | )

72



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY  (Continued)

(As Restated)


|                                                                                                           |                                                                                                        |                |         |          |  |            |       |             |  |               |   |              |  |               |           |         |   |   |         |        |  |   |        |        |   |   |          |         |  |   |         |         |  
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------- | ------- | -------- |  | ---------- | ----- | ----------- |  | ------------- | - | ------------ |  | ------------- | --------- | ------- | - | - | ------- | ------ |  | - | ------ | ------ | - | - | -------- | ------- |  | - | ------- | ------- | -
|                                                                                                           |                                                                                                        |                |         |          |  |            |       |             |  |               |   | Accumulated  |  |               |           |        
|                                                                                                           |                                                                                                        |                |         |          |  |            |       |             |  | Other         |   | Retained     |  |              
|                                                                                                           |                                                                                                        | Common Stock   |         |          |  | Additional |       | Deferred    |  | Comprehensive |   | Earnings     |  | Total        
|                                                                                                           |                                                                                                        |                |         | Treasury |  | Paid-In    |       | Stock-based |  | Income        |   | (Accumulated |  | Stockholders
|                                                                                                           |                                                                                                        | Shares         |         | Amount   |  | Stock      |       | Capital     |  | Compensation  |   | (Loss)       |  | Deficit)      |           | Equity 
|                                                                                                           |                                                                                                        |                |         |          |  |            |       |             |  |               |   |              |  |               |           |        
|                                                                                                           |                                                                                                        |               
|                                                                                                           |                                                                                                        | (In thousands)
|                                                                                                           | Foreign currency translation                                                                           |                |         |         |  |            |       |            |  |               |   |             |  |               |           |        |   |   |         |       |  |   |        | 5,961  |   |   |          |        |  |   |         | 5,961   |  
|                                                                                                           | Net increase (decrease) in unrealized gains on
    investments                                         |                |         |         |  |            |       |            |  |               |   |             |  |               |           |        |   |   |         |       |  |   |        | 3,332  |   |   |          |        |  |   |         | 3,332   |  
|                                                                                                           | Net income (As Restated)                                                                               |                |         |         |  |            |       |            |  |               |   |             |  |               |           |        |   |   |         |       |  |   |        |       |   |   |          | 83,253  |  |   |         | 83,253  |  
|                                                                                                           |                                                                                                        |                |         |          |  |            |       |             |  |               |   |              |  |               |           |         |   |   |         |        |  |   |        |        |   |   |          |         |  |   |         |        
|Balances, December 31, 2001                                                                                |                                                                                                        |                | 140,671 |          |  |            | 1,406 |             |  |               |  |              |  |               | 752,439   |         |   |   |        |        |  |   | 16,081 |        |   |   | (428,433 | )       |  |   | 341,493 |        
|                                                                                                           | Issuance of McAfee.com common stock upon exercise
    of stock options                                 |                |         | 8,197    |  |            |       | 82          |  |               |   |             |  |               |           | 99,664  |   |   |         |       |  |   |        |       |   |   |          |        |  |   |         | 99,746  |  
|                                                                                                           | Issuance of common stock upon exercise of stock
    options                                            |                |         |         |  |            |       |            |  |               |   |             |  |               |           | 3,633   |   |   |         |       |  |   |        |       |   |   |          |        |  |   |         | 3,633   |  
|                                                                                                           | Issuance of common stock from Employee Stock
    Purchase Plans                                        |                |         | 743      |  |            |       | 8           |  |               |   |             |  |               |           | 6,524   |   |   |         |       |  |   |        |       |   |   |          |        |  |   |         | 6,532   |  
|                                                                                                           | Issuance of common stock for acquisition of
    minority interest in McAfee.com, net of cost of $1,956 |                |         | 8,307    |  |            |       | 83          |  |               |   |             |  |               |           | 119,397 |   |   |         |       |  |   |        |       |   |   |          |        |  |   |         | 119,480 |  
|Deferred stock-based compensation                                                                          |                                                                                                        |                |        |          |  |            |      |             |  |               |  |              |  |               | 31,955    |         |   |   | (31,955 | )      |  |   |       |        |   |   |         |         |  |   |        |        
|                                                                                                           | Amortization of deferred stock-based Compensation
    and other compensation Charge                    |                |         |         |  |            |       |            |  |               |   |             |  |               |           | (3,815  | ) |   |         | 26,219 |  |   |        |       |   |   |          |        |  |   |         | 22,404  |  
|Reclassification of cash payable in excess of
    exercise price related to exchange of McAfee.com options |                                                                                                        |                |        |          |  |            |      |             |  |               |  |              |  |               | (4,190    | )       |   |   |        |        |  |   |       |        |   |   |         |         |  |   | (4,190  | )      
|                                                                                                           | Tax benefits from exercise of non-qualified stock
    options                                          |                |         |         |  |            |       |            |  |               |   |             |  |               |           | 45,962  |   |   |         |       |  |   |        |       |   |   |          |        |  |   |         | 45,962  |  
|                                                                                                           | Stock options issued in connection with
    Acquisition                                                |                |         |         |  |            |       |            |  |               |   |             |  |               |           | 357     |   |   |         |       |  |   |        |       |   |   |          |        |  |   |         | 357     |  
|                                                                                                           | Minority interest attributed to McAfee.com                                                             |                |         |         |  |            |       |            |  |               |   |             |  |               |           | (1,638  | ) |   |         |       |  |   |        |       |   |   |          |        |  |   |         | (1,638  | )
|                                                                                                           | Foreign currency translation                                                                           |                |         |         |  |            |       |            |  |               |   |             |  |               |           |        |   |   |         |       |  |   |        | 10,744 |   |   |          |        |  |   |         | 10,744  |  
|                                                                                                           | Net increase (decrease) in unrealized gains on
    investments                                         |                |         |         |  |            |       |            |  |               |   |             |  |               |           |        |   |   |         |       |  |   |        | (2,667 | ) |   |          |        |  |   |         | (2,667  | )
|                                                                                                           | Net income                                                                                             |                |         |         |  |            |       |            |  |               |   |             |  |               |           |        |   |   |         |       |  |   |        |       |   |   |          | 128,312 |  |   |         | 128,312 |  
|                                                                                                           |                                                                                                        |                |         |          |  |            |       |             |  |               |   |              |  |               |           |         |   |   |         |        |  |   |        |        |   |   |          |         |  |   |         |        
|Balances, December 31, 2002                                                                                |                                                                                                        |                | 157,928 |          |  | $          | 1,579 |             |  | $             |  |              |  | $             | 1,050,288 |         |   | $ | (5,736  | )      |  | $ | 24,158 |        |   | $ | (300,121 | )       |  | $ | 770,168 |        
|                                                                                                           |                                                                                                        |                |         |          |  |            |       |             |  |               |   |              |  |               |           |         |   |   |         |        |  |   |        |        |   |   |          |         |  |   |         |        

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

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                      |                                                                                              |                                                                                             |                                                 |                                                         |         |               |          |          |         |          |         |          |         |         |         |   
|------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------------- | ------- | ------------- | -------- | -------- | ------- | -------- | ------- | -------- | ------- | ------- | ------- | --
|                                      |                                                                                              |                                                                                            
|                                      |                                                                                              | Years Ended December 31,                                                                   
|                                      |                                                                                              |                                                                                            
|                                      |                                                                                              | 2002                                                                                        |                                                 | 2001                                                    |         | 2000         
|                                      |                                                                                              |                                                                                             |                                                 |                                                         |         |              
|                                      |                                                                                              |                                                                                             |                                                 | (As Restated)                                           |         |              
|                                      |                                                                                              |                                                                                             |                                                 | (In thousands)                                          |         | (As Restated)
|Cash flows from operating activities: |                                                                                              |                                                                                             |                                                 |                                                         |         |               |          |          |         |          |         |         
|                                      | Net income (loss)                                                                            |                                                                                             | $                                               | 128,312                                                 |         |               | $        | 83,253   |         |          | $       | (108,014 | )      
|                                      | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities: |                                                                                             |                                                 |                                                         |         |               |          |          |         |          |         |          |        
|                                      |                                                                                              | Depreciation and amortization                                                               |                                                 |                                                         | 53,684  |               |          |          | 100,008 |          |         |          | 80,827  |        
|                                      |                                                                                              | Provision for (recovery of) doubtful accounts                                               |                                                 |                                                         | (219    | )             |          |          | (7,449  | )        |         |          | 4,785   |        
|                                      |                                                                                              | Impairment of goodwill                                                                      |                                                 |                                                         |        |               |          |          |        |          |         |          | 3,600   |        
|                                      |                                                                                              | Non-cash interest and other expense on
    convertible notes                                |                                                 |                                                         | 12,025  |               |          |          | 24,697  |          |         |          | 18,857  |        
|                                      |                                                                                              | Stock-based compensation                                                                    |                                                 |                                                         | 22,404  |               |          |          | 24,871  |          |         |          | 10,116  |        
|                                      |                                                                                              | Deferred taxes                                                                              |                                                 |                                                         | (65,646 | )             |          |          | 39,077  |          |         |          | (13,175 | )      
|                                      |                                                                                              | Gain (loss) on investments                                                                  |                                                 |                                                         | (4,028  | )             |          |          | 10,100  |          |         |          | (31,801 | )      
|                                      |                                                                                              | Minority interest                                                                           |                                                 |                                                         | 1,895   |               |          |          | (1,137  | )        |         |          | (3,854  | )      
|                                      |                                                                                              | Extraordinary item  gain on repurchase
    of debt, net of tax                             |                                                 |                                                         | (26     | )             |          |          | (1,731  | )        |         |          |        |        
|                                      |                                                                                              | Gain on the sale of assets and technology                                                   |                                                 |                                                         | (9,301  | )             |          |          |        |          |         |          |        |        
|                                      |                                                                                              | Tax benefit from exercise of nonqualified stock
    options                                 |                                                 |                                                         | 45,962  |               |          |          | 5,389   |          |         |          |        |        
|                                      |                                                                                              | Change in fair value of interest rate swap, net
    of change in the fair value of the debt |                                                 |                                                         | (1,402  | )             |          |          |        |          |         |          |        |        
|                                      |                                                                                              | Changes in assets and liabilities, net of working
    capital purchased from acquisitions:  |                                                 |                                                         |         |               |          |          |         |          |         |          |         |        
|                                      |                                                                                              |                                                                                             | Accounts receivable                             |                                                         |         | (15,805       | )        |          |         | (18,105  | )       |          |         | (22,516 | )      
|                                      |                                                                                              |                                                                                             | Prepaid expenses, income taxes and other assets |                                                         |         | 9,699         |          |          |         | 35,239   |         |          |         | (24,097 | )      
|                                      |                                                                                              |                                                                                             | Accounts payable and accrued liabilities        |                                                         |         | 78,819        |          |          |         | (3,999   | )       |          |         | (1,168  | )      
|                                      |                                                                                              |                                                                                             | Deferred revenue                                |                                                         |         | (61,280       | )        |          |         | (144,224 | )       |          |         | 93,248  |        
|                                      |                                                                                              |                                                                                             | Other                                           |                                                         |         |              |          |          |         |         |         |          |         | 766     |        
|                                      |                                                                                              |                                                                                             |                                                 |                                                         |         |               |          |          |         |          |         |         
|                                      |                                                                                              |                                                                                             |                                                 | Net cash provided by operating activities               |         |               | 195,093  |          |         |          | 145,989 |          |         |         | 7,574   |   
|                                      |                                                                                              |                                                                                             |                                                 |                                                         |         |               |          |          |         |          |         |         
|Cash flows from investing activities: |                                                                                              |                                                                                             |                                                 |                                                         |         |               |          |          |         |          |         |         
|                                      | Purchase of marketable securities                                                            |                                                                                             |                                                 | (773,093                                                | )       |               |          | (678,093 | )       |          |         | (510,247 | )      
|                                      | Proceeds from sale and maturity of marketable
    securities                                 |                                                                                             |                                                 | 781,761                                                 |         |               |          | 754,182  |         |          |         | 547,354  |        
|                                      | Increase in restricted cash                                                                  |                                                                                             |                                                 | (21,734                                                 | )       |               |          |         |         |          |         |         |        
|                                      | Purchase of minority interest in McAfee.com                                                  |                                                                                             |                                                 | (98,447                                                 | )       |               |          |         |         |          |         |         |        
|                                      | Purchases of acquired technology                                                             |                                                                                             |                                                 | (807                                                    | )       |               |          | (12,250  | )       |          |         | (12,500  | )      
|                                      | Acquisitions, net of cash acquired                                                           |                                                                                             |                                                 | (19,054                                                 | )       |               |          | (916     | )       |          |         | (1,961   | )      
|                                      | Purchase of other investments                                                                |                                                                                             |                                                 |                                                        |         |               |          |         |         |          |         | (20,999  | )      
|                                      | Purchase of property and equipment and leasehold
    improvements, net                       |                                                                                             |                                                 | (59,427                                                 | )       |               |          | (31,493  | )       |          |         | (54,031  | )      
|                                      | Proceeds from sale of Goto.com investment                                                    |                                                                                             |                                                 |                                                        |         |               |          |         |         |          |         | 36,750   |        
|                                      | Proceeds from sale of shares of Networks
    Associates Japan                                |                                                                                             |                                                 |                                                        |         |               |          |         |         |          |         | 11,947   |        
|                                      | Sale of Secure Computing shares and collar                                                   |                                                                                             |                                                 | 5,105                                                   |         |               |          |         |         |          |         |         |        
|                                      | Sale of assets and technology                                                                |                                                                                             |                                                 | 2,050                                                   |         |               |          |         |         |          |         |         |        
|                                      | Purchase of shares of Networks Associates Japan                                              |                                                                                             |                                                 |                                                        |         |               |          | (10,655  | )       |          |         |         |        
|                                      |                                                                                              |                                                                                             |                                                 |                                                         |         |               |          |          |         |          |         |         
|                                      |                                                                                              |                                                                                             |                                                 | Net cash provided by (used in) investing
    activities |         |               | (183,646 | )        |         |          | 20,775  |          |         |         | [(3,687 | )]
|                                      |                                                                                              |                                                                                             |                                                 |                                                         |         |               |          |          |         |          |         |         
|Cash flows from financing activities: |                                                                                              |                                                                                             |                                                 |                                                         |         |               |          |          |         |          |         |         
|                                      | Proceeds from short-term financing                                                           |                                                                                             |                                                 |                                                        |         |               |          |         |         |          |         | 12,758   |        
|                                      | Repayment of short-term financing                                                            |                                                                                             |                                                 |                                                        |         |               |          | (41      | )       |          |         | (13,009  | )      
|                                      | Repayment of notes payable                                                                   |                                                                                             |                                                 |                                                        |         |               |          |         |         |          |         | (333     | )      
|                                      | Repayment for bank overdraft                                                                 |                                                                                             |                                                 |                                                        |         |               |          |         |         |          |         | (12,948  | )      
|                                      | Proceeds from issuance of common stock under
    stock option plan and stock purchase plans  |                                                                                             |                                                 | 109,911                                                 |         |               |          | 51,067   |         |          |         | 46,548   |        
|                                      | Proceeds from sale of put options                                                            |                                                                                             |                                                 |                                                        |         |               |          |         |         |          |         | 13,890   |        

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                               |                                                                                                         |                                                         |   |                |        |               |   |          |         |  |   |          |         |  
|------------------------------ | ------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | - | -------------- | ------ | ------------- | - | -------- | ------- |  | - | -------- | ------- | -
|                               |                                                                                                         |                                                        
|                               |                                                                                                         | Years Ended December 31,                               
|                               |                                                                                                         |                                                        
|                               |                                                                                                         | 2002                                                    |   | 2001           |        | 2000         
|                               |                                                                                                         |                                                         |   |                |        |              
|                               |                                                                                                         |                                                         |   | (As Restated)  |        |              
|                               |                                                                                                         |                                                         |   | (In thousands) |        | (As Restated)
|                               | Proceeds from exercise of McAfee.com stock options                                                      |                                                         |   |               |        |               |   |         |         |  |   | 3,461    |        
|                               | Repurchase of common stock                                                                              |                                                         |   |               |        |               |   | (53,800  | )       |  |   | (100,416 | )      
|                               | Repurchase of convertible debentures                                                                    |                                                         |   | (66,175        | )      |               |   | (173,708 | )       |  |   |         |        
|                               | Issuance of convertible debentures, net of
    issuance costs                                           |                                                         |   |               |        |               |   | 335,081  |         |  |   |         |        
|                               |                                                                                                         |                                                         |   |                |        |               |   |          |         |  |   |         
|                               |                                                                                                         | Net cash provided by (used in) financing
    activities |   |                | 43,736 |               |   |          | 158,599 |  |   |          | (50,049 | )
|                               |                                                                                                         |                                                         |   |                |        |               |   |          |         |  |   |         
|                               | Effect of exchange rate fluctuations                                                                    |                                                         |   | 6,211          |        |               |   | 11,930   |         |  |   | (8,031   | )      
|                               |                                                                                                         |                                                         |   |                |        |               |   |          |         |  |   |         
|                               | Net increase (decrease) in cash and cash
    equivalents                                                |                                                         |   | 61,394         |        |               |   | 337,293  |         |  |   | (54,193  | )      
|                               | Cash and cash equivalents at beginning of period                                                        |                                                         |   | 612,832        |        |               |   | 275,539  |         |  |   | 329,732  |        
|                               |                                                                                                         |                                                         |   |                |        |               |   |          |         |  |   |         
|                               | Cash and cash equivalents at end of period                                                              |                                                         | $ | 674,226        |        |               | $ | 612,832  |         |  | $ | 275,539  |        
|                               |                                                                                                         |                                                         |   |                |        |               |   |          |         |  |   |         
|Non cash investing activities: |                                                                                                         |                                                         |   |                |        |               |   |          |         |  |   |         
|                               | Unrealized gains (losses) on marketable
    investments, net                                            |                                                         | $ | (3,667         | )      |               | $ | 2,239    |         |  | $ | (318     | )      
|                               | Issuance of common stock for acquisition of
    minority interest in McAfee.com, net of costs of $1,956 |                                                         | $ | 119,397        |        |               |   |         |         |  |   |         |        
|                               | McAfee.com stock issued in acquisitions                                                                 |                                                         | $ |               |        |               | $ | 5,523    |         |  | $ | 11,600   |        
|                               | Supplemental disclosure of cash flow information:                                                       |                                                         |   |                |        |               |   |          |         |  |   |          |        
|                               | Cash paid during the year for interest                                                                  |                                                         | $ | 20,666         |        |               | $ |         |         |  | $ |         |        
|                               | Cash paid during the year for income taxes                                                              |                                                         | $ | 18,547         |        |               | $ | 8,844    |         |  | $ | 46,715   |        
|                               | Issuance of stock by consolidated subsidiary in
    acquisition                                         |                                                         |   |               |        |               |   |         |         |  | $ | 19,600   |        

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

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                          
|-- | -------------------------
|1. | Organization and Business

Network Associates, Inc. and its wholly owned
subsidiaries (the Company) are a leading supplier of
computer security solutions designed to prevent intrusions on
networks and protect computer systems from the next generation
of blended attacks and threats. The Company offers two families
of products, McAfee System Protection Solutions and McAfee
Network Protection Solutions. The Companys computer
security solutions are offered primarily to large enterprises,
governments, small and medium sized business and consumer users.
The Company operates its business in five geographic regions:
North America, Europe Middle East and Africa (EMEA),
Japan, Asia-Pacific and Latin America.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



| |                      
| | ---------------------
| | Basis of Presentation

The accompanying consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. In September 2002, the Company repurchased
the 25% minority interest in its McAfee.com subsidiary for
approximately $219.9 million in cash and common stock.
Since the date of acquisition on September 13, 2002, no
minority interest exists in McAfee.com and accordingly the
Companys consolidated net income for 2002 includes the
full amount of McAfee.com results from this date. All
intercompany accounts and transactions have been eliminated.

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. As of December 31,
2002, the Companys consolidated subsidiaries are all
wholly owned and there are no minority interest.



| |                 
| | ----------------
| | Use of Estimates

The preparation of consolidated 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, valuation allowances for deferred
tax assets, and warranty obligation accrual. Actual results
could differ from those estimates.



| |                                     
| | ------------------------------------
| | Certain Risks and
    Concentrations

The Companys revenues are derived primarily
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 anti-virus software products and network fault
and performance management products.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

The Company sells a significant amount of its
products through intermediaries such as distributors, resellers
and others. The Companys top ten distributors typically
represent approximately 40% to 45% of net sales in any quarter.
The Company two largest distributors accounted for approximately
35% of net revenue during 2002.

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 sale and 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
$6.6 million at December 31, 2002 and
$8.4 million at December 31, 2001. The Companys
uncollectible accounts could exceed our current or future
allowances.

The Company has credit risk exposure from the
potential that the counterparties to its interest rate swaps and
foreign forward exchange contracts may not perform according to
the terms of these derivative agreements. The Company limits the
risk that counterparties to these contracts may be unable to
perform by transacting only with major U.S. and European banks.
Failure of a counterparty to perform under the agreements with
respect to these transactions could have a material effect on
the Companys results of operations and cash flows.

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 products.
Reliance on third-party manufacturers, including software
replicators, 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.

77



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | 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 consolidated 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 comprehensive loss. Where the United States
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
consolidated statements 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 7 to these Notes
to the Consolidated Financial Statements.



| |                          
| | -------------------------
| | 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, which consists primarily of finished
goods, is stated at lower of cost or market and is included in
other current assets. Cost is computed using standard cost,
which approximates actual cost on a first in, first out basis.
The company provides an inventory allowance based upon excess
and obsolete inventory determined primarily by future demand
forecasts.

78



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are presented at cost less
accumulated depreciation and amortization (See Note 8 of
these Notes to Consolidated Financial Statements). Depreciation
and amortization of property and equipment are computed using
the straight-line method over the estimated useful lives as
follows:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | computer hardware and software  three
    to five years;                                            
|
| |  | office furniture and equipment  three
    to seven years; and                                       
|
| |  | leasehold improvements  the shorter of
    the lease term or the estimated useful life of the asset.

The capitalizable costs associated with
facilities are accumulated on the balance sheet until the
facility/construction is substantially complete and is placed
into service. Capitalized interest is calculated on all projects
in progress in accordance with SFAS 34
Capitalization of Interest Costs. Interest
capitalization begins when three conditions have been met
1) expenditures have occurred, 2) activities necessary
to prepare the asset have begun, and 3) interest cost has
been incurred. For 2002, the Company recorded $0.8 million
in capitalized interest. No capitalized interest was recorded
for the years 2001 and 2000.

Upon disposal, the Company removes the asset and
accumulated depreciation from its records and recognizes the
related gain or loss in results of operations.

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



| |         
| | --------
| | Goodwill

In July 2001, the Financial Accounting Standards
Board (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. As of
January 1, 2002, the Company adopted SFAS 142 and has
ceased to amortize goodwill. In lieu of amortization, the
Company is required to perform an impairment review of its
goodwill balance on at least an annual basis, upon the initial
adoption of SFAS No. 142 and on an interim basis if an
event occurs or circumstances change that would more likely than
not reduce the fair value of the Companys reporting units
below their carrying value. This impairment review involves a
two-step process as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Step 1  The Company compares 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 moves 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 performs an
    allocation of the fair value of the reporting unit to its
    identifiable tangible and non-goodwill intangible assets and
    liabilities. This derives an implied fair value for the
    reporting units goodwill. The Company then compares 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 charge would be recognized for the excess.

79



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                   
| | --------------------------------------------------
| | Finite-Lived Intangibles and Long-Lived
    Assets

Purchased technology and other identifiable
intangible assets are carried at cost less accumulated
amortization. The Company amortizes other identifiable
intangibles on a straight-line basis over their estimated useful
lives. The range of estimated useful lives of the Companys
identifiable intangibles is one to five years (see Note 10
to these Notes to Consolidated Financial Statements).

We account for finite-lived intangibles and
long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. Under this standard, the Company reviews
finite-lived intangibles or long-lived assets to be held and
used for impairment whenever events or changes in circumstances
indicate that the carrying value such assets may not be
recoverable. Factors considered important which could trigger an
impairment include, but are not limited to:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | significant under performance 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;                                                                                                                                        
|
| |  | our market capitalization relative to net book
    value; and                                                                                                                                             
|
| |  | a current expectation that, more likely than not,
    a long-lived asset (asset group) will be sold or otherwise
    disposed of significantly before the end of its previously
    estimated useful life.

Based upon the existence of one or more of the
above indicators of impairment, recoverability is assessed based
upon an estimate of undiscounted cash flows resulting from the
use of the assets and its eventual disposition. Measurement of
an impairment loss is based on a projected discounted cash flow
method using a discount rate determined by management to be
commensurate with the risk inherent in our current business
model. Finite-lived intangibles and long-lived assets to be
disposed of are reported at the lower of carrying amount of fair
value less the costs to sell.



| |                      
| | ---------------------
| | 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 and does not exercise significant
influence. The private investments

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with no concurrent revenue arrangements are
included in other assets on the Companys balance sheet and
are carried at original cost, less reductions related to
other-than-temporary declines in value. In accordance with APB
Opinion No. 29, investments with concurrent revenue
arrangements, are carried at cost, less the amounts received
under the revenue arrangement when fair value cannot be readily
determined. The public investments are included in short-term
marketable securities and are carried at fair value with
resulting unrealized gains (losses), net of related taxes,
included on the Companys balance sheet as a component of
accumulated other comprehensive income (loss). 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 $0.2 million and $20.6 million in 2002
and 2001, respectively



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

Carrying amounts of the Companys financial
instruments including 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 are disclosed in Note 6 to the Notes
to these Consolidated Financial Statements. The fair value of
the Companys derivative instruments is disclosed in
Note 7 to the Notes to these Consolidated Financial
Statements. The fair value of the Companys convertible
debt instruments is disclosed in Note 13 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
on-line subscription 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 on-line subscription
arrangements, which do not include any upfront setup 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, (SOP 97-2) 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 on-line
subscription software 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 or 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

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

customer support is deferred and recognized
ratably over the service period. On-line subscription 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.

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 or determinable if a significant portion
of the fee is due beyond the Companys normal payment terms
that are 30 to 90 days from the date of invoice. Fees due
under an arrangement with distributors and resellers are
generally deemed not to be fixed or determinable if a
significant portion of the fee is due beyond the date when the
products have been sold by the distributor reseller to the
customers. 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.

The Companys 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, 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 (sell-through or sell-out method). In addition, the
Company makes an estimate of returns from end users and amounts
for promotional and rebate programs based on its historical
experience. The provisions are recorded as a reduction of
revenue.

For arrangements with multiple obligations (e.g.
undelivered maintenance and support bundled with 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 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.



| |                     
| | --------------------
| | 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 income (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

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 2002, 2001, and 2000, the Company
recognized revenue of approximately $17.3 million,
$16.6 million, and $12.3 million, respectively,
associated with government contracts. Associated costs were
approximately $17.1 million, $14.9 million, and
$12.0 million in 2002, 2001, and 2000, 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.



| |                         
| | ------------------------
| | 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 (television and print) placement costs are
expensed in the period the advertising first appears. Total
advertising and promotional expenses were $13.6 million,
$25.1 million, and $43.7 million for 2002, 2001, and
2000, 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. Accordingly, with respect to fixed-plan awards, the
Company measures the excess, if any, of the market value of its
common stock on the date of the award over the exercise price of
options granted as deferred compensation expense (intrinsic
method) and recognizes any such excess over the vesting period
using the straight-line method. With respect to variable-plan
awards resulting from award modifications or award terms where
the amount of shares and the exercise price are not fixed at the
date of grant, the Company records stock-based deferred
compensation for the excess, if any, of the market value of its
common stock at the end of each reporting period (or date of
exercise, forfeiture or cancellation without replacement, if
earlier) over the fair value of its common stock on the date of
the award or modification. The resulting deferred compensation
charge to earnings will be recorded over the remaining vesting
term using the accelerated method of amortization. When variable
plan options become fully vested, any remaining deferred
compensation is recognized.

The Company accounts for options awarded to
non-employees (consultants) at fair value using the
Black-Scholes option pricing model. The resulting fair value is
recognized upon performance.

The following table illustrates the effect on net
income and earnings per share if the company had applied the
fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

For pro forma purposes, the compensation costs
for the 1997 Plan, the Stock Option Plan for Outside Directors,
the 2000 Nonstatutory Stock Option Plan and the 1994 ESPP has
been determined based on fair

83



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value at the grant date for awards from 1998
through 2002 consistent with the provisions of
SFAS No. 123, the Companys net income (loss) and
net income (loss) per share would have been as follows (in
thousands):

|                               |                                                                                                                                     |                         |         |               |  |               |        |         |   |   |          |          |  
|------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ------- | ------------- |  | ------------- | ------ | ------- | - | - | -------- | -------- | -
|                               |                                                                                                                                     |                        
|                               |                                                                                                                                     | Year Ended December 31,
|                               |                                                                                                                                     |                        
|                               |                                                                                                                                     | 2002                    |         | 2001          |  | 2000         
|                               |                                                                                                                                     |                         |         |               |  |              
|                               |                                                                                                                                     |                         |         | (As Restated) |  | (As Restated)
|Net income (loss), as reported |                                                                                                                                     | $                       | 128,312 |               |  | $             | 83,253 |         |   | $ | (108,014 | )       
|                               | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of tax |                         |         | 76,721        |  |               |        | 138,302 |   |   |          | 123,820  |  
|                               | Add back: stock-based compensation expense, net
    of tax; included in reported net income                                         |                         |         | 13,442        |  |               |        | 14,923  |   |   |          | 6,070    |  
|                               |                                                                                                                                     |                         |         |               |  |               |        |         |   |   |          |         
|                               | Pro forma net income (loss)                                                                                                         |                         | $       | 65,033        |  |               | $      | (40,126 | ) |   | $        | (225,764 | )
|                               |                                                                                                                                     |                         |         |               |  |               |        |         |   |   |          |         
|Net income (loss) per share:   |                                                                                                                                     |                         |         |               |  |               |        |         |   |   |          |         
|                               | Basic-as reported                                                                                                                   |                         | $       | 0.86          |  |               | $      | 0.60    |   |   | $        | (0.78    | )
|                               | Basic-pro forma                                                                                                                     |                         | $       | 0.44          |  |               | $      | (0.29   | ) |   | $        | (1.64    | )
|                               | Diluted-as reported                                                                                                                 |                         | $       | 0.80          |  |               | $      | 0.53    |   |   | $        | (0.78    | )
|                               | Diluted-pro forma                                                                                                                   |                         | $       | 0.41          |  |               | $      | (0.29   | ) |   | $        | (1.64    | )

The impact on pro forma income (loss) per share
and net income (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.



| |             
| | ------------
| | 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 Income (Loss) Per Share

Basic net income (loss) per share is computed
using the weighted-average common shares outstanding during the
period. Diluted net income per share is computed using the
weighted average common shares and potentially dilutive shares
outstanding during the period. Potentially dilutive common
shares include incremental common shares issuable upon exercise
of stock options, stock purchase warrants, restricted stock, and
potential dilution upon conversion of the convertible debt.
Diluted loss per share is computed using the weighted average
number of common shares and excludes potentially dilutive shares
outstanding, as their effect is anti-dilutive.



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

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

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For 2002, 2001 and 2000 other comprehensive
income (loss) is comprised of the following items (in thousands):

|                                                                   |                                  |            |         |            |   |            |         |        |   |   |         |        |  
|------------------------------------------------------------------ | -------------------------------- | ---------- | ------- | ---------- | - | ---------- | ------- | ------ | - | - | ------- | ------ | -
|                                                                   |                                  | Before     |         |            |   | Net of    
|                                                                   |                                  | Income Tax |         | Income Tax |   | Income Tax
|                                                                   |                                  |            |         |            |   |           
|2002                                                               |                                  |            |         |            |   |            |         |        |   |   |         |       
|Unrealized loss on marketable securities and
    investments, net  |                                  | $          | (8,808  | )          |   | $          | 3,523   |        |   | $ | (5,285  | )     
|Net realized gain on marketable securities and
    investments     |                                  |            | 4,562   |            |   |            | (1,825  | )      |   |   | 2,737   |       
|Impairment recognized                                              |                                  |            | (198    | )          |   |            | 79      |        |   |   | (119    | )     
|Foreign currency translation gain                                  |                                  |            | 10,744  |            |   |            |        |        |   |   | 10,744  |       
|                                                                   |                                  |            |         |            |   |            |         |        |   |   |         |       
|                                                                   | Total other comprehensive income |            | $       | 6,300      |   |            | $       | 1,777  |   |   | $       | 8,077  |  
|                                                                   |                                  |            |         |            |   |            |         |        |   |   |         |       
|2001, As Restated                                                  |                                  |            |         |            |   |            |         |        |   |   |         |       
|Unrealized gains on marketable securities and
    investments, net |                                  | $          | 15,943  |            |   | $          | (6,377  | )      |   | $ | 9,566   |       
|Net realized gain on marketable securities and
    investments     |                                  |            | 10,242  |            |   |            | (4,096  | )      |   |   | 6,146   |       
|Impairment recognized                                              |                                  |            | (20,631 | )          |   |            | 8,251   |        |   |   | (12,380 | )     
|Foreign currency translation gain                                  |                                  |            | 5,961   |            |   |            |        |        |   |   | 5,961   |       
|                                                                   |                                  |            |         |            |   |            |         |        |   |   |         |       
|                                                                   | Total other comprehensive income |            | $       | 11,515     |   |            | $       | (2,222 | ) |   | $       | 9,293  |  
|                                                                   |                                  |            |         |            |   |            |         |        |   |   |         |       
|2000, As Restated                                                  |                                  |            |         |            |   |            |         |        |   |   |         |       
|Unrealized loss on marketable securities and
    investments, net  |                                  | $          | (41,082 | )          |   | $          | 16,433  |        |   | $ | (24,649 | )     
|Net realized gain on marketable securities and
    investments     |                                  |            | 40,551  |            |   |            | (16,220 | )      |   |   | 24,331  |       
|Foreign currency translation loss                                  |                                  |            | (8,660  | )          |   |            |        |        |   |   | (8,660  | )     
|                                                                   |                                  |            |         |            |   |            |         |        |   |   |         |       
|                                                                   | Total other comprehensive loss   |            | $       | (9,191     | ) |            | $       | 213    |   |   | $       | (8,978 | )
|                                                                   |                                  |            |         |            |   |            |         |        |   |   |         |       

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

|                                                 |       |      |        |               |  |               |        |        |  |   |       |       | 
|------------------------------------------------ | ----- | ---- | ------ | ------------- |  | ------------- | ------ | ------ |  | - | ----- | ----- | 
|                                                 |       | 2002 |        | 2001          |  | 2000         
|                                                 |       |      |        |               |  |              
|                                                 |       |      |        | (As Restated) |  | (As Restated)
|Unrealized gain on available-for-sale securities |       | $    | 1,454  |               |  | $             | 4,121  |        |  | $ | 789   |      
|Cumulative translation adjustment                |       |      | 22,704 |               |  |               | 11,960 |        |  |   | 5,999 |      
|                                                 |       |      |        |               |  |               |        |        |  |   |       |      
|                                                 | Total |      | $      | 24,158        |  |               | $      | 16,081 |  |   | $     | 6,788 | 
|                                                 |       |      |        |               |  |               |        |        |  |   |       |      



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements



| |                                                
| | -----------------------------------------------
| | Accounting for Asset Retirement
    Obligations

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143
Accounting for Asset Retirement Obligations
(SFAS 143). SFAS 143 addresses the
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 applies to
legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction,
development and/or normal use of the assets, including lease
restoration obligations. SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of the fair value can be made. The fair value of the
liability is added to the carrying amount of the associated
asset, and this additional carrying amount is expensed over the
life of the asset. The Company adopted SFAS 143 effective
January 1, 2003. The adoption

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of SFAS 143 did not have a material impact
on the Companys consolidated financial condition, results
of operations or cash flows.



| |                                                                   
| | ------------------------------------------------------------------
| | Accounting for Extraordinary Items and
    Discontinued Operations

In May 2002, the FASB issued
SFAS No. 145, Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS No. 13, and Technical
Corrections (SFAS 145). Among other
things, SFAS 145 rescinds various pronouncements regarding
early extinguishment of debt and allows extraordinary accounting
treatment for early extinguishment only when the provisions of
Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions are met. SFAS 145 provisions
regarding early extinguishment of debt are generally effective
for fiscal years beginning after May 15, 2002 and require
retroactive application. Upon adoption of this Standard, the
Company will not classify the losses related to the repurchases
of its outstanding debt in 2003 as extraordinary.



| |                                               
| | ----------------------------------------------
| | Accounting for Exit or Disposal
    Activities

In July 2002, the FASB issued
SFAS No. 146 Accounting for Exit Costs
Associated With or Disposal Activities
(SFAS 146). SFAS 146 addresses the
recognition, measurement and reporting of costs associated with
exit and disposal activities (i.e., restructuring activities),
including costs related to terminating a contract that is not a
capital lease and termination benefits due to employees who are
involuntarily terminated under the terms of a one-time benefit
arrangement.

SFAS 146 supersedes the Emerging Issues Task
Force (EITF) Issue No. 94-3 Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring) (EITF 94-3) and EITF
Issue No. 88-10 Costs Associated with Lease
Modification or Termination (EITF 88-10).
Accordingly, SFAS 146 prohibits recognition of a liability
based solely on an entitys commitment to a plan to exit an
activity. SFAS 146 requires that: (i) liabilities
associated with exit and disposal activities be measured at fair
value and changes in the fair value of the liability at each
reporting period be measured using an interest allocation
approach; (ii) one-time termination benefits be expensed at
the date the entity notifies the employee, unless the employee
must provide future service, in which case the benefits are
expensed ratably over the future service period;
(iii) liabilities to terminate a contract be recorded at
fair value when the contract is terminated;
(iv) liabilities related to an existing operating
lease/contract, unless terminated, be recorded at fair value,
less estimated sublease income, and measured when the contract
does not have any future economic benefit to the entity (i.e.,
the entity ceases to utilize the rights conveyed by the
contract); and (v) all other costs related to an exit or
disposal activity be expensed as incurred.

SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002. The Company
adopted SFAS 146 during the fourth quarter of 2002. The
adoption of SFAS 146 will not impact the Companys
restructuring obligations recognized in 2002 as these
obligations must continue to be accounted for in accordance with
EITF 94-3 and other applicable pre-existing guidance.



| |                                                    
| | ---------------------------------------------------
| | Accounting for Stock-Based Compensation
    Charges

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure
(SFAS 148). SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. SFAS 148 also requires that disclosures of
the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed
more prominently and in a tabular format. Additionally,
SFAS 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual
disclosure requirements of SFAS 148 are effective for
fiscal years ended after December 15, 2002. The

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interim disclosure requirements are effective for
interim periods beginning after December 15, 2002. As the
adoption of this standard involves disclosures only, there was
no material impact on the Companys consolidated financial
position, results of operations or cash flows.



| |                                                                 
| | ----------------------------------------------------------------
| | Accounting for Derivative Instruments and
    Hedging Activities

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS 149). SFAS 149 (i) clarifies
under what circumstances a contract with an initial net
investment meets the characteristics of a derivative discussed
in SFAS 133. (ii) clarifies when a derivative contains
a financing component and (iii) amends the definition of an
underlying to conform it to language in FIN 45.
SFAS 149 is generally effective for contract entered into
or modified after June 30, 2003. The Company has adopted
the provisions of SFAS 149 which did not have a material
impact on the Companys consolidated financial position,
results of operations or cash flows.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Accounting for Certain Financial Instruments
    with Characteristics of both Liabilities and Equity

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity(SFAS 150).
SFAS 150 establishes standards for how companies classify
and measure certain financial instruments with characteristics
of both liabilities and equity. It requires companies classify a
financial instrument that is within its scope as a liability (or
an asset in some circumstances) as defined in SFAS 150. The
Company has adopted the provisions of SFAS 150 which did
not have a material impact on the Companys consolidated
financial position, results of operations or cash flows based on
the types of financial instruments the Company currently has
issued.



| |                                                             
| | ------------------------------------------------------------
| | Accounting for Multiple Deliverable Revenue
    Arrangements

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Multiple Deliverable Revenue
Arrangement (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which it will perform multiple
revenue-generating activities. It also addresses when and how an
arrangement involving multiple deliverables should be divided
into separate units of accounting. The guidance in
EITF 00-21 is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003, with
early application permitted. Companies may elect to report the
change in accounting as a cumulative effect of a change in
accounting principle in accordance with APB Opinion 20,
Accounting Changes and
SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements (an amendment of APB Opinion
No. 28). The Company will adopt the provisions of
EITF 00-21 for transactions to which SOP 97-2 does not
apply, such as sales of hardware without software and on-line
subscription software applications in the quarter ended
June 30, 2003. The adoption of EITF 00-21 did not have
a significant impact on its consolidated financial position,
results of operations or cash flows.



| |                              
| | -----------------------------
| | Accounting for Reimbursements

In November 2001, the FASB discussed Topic D-103,
recharacterized as EITF Issue No. 01-14, Income
Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred. This
issue deals with classification in the statement of operations
of incidental expenses, that in practice are commonly referred
to as out-of-pocket expenses, incurred by entities
that provide services as part of their central on-going
operations. The EITF reached a consensus that reimbursements
received for out-of-pocket expenses incurred should be
characterized as revenue in the statement of operations. This
issue is effective for fiscal years which began after
December 15, 2001. During the quarter ended March 31,
2002, the Company adopted EITF 01-14. As a result, the
Company reclassed a total amount of $1.5 million from cost
of revenue to revenue for the year ended December 31, 2001.
This reclassification has not been performed for 2000, as it is
impracticable to do so.

87



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                   
| | --------------------------------------------------
| | Accounting for Retroactive Insurance
    Contracts

In May 2003, the EITF reached a consensus on
Issue No. 03-03, Accounting for Retroactive
Insurance Contracts Purchased by Entities Other Than Insurance
Enterprises to Claims-Made Insurance Policies
(EITF 03-03). The consensus requires the
insured company to determine if their claims-made policy is
retroactive, prospective, or both and account for the policy
accordingly. A policy has a retroactive provision if it covers a
specific known claim(s) that was reportable before the
policys effective date. The continued applicability of
FASB Interpretation No. 39, Offsetting of Amounts
Related to Certain Contracts,
(FIN 39) to the recording of liabilities and
the related insurance recoverables is also addressed. Since
FIN 39 does not allow for offsetting the insurance
liability with the recoverable, regardless of whether the
company is recording the insurance policy as prospective or
retroactive, there will likely be a balance sheet gross-up for
all covered losses. EITF 03-03 is applicable to all claims-made
insurance arrangements entered into beginning in a
companys next reporting period following ratification
which is June 30, 2003 for the Company. The Company is
assessing the potential impact of EITF 03-03 on its
consolidated financial position, results of operations or cash
flows.



| |                                                
| | -----------------------------------------------
| | Accounting for and Disclosure of
    Guarantees

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 requires that a liability
(at fair value) be recorded in the guarantors balance
sheet upon issuance of a guarantee or indemnification. In
addition, FIN 45 requires disclosures about the guarantees
and indemnifications that an entity has issued, including a
reconciliation of changes in the entitys product warranty
liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis
to guarantees and indemnifications issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The Company has adopted FIN 45, which did
not have a material impact on its consolidated financial
position, results of operations, or cash flows.



| |                                                               
| | --------------------------------------------------------------
| | Accounting for Consolidation of Variable
    Interest Entities

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB
No. 51 (FIN 46). FIN 46
requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors
in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. The original
effective date of FIN 46 was delayed to the first reporting
period after December 15, 2003 (December 31, 2003 for
the Company) for any variable interest entities or potential
variable interest entities created before February 1, 2003.
We are studying the impact of FIN 46 on our consolidated
financial position, results of operations and cash flows.



|   |                                                  
|-- | -------------------------------------------------
|3. | Restatement of Consolidated Financial
    Results

On March 26, 2003, the Company announced
that, as a result of information obtained in connection with
ongoing Securities and Exchange Commission (SEC) and
Department of Justice investigations into its previously issued
consolidated financial statements, it would restate its 2000,
1999 and 1998 financial results to reflect sales to distributors
and resellers on a sell-through basis, which is how the Company
has recognized revenue from sales to distributors and resellers
since the beginning of 2001. In the course of the preparing the
1998 through 2000 consolidated financial statements to properly
reflect sales to distributors and resellers on the sell-through
basis, the Company identified other items and errors for which
accounting adjustments were necessary, which resulted in further
restatement adjustments to its consolidated financial statements
for 2001, 2000, 1999, 1998 and 1997. In addition to the
financial statements contained herein, the Company has filed

88



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Amendment No. 2 to its 2000 Annual Report on
Form 10-K containing the Companys restated
consolidated financial statements for each of the years in the
three-year period ended December 31, 2000.

In June 2002, the Company filed Amendment
No. 1 to its 2001 Annual Report on Form 10-K/ A with
the SEC to restate financial statements for 2001, 2000 and 1999.
This previous restatement (i) corrected certain
inaccuracies found in its accounts for 1998 through 2000 and
(ii) gave retroactive effect to the adoption of
EITF 01-09 Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendors
Products (EITF 01-09). Many of the
previous accounting inaccuracies pertained to amounts that were
reclassified from tax liability accounts to the operating and
administrative liability accounts, thereby causing the expenses
to be understated. Other previous accounting inaccuracies
included reclassification of tax liability accounts to the sales
return allowances account, reclassification of amounts from a
operating and administrative liability account to a marketing
liability account, and the recording of payments to a
distributor in a balance sheet tax liability account instead of
reducing net revenue. This previously filed financial
information for 2001 and 2000 set forth within Amendment
No. 1 to the Annual Report on Form 10-K/ A for 2001 is
referenced herein as reported. All restated
information for 2001 and 2000 is referenced herein as
restated.

The revenue restatement adjustments recorded in
this restatement primarily result in increased revenue related
to the recognition of revenue deferred in prior periods,
although certain adjustments during 1998 through 2000 result in
permanent reductions in revenue. The adjustments include
(i) amounts deferred from 1998 through 2000 and recognized
in subsequent periods as a result of (a) conversion from a
sell-in basis to the sell-through or consignment basis of
accounting for revenue from distributors and resellers to
properly report revenue on these sales and (b) errors
previously made in the application of the revenue recognition
principles under Statement of Position (SOP) 97-2,
Software Revenue Recognition
(SOP 97-2), and (ii) permanent reductions
in revenue as a result of the presence of concurrent investments
in customers and errors due to misclassifications between
revenue and expense. The net effect of these revenue adjustments
is to increase total revenue by $259.2 million and
$11.6 million in 2001 and 2000. The Company has also made
certain deferrals and adjustments to its expenses in connection
with these revenue adjustments and has made certain other
adjustments to its expenses. For example, the Company made
adjustments to its expenses to defer cost of revenue to the
period in which related deferred revenue was recognized. The net
effect of these adjustments is to increase 2001 expenses by
$20.7 million and decrease 2000 expenses by
$28.7 million. As a result of these adjustments to
revenues, expenses and other accounts, the Company is also
making certain income tax-related adjustments which increase the
provision for income taxes $54.6 million and
$24.4 million in 2001 and 2000. A subsequent effect of the
prior period restatement adjustments was to increase
2002 net revenue by $101.2 million and increase
2002 net income by $38.1 million. In addition, the
Company expects these adjustments will increase net revenue in
2003 and 2004 by approximately $5.7 million and
$0.3 million, respectively.

The restatement adjustments described herein
required an evaluation of a number of complex criteria and
significant accounting judgments by the Company.

The following table summarizes the net effect of
the restatement adjustments on cumulative net revenues for 2000
through 2001 and reflects the amount of net revenue deferred to
later periods (in millions). The primary net effect of the
revenue restatement adjustments is to defer revenue in 1998
through 2000 and recognize a greater amount of revenue in 2001
through 2004. Excluding permanent reductions and the impact of
currency conversions, there was no reduction in aggregate net
revenue as a result of the restatement over the affect periods.
Several adjustments, such as the reduction in revenue as a
result of the concurrent investments

89



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

in customers and misclassifications between
revenue and expense, have caused a permanent reduction in the
Companys revenues.

|                                                                                      |                                                |                                       |         |       |       |  
|------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------- | ------- | ----- | ----- | -
|Cumulative 2000 through 2001 net revenue, as
    previously reported                  |                                                | $                                     | 1,510.2 |      
|Permanent reductions in revenue:                                                      |                                                |                                       |         |      
|                                                                                      | Collection not reasonably assured              |                                       |         | 0.3   |      
|                                                                                      | General and administrative expenses            |                                       |         | (3.5  | )    
|                                                                                      | Reclassifications for payments to distributors |                                       |         | (14.1 | )    
|                                                                                      | Investments in customers                       |                                       |         | (2.6  | )    
|                                                                                      |                                                |                                       |         |      
|                                                                                      |                                                | Total permanent reductions in revenue |         |       | (19.9 | )
|Revenue deferred as of December 31, 1999
    recognized in 2000 through 2001          |                                                |                                       | 290.7   |      
|                                                                                      |                                                |                                       |         |      
|Total increase in cumulative net revenue, as
    previously reported in 2000 and 2001 |                                                |                                       | 270.8   |      
|                                                                                      |                                                |                                       |         |      
|Cumulative 2000 and 2001 net revenue, as
    restated                                 |                                                | $                                     | 1,781.0 |      
|                                                                                      |                                                |                                       |         |      
|Revenue recognized or to be recognized in 2002,
    2003 and 2004                     |                                                | $                                     | 107.2   |      
|                                                                                      |                                                |                                       |         |      

The consolidated statement of operations impact
of all of the adjustments discussed herein is to decrease the
Companys net loss by $183.9 and $15.9 million in 2001
and 2000. The following table summarizes the net effect of the
restatement adjustments on the cumulative net loss for 2000
through 2001(in millions):

|                                            |                                               |           |  |       |   |   |        |   | 
|------------------------------------------- | --------------------------------------------- | --------- |  | ----- | - | - | ------ | - | 
|                                            |                                               |           |  |      
|                                            |                                               |          
|                                            |                                               | 2000-2001
|                                            |                                               |          
|Cumulative net loss, as previously reported |                                               |           |  |       |   | $ | (224.6 | )
|Restatement adjustments to net revenue      |                                               |           |  |       |   |   | 270.8  |  
|Expense adjustments:                        |                                               |           |  |       |   |   |        |  
|                                            | Collection not reasonably assured             |           |  | (3.5  | ) |   |        |   | 
|                                            | Business combinations                         |           |  | 10.2  |   |   |        |   | 
|                                            | General and administrative expenses           |           |  | 3.5   |   |   |        |   | 
|                                            | Reclassification for payments to distributors |           |  | 15.2  |   |   |        |   | 
|                                            | Investments in customers                      |           |  | 11.0  |   |   |        |   | 
|                                            | Cumulative translation adjustment             |           |  | (1.3  | ) |   |        |   | 
|                                            | Cost of revenue                               |           |  | (16.3 | ) |   |        |   | 
|                                            | Stock-based compensation                      |           |  | (1.6  | ) |   |        |   | 
|                                            | Income tax effects of restatement adjustments |           |  | (79.1 | ) |   |        |   | 
|                                            | Other                                         |           |  | (9.1  | ) |   |        |   | 
|                                            |                                               |           |  |       |   |   |        |  
|Total restatement expense adjustments       |                                               |           |  |       |   |   | (71.0  | )
|                                            |                                               |           |  |       |   |   |        |  
|Net restatement adjustments                 |                                               |           |  |       |   |   | 199.8  |  
|                                            |                                               |           |  |       |   |   |        |  
|Restated cumulative net loss                |                                               |           |  |       |   | $ | (24.8  | )
|                                            |                                               |           |  |       |   |   |        |  

90



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth selected
consolidated financial data for the Company, showing previously
reported annual amounts, and restated amounts, for 2001:

Consolidated Balance Sheet

|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |         |         |        |  
|------------------------------------------ | ----------------------------------------------------------- | -------------------------- | ----------------------------------------------------------------- | ----------- | --------- | ---------- | -------- | ------- | --------- | --------- | -------- | ------- | ------- | ------ | -
|                                           |                                                             |                           
|                                           |                                                             | December 31, 2001         
|                                           |                                                             |                           
|                                           |                                                             | As Previously              |                                                                   |            
|                                           |                                                             | Reported                   |                                                                   | As Restated |           | Difference
|                                           |                                                             |                            |                                                                   |             |           |           
|                                           |                                                             |                           
|                                           |                                                             | (In thousands)            
|ASSETS                                    
|Current assets:                            |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|                                           | Cash and cash equivalents                                   |                            | $                                                                 | 612,832     |           |            | $        | 612,832 |           |           | $        |        |        
|                                           | Short-term marketable securities                            |                            |                                                                   | 135,761     |           |            |          | 135,761 |           |           |          |        |        
|                                           | Accounts receivable, net                                    |                            |                                                                   | 136,366     |           |            |          | 136,346 |           |           |          | (20     | )      
|                                           | Prepaid expenses, income taxes and other current
    assets |                            |                                                                   | 54,959      |           |            |          | 59,964  |           |           |          | 5,005   |        
|                                           | Deferred taxes                                              |                            |                                                                   | 142,869     |           |            |          | 167,378 |           |           |          | 24,509  |        
|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|                                           |                                                             | Total current assets       |                                                                   |             | 1,082,787 |            |          |         | 1,112,281 |           |          |         | 29,494  |       
|Long-term marketable securities            |                                                             |                            | 194,357                                                           |             |           |            | 194,357  |         |           |           |         |        
|Property and equipment 612,832             |                                                             |                            | 68,454                                                            |             |           |            | 68,454   |         |           |           |         |        
|Deferred taxes                             |                                                             |                            | 84,399                                                            |             |           |            | 82,576   |         |           |           | (1,823   | )      
|Intangible assets, excluding goodwill, net |                                                             |                            | 28,124                                                            |             |           |            | 28,124   |         |           |           |         |        
|Goodwill, net                              |                                                             |                            | 156,930                                                           |             |           |            | 128,112  |         |           |           | (28,818  | )      
|Other assets                               |                                                             |                            | 18,853                                                            |             |           |            | 18,853   |         |           |           |         |        
|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|                                           |                                                             | Total assets               |                                                                   | $           | 1,633,904 |            |          | $       | 1,632,757 |           |          | $       | (1,147  | )     
|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|LIABILITIES                               
|Current liabilities:                       |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|                                           | Accounts payable                                            |                            | $                                                                 | 26,368      |           |            | $        | 26,367  |           |           | $        | 1       |        
|                                           | Accrued liabilities                                         |                            |                                                                   | 293,583     |           |            |          | 288,652 |           |           |          | (4,931  | )      
|                                           | Deferred revenue                                            |                            |                                                                   | 250,048     |           |            |          | 354,226 |           |           |          | 104,178 |        
|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|                                           |                                                             | Total current liabilities  |                                                                   |             | 569,999   |            |          |         | 669,246   |           |          |         | 99,248  |       
|Deferred taxes                             |                                                             |                            | 20,445                                                            |             |           |            | 0        |         |           |           | (20,445  | )      
|Deferred revenue, less current portion     |                                                             |                            | 24,312                                                            |             |           |            | 25,265   |         |           |           | 953      |        
|Convertible debt                           |                                                             |                            | 578,850                                                           |             |           |            | 578,850  |         |           |           |         |        
|Other long term liabilities                |                                                             |                            | 393                                                               |             |           |            | 393      |         |           |           |         |        
|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|                                           |                                                             | Total liabilities          |                                                                   |             | 1,193,999 |            |          |         | 1,273,753 |           |          |         | 79,754  |       
|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|Minority interest                          |                                                             |                            | 17,311                                                            |             |           |            | 17,511   |         |           |           | 200      |        
|STOCKHOLDERS EQUITY                      
|Preferred stock                            |                                                             |                            |                                                                  |             |           |            |         |         |           |           |         |        
|Common stock                               |                                                             |                            | 1,406                                                             |             |           |            | 1,406    |         |           |           |         |        
|Additional paid in capital                 |                                                             |                            | 742,315                                                           |             |           |            | 752,439  |         |           |           | 10,124   |        
|Cumulative other comprehensive loss        |                                                             |                            | (30,345                                                           | )           |           |            | 16,081   |         |           |           | 46,426   |        
|Accumulated deficit                        |                                                             |                            | (290,782                                                          | )           |           |            | (428,433 | )       |           |           | (137,651 | )      
|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|                                           |                                                             | Total stockholders equity |                                                                   |             | 422,594   |            |          |         | 341,493   |           |          |         | (81,101 | )     
|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        
|                                           |                                                             |                            | Total liabilities, minority interest and
    stockholders equity |             | $         | 1,633,904  |          |         | $         | 1,632,757 |          |         | $       | (1,147 | )
|                                           |                                                             |                            |                                                                   |             |           |            |          |         |           |           |          |        

91



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth selected
consolidated financial data for the Company, showing previously
reported annual amounts, and restated amounts, for 2001 and 2000:

Consolidated Statement of Operations for the
Years Ended December 31, 2001 and 2000

|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |         |         |  
|---------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------- | ---------------------------- | -------- | ------------- | ------- | -------- | --------- | ----------- | ------- | ---------- | ------- | - | -------- | ------- | -------- | - | -------- | ------- | -------- | - | ------ | ------- | ------- | -
|                                                                 |                                                          |                                                                                                  |          |                             
|                                                                 |                                                          | Year Ended December 31, 2001                                                                     |          | Year Ended December 31, 2000
|                                                                 |                                                          |                                                                                                  |          |                             
|                                                                 |                                                          | As Previously                                                                                    |          |                              |          | As Previously |         |         
|                                                                 |                                                          | Reported                                                                                         |          | As Restated                  |          | Difference    |         | Reported |           | As Restated |         | Difference
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |           
|                                                                 |                                                          |                                                                                                 
|                                                                 |                                                          | (In thousands, except per share data)                                                           
|Net revenue:                                                     |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 | Product                                                  |                                                                                                  | $        | 533,538                      |          |               | $       | 633,572  |           |             | $       | 100,034    |         |   | $        | 457,964 |          |   | $        | 438,485 |          |   | $      | (19,479 | )      
|                                                                 | Services and support                                     |                                                                                                  |          | 278,946                      |          |               |         | 438,088  |           |             |         | 159,142    |         |   |          | 239,778 |          |   |          | 270,887 |          |   |        | 31,109  |        
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 |                                                          | Total net revenue                                                                                |          |                              | 812,484  |               |         |          | 1,071,660 |             |         |            | 259,176 |   |          |         | 697,742  |   |          |         | 709,372  |   |        |         | 11,630  |  
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|Cost of net revenue:                                             |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 | Product                                                  |                                                                                                  |          | 103,052                      |          |               |         | 114,917  |           |             |         | 11,865     |         |   |          | 113,394 |          |   |          | 117,801 |          |   |        | 4,407   |        
|                                                                 | Services and support                                     |                                                                                                  |          | 56,536                       |          |               |         | 56,536   |           |             |         |           |         |   |          | 42,301  |          |   |          | 42,301  |          |   |        |        |        
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 |                                                          | Total cost of net revenue                                                                        |          |                              | 159,588  |               |         |          | 171,453   |             |         |            | 11,865  |   |          |         | 155,695  |   |          |         | 160,102  |   |        |         | 4,407   |  
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|Operating costs:                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 | Research and development                                 |                                                                                                  |          | 146,701                      |          |               |         | 146,701  |           |             |         |           |         |   |          | 172,968 |          |   |          | 172,968 |          |   |        |        |        
|                                                                 | Marketing and sales                                      |                                                                                                  |          | 419,957                      |          |               |         | 421,583  |           |             |         | 1,626      |         |   |          | 377,001 |          |   |          | 358,295 |          |   |        | (18,706 | )      
|                                                                 | General and administrative                               |                                                                                                  |          | 109,946                      |          |               |         | 111,106  |           |             |         | 1,160      |         |   |          | 85,064  |          |   |          | 91,277  |          |   |        | 6,213   |        
|                                                                 | Provision for (recovery from) doubtful accounts,
    net |                                                                                                  |          | (9,673                       | )        |               |         | 7,449    |           |             |         | 17,122     |         |   |          | 9,924   |          |   |          | 4,785   |          |   |        | (5,139  | )      
|                                                                 | Amortization of intangibles                              |                                                                                                  |          | 64,110                       |          |               |         | 56,064   |           |             |         | (8,046     | )       |   |          | 66,282  |          |   |          | 58,236  |          |   |        | (8,046  | )      
|                                                                 | Acquisition, restructuring and other related costs       |                                                                                                  |          | 3,821                        |          |               |         | 3,821    |           |             |         |           |         |   |          |        |          |   |          |        |          |   |        |        |        
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 |                                                          | Total operating costs                                                                            |          |                              | 734,862  |               |         |          | 746,724   |             |         |            | 11,862  |   |          |         | 711,239  |   |          |         | 685,561  |   |        |         | (25,678 | )
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 |                                                          | Income (loss) from operations                                                                    |          |                              | (81,966  | )             |         |          | 153,483   |             |         |            | 235,449 |   |          |         | (169,192 | ) |          |         | (136,291 | ) |        |         | 32,901  |  
|Interest and other income                                        |                                                          |                                                                                                  | 28,631   |                              |          |               | 27,993  |          |           |             | (638    | )          |         |   | 44,624   |         |          |   | 43,018   |         |          |   | (1,606 | )      
|Interest and other expense                                       |                                                          |                                                                                                  | (24,697  | )                            |          |               | (24,682 | )        |           |             | 15      |            |         |   | (18,169  | )       |          |   | (18,202  | )       |          |   | (33    | )      
|Gain (loss) on investments, net                                  |                                                          |                                                                                                  | 7,280    |                              |          |               | 10,242  |          |           |             | 2,962   |            |         |   | 40,361   |         |          |   | 40,551   |         |          |   | 190    |        
|Impairment of strategic and other investments                    |                                                          |                                                                                                  | (20,631  | )                            |          |               | (20,631 | )        |           |             |        |            |         |   | (10,000  | )       |          |   |         |         |          |   | 10,000 |        
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 |                                                          | Income (loss) before provision for income taxes
    and minority interest and extraordinary item |          |                              | (91,383  | )             |         |          | 146,405   |             |         |            | 237,788 |   |          |         | (112,376 | ) |          |         | (70,924  | ) |        |         | 41,452  |  
|Provision for income taxes                                       |                                                          |                                                                                                  | 11,409   |                              |          |               | 66,020  |          |           |             | 54,611  |            |         |   | 16,504   |         |          |   | 40,944   |         |          |   | 24,440 |        
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 |                                                          | Net income (loss) before minority interest and
    extraordinary item                            |          |                              | (102,792 | )             |         |          | 80,385    |             |         |            | 183,177 |   |          |         | (128,880 | ) |          |         | (111,868 | ) |        |         | 17,012  |  
|Minority interest in loss of consolidated
    subsidiaries       |                                                          |                                                                                                  | 411      |                              |          |               | 1,137   |          |           |             | 726     |            |         |   | 4,954    |         |          |   | 3,854    |         |          |   | (1,100 | )      
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|Income (loss) before extraordinary item                          |                                                          |                                                                                                  | (102,381 | )                            |          |               | 81,522  |          |           |             | 183,903 |            |         |   | (123,926 | )       |          |   | (108,014 | )       |          |   | 15,912 |        
|Extraordinary item, gain on repurchase of debt,
    net of taxes |                                                          |                                                                                                  | 1,731    |                              |          |               | 1,731   |          |           |             |        |            |         |   |         |         |          |   |         |         |          |   |       |        
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 |                                                          | Net income (loss)                                                                                |          | $                            | (100,650 | )             |         | $        | 83,253    |             |         | $          | 183,903 |   |          | $       | (123,926 | ) |          | $       | (108,014 | ) |        | $       | 15,912  |  
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|Other comprehensive income (loss):                               |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|                                                                 | Unrealized gain (loss) on investments                    |                                                                                                  | $        | 1,950                        |          |               | $       | 2,239    |           |             | $       | 289        |         |   | $        | 2,654   |          |   | $        | 857     |          |   | $      | (1,797  | )      
|                                                                 | Foreign currency translation gains (loss)                |                                                                                                  |          | (1,029                       | )        |               |         | 7,054    |           |             |         | 8,083      |         |   |          | (23,963 | )        |   |          | (9,835  | )        |   |        | 14,128  |        
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        
|Comprehensive income (loss)                                      |                                                          | $                                                                                                | (99,729  | )                            |          | $             | 92,546  |          |           | $           | 192,275 |            |         | $ | (145,235 | )       |          | $ | (116,992 | )       |          | $ | 28,243 |        
|                                                                 |                                                          |                                                                                                  |          |                              |          |               |         |          |           |             |         |            |         |   |          |         |          |   |          |         |          |   |        |        

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                     |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |            |  |  |   |         |   |  |   |         |   |  |   |      | 
|------------------------------------ | ---------------------------------------------------------------- | ------------------------------------- | - | ---------------------------- | - | ------------- | - | -------- |  | ----------- | - | ---------- |  |  | - | ------- | - |  | - | ------- | - |  | - | ---- | 
|                                     |                                                                  |                                       |   |                             
|                                     |                                                                  | Year Ended December 31, 2001          |   | Year Ended December 31, 2000
|                                     |                                                                  |                                       |   |                             
|                                     |                                                                  | As Previously                         |   |                              |   | As Previously |   |         
|                                     |                                                                  | Reported                              |   | As Restated                  |   | Difference    |   | Reported |  | As Restated |   | Difference
|                                     |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |           
|                                     |                                                                  |                                      
|                                     |                                                                  | (In thousands, except per share data)
|Basic net income (loss) per share:   |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |            |  |  |   |         |   |  |   |         |   |  |   |     
|                                     | Income (loss) before extraordinary item                          |                                       | $ | (0.74                        | ) |               | $ | 0.59     |  |             | $ | 1.33       |  |  | $ | (0.90   | ) |  | $ | (0.78   | ) |  | $ | 0.12 | 
|                                     | Extraordinary item, gain on repurchase of debt,
    net of taxes |                                       |   | 0.01                         |   |               |   | 0.01     |  |             |   |           |  |  |   |        |   |  |   |        |   |  |   |     | 
|                                     |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |            |  |  |   |         |   |  |   |         |   |  |   |     
|                                     | Net income (loss) per share  basic                              |                                       | $ | (0.73                        | ) |               | $ | 0.60     |  |             | $ | 1.33       |  |  | $ | (0.90   | ) |  | $ | (0.78   | ) |  | $ | 0.12 | 
|                                     |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |            |  |  |   |         |   |  |   |         |   |  |   |     
|                                     | Shares used in per share calculation 
    basic                 |                                       |   | 137,847                      |   |               |   | 137,847  |  |             |   |            |  |  |   | 138,072 |   |  |   | 138,072 |   |  |   |      | 
|                                     |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |            |  |  |   |         |   |  |   |         |   |  |   |     
|Diluted net income (loss) per share: |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |            |  |  |   |         |   |  |   |         |   |  |   |     
|                                     | Income (loss) before extraordinary item                          |                                       | $ | (0.74                        | ) |               | $ | 0.52     |  |             | $ | 1.26       |  |  | $ | (0.90   | ) |  | $ | (0.78   | ) |  | $ | 0.12 | 
|                                     | Extraordinary item, gain on repurchase of debt,
    net of taxes |                                       |   | 0.01                         |   |               |   | 0.01     |  |             |   |           |  |  |   |        |   |  |   |        |   |  |   |     | 
|                                     |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |            |  |  |   |         |   |  |   |         |   |  |   |     
|                                     | Net income (loss) per share  diluted                            |                                       | $ | (0.73                        | ) |               | $ | 0.53     |  |             | $ | 1.26       |  |  | $ | (0.90   | ) |  | $ | (0.78   | ) |  | $ | 0.12 | 
|                                     |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |            |  |  |   |         |   |  |   |         |   |  |   |     
|                                     | Shares used in per share calculation 
    diluted               |                                       |   | 137,847                      |   |               |   | 164,200  |  |             |   |            |  |  |   | 138,072 |   |  |   | 138,072 |   |  |   |      | 
|                                     |                                                                  |                                       |   |                              |   |               |   |          |  |             |   |            |  |  |   |         |   |  |   |         |   |  |   |     

Net Revenue and Related Expense
Adjustments

The following is a description of the restatement
adjustment categories impacting net revenue, as reported (in
thousands):

|                                    |                                                                |                                       |           |         |         |                 |         |         |        |   |           |         |         | 
|----------------------------------- | -------------------------------------------------------------- | ------------------------------------- | --------- | ------- | ------- | --------------- | ------- | ------- | ------ | - | --------- | ------- | ------- | 
|                                    |                                                                |                                       |           |        
|                                    |                                                                | Years Ended December 31,              |           |        
|                                    |                                                                |                                       |           |        
|                                    |                                                                | 2001                                  |           | 2000    |         | Total 2000-2001
|                                    |                                                                |                                       |           |         |         |                
|Net revenue, as previously reported |                                                                | $                                     | 812,484   |         |         | $               | 697,742 |         |        | $ | 1,510,226 |        
|Revenue restatement adjustments:    |                                                                |                                       |           |         |         |                 |         |         |        |   |           |        
|                                    | Restatement to sell-through basis of revenue
    recognition   |                                       |           | 82,384  |         |                 |         | 49,359  |        |   |           | 131,743 |        
|                                    | Allocation of revenue in multi-element
    arrangements        |                                       |           | 157,563 |         |                 |         | (9,009  | )      |   |           | 148,554 |        
|                                    | Collection not reasonably assured                              |                                       |           | 3,013   |         |                 |         | (2,674  | )      |   |           | 339     |        
|                                    | Allowances for sales returns and other revenue
    adjustments |                                       |           | 596     |         |                 |         | (8,136  | )      |   |           | (7,540  | )      
|                                    | General and administrative expenses                            |                                       |           |        |         |                 |         | (3,519  | )      |   |           | (3,519  | )      
|                                    | Reclassifications for payments to distributors                 |                                       |           |        |         |                 |         | (14,114 | )      |   |           | (14,114 | )      
|                                    | Investments in customers                                       |                                       |           |        |         |                 |         | (2,563  | )      |   |           | (2,563  | )      
|                                    | Other revenue adjustments                                      |                                       |           | 15,620  |         |                 |         | 2,286   |        |   |           | 17,906  |        
|                                    |                                                                |                                       |           |         |         |                 |         |         |        |   |           |        
|                                    |                                                                | Total revenue restatement adjustments |           |         | 259,176 |                 |         |         | 11,630 |   |           |         | 270,806 | 
|                                    |                                                                |                                       |           |         |         |                 |         |         |        |   |           |        
|Net revenue, as restated            |                                                                | $                                     | 1,071,660 |         |         | $               | 709,372 |         |        | $ | 1,781,032 |        
|                                    |                                                                |                                       |           |         |         |                 |         |         |        |   |           |        



| |                                                             
| | ------------------------------------------------------------
| | Restatement to Sell-through Basis of
    Revenue Recognition

The Company sells certain of its products through
distributors and other resellers. Since January 1, 2001,
the Company has reported revenue from sales to distributors and
resellers on a sell-through basis. Through December 2000,
business arrangements with the Companys distributors and
resellers were believed to require payment within a customary
collection period and provide limited return rights under
specific circumstances and revenue recognized upon shipment, net
of allowances for estimated returns. Under the provisions of

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SFAS No. 48, Revenue Recognition
When Right-of-Return Exists, or SFAS No. 48,
specific criteria must be met for revenue to be recognized upon
shipment when the buyer has the explicit or implicit right to
return the product. In error, the Company previously concluded
that the criteria of SFAS No. 48 and SOP 97-2 had
been satisfied and revenue from its distributors and resellers
was recognized on a sell-in basis, net of allowances for
estimated returns. The Company has determined that in 1998, 1999
and 2000 it did not meet the criteria of SFAS No. 48
and SOP 97-2 that requires the vendors obligation to
the buyer be complete and the fees be fixed or determinable at
the time of product shipment. The Company provided concessions,
including return rights and stock rotation rights, outside the
contractual terms, and in some instances facilitated the resale
of the Companys products by its distributors. In addition,
in some instances, distributors and resellers were not obligated
to pay for delivered inventory until they had sold the
inventory. Accordingly, the Company has adjusted revenue on
distributor and reseller transactions prior to 2001 to reflect
the sell-through basis of revenue recognition.

The total restatement adjustments required under
our change to a sell-through revenue recognition policy resulted
in previously reported net revenue increasing by
$82.4 million, $49.4 million and $137.0 million
in 2001, 2000 and 1999, respectively, and decreasing in 1998 by
$303.0 million. Revenue in 2002 and 2003 was increased or
will increase by $25.2 million and ($1.4) million,
respectively, as a result of this change in revenue recognition
method.



| |                                                           
| | ----------------------------------------------------------
| | Allocation of Revenue in Multiple-element
    Arrangements

The accounting treatment with respect to certain
revenue arrangements with multiple obligations in 1998 through
2000 has been adjusted to correct certain errors. The
Companys software license arrangements typically include
the licensing of software and maintenance and support services
or post contract support (PCS). SOP 97-2, as
amended by SOP 98-9, provides that for arrangements with
multiple obligations, such as the sale of software licenses with
undelivered PCS, revenue is allocated to each element of the
arrangement based on the vendors specific objective
evidence (VSOE) of fair value of the undelivered
elements. Where evidence of fair value of the undelivered
elements are determinable and the fair value of the delivered
element (e.g. the license) is not determinable, the Company
defers revenue for the arrangement equivalent to the fair value
of the undelivered elements (e.g. PCS) and recognizes revenue on
the delivered element under the residual value method. If the
evidence of fair value of undelivered PCS is not determinable,
then the entire arrangement fee is recognized ratably over the
period that PCS is provided or until evidence of fair value is
established. When evidence of fair value is established at a
later date, the fair value of the undelivered elements is
deferred and the residual portion of the fee is recognized as
license revenue.

For its enterprise multi-element products, the
Company unbundles and defers revenue from the undelivered PCS
element and recognizes revenue with respect to the delivered
license element. For one-year and two-year term software
licenses in 1998 through 2000, amounts were allocated based on
the list price of the license and the PCS element. In other
instances in 1998 through 2000, the Company allocated revenue to
the PCS element based on the amount invoiced to the customer.
Further, when customers were offered a discount on the list
price of bundled licenses and PCS, the discount was allocated
proportionately based on list price for the license and PCS in
1998 through 2000. The Company has determined that these
discounts should have been allocated entirely to the delivered
license elements. In addition, the Company has reevaluated
whether its methods for allocating revenues to the PCS element
was supported by sufficient evidence of the fair value of the
PCS based on prices for which PCS was sold separately. For some
enterprise products in 1998 through 2000, the Company determined
that sufficient evidence of fair value did not exist. For other
products, evidence of fair value existed, but the amount of
deferred revenue should have been greater. These correcting
adjustments in 1998 through 2000 cumulatively resulted in the
deferral of $139.5 million and $46.0 million to 2001
and 2002, respectively. For these periods, the deferred amounts
have been, or will be, recognized as service and support revenue.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Upon review of maintenance and support agreements
included with the sale of retail licenses in 1998 through 2000,
the Company determined it had inappropriately established the
fair value for the PCS element (updates to virus definition
files) of these arrangements. As the Company did not sell the
PCS separately until late 2000, all license and PCS revenue
under the arrangement should have been deferred and recognized
over the three-year estimated life of the retail license or
until evidence of fair value of the PCS was established. In
addition, in 1999 and 2000, McAfee.coms carve-out
financials established VSOE of fair value for PCS of its retail
licenses based on renewal rates offered on its Web site.
However, the renewal rate for PCS used by McAfee.com to
establish the VSOE of fair value of updates was not sufficiently
similar to the PCS offering included with the software license
sold. As a result, the Company recorded adjustments related to
its retail licenses and McAfee.coms arrangements in 1998
through 2000 to recognize all related license and PCS revenue
ratably over the estimated life of the retail licenses of three
years until the VSOE of fair value of PCS was established in the
fourth quarter of 2000. At that time, the VSOE of fair value for
PCS was established based on an annual renewal rate for the PCS
element included with its retail licenses.

In addition, the Company identified an element in
certain retail product offerings in 1998 through 2000 that
provided for a free upgrade for 90 days after purchase that
had originally not been considered in determining the allocation
of revenue to the various elements in the arrangement. Since the
Company does not sell such an upgrade right separately, VSOE of
fair value for the upgrade right could not be established and
all revenue related to these products has been deferred until
the 90-day period expires.

The Company also examined significant licensing
arrangements with end-user customers in 1998 through 2000 to
evaluate whether VSOE of fair value had been adequately
established for PCS. As a result, the Company recorded
adjustments in 1999 and 2000 deferring revenue previously
recognized upon shipment of software licenses which will be
recognized over the PCS term (generally 2 to 3 years).
Additional adjustments were recorded for other arrangements in
1998 through 2000 where the Company was required to provide an
element of the arrangement over a contractual term and there was
no VSOE of fair value of this element. In these instances, all
the revenue under the arrangement was deferred and recognized
ratably over the contract term.

Overall correcting adjustments to multi-element
revenue arrangements resulted in the same amount of revenue
recognized in total cumulatively over all periods affected,
excluding the effect of currency related adjustments. However,
as there was a significant increase in deferred revenue for PCS
offset by a commensurate decrease in product revenue in 1998
through 2000, service and support revenue increased or will
increase in 2001, 2002 and later periods.



| |                                      
| | -------------------------------------
| | Collection Not Reasonably
    Assured

Several of the Companys distributors were
undergoing financial difficulty during 1998, 1999 and 2000.
However, the Company continued in error to recognize revenue
from these distributors upon shipment of product to the
distributor. Revenue from these distributors should have been
recognized upon receipt of cash as one of the criteria for
revenue recognition under SOP 97-2 is that collectibility
is reasonably assured.

The Company routinely records an allowance for
product returns and other revenue adjustments (Revenue
Allowance) for a variety of reasons including product
returns, estimates for price adjustments provided to
distributors to meet competitors prices as well as other
expected incentives. Revenue Allowances are recorded as an
offset to revenue, reducing the net revenue reported in the
consolidated statement of operations. Upon review of
transactions recorded into the provision for doubtful accounts
in 1998 through 2000, the Company identified excess allowances
for doubtful accounts transferred to the Companys Revenue
Allowances. Net revenue was increased by releasing excess
allowances for doubtful accounts (i) to increase the
Revenue Allowance or (ii) into revenue when the Revenue
Allowance was deemed no longer necessary. Correcting adjustments
have been recorded in 1998 through 2000 to reduce revenue for
the misclassified amounts with an offsetting decrease in the
provision for doubtful accounts.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                               
| | --------------------------------------------------------------
| | Allowances for Sales Returns and Other
    Revenue Adjustments

In the ordinary course of business, the Company
issues credit memorandums to its customers for product returns
and other business purposes, which result in a reduction of
revenue. In connection with the restatement to the sell-through
basis of revenue recognition, the Company gave appropriate
effect to previously issued credit memorandums and related
allowances by moving the credit memorandums to the period the
related revenue was recognized and eliminating those credit
memorandums applicable to sell-in revenue recognition but not
sell-through revenue recognition (e.g., distribution product
returns and stock rotation). While these adjustments in 1998
through 2000 increased or decreased revenue in specific periods,
there was no overall reduction in revenue when considering all
periods affected.



| |                                        
| | ---------------------------------------
| | General and Administrative
    Expenses

The Company also establishes accruals for a
variety of costs that are normally charged to general and
administrative expense as incurred. The Company routinely
records Revenue Allowances based primarily on estimates for
price adjustments provided to distributors to meet
competitors prices as well as other expected incentives to
be provided to distributors. Revenue Allowances are an offset to
revenue. In connection with the restatement of the
Companys 1998 through 2000 financial statements, the
Company determined that excess accruals were in error
reclassified to Revenue Allowances causing revenue and expenses
to be overstated. Additionally, certain discounts provided to
consumers were originally recorded as interest expense rather
than a reduction of revenue. Correcting adjustments have been
recorded to reduce revenue with an offsetting decrease in
general and administrative expense in 2000 and a decrease in
interest expense in 1999.



| |                                                   
| | --------------------------------------------------
| | Reclassifications for Payments to
    Distributors

During the three months ended March 31,
2002, the Company adopted EITF 01-09, Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of
the Vendors Products. 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 reclassified as reductions of
revenue. Upon adoption of EITF 01-09, the Company was
required to retroactively reclassify amounts recognized for such
payments in previously issued consolidated financial statements
to comply with the statement of operations presentation
requirements of the consensus. As these adjustments have the
effect of reducing both previously reported net revenue as well
as previously reported marketing costs, the reclassification has
no impact on previously reported net loss. As prescribed in
EITF 01-09, the Company previously reclassified
approximately $32.7 million from marketing expense to
reduction of revenue for 2000. As a result of further
investigation, the Company has determined the provisions of
EITF 01-09 required additional reclassifications reducing
revenue and expense in 2000 of $11.4 million.



| |                         
| | ------------------------
| | Investments in Customers

The Company, in certain instances, licensed its
products to certain customers immediately prior to,
contemporaneously with, or immediately after acquiring an equity
position in those customers. The Company subsequently determined
that the transaction lacked economic substance or the fair value
of the underlying equity investments could not be readily
determined. Therefore, these transactions should have been
accounted for as non-monetary exchanges in accordance with APB
Opinion No. 29, Accounting for Nonmonetary
Transactions(APB 29). Under
APB 29, the exchange of assets when fair value cannot be
readily determined is recorded at the historical cost of the
asset surrendered. As a result, the carrying value of certain
investments was reduced by the amount of license or services
revenue previously recognized in the restatement of the
Companys consolidated financial statements. This has
resulted in a reduction in revenues of $9.2 million and
$2.6 million in 1999 and 2000, respectively. In addition,
loss from the disposition or

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

impairment of the related investments was also
reduced by $9.2 million and $1.8 million in 2000 and
2001, respectively.



| |              
| | -------------
| | Other Revenue

The Company recorded certain other restatement
adjustments in 2001 and 2000, including an adjustment to credit
accumulated other comprehensive income (loss), reduced revenue
in 2000 and increased revenue in 2001, relating to the effects
of translating the adjusted financial statements of the foreign
subsidiaries into the Companys reporting currency. As
noted elsewhere, excluding the effect of currency related
adjustments, the Company determined no revenue was lost as a
result of its change to the sell-through revenue recognition for
years prior to 2001 or the corrections made in connection with
multi-element revenue arrangements in 1998 through 2000. The
impact of the related currency translation adjustments is
included in this line item.

Expense and Other Adjustments



| |                        
| | -----------------------
| | Cost of Product Revenue

The Companys cost of net product revenue
consists primarily of the following: 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. The cost of net product
revenue has been adjusted to reflect the Companys
conversion to a sell-through revenue recognition as discussed in
Restatement to Sell-through Revenue
Recognition above. Adjustments have been recorded to
defer and recognize cost of product revenue in the same periods
that the related revenue is recognized. As of December 31,
2002, cost of net product revenue deferred to future periods is
$0.5 million.



| |                      
| | ---------------------
| | Business Combinations

The original accounting treatment with respect to
certain purchase transactions has been corrected. Net assets in
these transactions were recorded at their estimated fair values
with the excess of the purchase price over the fair value of
acquired net assets allocated to goodwill. The Company has
determined adjustments were required based on its consideration
of subsequent events or re-examination of the original estimates
of fair value related to liabilities assumed, including
restructuring accruals, and deferred tax assets. The net effect
of the adjustments was to reduce the total purchase price of
Magic Solutions and CyberMedia, both acquired in 1998, by
$13.0 million and $44.2 million, respectively, with a
resulting decrease in goodwill and related amortization of
goodwill in 2000 and 2001.



| |                                    
| | -----------------------------------
| | Stock-based Compensation
    Charge

The Company determined stock-based compensation
charges of $1.4 million originally recorded in the first
quarter of 2002 should have been recorded in 2000 and recorded
an increase in stock-based compensation of that amount in 2000
and reversed the charge in the first quarter of 2002.



| |              
| | -------------
| | Tax Provision

The tax provision for all periods presented was
adjusted for the impact of adjustments described above and
adjustments to previously reported current income tax expense
for the effects of changes in tax accruals for tax exposure
items.



| |           
| | ----------
| | McAfee.com

Effective January 1, 1999, the Company
contributed its consumer e-commerce business to its then wholly
owned subsidiary, McAfee.com and entered into a number of
related inter-company agreements. Pursuant to

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the license agreement under which McAfee.com
licensed certain of its technologies, including its McAfee
anti-virus software, McAfee.com was obligated to pay the Company
a royalty on certain related revenue. In December 1999,
McAfee.com completed its initial public offering. In September
2002, the Company acquired all the outstanding publicly held
shares of McAfee.com (representing approximately 25% of
McAfee.coms then-outstanding common stock) and McAfee.com
was merged into the Company.

For 2001 and 2000, on a stand-alone basis,
McAfee.com reported net revenue of $62.0 and $46.9 million
and a net loss of $0.9 and $27.5 million. In 2001, the
effect of the restatement adjustments (described in the sections
above) on McAfee.coms stand-alone results was to decrease
2001 net revenue by $3.6 million, primarily reflecting
a VSOE of fair value related decrease of $1.1 and a concurrent
equity investment related decrease of $2.3 million. The
aggregate impact on 2001 was to increase reported net loss by
$3.9 million. In 2000, the effect of the restatement
adjustments on McAfee.coms stand-alone results was to
increase 2000 net revenue by $6.7 million, primarily
reflecting a VSOE of fair value related increase of
$10.3 million and a concurrent equity investment related
increase of $1.2 million. The aggregate impact on 2000 was
to decrease reported net loss by $7.5 million.

The effect of the restatement adjustments on
McAfee.coms stand-alone results of operations from
January 1, 2000 through the September 2002 merger date is a
$6.5 million increase in net revenue and a
$8.8 million decrease in net loss.

Additional information regarding the
Companys restatement adjustments in 1998 and 1999 is
located in the Companys consolidated financial statements
for each of the years in the three-year period ended
December 31, 2000, as filed in Amendment No. 2 to the
Companys 2000 Form 10-K.



|   |                                
|-- | -------------------------------
|4. | Business Combinations and Other

In September 2002, the Company repurchased the
25% minority interest in its McAfee.com subsidiary for
$219.9 million in cash and stock. The Company issued
8.3 million shares of its common stock valued at
$14.62 per share, which corresponds to the average market
price of the Companys common stock two days before and
after the date the terms of the acquisition were agreed and
announced. The acquisition was an effort to reduce or eliminate
customer, market and brand confusion due to the similarity in
its products, names and web addresses and to reduce or eliminate
actual and potential conflicts between the companies and their
sales forces, and related senior management distraction, due to
confusion over market boundaries. This acquisition increased the
Companys ownership of McAfee.com to a 100% interest and
was accounted for using the purchase method of accounting. As
part of the acquisition, McAfee.com was merged with and into the
Company. The results of operations of McAfee.com have always
been included in the consolidated income (loss) before minority
interest of the Company. Prior to the acquisition, the minority
interest in the McAfee.com income (loss) was excluded from the
Companys consolidated net income (loss). Since the date of
acquisition on September 13, 2002, no minority interest
exists in McAfee.com and accordingly the consolidated net income
(loss) includes the full amount of McAfee.com results from this
date. The aggregate purchase price was allocated to tangible and
identified intangible assets acquired and liabilities assumed
based on estimates of fair value. Identifiable intangible assets
totaled $50.7 million and are amortized using an estimated
useful life identified for each type of intangible ranging from
two to seven years, or a weighted average period of
6.7 years. The excess of the aggregate purchase price over
the fair value of the identifiable net assets acquired of
approximately $145.8 million has been recognized as
goodwill of which none will be deductible for tax purposes.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the
date of acquisition.

|                         |                           |                |         |         | 
|------------------------ | ------------------------- | -------------- | ------- | ------- | 
|                         |                           | At            
|                         |                           | September 13, 
|                         |                           | 2002          
|                         |                           |               
|                         |                           | (In thousands)
|Deferred tax assets      |                           | $              | 25,767  |        
|Technology               |                           |                | 1,401   |        
|Other intangible assets  |                           |                | 49,335  |        
|Goodwill                 |                           |                | 145,756 |        
|Minority Interest        |                           |                | 21,044  |        
|                         |                           |                |         |        
|                         | Total assets acquired     |                |         | 243,303 | 
|                         |                           |                |         |        
|Current liabilities      |                           |                | 2,065   |        
|Deferred tax liabilities |                           |                | 21,345  |        
|                         |                           |                |         |        
|                         | Total liabilities assumed |                |         | 23,410  | 
|                         |                           |                |         |        
|Net assets acquired      |                           | $              | 219,893 |        
|                         |                           |                |         |        

The following unaudited pro forma financial
information presents the combined results of the Company and
McAfee.com as if the acquisition had occurred on January 1,
2001, after giving effect to certain adjustments, including
amortization of identifiable intangible assets (in thousands
except per share amounts):

|                                                   |                                                                   |            |           |               |      |   |           |      |      | 
|-------------------------------------------------- | ----------------------------------------------------------------- | ---------- | --------- | ------------- | ---- | - | --------- | ---- | ---- | 
|                                                   |                                                                   | 2002       |           | 2001         
|                                                   |                                                                   |            |           |              
|                                                   |                                                                   |            |           | (As Restated)
|Net revenue                                        |                                                                   | $          | 1,043,044 |               |      | $ | 1,071,660 |     
|Income before extraordinary item                   |                                                                   | $          | 141,308   |               |      | $ | 73,171    |     
|Net income                                         |                                                                   | $          | 141,334   |               |      | $ | 74,902    |     
|Basic net income per share:                        |                                                                   |            |           |               |      |   |           |     
|                                                   | Income before extraordinary item                                  |            | $         | 0.91          |      |   | $         | 0.50 |     
|                                                   | Extraordinary item  gain on repurchase
    of debt, net of taxes |            |           | 0.00          |      |   |           | 0.01 |     
|                                                   |                                                                   |            |           |               |      |   |           |     
|                                                   |                                                                   | Net income |           | $             | 0.91 |   |           | $    | 0.51 | 
|                                                   |                                                                   |            |           |               |      |   |           |     
|Shares used in per share calculation 
    basic   |                                                                   |            | 155,245   |               |      |   | 146,154   |     
|                                                   |                                                                   |            |           |               |      |   |           |     
|Diluted net income per share:                      |                                                                   |            |           |               |      |   |           |     
|                                                   | Income before extraordinary item                                  |            | $         | 0.84          |      |   | $         | 0.45 |     
|                                                   | Extraordinary item  gain on repurchase
    of debt, net of taxes |            |           | 0.00          |      |   |           | 0.01 |     
|                                                   |                                                                   |            |           |               |      |   |           |     
|                                                   |                                                                   | Net income |           | $             | 0.84 |   |           | $    | 0.46 | 
|                                                   |                                                                   |            |           |               |      |   |           |     
|Shares used in per share calculation 
    diluted |                                                                   |            | 183,150   |               |      |   | 172,508   |     
|                                                   |                                                                   |            |           |               |      |   |           |     

The above unaudited pro forma financial
information includes adjustments for interest income on cash
disbursed for the acquisition, amortization of identifiable
intangible assets and adjustments for the expenses incurred by
McAfee.com related to our exchange offer for all McAfee.com
outstanding publicly held shares.

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

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

market price of McAfee.com stock a few 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. The purchased technology is being amortized on a
straight-line basis over three years. The goodwill was amortized
over three years through December 31, 2001. On
January 1, 2002, the Company ceased amortization of
goodwill (see Note 2 to the notes to these consolidated
financial statements.) 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 | 
|                                                                                    |       |   |        |       

On September 13, 2002, the minority interest
in the above assets was adjusted to fair value as part of the
acquisition by the Company of the minority interest in
McAfee.com. 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 its
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. 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.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | Other Acquisitions

In 2002, the Company acquired four entities for a
total cost of $19.1 million, which was paid in cash:



| |   |                                                         
| | - | --------------------------------------------------------
| |  | Traxess, a provider of forensic software,               
|
| |  | BySupport, one of our South America reseller            
|
| |  | BySecure, one of our Central American resellers,
    and
|
| |  | Deersoft, a provide of anti-spam software.              

Liabilities assumed in conjunction with the
acquisitions totaled $2.0 million. Intangible assets
consisting primarily of acquired technology totaled
$20.1 million.



|   |                                
|-- | -------------------------------
|5. | Sale of Assets and Product Line

On October 9, 2001, the Board of Directors
of the Company approved a plan to integrate the activities of
the Companys PGP product group into its other product
groups. In addition to the integration plan, the Company began
to look for a buyer for the PGP desktop encryption and Gauntlet
firewall product. On February 13, 2002, the Company
announced the sale of Gauntlet firewall/ VPN product to Secure
Computing. As a result of the transaction, the Company received
common shares of Secure Computing in exchange for the Gauntlet
assets. The Company recorded a gain on sale of the product line
of $6.7 million. On August 19, 2002, the Company
announced the sale of PGP desktop encryption to PGP Corporation,
a new venture funded company unrelated to the Company, for
$2.0 million in cash. As a result of the transaction, the
Company recorded a gain on sale of net assets of
$2.6 million.



|   |                                                        
|-- | -------------------------------------------------------
|6. | 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):

|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|------------------------------- |  | --------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | ---- | - |  | - | ------- | 
|                                |  |          
|                                |  | 2002     
|                                |  |          
|                                |  | Purchase/ |         | Gross      |  | Gross      |       |           
|                                |  | Amortized |         | Unrealized |  | Unrealized |       | Aggregate 
|                                |  | Cost      |         | Gains      |  | Losses     |       | Fair Value
|                                |  |           |         |            |  |            |       |           
|U.S. Government debt securities |  | $         | 214,337 |            |  | $          | 1,634 |            |  | $ | (16  | ) |  | $ | 215,955 | 
|Municipal debt securities       |  |           | 10,035  |            |  |            | 121   |            |  |   |     |   |  |   | 10,156  | 
|Corporate debt securities       |  |           | 644,410 |            |  |            | 785   |            |  |   | (105 | ) |  |   | 645,090 | 
|Equity securities               |  |           | 1,500   |            |  |            | 148   |            |  |   |     |   |  |   | 1,648   | 
|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|                                |  | $         | 870,282 |            |  | $          | 2,688 |            |  | $ | (121 | ) |  | $ | 872,849 | 
|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 

|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 
|------------------------------- |  | --------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | ---- | - |  | - | ------- | 
|                                |  |          
|                                |  | 2001     
|                                |  |          
|                                |  | Purchase/ |         | Gross      |  | Gross      |       |           
|                                |  | Amortized |         | Unrealized |  | Unrealized |       | Aggregate 
|                                |  | 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 | 
|                                |  |           |         |            |  |            |       |            |  |   |      |   |  |   |         | 

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 2002, $338 million of
marketable debt securities had scheduled maturities of less than
three years, and $11 million of marketable debt securities
had scheduled maturities of more than three years. At
December 31, 2001, all marketable debt securities had
scheduled maturities of less than three years. Marketable debt
securities totaling $532.7 million in 2002, and
$545.3 million in 2001, 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):

|                                                                       |                                 |      |         |         |  |   |         |         | 
|---------------------------------------------------------------------- | ------------------------------- | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                                       |                                 | 2002 |         | 2001   
|                                                                       |                                 |      |         |        
|Cash and money market funds, at cost which
    approximates fair value |                                 | $    | 660,901 |         |  | $ | 394,551 |        
|Corporate debt securities, primarily commercial
    paper              |                                 |      | 13,325  |         |  |   | 218,281 |        
|                                                                       |                                 |      |         |         |  |   |         |        
|                                                                       | Total cash and cash equivalents |      | $       | 674,226 |  |   | $       | 612,832 | 
|                                                                       |                                 |      |         |         |  |   |         |        

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

|                |                   |      |       |       |  |      |       |       |  |   |        |        | 
|--------------- | ----------------- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ------ | ------ | 
|                |                   | 2002 |       | 2001  |  | 2000
|                |                   |      |       |       |  |     
|Realized gains  |                   | $    | 4,670 |       |  | $    | 7,921 |       |  | $ | 40,634 |       
|Realized losses |                   |      | (832  | )     |  |      | (641  | )     |  |   | (273   | )     
|                |                   |      |       |       |  |      |       |       |  |   |        |       
|                | Net realized gain |      | $     | 3,838 |  |      | $     | 7,280 |  |   | $      | 40,361 | 
|                |                   |      |       |       |  |      |       |       |  |   |        |       



|   |            
|-- | -----------
|7. | Derivatives



| |                           
| | --------------------------
| | Forward Exchange Contracts

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, British
Pound Sterling, Singapore, Canadian and Australian dollars. 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 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 as interest and other
income.

The unrealized gain (loss) on forward contracts
outstanding is presented below as of December 31 (in
thousands):

|                       |  |      |       |      |  |   |     |  
|---------------------- |  | ---- | ----- | ---- |  | - | --- | -
|                       |  | 2002 |       | 2001
|                       |  |      |       |     
|Euro                   |  | $    | 488   |      |  | $ | (1  | )
|British Pound Sterling |  |      | 774   |      |  |   | 91  |  
|Singapore Dollar       |  |      | 15    |      |  |   | 5   |  
|Australian Dollar      |  |      | 155   |      |  |   |    |  
|Canadian Dollar        |  |      | 354   |      |  |   | 7   |  
|                       |  |      |       |      |  |   |     |  
|                       |  | $    | 1,786 |      |  | $ | 102 |  
|                       |  |      |       |      |  |   |     |  

102



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | Interest Rate Swaps

In July 2002, the Company entered into interest
rate swap transactions (the Transactions) with two
investment banks (the Banks), to hedge the interest
rate risk of its outstanding 5.25% Convertible Subordinated
Note due 2006 (the Notes) (See Note 13 of notes
to these consolidated financial statements).

The notional amount of the Transactions was
$345.0 million to match the entire principal amount of the
Notes. The Company will receive from the Banks fixed payments
equal to 5.25% percent of the notional amount, payable on
February 15 and August 15 starting on August 15,
2002. In exchange, the Company will pay to the Banks floating
rate payments based upon the London InterBank Offered Rate
(LIBOR) plus 1.66% multiplied by the notional amount
of the Transactions with the LIBOR resetting every three months
beginning August 15, 2002.

The Transactions will terminate on
August 15, 2006 (Termination Date), subject to
certain early termination provisions if on or after
August 20, 2004 and prior to August 15, 2006 the
twenty-day average closing price of the Companys common
stock equals or exceeds $22.59 per share. Depending on the
timing of the early termination event, the Banks would be
obligated to pay the Company an amount equal to the repurchase
premium called for under the terms of the Notes.

The Transactions qualified and were designated as
a fair value hedge against movements in the fair value of the
Notes due to changes in the benchmark interest rate. Under the
fair value hedge model, the derivative is recognized at fair
value on the balance sheet with an offsetting entry to the
income statement. In addition, changes in fair value of the
Notes due to changes in the benchmark interest rate are
recognized as a basis adjustment to the carrying amount of the
Notes with an offsetting entry to the income statement. The gain
or loss from the change in fair value of the Transaction and the
offsetting change in the fair value of the Notes are recognized
as interest and other expense. The net gain recorded as of
December 31, 2002 was approximately $1.4 million.

In support of the Companys obligation under
the Transactions, the Company is required to maintain with the
Banks a minimum level of cash and investment collateral of
$20.0 million and periodically adjust the overall level of
collateral depending on the fair market value of the
Transactions. This minimum amount of collateral is presented as
restricted cash in the financial statements.

The Transactions qualify as a fair value hedge
under SFAS 133. To test effectiveness of the hedge,
regression analysis has and will be performed at least quarterly
comparing the change in fair value of the Transactions and the
Notes. The fair values of the Transactions and the Notes are
calculated at least quarterly as the present value of the
contractual cash flows to the expected maturity date, where the
expected maturity date is based on probability-weighted analysis
of interest rates relating to the five-year LIBOR curve and the
Companys stock prices. For 2002, the hedge was highly
effective and therefore, the ineffective portion did not have a
material impact on earnings.



| |       
| | ------
| | Collar

In March 2002, the Company purchased a one-year
collar consisting of 300,354 purchased put options with a strike
price of $17.31 and the same number of written call options with
a strike price of $22.04. Underlying both the put and call
options are the Secure Computing shares. The Company designated
the purchased collar as a fair value hedge of the Secure
Computing available-for-sale securities received in the sales of
Gauntlet assets (described in Note 5 to these Notes to
Consolidated Financial Statements) in accordance with
SFAS 133. At the inception of the hedge, the Company
assessed that the collar was highly effective based upon
expected changes in the collars intrinsic value. In July
2002, the Company sold its shares in Secure Computing and closed
its collar. As a result the Company recorded a net gain of
$284,000, which is

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recorded as a gain of $388,000 from the sale of
the collar offset by a loss of $104,000 from the sale of Secure
Computing securities.



|   |                                                      
|-- | -----------------------------------------------------
|8. | Consolidated Balance Sheet Detail (in
    thousands):

|                        |                                                                          |              |          |              |   |   |          |          |  
|----------------------- | ------------------------------------------------------------------------ | ------------ | -------- | ------------ | - | - | -------- | -------- | -
|                        |                                                                          |             
|                        |                                                                          | December 31,
|                        |                                                                          |             
|                        |                                                                          | 2002         |          | 2001        
|                        |                                                                          |              |          |             
|                        |                                                                          |              |          | (As Restated
|                        |                                                                          |              |          | See Note 3) 
|Property and equipment: |                                                                          |              |          |              |   |   |          |         
|                        | Furniture and fixtures (useful lives of 5 to
    7 years)                |              | $        | 23,235       |   |   | $        | 20,580   |  
|                        | Computers and equipment (useful lives of
    3 years)                    |              |          | 170,557      |   |   |          | 141,872  |  
|                        | Leasehold improvements (shorter of 5 years
    or the term of the lease) |              |          | 23,528       |   |   |          | 21,360   |  
|                        | Construction in progress                                                 |              |          | 23,418       |   |   |          | 1,338    |  
|                        |                                                                          |              |          |              |   |   |          |         
|                        |                                                                          |              | 240,738  |              |   |   | 185,150  |         
|                        |                                                                          |              |          |              |   |   |          |         
|                        | Accumulated depreciation furniture and fixtures                          |              |          | (16,762      | ) |   |          | (13,541  | )
|                        | Accumulated depreciation computers and equipment                         |              |          | (126,241     | ) |   |          | (100,009 | )
|                        | Accumulated depreciation leasehold improvements                          |              |          | (12,872      | ) |   |          | (7,560   | )
|                        |                                                                          |              |          |              |   |   |          |         
|                        |                                                                          |              | (155,875 | )            |   |   | (121,110 | )       
|                        |                                                                          |              |          |              |   |   |          |         
|                        |                                                                          | $            | 84,863   |              |   | $ | 64,040   |         
|                        |                                                                          |              |          |              |   |   |          |         
|Land                    |                                                                          | $            | 4,414    |              |   | $ | 4,414    |         
|                        |                                                                          |              |          |              |   |   |          |         
|Accrued liabilities:    |                                                                          |              |          |              |   |   |          |         
|                        | Accrued taxes                                                            |              | $        | 173,980      |   |   | $        | 176,554  |  
|                        | Accrued compensation                                                     |              |          | 65,138       |   |   |          | 52,319   |  
|                        | Accrued marketing costs                                                  |              |          | 6,568        |   |   |          | 11,035   |  
|                        | Accrued legal and accounting fees                                        |              |          | 76,424       |   |   |          | 9,359    |  
|                        | Other accrued expenses                                                   |              |          | 61,348       |   |   |          | 39,385   |  
|                        |                                                                          |              |          |              |   |   |          |         
|                        |                                                                          | $            | 383,458  |              |   | $ | 288,652  |         
|                        |                                                                          |              |          |              |   |   |          |         

Depreciation expense for 2002, 2001, and 2000 was
$40.0 million, $43.9 million, and $23.8 million,
respectively.



|   |              
|-- | -------------
|9. | Restructuring

As part of the plan to integrate certain
activities of the Companys PGP product group into its
other product groups and to dispose of other product lines, the
Company sold its Gauntlet business during the first quarter of
2002. In connection with this process, a restructuring charge of
approximately $1.1 million was recorded during the first
quarter of 2002. The restructuring charge consists of costs of
severance packages for 44 employees as well as related
legal and outplacement services.

104



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the Companys
restructuring accrual established in February 2002 and the
activity against the accrual during the twelve months ended
December 31, 2002 (in thousands):

|                           |  |       |      |           |  |       |      |   |  |   |        |  
|-------------------------- |  | ----- | ---- | --------- |  | ----- | ---- | - |  | - | ------ | -
|                           |  |       |      | Severance |  |      
|                           |  | Other |      | and       |  |      
|                           |  | Costs |      | Benefits  |  | Total
|                           |  |       |      |           |  |      
|Balance, February 2002     |  | $     | 190  |           |  | $     | 926  |   |  | $ | 1,116  |  
|Paid out                   |  |       | (190 | )         |  |       | (926 | ) |  |   | (1,116 | )
|                           |  |       |      |           |  |       |      |   |  |   |        |  
|Balance, December 31, 2002 |  | $     |     |           |  | $     |     |   |  | $ |       |  
|                           |  |       |      |           |  |       |      |   |  |   |        |  

In connection with the same plan, 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 North America, 16 in Europe, Middle East, and
Africa (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     |        |      
|                           |  |       |      | Severance |  | Stock Based  |        |      
|                           |  | Other |      | and       |  | 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 other benefits and other
transaction costs were paid in cash during 2001.



|    |                                     
|--- | ------------------------------------
|10. | Goodwill and Other Intangible Assets

The Company accounts for goodwill and other
intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. In lieu of
amortization, the Company performs an impairment review of its
goodwill balance on at least an annual basis. This impairment
review involves a two-step process. The Company performed Step 1
of the initial goodwill impairment analysis as of
January 1, 2002, as described in Note 2 of the
Consolidated Financial Statements and concluded that goodwill
was not impaired, as the fair value of each reporting unit
exceeded its carrying value, including goodwill. Accordingly,
Step 2 was not performed. As required, the Company completed its
annual goodwill impairment review as of October 1, 2002
during the fourth quarter of 2002 and concluded that goodwill
was not impaired. The fair value of the reporting units was
estimated using the average of the expected present value of
future cash flows and of the market multiple value. The Company
will continue to test for impairment on an annual basis and on
an interim basis if an event occurs or circumstances change that
would more likely than not reduce the fair value of the
Companys reporting units below their carrying amounts.

105



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Goodwill information is as follows (in thousands):

|                               |  |            |         |          |  |             |         |          |  |              |   |  |  |   |    |  |  |   |         | 
|------------------------------ |  | ---------- | ------- | -------- |  | ----------- | ------- | -------- |  | ------------ | - |  |  | - | -- |  |  | - | ------- | 
|                               |  |            |         |          |  |             |         | Effects  |  |             
|                               |  |            |         |          |  |             |         | of       |  |             
|                               |  |            |         |          |  |             |         | Foreign  |  |             
|                               |  | January 1, |         | Goodwill |  |             |         | Currency |  | December 31,
|                               |  | 2002       |         | Acquired |  | Adjustments |         | Exchange |  | 2002        
|                               |  |            |         |          |  |             |         |          |  |             
|North America                  |  | $          | 81,643  |          |  | $           | 145,752 |          |  | $            |  |  |  | $ |   |  |  | $ | 227,395 | 
|EMEA                           |  | $          | 25,354  |          |  | $           |        |          |  | $            |  |  |  | $ | 70 |  |  | $ | 25,424  | 
|Japan                          |  | $          | 12,071  |          |  | $           |        |          |  | $            |  |  |  | $ |   |  |  | $ | 12,071  | 
|Canada                         |  | $          | 4,727   |          |  | $           |        |          |  | $            |  |  |  | $ |   |  |  | $ | 4,727   | 
|Asia-Pacific (excluding Japan) |  | $          | 2,301   |          |  | $           |        |          |  | $            |  |  |  | $ |   |  |  | $ | 2,301   | 
|Latin America                  |  | $          | 2,016   |          |  | $           |        |          |  | $            |  |  |  | $ |   |  |  | $ | 2,016   | 
|                               |  |            |         |          |  |             |         |          |  |              |   |  |  |   |    |  |  |   |         | 
|Total                          |  | $          | 128,112 |          |  | $           | 145,752 |          |  | $            |  |  |  | $ | 70 |  |  | $ | 273,934 | 
|                               |  |            |         |          |  |             |         |          |  |              |   |  |  |   |    |  |  |   |         | 

The following table presents comparative
information showing the effects that non-amortization of
goodwill would have had on the consolidated statements of
operations for 2002, 2001 and 2000 (in thousands, except per
share amounts):

|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |          |        | 
|---------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------- | ------- | ------------- | - | ------------- | ------- | ------ | ------ | - | ------- | -------- | ------ | 
|                                                                                                                                   |                                                          | 2002                                     |         | 2001          |   | 2000         
|                                                                                                                                   |                                                          |                                          |         |               |   |              
|                                                                                                                                   |                                                          |                                          |         | (As Restated) |   | (As Restated)
|Income (loss) before extraordinary item:                                                                                           |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|                                                                                                                                   | Income (loss) before extraordinary item, as
    reported |                                          | $       | 128,286       |   |               | $       | 81,522 |        |   | $       | (108,014 | )     
|                                                                                                                                   |                                                          | Add: Goodwill amortization, net of taxes |         |               |  |               |         |        | 43,895 |   |         |          | 45,334 | 
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|Adjusted net income (loss) before extraordinary
    item                                                                           |                                                          | $                                        | 128,286 |               |   | $             | 125,417 |        |        | $ | (62,680 | )       
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|Net Income (loss)                                                                                                                  |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|                                                                                                                                   | Net income (loss), as reported                           |                                          | $       | 128,312       |   |               | $       | 83,253 |        |   | $       | (108,014 | )     
|                                                                                                                                   |                                                          | Add: Goodwill amortization, net of taxes |         |               |  |               |         |        | 43,895 |   |         |          | 45,334 | 
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|Adjusted net income (loss)                                                                                                         |                                                          | $                                        | 128,312 |               |   | $             | 127,148 |        |        | $ | (62,680 | )       
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|Income (loss) before extraordinary item per
    share  basic income (loss) before extraordinary item,
    as reported  basic     |                                                          | $                                        | 0.86    |               |   | $             | 0.59    |        |        | $ | (0.78   | )       
|Effect of goodwill amortization                                                                                                    |                                                          |                                          |        |               |   |               | 0.32    |        |        |   | 0.33    |         
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|Adjusted income (loss) before extraordinary item
    per share  basic                                                             |                                                          | $                                        | 0.86    |               |   | $             | 0.91    |        |        | $ | (0.45   | )       
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|Income (loss) before extraordinary item per
    share  diluted income (loss) before extraordinary
    item, as reported  diluted |                                                          | $                                        | 0.80    |               |   | $             | 0.52    |        |        | $ | (0.78   | )       
|Effect of goodwill amortization                                                                                                    |                                                          |                                          |        |               |   |               | 0.26    |        |        |   | 0.33    |         
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|Adjusted income (loss) before extraordinary item
    per share  diluted                                                           |                                                          | $                                        | 0.80    |               |   | $             | 0.78    |        |        | $ | (0.45   | )       
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|Net income (loss) per share  basic Net
    income (loss), as reported  basic                                                     |                                                          | $                                        | 0.86    |               |   | $             | 0.60    |        |        | $ | (0.78   | )       
|Effect of goodwill amortization                                                                                                    |                                                          |                                          |        |               |   |               | 0.32    |        |        |   | 0.33    |         
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         
|Adjusted net income (loss) per share 
    basic                                                                                   |                                                          | $                                        | 0.86    |               |   | $             | 0.92    |        |        | $ | (0.45   | )       
|                                                                                                                                   |                                                          |                                          |         |               |   |               |         |        |        |   |         |         

106



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                   |  |      |      |               |  |               |      |  |  |   |       |  
|---------------------------------------------------------------------------------- |  | ---- | ---- | ------------- |  | ------------- | ---- |  |  | - | ----- | -
|                                                                                   |  | 2002 |      | 2001          |  | 2000         
|                                                                                   |  |      |      |               |  |              
|                                                                                   |  |      |      | (As Restated) |  | (As Restated)
|Net income (loss) per share  diluted
    Net income (loss), as reported  diluted |  | $    | 0.80 |               |  | $             | 0.53 |  |  | $ | (0.78 | )
|Effect of goodwill amortization                                                    |  |      |     |               |  |               | 0.26 |  |  |   | 0.33  |  
|                                                                                   |  |      |      |               |  |               |      |  |  |   |       |  
|Adjusted net income (loss) per share 
    diluted                                 |  | $    | 0.80 |               |  | $             | 0.79 |  |  | $ | (0.45 | )
|                                                                                   |  |      |      |               |  |               |      |  |  |   |       |  

The components of intangible assets, excluding
goodwill, are as follows (in thousands):

|                                                              |                        |                   |         |                    |  |          |         |          |   |                    |        |          |  |   |        |        |  |   |         |         |   |   |        |       | 
|------------------------------------------------------------- | ---------------------- | ----------------- | ------- | ------------------ |  | -------- | ------- | -------- | - | ------------------ | ------ | -------- |  | - | ------ | ------ |  | - | ------- | ------- | - | - | ------ | ----- | 
|                                                              |                        |                   |         |                   
|                                                              |                        | December 31, 2002 |         | December 31, 2001 
|                                                              |                        |                   |         |                   
|                                                              |                        |                   |         | Accumulated        |  |          |         |          |   | Accumulated        |        |         
|                                                              |                        |                   |         | Amortization       |  |          |         |          |   | Amortization       |        |         
|                                                              |                        |                   |         | (Including Effects |  |          |         |          |   | (Including Effects |        |         
|                                                              |                        | Gross             |         | of Foreign         |  | Net      |         | Gross    |   | of Foreign         |        | Net     
|                                                              |                        | Carrying          |         | Currency           |  | Carrying |         | Carrying |   | Currency           |        | Carrying
|                                                              |                        | Amount            |         | Exchange)          |  | Amount   |         | Amount   |   | Exchange)          |        | Amount  
|                                                              |                        |                   |         |                    |  |          |         |          |   |                    |        |         
|Other Intangible assets:                                      |                        |                   |         |                    |  |          |         |          |   |                    |        |          |  |   |        |        |  |   |         |         |   |   |        |      
|                                                              | Purchased technologies |                   | $       | 69,286             |  |          | $       | (45,995  | ) |                    | $      | 23,291   |  |   | $      | 43,954 |  |   | $       | (40,050 | ) |   | $      | 3,904 | 
|Trademarks, patents customer base , and other
    intangibles |                        |                   | 104,540 |                    |  |          | (34,280 | )        |   |                    | 70,260 |          |  |   | 48,351 |        |  |   | (24,131 | )       |   |   | 24,220 |      
|                                                              |                        |                   |         |                    |  |          |         |          |   |                    |        |          |  |   |        |        |  |   |         |         |   |   |        |      
|                                                              |                        | $                 | 173,826 |                    |  | $        | (80,275 | )        |   | $                  | 93,551 |          |  | $ | 92,305 |        |  | $ | (64,181 | )       |   | $ | 28,124 |      
|                                                              |                        |                   |         |                    |  |          |         |          |   |                    |        |          |  |   |        |        |  |   |         |         |   |   |        |      

The aggregate amortization expenses for the
intangible assets listed above totaled $13.9 million,
$12.9 million, and $12.1 million for 2002, 2001, and
2000, respectively.

|                                          |           |                                                                                    |         |         |        |  
|----------------------------------------- | --------- | ---------------------------------------------------------------------------------- | ------- | ------- | ------ | -
|                                          |           | 2002                                                                              
|                                          |           |                                                                                   
|                                          |           | (In thousands)                                                                    
|Intangible assets as of December 31, 2001 |           | $                                                                                  | 92,305  |        
|                                          |           | Add: Purchased technologies (amortized over 1 to
    7 years)                      |         |         | 23,028 |  
|                                          |           | Add: Trademarks, patents and other intangibles
    (amortized over 1.5 to 7 years) |         |         | 56,770 |  
|                                          |           | Add: Change in value due to foreign exchange                                       |         |         | 1,823  |  
|                                          |           |                                                                                    |         |        
|                                          | Sub-total |                                                                                    | $       | 173,926 |       
|                                          |           | Subtract: Sales or write-offs                                                      |         |         | (100   | )
|                                          |           |                                                                                    |         |        
|Intangible Assets as of December 31, 2002 |           | $                                                                                  | 173,826 |        
|                                          |           |                                                                                    |         |        

Expected future intangible asset amortization
expense is as follows (in thousands):

|              |            |   |        |        | 
|------------- | ---------- | - | ------ | ------ | 
|Fiscal Years: |            |   |        |       
|              | 2003       |   | $      | 21,283 | 
|              | 2004       |   |        | 18,419 | 
|              | 2005       |   |        | 15,553 | 
|              | 2006       |   |        | 12,738 | 
|              | 2007       |   |        | 10,538 | 
|              | Thereafter |   |        | 15,020 | 
|              |            |   |        |       
|              |            | $ | 93,551 |       
|              |            |   |        |       

107



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |            
|--- | -----------
|11. | 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 Expiration |                                  | Renewal Option
|                        |                            |                  |                                  |               
|Corporate Headquarters, |                            |                  |                                  |               
|                        | Santa Clara, California    |                  | March 2013                       |                | None           
|                        | Slough, England            |                  | December 2017                    |                | None           
|European Headquarters,  |                            |                  |                                  |               
|                        | Amsterdam, The Netherlands |                  | Various dates Through April 2007 |                | Various Options
|                        | Tokyo, Japan               |                  | February 2004                    |                | 2 year renewal 

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):

|           |       |   |        |        | 
|---------- | ----- | - | ------ | ------ | 
|2003       |       | $ | 18,899 |       
|2004       |       |   | 14,681 |       
|2005       |       |   | 13,443 |       
|2006       |       |   | 10,990 |       
|2007       |       |   | 9,129  |       
|Thereafter |       |   | 8,738  |       
|           |       |   |        |       
|           | Total |   | $      | 75,880 | 
|           |       |   |        |       

Rent expense for 2002, 2001, and 2000 amounted to
$25.2 million, $25.5 million, and $18.4 million,
respectively. Rental income under non-cancelable subleases
amounted to $0.01 million, $1.5 million, and
$3.8 million for 2002, 2001, and 2000, respectively.



|    |                      
|--- | ---------------------
|12. | Warranty Cost Accrual

The Company offers warranty on its hardware and
software products and records a liability for the estimated
future costs associated with warranty claims, which is based
upon historical experience and the Companys estimate of
the level of future costs. A reconciliation of the change in the
Companys warranty obligation for the year ended
December 31, 2002 follows (in thousands):

|                                           |  |   |        |  
|------------------------------------------ |  | - | ------ | -
|Warranty Provision as of December 31, 2001 |  | $ | 982    |  
|Additional accruals                        |  |   | 4,624  |  
|Expenses incurred during the period        |  |   | (4,453 | )
|                                           |  |   |        |  
|Warranty Provision as of December 31, 2002 |  | $ | 1,153  |  
|                                           |  |   |        |  

Under the terms of the Companys software
license agreements with its customers, the Company agrees that
in the event the software sold infringes upon any patent,
copyright, trademark, or any other proprietary right of a third
party, it will indemnify its customer, licensees, against any
loss, expense, or liability from any damages that may be awarded
against its customer. The Company includes this infringement
indemnification in all of its software license agreements and
selected managed service arrangements. In the event the customer

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

cannot use the software or service due to
infringement and the Company can not obtain the right to use,
replace or modify the license or service in a commercially
feasible manner so that it no longer infringes then the Company
may terminate the license and provide the customer a pro-rata
refund of the fees paid by the customer for the infringing
license or service. The Company has recorded no liability
associated with this indemnification, as it is not aware of any
pending or threatened infringement actions that are probable
losses.

Under the terms of certain vendor agreements, in
particular, vendors used as part of the Companys managed
services, the Company agreed that in the event the service
provided to the customer by the vendor on behalf of the Company
infringes upon any patent, copyright, trademark, or any other
proprietary right of a third party, it will indemnify its
vendor, against any loss, expense, or liability from any damages
that may be awarded against its customer. No maximum liability
is stipulated in these vendor agreements. The Company has
recorded no liability associated with this indemnification, as
it is not aware of any pending or threatened infringement
actions or claims that are probable losses.

Under the terms of the Companys agreements
to sell the PGP and Gauntlet assets the Company agreed to
indemnify the purchasers for any breach of representations or
warranties in the agreement as well as for any liabilities
related to the assets prior to sale that are not included in the
purchaser assumed liabilities (undiscovered liabilities). The
maximum potential loss related to the indemnification for breach
of representations or warranties is $2.4 million. No
maximum liability is stipulated in the agreement related to any
undiscovered liabilities. To date, the Company has paid
$0.4 million under the representations and warranties
indemnification.

The Company has agreed to indemnify members of
the board of directors, as well as officers of the Company, if
they are made a party or are threatened to be made a party to
any proceeding (other than an action by or in the right of the
Company) by reason of the fact that they are an agent of the
Company, or by reason of anything done or not done by them in
any such capacity. The indemnity is for any and all expenses and
liabilities of any type whatsoever (including but not limited
to, judgements, fines and amounts paid in settlement) actually
and reasonably incurred by the directors or officers in
connection with the investigation, defense, settlement or appeal
of such proceeding, provided they acted in good faith. The
Company does maintain insurance coverage for directors and
officers liability (D&O insurance). No maximum liability is
stipulated in these agreements that include indemnifications of
members of the board of directors and officers of the Company.
The Company has recorded no liability associated with these
indemnifications as it is not aware of any pending or threatened
actions or claims against it members of board of directors or
officers that are probable losses in excess of amounts covered
by its D&O insurance.

If the Company believes a liability associated
with any of the aforementioned indemnifications becomes probable
and the amount of the liability is reasonably estimable or the
maximum amount of a range of loss is reasonably estimable, then
an appropriate liability will be established.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                 
|--- | ----------------
|13. | Convertible Debt

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

|                                                             |                                                                                                                          |                        |         |          |         |  |         |          |         | 
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ | ---------------------- | ------- | -------- | ------- |  | ------- | -------- | ------- | 
|                                                             |                                                                                                                          | 2002                   |         | 2001    
|                                                             |                                                                                                                          |                        |         |         
|Zero Coupon Convertible Subordinated Debentures
    due 2018 |                                                                                                                          |                        |         |          |         |  |         |         
|                                                             | Face Value                                                                                                               |                        | $       | 358,500  |         |  | $       | 498,500  |        
|                                                             | Unamortized Discount                                                                                                     |                        |         | (182,240 | )       |  |         | (264,650 | )      
|                                                             |                                                                                                                          |                        |         |          |         |  |         |         
|                                                             |                                                                                                                          |                        | 176,260 |          |         |  | 233,850 |         
|                                                             |                                                                                                                          |                        |         |          |         |  |         |         
|5.25% Convertible Subordinated Notes due 2006                |                                                                                                                          |                        |         |          |         |  |         |         
|                                                             | Face Value (net of accumulated fair value
    adjustment of $11,012 at December 31, 2002, See Note 7
    on Derivatives) |                        |         | 356,013  |         |  |         | 345,000  |        
|                                                             |                                                                                                                          |                        |         |          |         |  |         |         
|                                                             |                                                                                                                          | Total convertible debt |         | $        | 532,273 |  |         | $        | 578,850 | 
|                                                             |                                                                                                                          |                        |         |          |         |  |         |         



| |                                                
| | -----------------------------------------------
| | 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 repurchase, subject to
adjustment. The accretion of the discount on the Debentures is
calculated using the effective interest method.

In 2002 and 2001, the Company redeemed
Debentures, which had an aggregate face amount at maturity of
$140.0 million and $387.0 million respectively, at a
net price of $66.2 million and $173.7 million, which
was financed from the Companys investment portfolio. In
connection with these repurchases, the Company recognized
extraordinary gains of approximately $26,000 and
$1.7 million, net of approximately $17,000 and
$1.2 million in taxes in 2002 and 2001, respectively. The
gain was calculated as the difference between the accreted value
of the debt, net of unamortized issuance costs, and the cost of
repurchase.

On February 18, 2003, outstanding
Debentures, with an aggregate face amount at maturity of
$358.5 million, became redeemable for cash at the option of
the holders thereof, at which time the Company repurchased
Debentures which had an aggregate face amount at maturity of
$358.0 million for a net price of $177.1 million. On
June 9, 2003, the Company repurchased the remaining
Debentures with an aggregate face amount at maturity of
$0.5 million for a net price of $0.2 million.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                 
| | ------------------------------------------------
| | 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) for . At any time between
August 20, 2004 and August 14, 2005, the Company may
redeem all or a portion of the Notes for cash at a repurchase
price of 101.3125% of the principal amount. After
August 14, 2005, the repurchase price is 100.0% of the
principal amount. The Notes are unsecured and are subordinated
to all existing and future Senior Indebtedness (as defined in
the related indenture). In July 2002, the Company entered into
an interest rate swap transaction with two investment banks,
which results in the convertible notes being carried at fair
value. (See Note 7 to the notes to the Consolidated
Financial Statements).

Aggregate maturities of the value of the
long-term debt outstanding at December 31, 2002 are as
follows (in thousands):

|                    |  |             |         |              |  |       |         |  |  |   |         | 
|------------------- |  | ----------- | ------- | ------------ |  | ----- | ------- |  |  | - | ------- | 
|                    |  |             |         | 5.25%        |  |      
|                    |  | Zero Coupon |         | Convertible  |  |      
|                    |  | Convertible |         | Subordinated |  |      
|                    |  | Debentures  |         | Notes Due    |  |      
|                    |  | Due 2018(1) |         | 2006(2)      |  | Total
|                    |  |             |         |              |  |      
|2003                |  | $           | 177,248 |              |  | $     |        |  |  | $ | 177,248 | 
|2004                |  |             |        |              |  |       |        |  |  |   |        | 
|2005                |  |             |        |              |  |       |        |  |  |   |        | 
|2006                |  |             |        |              |  |       | 345,000 |  |  |   | 345,000 | 
|2007 and thereafter |  |             |        |              |  |       |        |  |  |   |        | 
|                    |  |             |         |              |  |       |         |  |  |   |         | 
|                    |  | $           | 177,248 |              |  | $     | 345,000 |  |  | $ | 522,248 | 
|                    |  |             |         |              |  |       |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On February 18, 2003, outstanding
    Debentures, with an aggregate face amount at maturity of
    $358.5 million, became redeemable for cash at the option of
    the holders thereof, at which time the Company repurchased
    Debentures which had an aggregate face amount at maturity of
    $358.0 million for a net price of $177.1. On June 9,
    2003, the Company repurchased the remaining Debentures with an
    aggregate face amount at maturity of $0.5 million for a net
    price of $0.2 million.
|   
|(2) | In 2003, 2004, 2005 and 2006, without giving
    effect to the related floating rate interest rate swap (See
    Note 7 to these Notes to Consolidated Financial
    Statements), the Company will make interest payments of
    $18.1 million. In the event the Notes are redeemed after
    August 20, 2004, the annual interest payments will be
    reduced.                                                                                                                                                     

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

|                                              |  |                    |         |      |  |   |         | 
|--------------------------------------------- |  | ------------------ | ------- | ---- |  | - | ------- | 
|                                              |  |                   
|                                              |  | As of December 31,
|                                              |  |                   
|                                              |  | 2002               |         | 2001
|                                              |  |                    |         |     
|Zero Coupon Convertible Debentures due 2018   |  | $                  | 174,360 |      |  | $ | 228,587 | 
|5.25% Convertible Subordinated Notes due 2006 |  |                    | 425,364 |      |  |   | 567,111 | 
|                                              |  |                    |         |      |  |   |         | 
|                                              |  | $                  | 599,724 |      |  | $ | 795,698 | 
|                                              |  |                    |         |      |  |   |         | 

111



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                       
|--- | ----------------------
|14. | 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. 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
$4.3 million, $4.5 million, and $4.2 million in
2002, 2001, and 2000, respectively.



| |                                         
| | ----------------------------------------
| | Company Employee Stock Purchase
    Plan

Under the 1994 Employee Qualified Stock Purchase
Plan (the 1994 Purchase Plan), 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
incurred a shortfall in the number of shares available to meet
the requirements of open purchase periods. Accordingly, the
Company reduced by a pro rata amount the shares available for
purchase by plan participants for the purchase period ending
January 31, 2002. After the purchase on January 31,
2002, the 1994 Purchase Plan was terminated. In 2002,
approximately 743,000 shares were issued under the 1994
Purchase Plan at a weighted average purchase price of $7.24.

In April 2002, the Companys board of
directors adopted Networks Associates 2002 Employee Stock
Purchase Plan (the 2002 Purchase Plan). A total of
2,000,000 shares of the Companys common stock have
been reserved for issuance under the 2002 Purchase Plan. All
employees are eligible to participate in the 2002 Purchase Plan.
The 2002 Purchase Plan is comprised of two year offering periods
with four six-month purchase periods. Purchase periods occur
twice yearly and each offering effectively contains a 6, 12, 18
and 24-month option. Shares are purchased through Network
Associate employees contributions at exercise prices equal
to 85% of the lesser of the fair market value of the
Companys common stock at either the first day of an
offering period or the last day of the purchase period. No
participant may purchase more than $25,000 worth of common stock
in any one calendar year and the maximum number of shares a
participant may purchase during a single offering period is
10,000 shares. Under this plan the first purchase will not
occur until 2003.



| |                                            
| | -------------------------------------------
| | 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 were
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 were
eligible to participate in the 1999 Purchase Plan. The 1999
Purchase Plan was 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 were 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 could purchase more than $25,000
worth of Class A common stock in any one calendar year and
the maximum number of shares a

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

participant could purchase during a single
purchase period is 2,500 shares. Purchase periods occurred
twice yearly and each offering effectively contained a 6, 12, 18
and 24-month option. On September 13, 2002, the Company
acquired the minority interest in McAfee.com and therefore the
McAfee.com employee stock purchase plan was terminated. In 2002,
175,000 shares were issued under the 1999 Purchase Plan at
weighted average purchase price of $6.66

15.     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.



| |                           
| | --------------------------
| | Company Stock Option Plans

Under the amended 1997 Plan, the Company has
reserved 32.5 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
11.5 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%
become exercisable 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.

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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 
|                                                                       |  | Shares    |         |                     |  | Average  
|                                                                       |  | Available |         | Number of           |  | Price Per |        | Aggregate |  | Exercise
|                                                                       |  | for Grant |         | Shares              |  | Share     |        | Price     |  | Price   
|                                                                       |  |           |         |                     |  |           |        |           |  |         
|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 | 
|Additional options Reserved                                            |  |           | 5,000   |                     |  |           |       |           |  |          |             |  |  |   |         |   |  |   |      | 
|Option plan expirations                                                |  |           | (984    | )                   |  |           |       |           |  |          |             |  |  |   |         |   |  |   |      | 
|Options granted                                                        |  |           | (8,302  | )                   |  |           | 8,302  |           |  | $        | 0.01-$30.26 |  |  |   | 190,401  |   |  | $ | 22.94 | 
|Options issued in exchange of McAfee.com
    outstanding stock options |  |           |        |                     |  |           | 2,761  |           |  | $        | 4.63-$71.26 |  |  |   | 46,748   |   |  | $ | 16.93 | 
|Options exercised                                                      |  |           |        |                     |  |           | (8,197 | )         |  | $        | 0.01-$28.50 |  |  |   | (107,454 | ) |  | $ | 13.11 | 
|Options canceled                                                       |  |           | 6,335   |                     |  |           | (6,335 | )         |  | $        | 4.19-$34.69 |  |  |   | (124,025 | ) |  | $ | 19.58 | 
|                                                                       |  |           |         |                     |  |           |        |           |  |          |             |  |  |   |          |   |  |   |       | 
|Balances, December 31, 2002                                            |  |           | 11,153  |                     |  |           | 28,302 |           |  | $        | 0.01-$71.26 |  |  | $ | 427,163  |   |  | $ | 15.09 | 
|                                                                       |  |           |         |                     |  |           |        |           |  |          |             |  |  |   |          |   |  |   |       | 

At December 31, 2002, approximately
10.0 million options to purchase common stock of the
Company were exercisable at an average exercise price of $14.27.
For the year ended December 31, 2002, net proceeds from
exercise of stock options amounted to $97.6 million, which
is net of a reduction in stock option exercise proceeds of
$7.9 million. This reduction is for the payment of the
Companys cash obligation, not exceeding the full exercise
price, which is triggered upon exercise of the Company stock
options that were granted in exchange for the McAfee options
(see Note 21 to the notes to these consolidated financial
statements).

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
3.0 million shares of treasury stock to fulfill employee
option exercises and shares issued under the employee stock
purchase plan.

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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, 2002 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 |  |                     | 12,290 |                     |  |          | 7.2  |             |  | $        | 6.42  |  |  |  | 5,453  |  |  | $ | 7.30  | 
|$12.19  $24.36 |  |                     | 8,926  |                     |  |          | 8.1  |             |  | $        | 17.99 |  |  |  | 2,639  |  |  | $ | 18.32 | 
|$24.37  $36.54 |  |                     | 6,754  |                     |  |          | 8.0  |             |  | $        | 25.69 |  |  |  | 1,640  |  |  | $ | 25.71 | 
|$36.55  $71.26 |  |                     | 332    |                     |  |          | 1.6  |             |  | $        | 42.94 |  |  |  | 301    |  |  | $ | 42.68 | 
|                |  |                     |        |                     |  |          |      |             |  |          |       |  |  |  |        |  |  |   |       | 
|                |  |                     | 28,302 |                     |  |          | 7.61 |             |  | $        | 15.09 |  |  |  | 10,033 |  |  | $ | 14.27 | 
|                |  |                     |        |                     |  |          |      |             |  |          |       |  |  |  |        |  |  |   |       | 



| |                              
| | -----------------------------
| | 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 reserved 10.9 million shares of its
Class A common stock for issuance to employees, officers,
directors and consultants. The McAfee Plan also provided 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 provided
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
were exercisable immediately, or became 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 expired ten years after grant.
Unvested options on termination of employment were canceled and
returned to the McAfee Plan.

In September 1999, McAfee.com adopted the 1999
Director Option Plan. McAfee.com had reserved
150,000 shares of its Class A common stock for
issuance under the plan to certain members of its board of
directors who were not employees of McAfee.com or any affiliated
corporation. Under this plan the number of shares reserved
automatically increased 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 was automatically
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 was automatically granted an option to purchase
10,000 shares of McAfee.coms Class A common
stock. Both the initial and subsequent grants became exercisable
at a rate of 25% after one year and 1/48 each month thereafter.
All options under grant expire ten years after grant. Unvested
options on termination of employment were canceled and returned
to the Director Option Plan.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In September 2002, the Company acquired the
minority interest in McAfee.com. At that time, all outstanding
options were converted and transferred into the Companys
option plans and the McAfee.com stock option plans were
terminated. The following is the aggregate activity under the
McAfee.com stock option plans through the date of acquisition
(in thousands, except per share data):

|                                                   |  |                     |        |           |  |                 |        |           |  |          |               |  |  |  |         |   |  |   |       | 
|-------------------------------------------------- |  | ------------------- | ------ | --------- |  | --------------- | ------ | --------- |  | -------- | ------------- |  |  |  | ------- | - |  | - | ----- | 
|                                                   |  |                    
|                                                   |  | Outstanding Options
|                                                   |  |                    
|                                                   |  | Shares              |        |           |  | Weighted       
|                                                   |  | Available           |        |           |  | Average        
|                                                   |  | for                 |        | Number of |  |                 |        | Aggregate |  | Exercise
|                                                   |  | Grant               |        | Shares    |  | Price Per Share |        | Price     |  | Price   
|                                                   |  |                     |        |           |  |                 |        |           |  |         
|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  | 
|                                                   |  |                     |        |           |  |                 |        |           |  |          |               |  |  |  |         |   |  |   |       | 

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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, December 31, 2001                                             |  |                     | 5,991  |           |  |                 | 3,820  |           |  | $        | 3.13  $49.06  |  |  |   | 34,577  |   |  | $ | 9.05  | 
|Additional options reserved                                             |  |                     |        |           |  |                 |       |           |  |          |                |  |  |   |        |   |  |   |       | 
|Options granted  company employees                                     |  |                     | (1,444 | )         |  |                 | 1,444  |           |  | $        | 10.94  $34.31 |  |  |   | 20,148  |   |  | $ | 13.95 | 
|Options exercised  company employees                                   |  |                     |       |           |  |                 | (633   | )         |  | $        | 3.13  $16.66  |  |  |   | (3,491  | ) |  | $ | 5.51  | 
|Options exercised  NAI officers and
    employees                      |  |                     |       |           |  |                 | (20    | )         |  | $        | 6.55  $12.00  |  |  |   | (142    | ) |  | $ | 7.10  | 
|Options canceled  company employees                                    |  |                     | 519    |           |  |                 | (519   | )         |  | $        | 3.13  $43.13  |  |  |   | (4,712  | ) |  | $ | 9.07  | 
|Options available for grant terminated due to
    acquisition           |  |                     | (5,066 | )         |  |                 |       |           |  | $        | 3.13  $43.13  |  |  |   | (14,825 | ) |  | $ | 2.93  | 
|Options converted into the Companys options
    at date of acquisition |  |                     |       |           |  |                 | (4,092 | )         |  | $        | 3.13  $48.10  |  |  |   | (31,555 | ) |  | $ | 7.71  | 
|                                                                        |  |                     |        |           |  |                 |        |           |  |          |                |  |  |   |         |   |  |   |       | 
|Balances, September 13, 2002                                            |  |                     |       |           |  |                 |       |           |  |          |                |  |  | $ |        |   |  |   |       | 
|                                                                        |  |                     |        |           |  |                 |        |           |  |          |                |  |  |   |         |   |  |   |       | 



| |                                           
| | ------------------------------------------
| | 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.

|             |                         |      |  |      |   |      |  |      |   |  |  |      |  
|------------ | ----------------------- | ---- |  | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|             |                         | 2002 |  | 2001 |   | 2000
|             |                         |      |  |      |   |     
|The Company: |                         |      |  |      |   |      |  |      |   |  |  |     
|             | Risk free interest rate |      |  | 3.46 | % |      |  | 4.24 | % |  |  | 6.31 | %
|             | Expected life (years)   |      |  | 4    |   |      |  | 4    |   |  |  | 4    |  
|             | Volatility              |      |  | 84   | % |      |  | 84   | % |  |  | 91   | %
|             | Dividend yield          |      |  |     |   |      |  |     |   |  |  |     |  

The weighted average grant date fair value of
options granted by the Company in 2002, 2001 and 2000 was
$10.07, $4.86 and $16.07, respectively.

The weighted average fair value of restricted
stock granted by the Company in 2002 and 2001 was $27.19 and
$7.67, respectively.

No options were granted to employees below or
above fair value during 2001 and 2000. During 2002, the Company
exchanged approximately 2.3 million options in the
McAfee.com acquisition at exercise prices below fair value as of
the acquisition date (see Note 21 to the Notes to these
Consolidated Financial Statements).

117



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |            
| | -----------
| | McAfee.com:

|                        |  |                    |      |                    |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |   | 
|----------------------- |  | ------------------ | ---- | ------------------ |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | - | 
|                        |  |                    |      |                   
|                        |  | Options Granted to |      | Options Granted to
|                        |  | Employees          |      | Non-Employees     
|                        |  |                    |      |                   
|                        |  | 2002               |      | 2001               |  | 2000 |      | 2002 |  | 2001 |      | 2000
|                        |  |                    |      |                    |  |      |      |      |  |      |      |     
|Risk free interest rate |  |                    | 3.82 | %                  |  |      | 4.49 | %    |  |      | 5.23 | %    |  |  | 3.82 | % |  |  | 5.25 | % |  |  |  | 
|Expected life (years)   |  |                    | 5    |                    |  |      | 5    |      |  |      | 5    |      |  |  | 10   |   |  |  | 10   |   |  |  |  | 
|Volatility              |  |                    | 110  | %                  |  |      | 167  | %    |  |      | 201  | %    |  |  | 110  | % |  |  | 167  | % |  |  |  | 
|Dividend yield          |  |                    |     |                    |  |      |     |      |  |      |     |      |  |  |     |   |  |  |     |   |  |  |  | 

The weighted average expected life of the option
grants was estimated based on historical exercise patterns.

The weighted average grant date fair value of
options granted by McAfee.com to employees in 2002, 2001 and
2000 were $7.76, $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:

|                        |  |      |          |      |  |      |          |   |  |  |          |  
|----------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                        |  | 2002 |          | 2001 |  | 2000
|                        |  |      |          |      |  |     
|Risk free interest rate |  |      | 2.05     | %    |  |      | 3.08     | % |  |  | 6.31     | %
|Expected life           |  |      | 6 months |      |  |      | 6 months |   |  |  | 6 months |  
|Volatility              |  |      | 84       | %    |  |      | 84       | % |  |  | 91       | %
|Dividend yield          |  |      |         |      |  |      |         |   |  |  |         |  

The weighted average fair value of rights issued
pursuant to the Companys employee stock purchase plans in
2002, 2001, and 2000, was $14.62, $7.75, and $9.44, respectively.



| |            
| | -----------
| | McAfee.com:

|                        |  |      |          |      |  |      |          |   |  |  |          |  
|----------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                        |  | 2002 |          | 2001 |  | 2000
|                        |  |      |          |      |  |     
|Risk free interest rate |  |      | 1.72     | %    |  |      | 3.27     | % |  |  | 6.03     | %
|Expected life (years)   |  |      | 6 months |      |  |      | 6 months |   |  |  | 6 months |  
|Volatility              |  |      | 110      | %    |  |      | 145      | % |  |  | 201      | %
|Dividend yield          |  |      |         |      |  |      |         |   |  |  |         |  

The weighted average fair value of rights issued
by McAfee.com pursuant to its employee stock purchase plan until
September 13, 2002 and in 2001 was $39.60 and $5.30,
respectively.



| |                                          
| | -----------------------------------------
| | 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.

118



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



| |                           
| | --------------------------
| | Summary of Reserved Shares

At December 31, 2002, the following shares
of the Companys common stock were reserved for potential
future issuances (in millions):

|                                             |  |  |      | 
|-------------------------------------------- |  |  | ---- | 
|1997 Stock Incentive Plan                    |  |  | 32.5 | 
|Stock Option Plan for Outside Directors      |  |  | 1.1  | 
|2000 Nonstatutory Stock Option Plan          |  |  | 11.5 | 
|2002 Employee Stock Purchase Plan            |  |  | 2.0  | 
|Convertible subordinated debentures due 2018 |  |  | 5.0  | 
|5.25% convertible subordinated note due 2006 |  |  | 19.1 | 
|                                             |  |  |      | 
|Total                                        |  |  | 71.2 | 
|                                             |  |  |      | 



|    |                           
|--- | --------------------------
|16. | Provision for Income Taxes

The domestic and foreign components of our income
(loss) before provision for income taxes and extraordinary item
were as follows (in thousands):

|         |  |      |         |               |  |               |         |  |  |   |         |  
|-------- |  | ---- | ------- | ------------- |  | ------------- | ------- |  |  | - | ------- | -
|         |  | 2002 |         | 2001          |  | 2000         
|         |  |      |         |               |  |              
|         |  |      |         | (As Restated) |  | (As Restated)
|Domestic |  | $    | 252     |               |  | $             | 21,011  |  |  | $ | (49,510 | )
|Foreign  |  |      | 129,655 |               |  |               | 125,394 |  |  |   | (21,414 | )
|         |  |      |         |               |  |               |         |  |  |   |         |  
|         |  | $    | 129,907 |               |  | $             | 146,405 |  |  | $ | (70,924 | )
|         |  |      |         |               |  |               |         |  |  |   |         |  

119



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                          |          |                          |      |               |         |               |        |        |        |   |        |        |        |  
|----------------------------------------- | -------- | ------------------------ | ---- | ------------- | ------- | ------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                          |          |                         
|                                          |          | Years Ended December 31,
|                                          |          |                         
|                                          |          | 2002                     |      | 2001          |         | 2000         
|                                          |          |                          |      |               |         |              
|                                          |          |                          |      | (As Restated) |         | (As Restated)
|Federal:                                  |          |                          |      |               |         |               |        |        |        |   |        |       
|                                          | Current  |                          | $    | 39,916        |         |               | $      | (453   | )      |   | $      | 24,681 |       
|                                          | Deferred |                          |      | (61,674       | )       |               |        | 38,640 |        |   |        | (5,542 | )     
|                                          |          |                          |      |               |         |               |        |        |        |   |        |       
|                                          |          | Total Federal            |      |               | (21,758 | )             |        |        | 38,187 |   |        |        | 19,139 |  
|State:                                    |          |                          |      |               |         |               |        |        |        |   |        |       
|                                          | Current  |                          |      | 5,189         |         |               |        | (59    | )      |   |        | 3,208  |       
|                                          | Deferred |                          |      | (2,362        | )       |               |        | 2,773  |        |   |        | (6,437 | )     
|                                          |          |                          |      |               |         |               |        |        |        |   |        |       
|                                          |          | Total State              |      |               | 2,827   |               |        |        | 2,714  |   |        |        | (3,229 | )
|Foreign:                                  |          |                          |      |               |         |               |        |        |        |   |        |       
|                                          | Current  |                          |      | 19,829        |         |               |        | 19,246 |        |   |        | 18,805 |       
|                                          | Deferred |                          |      | (1,172        | )       |               |        | 5,873  |        |   |        | 6,229  |       
|                                          |          |                          |      |               |         |               |        |        |        |   |        |       
|                                          |          | Total Foreign            |      |               | 18,657  |               |        |        | 25,119 |   |        |        | 25,034 |  
|                                          |          |                          |      |               |         |               |        |        |        |   |        |       
|Provision for (benefit from) income taxes |          | $                        | (274 | )             |         | $             | 66,020 |        |        | $ | 40,944 |       
|                                          |          |                          |      |               |         |               |        |        |        |   |        |       

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                             |  |                          |         |               |  |   |          |  
|-------------------------------------------- |  | ------------------------ | ------- | ------------- |  | - | -------- | -
|                                             |  |                         
|                                             |  | Years Ended December 31,
|                                             |  |                         
|                                             |  | 2002                     |         | 2001         
|                                             |  |                          |         |              
|                                             |  |                          |         | (As Restated)
|ASSETS                                      
|Deferred revenue                             |  | $                        | 91,811  |               |  | $ | 100,834  |  
|Accrued liabilities and allowances           |  |                          | 92,975  |               |  |   | 63,437   |  
|Depreciation and amortization                |  |                          | 98,370  |               |  |   | 84,582   |  
|Tax credits                                  |  |                          | 101,239 |               |  |   | 108,683  |  
|Net operating loss carryover                 |  |                          | 42,299  |               |  |   | 53,322   |  
|                                             |  |                          |         |               |  |   |          |  
|                                             |  |                          | 426,694 |               |  |   | 410,858  |  
|Valuation allowance                          |  |                          | (75,731 | )             |  |   | (135,570 | )
|                                             |  |                          |         |               |  |   |          |  
|Total deferred tax assets                    |  |                          | 350,963 |               |  |   | 275,288  |  
|                                             |  |                          |         |               |  |   |          |  
|LIABILITIES                                 
|Intangibles not amortizable for tax purposes |  |                          | 29,791  |               |  |   | 5,200    |  
|Deferred Revenue                             |  |                          | 7,612   |               |  |   | 15,245   |  
|Other                                        |  |                          |        |               |  |   | 4,889    |  
|                                             |  |                          |         |               |  |   |          |  
|Total Deferred tax liability                 |  |                          | 37,403  |               |  |   | 25,334   |  
|                                             |  |                          |         |               |  |   |          |  
|Net deferred tax asset                       |  | $                        | 313,560 |               |  | $ | 249,954  |  
|                                             |  |                          |         |               |  |   |          |  
|Current portion                              |  | $                        | 174,469 |               |  | $ | 167,378  |  
|Noncurrent portion                           |  |                          | 139,091 |               |  |   | 82,576   |  
|                                             |  |                          |         |               |  |   |          |  
|                                             |  | $                        | 313,560 |               |  | $ | 249,954  |  
|                                             |  |                          |         |               |  |   |          |  

At December 31, 2002, the Company has net
operating loss carryovers for federal income tax purposes of
approximately $120.8 million. These net operating loss
carryovers have expiration dates ranging from 2009 to 2017. The
decrease in the valuation allowance primarily relates to changes
in our assessment of the realizability of certain foreign tax
credit carryovers and net loss carry forwards relating to the
Companys former subsidiary, McAfee.com.

U.S. income taxes were not provided for on a
cumulative total of approximately $82.7 million of retained
earnings of certain non-U.S. subsidiaries. The Company
intends to reinvest these earnings indefinitely in operations
outside the United States.

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                  |  |                          |         |               |  |               |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------------------ | ------- | ------------- |  | ------------- | ------- | - |  | - | ------- | -
|                                                                  |  |                         
|                                                                  |  | Years Ended December 31,
|                                                                  |  |                         
|                                                                  |  | 2002                     |         | 2001          |  | 2000         
|                                                                  |  |                          |         |               |  |              
|                                                                  |  |                          |         | (As Restated) |  | (As Restated)
|U.S. Federal income tax provision (benefit)
    at statutory rate |  | $                        | 45,469  |               |  | $             | 51,240  |   |  | $ | (24,823 | )
|State provision (benefit)                                         |  |                          | 2,725   |               |  |               | 2,402   |   |  |   | (3,229  | )
|Non deductible acquisition and other costs                        |  |                          | 5,343   |               |  |               | 22,017  |   |  |   | 7,958   |  
|Foreign earnings taxed at rates different than
    the U.S. rate  |  |                          | (26,724 | )             |  |               | (18,767 | ) |  |   | 22,535  |  
|Goodwill and other permanent differences                          |  |                          | (957    | )             |  |               | 14,812  |   |  |   | 16,627  |  
|Tax credits                                                       |  |                          | (26,096 | )             |  |               | (5,316  | ) |  |   | (4,583  | )
|Other                                                             |  |                          | (34     | )             |  |               | (368    | ) |  |   |        |  
|Subsidiary losses not benefitted                                  |  |                          |        |               |  |               |         |   |  |   | 26,459  |  
|                                                                  |  |                          |         |               |  |               |         |   |  |   |         |  
|                                                                  |  | $                        | (274    | )             |  | $             | 66,020  |   |  | $ | 40,944  |  
|                                                                  |  |                          |         |               |  |               |         |   |  |   |         |  



|    |                            
|--- | ---------------------------
|17. | Net Income (Loss) Per Share

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

|                                                              |                                                                 |                             |         |               |         |               |        |        |        |   |          |          |          |  
|------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------- | ------- | ------------- | ------- | ------------- | ------ | ------ | ------ | - | -------- | -------- | -------- | -
|                                                              |                                                                 |                            
|                                                              |                                                                 | Years Ended December 31,   
|                                                              |                                                                 |                            
|                                                              |                                                                 | 2002                        |         | 2001          |         | 2000         
|                                                              |                                                                 |                             |         |               |         |              
|                                                              |                                                                 |                             |         | (As Restated) |         | (As Restated)
|Numerator  Basic income (loss) before
    extraordinary item |                                                                 | $                           | 128,286 |               |         | $             | 81,522 |        |        | $ | (108,014 | )       
|                                                              | Extraordinary item  gain on repurchase
    of debt, net of tax |                             |         | 26            |         |               |        | 1,731  |        |   |          |         |         
|                                                              |                                                                 |                             |         |               |         |               |        |        |        |   |          |         
|                                                              |                                                                 | Net income (loss)           |         | $             | 128,312 |               |        | $      | 83,253 |   |          | $        | (108,014 | )
|                                                              |                                                                 |                             |         |               |         |               |        |        |        |   |          |         
|Numerator  Diluted                                           |                                                                 |                             |         |               |         |               |        |        |        |   |          |         
|                                                              | Income (loss) before extraordinary item                         |                             | $       | 128,286       |         |               | $      | 81,522 |        |   | $        | (108,014 | )       
|                                                              | Interest on convertible debentures(1)                           |                             |         | 12,042        |         |               |        | 4,358  |        |   |          |         |         
|                                                              |                                                                 |                             |         |               |         |               |        |        |        |   |          |         
|                                                              | Income (loss) before extraordinary item, adjusted               |                             |         | 140,328       |         |               |        | 85,880 |        |   |          | (108,014 | )       
|                                                              | Extraordinary item  gain on repurchase
    of debt, net of tax |                             |         | 26            |         |               |        | 1,731  |        |   |          |         |         
|                                                              |                                                                 |                             |         |               |         |               |        |        |        |   |          |         
|                                                              |                                                                 | Net income (loss), adjusted |         | $             | 140,354 |               |        | $      | 87,611 |   |          | $        | (108,014 | )
|                                                              |                                                                 |                             |         |               |         |               |        |        |        |   |          |         

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                     |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |         |         |  
|------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------ | - | ------------- | ------- | ------------- | - | ------- | ------- |  | - | ------- | ------- | -
|                                     |                                                                             |                                                 
|                                     |                                                                             | Years Ended December 31,                        
|                                     |                                                                             |                                                 
|                                     |                                                                             | 2002                                             |   | 2001          |         | 2000         
|                                     |                                                                             |                                                  |   |               |         |              
|                                     |                                                                             |                                                  |   | (As Restated) |         | (As Restated)
|Denominator  Basic                  |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|                                     | Weighted average shares of common stock
    outstanding                     |                                                  |   | 149,641       |         |               |   | 138,172 |         |  |   | 138,072 |        
|                                     | Less: weighted average shares of common stock
    subject to repurchase     |                                                  |   | (200          | )       |               |   | (325    | )       |  |   |        |        
|                                     |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|                                     |                                                                             | Basic weighted average common shares outstanding |   |               | 149,441 |               |   |         | 137,847 |  |   |         | 138,072 |  
|                                     |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|Denominator                         |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|                                     | Diluted Weighted average common shares
    outstanding, unless antidilutive |                                                  |   | 149,641       |         |               |   | 138,172 |         |  |   | 138,072 |        
|                                     | Effective of dilutive securities:                                           |                                                  |   |               |         |               |   |         |         |  |   |         |        
|                                     |                                                                             | Convertible debentures(1)                        |   |               | 19,092  |               |   |         | 19,092  |  |   |         |        |  
|                                     |                                                                             | Common stock options(2)                          |   |               | 7,333   |               |   |         | 6,774   |  |   |         |        |  
|                                     |                                                                             | Put options(3)                                   |   |               |        |               |   |         | 163     |  |   |         |        |  
|                                     |                                                                             | Warrants                                         |   |               | 183     |               |   |         | 162     |  |   |         |        |  
|                                     |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|                                     |                                                                             | Diluted weighted average shares                  |   |               | 176,249 |               |   |         | 164,363 |  |   |         | 138,072 |  
|                                     |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|Basic net income (loss) per share:   |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|                                     | Income (loss) before extraordinary item                                     |                                                  | $ | 0.86          |         |               | $ | 0.59    |         |  | $ | (0.78   | )      
|                                     | Extraordinary item  gain on repurchase
    of debt, net of taxes           |                                                  |   |              |         |               |   | 0.01    |         |  |   |        |        
|                                     |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|                                     |                                                                             | Net income (loss) per share  Basic              |   | $             | 0.86    |               |   | $       | 0.60    |  |   | $       | (0.78   | )
|                                     |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|Diluted net income (loss) per share: |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|                                     | Income (loss) before extraordinary item                                     |                                                  | $ | 0.80          |         |               | $ | 0.52    |         |  | $ | (0.78   | )      
|                                     | Extraordinary item  gain on repurchase
    of debt, net of taxes           |                                                  |   |              |         |               |   | 0.01    |         |  |   |        |        
|                                     |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        
|                                     |                                                                             | Net income (loss) per share  Diluted            |   | $             | 0.80    |               |   | $       | 0.53    |  |   | $       | (0.78   | )
|                                     |                                                                             |                                                  |   |               |         |               |   |         |         |  |   |        



---



|    |                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Convertible debt interest and related as-if
    converted shares were excluded from the calculation in 2000
    since the effect was anti-dilutive. The total number of shares
    excluded from the calculation related to as-if converted shares
    was 22.2 million and 7.6 million for 2002 and 2000,
    respectively.
|   
|(2) | At December 31, 2000, 19.2 million
    options to purchase common stock, respectively, were excluded
    from the calculation since the effect was anti-dilutive.                                                                                                                                                           
|   
|(3) | Put options and related as-if converted shares
    were excluded from the calculation in 2000 since the effect was
    anti-dilutive. The total number of shares excluded from the
    calculation related to as-if converted shares was
    0.3 million for 2000.                                                          

18.     Business
Segment and Major Customer Information

The Company has concluded that it has one
business and operates in one industry, developing, marketing,
distributing and supporting computer security solutions for
large enterprises, governments, small and medium sized business
and consumer users, as well as resellers and distributors
Management measures profitability based on the Companys
five geographic regions: North America, EMEA, Japan,
Asia-Pacific (excluding

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Japan) and Latin America. The regions are
evidence of the operating structure of the Companys
internal organization.

The Company markets and sells, through its
geographic regions, 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 worldwide directly to
consumers, corporate and government users, as well as through
resellers, distributors, systems integrators and retailers. In
addition, the Company offers web sites, which provide suites of
on-line products and services personalized for the user based on
the users PC configuration, attached peripherals and
resident software. The Company also offers managed security and
availability applications to corporations and governments on the
Internet.

Following is the summary of the Companys
revenue and income (loss) from operations by geographic region.
The accounting policies of the businesses and geographic
segments are the same as 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 and corporate marketing expenses of
$37.3 million, $48.6 million and $52.0 million in
2002, 2001 and 2000, respectively; stock-based compensation
charges; and acquisition, restructuring and other related costs.
These corporate expenses are not considered attributable to any
specific geographic region. Summarized financial information
concerning the Companys net revenue and operating income
(losses) by business and geographic region is as follows (in
thousands):

|                                   |                         |                          |          |               |  |               |          |           |  |   |          |          |  
|---------------------------------- | ----------------------- | ------------------------ | -------- | ------------- |  | ------------- | -------- | --------- |  | - | -------- | -------- | -
|                                   |                         |                         
|                                   |                         | Years Ended December 31,
|                                   |                         |                         
|                                   |                         | 2002                     |          | 2001          |  | 2000         
|                                   |                         |                          |          |               |  |              
|                                   |                         |                          |          | (As Restated) |  | (As Restated)
|Net revenue by region:             |                         |                          |          |               |  |               |          |           |  |   |          |         
|North America                      |                         | $                        | 653,528  |               |  | $             | 696,136  |           |  | $ | 480,343  |         
|EMEA                               |                         |                          | 298,669  |               |  |               | 292,663  |           |  |   | 141,782  |         
|Japan                              |                         |                          | 39,369   |               |  |               | 28,919   |           |  |   | 39,932   |         
|Asia-Pacific (excluding Japan)     |                         |                          | 33,589   |               |  |               | 37,606   |           |  |   | 30,862   |         
|Latin America                      |                         |                          | 17,889   |               |  |               | 16,336   |           |  |   | 16,453   |         
|                                   |                         |                          |          |               |  |               |          |           |  |   |          |         
|                                   | Net revenue             |                          | $        | 1,043,044     |  |               | $        | 1,071,660 |  |   | $        | 709,372  |  
|                                   |                         |                          |          |               |  |               |          |           |  |   |          |         
|Operating income (loss) by region: |                         |                          |          |               |  |               |          |           |  |   |          |         
|North America                      |                         | $                        | 156,076  |               |  | $             | 231,479  |           |  | $ | 27,319   |         
|EMEA                               |                         |                          | 135,639  |               |  |               | 134,674  |           |  |   | 22,423   |         
|Japan                              |                         |                          | 8,710    |               |  |               | (2,404   | )         |  |   | 14,568   |         
|Asia-Pacific (excluding Japan)     |                         |                          | 6,676    |               |  |               | 16,727   |           |  |   | 7,143    |         
|Latin America                      |                         |                          | 2,436    |               |  |               | 4,777    |           |  |   | 2,432    |         
|Corporate                          |                         |                          | (194,810 | )             |  |               | (231,770 | )         |  |   | (210,176 | )       
|                                   |                         |                          |          |               |  |               |          |           |  |   |          |         
|                                   | Operating income (loss) |                          | $        | 114,727       |  |               | $        | 153,483   |  |   | $        | (136,291 | )
|                                   |                         |                          |          |               |  |               |          |           |  |   |          |         

Following is a summary of the Companys
long-lived assets and total assets by business and by geographic
region. Long-lived assets are capital expenditures, including
land purchases. 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 general and administrative activities, including
land purchases, are included in Corporate in the
Total assets table, below. These corporate assets
are not assigned to any specific geographic region. Summarized
financial information

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

concerning the Companys long-lived assets
and total assets by business and geographic region is as follows
(in thousands):

|                                   |                         |              |           |               |           |   |           |        |           | 
|---------------------------------- | ----------------------- | ------------ | --------- | ------------- | --------- | - | --------- | ------ | --------- | 
|                                   |                         |             
|                                   |                         | December 31,
|                                   |                         |             
|                                   |                         | 2002         |           | 2001         
|                                   |                         |              |           |              
|                                   |                         |              |           | (As Restated)
|Total long-lived assets by region: |                         |              |           |               |           |   |           |       
|North America                      |                         | $            | 9,237     |               |           | $ | 34,518    |       
|EMEA                               |                         |              | 7,391     |               |           |   | 6,143     |       
|Japan                              |                         |              | 4,059     |               |           |   | 3,652     |       
|Asia-Pacific (excluding Japan)     |                         |              | 3,270     |               |           |   | 1,866     |       
|Latin America                      |                         |              | 198       |               |           |   | 231       |       
|Corporate                          |                         |              | 65,122    |               |           |   | 22,044    |       
|                                   |                         |              |           |               |           |   |           |       
|                                   | Total long-lived assets |              | $         | 89,277        |           |   | $         | 68,454 |          
|                                   |                         |              |           |               |           |   |           |       
|Total assets by region:            |                         |              |           |               |           |   |           |       
|North America                      |                         | $            | 1,608,853 |               |           | $ | 1,375,060 |       
|EMEA                               |                         |              | 330,922   |               |           |   | 206,886   |       
|Japan                              |                         |              | 47,107    |               |           |   | 35,940    |       
|Asia-Pacific (excluding Japan)     |                         |              | 12,955    |               |           |   | 9,098     |       
|Latin America                      |                         |              | 17,933    |               |           |   | 9,065     |       
|Corporate                          |                         |              | 65,121    |               |           |   | 22,044    |       
|                                   |                         |              |           |               |           |   |           |       
|                                   |                         | Total assets |           | $             | 2,082,891 |   |           | $      | 1,658,093 | 
|                                   |                         |              |           |               |           |   |           |       

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

|                                  |       |      |         |                   |  |   |         |           | 
|--------------------------------- | ----- | ---- | ------- | ----------------- |  | - | ------- | --------- | 
|                                  |       | 2002 |         | 2001             
|                                  |       |      |         |                  
|                                  |       |      |         | (Reclassified and
|                                  |       |      |         | As Restated)     
|Software licenses                 |       | $    | 459,707 |                   |  | $ | 380,353 |          
|Support and maintenance           |       |      | 310,473 |                   |  |   | 359,403 |          
|Hardware                          |       |      | 93,359  |                   |  |   | 87,932  |          
|Retail                            |       |      | 63,236  |                   |  |   | 127,453 |          
|Consulting                        |       |      | 36,740  |                   |  |   | 41,276  |          
|Training                          |       |      | 12,527  |                   |  |   | 19,161  |          
|On-line subscription arrangements |       |      | 51,754  |                   |  |   | 40,790  |          
|Other                             |       |      | 15,248  |                   |  |   | 15,292  |          
|                                  |       |      |         |                   |  |   |         |          
|                                  | Total |      | $       | 1,043,044         |  |   | $       | 1,071,660 | 
|                                  |       |      |         |                   |  |   |         |          

The Company has amended the previously disclosed
analysis of net product revenue information for the software
licenses, hardware and retail categories to reflect a refinement
in its methodology of allocating the Companys revenue
related reserves to the individual categories shown above. For
the purposes of calculating the previously disclosed
information, reserves had been allocated to the individual line
items in the above analysis based on a pro-rata allocation using
gross revenue for each line item during the quarter. The amended
analysis reflects a methodology that specifically applies
certain revenue-related reserves to the applicable product
revenue line items. The remaining revenue related reserves
continue to be allocated to each of these

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

line items using a pro-rata allocation. This
reallocation has not been performed for 2000, as it is
impracticable to do so and accordingly 2000 has not been
presented.

At December 31, 2002 and 2001, one customer
had an accounts receivable balance greater than 10% of the
Companys total accounts receivable balance. During 2002,
2001 and 2000, one customer accounted for 25%, 24% and 27%,
respectively, of the total net revenue for each year. During
2002, another customer accounted for 10% of the net revenue, but
accounted for less than 10% for 2001 and 2000. The revenue
derived from these customers is reported mainly in North America
and Europe segments.



|    |           
|--- | ----------
|19. | 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
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 flows.



| |                 
| | ----------------
| | 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, styled In re Network
Associates, Inc. II Securities Litigation, 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 asserts
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). After a hearing on
defendants motion to dismiss was held on April 16,
2002, the Court entered an order approving a jointly stipulated
withdrawal of defendants motion to dismiss. On
September 30, 2002, plaintiffs filed a first amended and
consolidated complaint. The amended and consolidated complaint
asserts claims on behalf of an expanded class of plaintiffs,
i.e., persons who purchased the Companys stock
between April 15, 1999 and December 26, 2000, and, in
addition to reasserting the allegations contained in the
consolidated complaints, adds allegations regarding the
Companys restatement of its 1998, 1999, and 2000 financial
statements, which restatement resulted from the Companys
discovery of certain accounting inaccuracies impacting those
financial statements. The FAC also adds Terry Davis, the
Companys former Controller as a party defendant. On
November 11, 2002, the Company and the individual
defendants each moved to dismiss certain claims asserted on the
first amended and consolidated complaint. Prior to the hearing
on Defendants motions, which took place on
February 11, 2003, plaintiff voluntarily dismissed Peter
Watkins as a party defendant in the lawsuit. A decision on the
remaining motions to dismiss

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

was issued on March 25, 2003, where the
Court granted, in part, defendants motion to dismiss. On
September 23, 2003, the Company and the plaintiffs entered
into a memorandum of agreement of settlement settling the matter
for $70.0 million. The settlement was preliminarily
approved by the court on October 22, 2003 and is subject to
notice to and opportunity to object and opt-out by members of
the Class and approval by the court following a hearing on any
objections to the settlement.

On February 5, 2001, the Company was
nominally sued in a derivative lawsuit filed in the Superior
Court in Santa Clara County. The lawsuit, captioned Mead
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 (collectively the individual
defendants), and PricewaterhouseCoopers LLP for breach of
fiduciary duty, unjust enrichment and professional negligence
against the accountants. In particular, the complaint alleges
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 Network
Associates, Inc. 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. Plaintiff filed an amended complaint on
December 26, 2001. Nominal defendant Network Associates,
Inc. filed a demurrer, which was joined by the individual
defendants, to the amended complaint on January 30, 2002. A
hearing on the demurrer was held on March 8, 2002. The
Court entered an order on March 28, 2002 sustaining the
demurrer without leave to amend and dismissing the amended
complaint with prejudice. Plaintiff filed a Notice of Appeal in
the California Court of Appeals, Sixth Appellate District on
June 24, 2002. On December 19, 2002, plaintiff filed a
motion seeking the Courts approval of the parties
settlement stipulation and dismissal of the case with prejudice.
By order dated January 7, 2003, the Court entered the
parties stipulation and dismissed the case with prejudice
as to all parties and all claims.

In March 2002, several putative securities class
action lawsuits were filed in the Court of Chancery in the State
of Delaware, County of New Castle, and the Superior Court of the
State of California, County of Santa Clara, arising out of
the Companys proposed acquisition of McAfee.com
Corporation (McAfee.com). The lawsuits named as
defendants Network Associates and certain of McAfee.coms
officers and directors, and with respect to the Delaware Court
of Chancery actions, McAfee.com. The lawsuit filed in
Santa Clara County is encaptioned Peyton v.
Richards, et al., No. CV 806199. The lawsuits
filed in the Delaware Court of Chancery, which were encaptioned
Bank v. McAfee.com Corp., et al., Civil Action
No. 19481; Birnbaum v. Sampath, et al.,
Civil Action No. 19482 NC; Brown v. Sampath,
et al., Civil Action No. 19483 NC; Chin v.
McAfee.com Corp., et al., Civil Action No. 19484
NC; Monastero v. Sampath, et al., Civil Action
No. 19485; and Ebner v. Sampath, et al.,
Civil Action No. 19487, were consolidated into a single
case (the Consolidated Action) by Court order dated
April 9, 2002. Plaintiffs amended the complaint in the
Consolidated Action on July 8, 2002. The second amended
complaint asserts claims against defendants for breach of
fiduciary duty on the grounds that (i) the price at which
Network Associates proposed to consummate the current exchange
offer purportedly was unfair and inadequate, and
(ii) defendants purportedly failed to disclose information
material to assessing the propriety of the exchange offer. The
plaintiffs seek, among other things, to recover unspecified
damages and costs and to enjoin or rescind the transaction
contemplated by the offer. On September 19, 2002 the
parties entered into a memorandum of understanding. On
July 18, 2003, the Delaware Court of Chancery approved the
settlement and the case was dismissed. Another class action
lawsuit was filed on April 9, 2002 in the United States
District Court for the Northern District of California,
encaptioned Getty v. Sampath, et. al., Case
No. C 02 1692. On September 30, 2002, the parties in
the Getty action filed a joint request with United States
District Court for the entry of an order staying the
Getty proceedings until after the Delaware Chancery Court
has an opportunity to approve the

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

proposed settlement in the Delaware Consolidated
Action. On April 2, 2002, defendants removed the California
state action encaptioned Peyton v. Richards,
et al., No. CV 806199 to the United States
District Court for the Northern District of California.
Subsequently, by stipulation filed June 20, 2002, the
parties in Peyton agreed for the action to be remanded to
California Superior Court for the County of Santa Clara
solely for the purpose of allowing plaintiff Justin Peyton to
dismiss the action. On July 1, 2002, a putative class
action lawsuit encaptioned Peyton v. Richards, et
al., Case No. CV 809111, was filed in the California
Superior Court for the County of Santa Clara against
Network Associates and various officers and directors of
McAfee.com. The complaint generally alleges that (i) the
defendant directors of McAfee.com are liable for breach of
fiduciary duty because they failed to maximize the price of
Network Associates exchange offer, and (ii) defendant
Network Associates aided and abetted these breaches of fiduciary
duty by structuring the exchange offer in terms preferential to
Network Associates. The plaintiff seeks, among other things, to
enjoin or rescind the transaction contemplated by the offer, to
recover costs, and to impose a constructive trust upon any
benefits improperly received by defendants. On
September 20, 2002, the Superior Court entered an order
approving the parties joint stipulation to stay the
Peyton proceedings pending the Delaware Chancery
Courts approval of the proposed settlement in the Del
aware Consolidated Action. On August 14, 2003, the parties
entered into a stipulation for an order that would dismiss the
Peyton action with prejudice.

Certain investment bank underwriters, the
Company, and certain of our directors and officers have been
named in a putative class action for violation of the federal
securities laws in the United States District Court for the
Southern District of New York, captioned In re
McAfee.com Corp. Initial Public Offering Securities
Litigation, 01 Civ. 7034 (SAS). This is one of a number
of cases challenging underwriting practices in the initial
public offerings (IPOs) of more than 300 companies.
These cases have been coordinated for pretrial proceedings as
In re Initial Public Offering Securities Litigation, 21
MC 92 (SAS). Plaintiffs generally allege that certain
underwriters engaged in undisclosed and improper underwriting
activities, namely the receipt of excessive brokerage
commissions and customer agreements regarding post-offering
purchases of stock in exchange for allocations of IPO shares.
Plaintiffs also allege that various investment bank securities
analysts issued false and misleading analyst reports. The
complaint against the Company claims that the purported improper
underwriting activities were not disclosed in the registration
statements for McAfee.Coms IPO and seeks unspecified
damages on behalf of a purported class of persons who purchased
the Companys securities or sold put options during the
time period from December 1, 1999 to December 6, 2000.
On February 19, 2003 the Court issued an Opinion and Order
dismissing certain of the claims against the Company with leave
to amend. A settlement proposal was accepted by the Company on
July 15, 2003 and is awaiting Court approval.



| |              
| | -------------
| | Other Matters

On February 6, 2002, the Attorney General of
the State of New York filed a Petition in the Supreme
Court, New York County, alleging that certain restrictions
posted by the Company on and with its software are deceptive,
unenforceable and illegal. The challenged restrictions relate to
publication of benchmark tests and reviews concerning the
Companys software products. The Petition seeks damages,
costs and an injunction requiring the Company to give notice to
the Attorney General before making any representations to
consumers concerning the right to review, test or
criticize its products. This is a special
proceeding under New York law. The Company filed
papers in opposition to the Petition in which it denied the
substantive allegations of the Petition and asserted various
affirmative defenses. By a Final Order of the Supreme Court,
New York County dated May 6, 2003, the Company and the
Attorney General of the State of New York resolved the
action.

On March 22, 2002, the Securities and
Exchange Commission notified the Company that it has commenced a
Formal Order of Private Investigation into the
Companys accounting practices. The SEC investigation is
continuing, and the Company continues to provide documents and
information to the SEC.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                           
|--- | --------------------------
|20. | Related Party Transactions

Under the terms of the amended and restated
employment agreement for Mr. George Samenuk, Chairman of
the Board and Chief Executive Officer, the Company agreed to
loan Mr. Samenuk the funds necessary to pay the taxes due
on each vesting date for the 400,000 shares of restricted
stock granted to Mr. Samenuk on January 3, 2001. In
addition, the Company agreed to loan Mr. Samenuk the funds
necessary to pay the taxes due on the 3,000 shares of stock
granted to Mr. Samenuk on January 15, 2002. In
accordance with the provisions of the Sarbanes-Oxley Act of
2002, no additional loans were made to Mr. Samenuk after
July 30, 2002 and no material modifications were made to
any loan outstanding on that date. In total the Company extended
5 separate loans to Mr. Samenuk. As of
December 31, 2002, 4 loans in an aggregate amount of
approximately $955,000 were outstanding. The loans each had a
two-year maturity and bore interest at the applicable federal
rate. The loans were full recourse and secured by
Mr. Samenuks restricted stock and 3,000 shares
of stock. The last remaining loan was fully repaid in October
2003.



|    |                         
|--- | ------------------------
|21. | Stock-Based Compensation

The Company expensed $22.4 million,
$24.9 million and $10.1 million in 2002, 2001 and
2000, respectively. Stock-based compensation charges relate
primarily to the exchange of McAfee.com options in connection
with the companys acquisition of the publicly traded
minority interest in McAfee.com, non-recurring stock
compensation charges primarily related to executive compensation
and the repricing of employee stock options. The Company does
expect significant future stock-based compensation charges
related to the exchange of McAfee.com options and repriced
employee stock options.

The Companys stock based compensation
charges are made up of the following for the years presented (in
thousands):

|                                                                    |                                |                          |        |        |  |      |        |        |  |   |       |        | 
|------------------------------------------------------------------- | ------------------------------ | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ----- | ------ | 
|                                                                    |                                |                         
|                                                                    |                                | Years Ended December 31,
|                                                                    |                                |                         
|                                                                    |                                | 2002                     |        | 2001   |  | 2000
|                                                                    |                                |                          |        |        |  |     
|Exchange of McAfee.com options                                      |                                | $                        | 16,101 |        |  | $    |       |        |  | $ |      |       
|Former executives                                                   |                                |                          | 10,118 |        |  |      | 2,668  |        |  |   |      |       
|New and existing executives                                         |                                |                          | 1,478  |        |  |      | 3,230  |        |  |   |      |       
|Extended vesting term of options                                    |                                |                          | 193    |        |  |      |       |        |  |   |      |       
|Shares purchased outside Employee Stock Purchase
    Plan and other |                                |                          | 62     |        |  |      | 9      |        |  |   |      |       
|Repriced options                                                    |                                |                          | (5,548 | )      |  |      | 17,396 |        |  |   | 8,714 |       
|Warrants to outside consultants                                     |                                |                          |       |        |  |      | 1,049  |        |  |   |      |       
|PGP restructuring                                                   |                                |                          |       |        |  |      | 519    |        |  |   |      |       
|Options issued below fair market value                              |                                |                          |       |        |  |      |       |        |  |   | 1,402 |       
|                                                                    |                                |                          |        |        |  |      |        |        |  |   |       |       
|                                                                    | Total stock-based compensation |                          | $      | 22,404 |  |      | $      | 24,871 |  |   | $     | 10,116 | 
|                                                                    |                                |                          |        |        |  |      |        |        |  |   |       |       

Exchange of McAfee.com
options.On September 13, 2002,
the Company acquired the minority interest in McAfee.com.
McAfee.com option holders received options for 0.675 of a share
of our common stock plus $8.00 in cash, which will be paid to
the option holder only upon exercise of the option and without
interest, in exchange for each McAfee.com option. McAfee.com
options to purchase 4.1 million shares were converted into
options to purchase 2.8 million shares of the
Companys common stock. The assumed options have been
accounted for under the guidance in Emerging Issues Task Force
Issue Number 00-23 Issues Related to the Accounting
for Stock Compensation under APB Opinion No. 25 and
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation  an
Interpretation of APB Opinion No. 25. Accordingly,
these options are subject to variable accounting treatment,
which means that a compensation charge has

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

been measured initially at the date of the
closing of the merger and then remeasured at the end of each
reporting period. The initial charge was based on the excess of
the closing price of the Companys stock over the exercise
price of the options plus the $11.85 per share payable in
cash, which will be paid upon exercise of the option. The charge
has been and will be remeasured, using the same methodology,
until the earlier of the date of exercise, forfeiture or
cancellation without replacement. This compensation charge will
be recorded as an expense over the remaining vesting period of
the options, using the accelerated method of amortization under
FASB Interpretation No. 28 (FIN 28) Accounting
for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans. To the extent that the options issued were
fully vested at the date of the closing of the McAfee.com
acquisition, the Company immediately recorded a compensation
expense of approximately $10.5 million. Charges related to
unvested options will be recorded in Deferred Compensation in
stockholders equity. Depending upon movements in the
market value of its common stock, this accounting treatment may
result in significant additional stock-based compensation
charges in future periods.

During 2002, the Company recorded a charge of
approximately $16.1 million, including the
$10.5 million described above, related to exchanged options
subject to variable accounting. Its stock-based compensation
charge related to exchanged options subject to variable
accounting was based on its closing share price of $16.09 on
December 31, 2002. As of December 31, 2002, the
Company had outstanding exchanged options of approximately
1.2 million shares subject to variable accounting.

Former Executives.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, the
Company recorded a one-time stock compensation charge of
approximately $0.6 million during 2001.

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

In July 2002, one of its employees became a
non-employee, but continues to provide services to the Company.
As he was allowed to continue to vest his options, the Company
recorded a stock-based compensation charge corresponding to the
fair market value of his vested options. The unvested options
have been and will be remeasured periodically using the Black
Scholes option valuation model and recognized over the remaining
vesting period using the accelerated method of amortization
discussed in FIN 28. Stock-based compensation of
$0.2 million was expensed during 2002.

In October 2002, the Company terminated the
employment of four former McAfee.com executives. These
executives held McAfee.com options exchanged options, which are
subject to variable accounting as discussed above. Upon
termination, the options were modified in accordance with a
change in control agreement. As a result, the Company recorded a
stock compensation charge of $9.9 million during 2002. The
Company will continue to value these options until the earlier
of the date of exercise, forfeiture or cancellation without
replacement.

New Executives.On
January 3, 2001, the Company entered into an employment
agreement with George Samenuk to become its chief executive
officer. In accordance with the terms of the agreement, the
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 and the remaining 50% on the
second year anniversary of Mr. Samenuks employment.
The fair value of the restricted stock was determined to be
approximately $2.0 million and was estimated based on the
difference between the exercise price of the restricted stock
and the fair value of the Companys common stock on
Mr. Samenuks employment

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

commencement date. During 2002 and 2001, the
Company recorded approximately $1.0 million related to
stock compensation associated with Mr. Samenuks 2001
restricted stock grant.

On April 3, 2001, the Company entered into
an employment agreement with Stephen C. Richards to become its
executive vice president and chief financial officer. In
accordance with the terms of the agreement, the Company issued
50,000 shares of stock to Mr. Richards for
$0.01 per share. During 2001, the Company recorded
approximately $0.3 million 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 the
president of its McAfee product group. In accordance with the
terms of the agreement, the Company issued 100,000 shares
of restricted 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.

On January 15, 2002, the Companys
board of directors approved a grant of 50,000 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: 3,000 vested as of the grant date and 47,000
are restricted until 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
value of its common stock on January 15, 2002. During 2002,
the Company recorded approximately $0.5 million related to
stock-based compensation associated with Mr. Samenuks
2002 restricted stock grant.

Options Issued Below Fair Market Value.In January 2000, we issued fully
vested options to consultants. As a result, we recorded a
stock-based compensation of approximately $1.4 million
based on the Black-Scholes model with the following assumptions:
risk free interest rate of 6.03%; contractual life of
10 years; dividend yield of 0%; and expected volatility of
124.15%.

Extended Vesting Term of Options.During the three months ended
June 30, 2002, the Company recorded a one-time stock-based
compensation charge of $0.2 million as a result of the
modification of the terms of the options previously granted to
certain employees.

Shares Purchased Outside Employee Stock
Purchase Plan.On January 31,
2002, the Company experienced a shortfall in the number of
shares available under the 1994 Employee Qualified Stock
Purchase Plan to meet the requirements of the open purchase
period. Although the Company reduced the number of shares plan
participants could purchase by a pro rata amount, additional
shares were required to be purchased outside of the plan in
order to meet this shortfall. As a result, the Company recorded
a one-time stock-based compensation charge of approximately
$60,000 in the three months ending March 31, 2002. The
charge was based on the difference between the fair value of the
shares purchased outside of the plan and the price the shares
were sold to plan participants.

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 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 these repriced options until
these options are exercised, cancelled, or forfeited without
replacement. The first valuation period began 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 the Companys common stock on
July 1, 2000, which was $20.375. The resulting compensation
charge to earnings will be recorded over the remaining vesting
period,

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
2002, these Networks Associates options are substantially fully
vested. Depending upon movements in the market value of the
Companys common stock, this accounting treatment may
result in additional stock-based compensation charges in future
periods.

During 2002, 2001 and 2000, the Company incurred
charges (credits) to earnings of approximately
$(6.5) million, $15.6 million and $2.0 million
related to options subject to variable plan accounting. For
2002, 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 its stock of $16.09,
$25.85 and $4.19, respectively. As of December 31, 2002,
the Company had options to purchase 1.1 million shares,
which were outstanding and subject to variable accounting.

The Company 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 $1.0 million, $1.8 million and
$6.7 million was expensed during 2002, 2001 and 2000,
respectively.

Warrants to Outside Consultants.In January 2001, upon completion of
the search for our 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 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 $0.5 million. The fair 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
its 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 $0.3 million. The fair 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 $0.2 million. The fair 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.

PGP Restructuring.In connection with the integration of
the PGP product group, the Company accelerated the vesting of
45,600 options held by the 100 employees terminated during 2001.
As a result of this modification, it recorded a stock based
compensation charge of $0.5 million 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 the Companys
board of directors.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|22. | Subsequent Events (unaudited)

The Company filed with the SEC its
Form 10-Qs for the quarterly periods ended March 31
and June 30, 2003 concurrent with filing this 2002 Annual
Report on Form 10-K. These concurrent filings and the
subsequent events described therein should be read in
conjunction with these financial statements.

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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 31st day of
October, 2003.



| |                          
| | -------------------------
| | 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
October 31, 2003 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 |  | October 31, 2003
|                                            
|/s/ STEPHEN C. RICHARDS(Stephen C. Richards) |  | Chief Operating Officer and
    Chief Financial Officer                                 |  | October 31, 2003
|                                            
|/s/ ROBERT B. BUCKNAM(Robert B. Bucknam)     |  | Director                                                                                |  | October 31, 2003
|                                            
|/s/ LESLIE G. DENEND(Leslie G. Denend)       |  | Director                                                                                |  | October 31, 2003
|                                            
|/s/ ROBERT DUTKOWSKY(Robert Dutkowsky)       |  | Director                                                                                |  | October 31, 2003
|                                            
|/s/ DENIS J. OLEARY(Denis J. OLeary)       |  | Director                                                                                |  | October 31, 2003
|                                            
|/s/ ROBERT PANGIA(Robert Pangia)             |  | Director                                                                                |  | October 31, 2003
|                                            
|/s/ LIANE WILSON(Liane Wilson)               |  | Director                                                                                |  | October 31, 2003

134



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##### Table of Contents



SCHEDULE II

NETWORKS ASSOCIATES, INC.

VALUATION AND QUALIFYING ACCOUNTS


|                             |                                              |                |   |                   |  |               |   |            |   |  |   |        |   |  |   |       | 
|---------------------------- | -------------------------------------------- | -------------- | - | ----------------- |  | ------------- | - | ---------- | - |  | - | ------ | - |  | - | ----- | 
|                             |                                              |                |   | Provision for     |  |               |   |           
|                             |                                              |                |   | Doubtful          |  |               |   |           
|                             |                                              |                |   | Accounts,         |  | Write-offs of |   |           
|                             |                                              | Balance at     |   | Additions Charged |  | Previously    |   | Balance at
|                             |                                              | Beginning of   |   | to Expense or     |  | Provided      |   | End of    
|                             |                                              | Period         |   | Revenue Net(1)    |  | Accounts      |   | Period    
|                             |                                              |                |   |                   |  |               |   |           
|                             |                                              |               
|                             |                                              | (In thousands)
|Year Ended December 31, 2002 |                                              |                |   |                   |  |               |   |            |   |  |   |        |   |  |   |      
|                             | Allowance for Doubtful Accounts              |                | $ | 8,394             |  |               | $ | (219       | ) |  | $ | (1,537 | ) |  | $ | 6,638 | 
|Year Ended December 31, 2001 |                                              |                |   |                   |  |               |   |            |   |  |   |        |   |  |   |      
|                             | Allowance for Doubtful Accounts, as restated |                | $ | 7,165             |  |               | $ | 7,449      |   |  | $ | (6,220 | ) |  | $ | 8,394 | 
|Year Ended December 31, 2000 |                                              |                |   |                   |  |               |   |            |   |  |   |        |   |  |   |      
|                             | Allowance for Doubtful Accounts, as restated |                | $ | 7,658             |  |               | $ | 4,785      |   |  | $ | (5,278 | ) |  | $ | 7,165 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Provision for Doubtful Accounts,
    Net.The provision for doubtful
    accounts, net consists of our estimates with respect to the
    uncollectibility of our receivables, net of recoveries of
    amounts previously written off. Our management must make
    estimates of the uncollectibility 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.

|                             |                                           |                |   |               |  |             |   |            |  |  |   |          |   |  |   |        | 
|---------------------------- | ----------------------------------------- | -------------- | - | ------------- |  | ----------- | - | ---------- |  |  | - | -------- | - |  | - | ------ | 
|                             |                                           |                |   | Provision for |  |             |   |           
|                             |                                           | Balance at     |   | Sales Returns |  | Actual      |   | Balance at
|                             |                                           | Beginning of   |   | and Other     |  | Returns and |   | End of    
|                             |                                           | Period         |   | Allowances(2) |  | Allowances  |   | Period    
|                             |                                           |                |   |               |  |             |   |           
|                             |                                           |               
|                             |                                           | (In thousands)
|Year Ended December 31, 2002 |                                           |                |   |               |  |             |   |            |  |  |   |          |   |  |   |       
|                             | Sales Returns and Allowances              |                | $ | 32,586        |  |             | $ | 130,163    |  |  | $ | (130,412 | ) |  | $ | 32,337 | 
|Year Ended December 31, 2001 |                                           |                |   |               |  |             |   |            |  |  |   |          |   |  |   |       
|                             | Sales Returns and Allowances, as restated |                | $ | 48,076        |  |             | $ | 134,814    |  |  | $ | (150,304 | ) |  | $ | 32,586 | 
|Year Ended December 31, 2000 |                                           |                |   |               |  |             |   |            |  |  |   |          |   |  |   |       
|                             | Sales Returns and Allowances, as restated |                | $ | 32,638        |  |             | $ | 115,956    |  |  | $ | (100,518 | ) |  | $ | 48,076 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
    total provision for sales returns and other allowances amounted
    to $130.2 million in 2002. The balance at December 31,
    2002, of $32.3 million includes the estimate of potential
    future product returns amounting to $6.7 million and
    specific allowances for distributor, reseller, and retailer
    sales incentives amounting to $25.6 million.

Our accounts receivable balance at
December 31, 2002 was $160.2 million, net of allowance
for doubtful accounts of $6.6 million and allowance for
sales returns and other allowances of $32.3 million.

135



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##### Table of Contents



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.(12)                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 2  | .12 |  |            |  | Agreement and Plan of Merger, dated July 28,
    1998, by and between the Registrant and CyberMedia, Inc.(13)                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 3  | .1  |  |            |  | Second Restated Certificate of Incorporation of
    the Registrant, as amended on December 1, 1997.(6)                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 3  | .2  |  |            |  | Amended and Restated Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 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.(14)                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 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.(18)                                                                                                                                                                                                                                                                                                                                                                                         
|        | 4  | .3  |  |            |  | Indenture dated as of August 17, 2001
    between the Registrant and State Street Bank and Trust Company
    of California.(17)                                                                                                                                                                                                                                                                                                                                                                                                
|        | 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)                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .5  |  |            |  | 2002 Employee Stock Purchase Plan.(11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



---



##### Table of Contents



|        |    |      |  |             |  |                                                                                                                                                                                             
|------- | -- | ---- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .6*  |  |            |  | 1997 Stock Incentive Plan, as Amended.(11)                                                                                                                                                  
|        | 10 | .7*  |  |            |  | Amended and Restated 1993 Stock Option Plan for
    Outside Directors.                                                                                                                      
|        | 10 | .8*  |  |            |  | 2000 Nonstatutory Stock Option Plan.(15)                                                                                                                                                    
|        | 10 | .9*  |  |            |  | Amended and Restated Employment Agreement between
    George Samenuk and the Registrant, dated October 9,
    2001.(24)                                                                     
|        | 10 | .10* |  |            |  | Employment agreement between Stephen C. Richards
    and Registrant, dated April 3, 2001.(16)                                                                                               
|        | 10 | .11  |  |            |  | 1st Amendment to Lease dated March 20,
    1998 between Birk S. McCandless, LLC and the Registrant.(18)                                                                                     
|        | 10 | .12  |  |            |  | Confirmation, Amendment and Notice of Security
    Agreement dated March 20, 1998 among Informix Corporation,
    Birk S. McCandless, LLC and the Registrant.(18)                           
|        | 10 | .13  |  |            |  | Second Amendment to Lease dated September 1,
    1998 among Informix Corporation, Birk S. McCandless, LLC and the
    Registrant.(18)                                                       
|        | 10 | .14  |  |            |  | Subordination, Nondisturbance and Attornment
    Agreement dated June 21, 2000, among Column Financial,
    Inc., Informix Corporation, Birk S. McCandless, LLC, and the
    Registrant.(18)
|        | 10 | .15  |  |            |  | Lease Agreement dated November 14, 1996
    between Blue Lake Partners and McAfee Associates, Inc.(18)                                                                                      
|        | 10 | .16  |  |            |  | Lease Amendment dated November 24, 1997
    between Blue Lake Partners and McAfee Software, Inc.(18)                                                                                        
|        | 10 | .17  |  |            |  | Lease Amendment dated March 17, 1998 between
    Blue Lake Partners and McAfee Software, Inc.(18)                                                                                           
|        | 10 | .18  |  |            |  | Lease Amendment dated March 27, 1998 between
    Blue Lake Partners and McAfee Software, Inc.(18)                                                                                           
|        | 10 | .19  |  |            |  | Lease Amendment dated June 4, 1998 between
    Blue Lake Partners and McAfee Software, Inc.(18)                                                                                             
|        | 10 | .20  |  |            |  | Lease Amendment dated July 21, 1998 between
    Blue Lake Partners and McAfee Software, Inc.(18)                                                                                            
|        | 10 | .21  |  |            |  | Lease Amendment dated November 20, 1998
    between Blue Lake Partners and McAfee Software, Inc.(18)                                                                                        
|        | 10 | .22  |  |            |  | Lease Amendment dated March 18, 1999 between
    Blue Lake Partners and McAfee Software, Inc.(18)                                                                                           
|        | 10 | .23  |  |            |  | Lease Amendment dated June 3, 1999 between
    Blue Lake Partners and McAfee Software, Inc.(18)                                                                                             
|        | 10 | .24  |  |            |  | Lease Amendment dated October 7, 1999
    between Blue Lake Partners and McAfee Software, Inc.(18)                                                                                          
|        | 10 | .25  |  |            |  | Lease Amendment dated March 25, 2000 between
    Daltex Centre LP and the Registrant.(18)                                                                                                   
|        | 10 | .26  |  |            |  | Lease Amendment dated July 31, 2000 between
    Daltex Centre LP and the Registrant.(18)                                                                                                    
|        | 10 | .27  |  |            |  | Lease Amendment dated January 24, 2001
    between Daltex Centre LP and the Registrant.(18)                                                                                                 
|        | 10 | .28  |  |            |  | Lease Amendment dated May 31, 2001 between
    Daltex Centre LP and the Registrant.(18)                                                                                                     
|        | 10 | .29* |  |            |  | Employment Agreement between Kent H. Roberts and
    the Registrant, dated October 9, 2001.(19)                                                                                             
|        | 10 | .30* |  |            |  | Employment Agreement between Arthur R. Matin and
    the Registrant, dated October 30, 2001.(19)                                                                                            
|        | 10 | .31* |  |            |  | Employment Agreement between Vernon Gene Hodges
    and the Registrant, dated December 3, 2001.(19)                                                                                         
|        | 10 | .32* |  |            |  | Employment Agreement between Raymond J. Smets and
    the Registrant, dated October 7, 2002.(20)                                                                                            
|        | 10 | .33* |  |            |  | Summary of Pay for Performance Plan                                                                                                                                                         
|        | 12 | .1   |  |            |  | Calculation of Ratio of Earnings to Fixed Charges                                                                                                                                           
|        | 21 | .1   |  |            |  | Subsidiaries of the Registrant                                                                                                                                                              
|        | 23 | .1   |  |            |  | Consent of PricewaterhouseCoopers LLP,
    independent Accountants                                                                                                                          



---



##### Table of Contents



|        |    |    |  |             |  |                                                                                                                                       
|------- | -- | -- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |            
|Number  |    |    |  | Description
|        |    |    |  |            
|        | 31 | .1 |  |            |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002
|        | 32 | .1 |  |            |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002



---



|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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/ A filed with the
    Commission on February 28, 1995.                                            
|   
|(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 3, 1998.                                                   
|   
|(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 14, 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 June 28, 2002.                                                                                     
|    
|(12) | Incorporated by reference from the
    Registrants Report on Form 8-K filed with the
    Commission on June 16, 1998.                                                                                                     
|    
|(13) | 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.
|    
|(14) | Incorporated by reference from the
    Registrants Report on Form 8-A filed with the
    Commission on October 22, 1998.                                                                                                  
|    
|(15) | 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.                                                          
|    
|(16) | 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.                                                           
|    
|(17) | Incorporated by reference from the
    Registrants Registration Statement on Form S-3 filed
    with the Commission on November 9, 2001.                                                                                  
|    
|(18) | 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.                                                  
|    
|(19) | Incorporated by reference from the
    Registrants report on Form 10-K for the year ended
    December 31, 2001, filed with the Commission on
    February 8, 2002.                                                       
|    
|(20) | Incorporated by reference from the
    Registrants report on Form 10-Q for the quarter ended
    September 30, 2002, filed with the Commission on
    November 12, 2002.                                                  



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