##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K/A

Amendment No. 2



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|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the Fiscal Year Ended December 31,
    2000                                                 
|  
|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 of incorporation) |  | (I.R.S. Employer
    Identification No.)

3965 Freedom Circle

Santa Clara, California 95054


(408) 988-3832


(Address, Including Zip Code, and Telephone
Number, Including Area Code, of Registrants Principal
Executive Offices)




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EXPLANATORY NOTE:




THIS 10-K/A IS BEING FILED FOR THE PURPOSE OF
AMENDING AND RESTATING ITEMS 6, 7, 7A, 8 AND 14 TO REFLECT THE
RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998. WE HAVE MADE
NO FURTHER CHANGES TO THE PREVIOUSLY FILED FORM 10-K/A. ALL
INFORMATION IN THIS FORM 10-K/A IS AS OF DECEMBER 31, 2000
AND DOES NOT REFLECT ANY SUBSEQUENT INFORMATION OR EVENTS OTHER
THAN THE RESTATEMENT. THIS 10-K/A AMENDS OUR PREVIOUSLY FILED
FORM 10-K/A WHICH WAS FILED ON JUNE 28, 2002. FOR A
DESCRIPTION OF OUR BUSINESS AND THE RISKS RELATED TO OUR
BUSINESS, SEE OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2002.






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TABLE OF CONTENTS



|                                                                                                          |                                                                                                |                                                                       |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                                                                                                   
|                                                                                                          | Item 6. Selected Financial Data.                                                              
|                                                                                                          | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                                                                                                          | Item 7A. Quantitative and Qualitative Disclosures About Market Risk.                          
|                                                                                                          | Item 8. Financial Statements and Supplementary Data                                           
|                                                                                                          | Item 14. Exhibits, Financial Statement Schedules and Exhibit Index                            
|                                                                                                          | Item 6. Selected Financial Data (Unaudited)                                                   
|                                                                                                          | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations 
|                                                                                                          | Item 8. Financial Statements and Supplementary Data (Unaudited)                               
|Quarterly Operating Results                                                                              
|PART IV                                                                                                  
|                                                                                                          | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                      
|REPORT OF INDEPENDENT AUDITORS                                                                           
|                                                                                                          |                                                                                                | CONSOLIDATED BALANCE SHEETS                                          
|                                                                                                          |                                                                                                | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY                                                          
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                    
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                               
|SIGNATURES                                                                                               
|REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE                                           
|NETWORKS ASSOCIATES, INC. SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS AT DECEMBER 31, 2000, AS RESTATED
|EXHIBIT INDEX                                                                                            
|EX-23.1 Consent of PricewaterhouseCoopers LLP                                                            
|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






PART I

Restatement of Consolidated Financial
Statements

In the first quarter of 2002, the Securities and
Exchange Commission (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, Amendment
No. 1 to this Annual Report on Form 10-K containing
restated consolidated financial statements for 2000, 1999 and
1998, years which precede our current managements tenure.
This previous restatement (i) corrected certain
inaccuracies found in our accounts for 1998 through 2000 and
(ii) gave effect to our adoption of Emerging Issues Task
Force (EITF) Issue No. 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 required 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,
which caused 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
consolidated 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 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 our distributors and
resellers on the sell-through basis of revenue recognition (which
is how we have accounted for these sales since 2001). In the
course of reviewing 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 1998 through 2000
(contained in this Form 10-K/A) and in note 3 to our
consolidated financial statements for 2000 through 2002
(contained in our filing on Form 10-K for year ended
December 31, 2002), 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) conversion from the 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) 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 previously
announced (2002) 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
result in a $112.6 million reduction to net revenue. Net
revenue for 2003 is also expected to be increased by
approximately $5.7 million as a result of these
adjustments. 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 and
reseller sales in 1998 through 2000 or (ii) changes related
to SOP 97-2 revenue recognition principles. These
adjustments had the effect of deferring revenue from earlier
periods to be recognized in later periods.

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

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expense and other account adjustments is to
increase 2002 previously announced expenses by $2.9 million, increase 2001
expenses by $20.7 million, reduce 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 statements of operations impact
of all of these adjustments discussed above is to increase previously announced
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.

SEC Filings

We are filing this Amendment No. 2 to our
2000 Form 10-K containing restated consolidated financial
statements for 1998 through 2000. Pending the completion of this
restatement, the filings of our 2002 Form 10-K and
Form 10-Qs for the first and second quarters of 2003 were
delayed. These documents have now been filed with the SEC. We
have not amended and do not intend to amend our other previously
filed annual reports on Form 10-K or our 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.

Amended Items

We hereby amend the following items, consolidated
financial statements, exhibits or other portions of our Annual
Report on Form 10-K/A for the year ended December 31,
2000 as set forth herein:






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

The information set forth under the caption
Selected Financial Data is amended to read in its
entirety as set forth at pages 3 through 4 herein and is incorporated
herein by reference.






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

The information set forth under the caption
Managements Discussion and Analysis is amended
to read in its entirety as set forth at pages 4 through 17
herein and is incorporated herein by reference.






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

The information set forth under the caption
Quantitative and Qualitative Disclosures About Market
Risk is amended to read in its entirety as set forth at
pages 16 through 17 herein and is incorporated herein by
reference.






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

Our quarterly financial information is amended to
read in its entirety as set forth as pages 17 through 20 herein and is
incorporated herein by reference.

Our consolidated financial statements and
supplementary data and the report of independent auditors
thereon are amended to read in their entirety as set forth at
pages 22 through 73.






|         |                                                              
|-------- | -------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules and
    Exhibit Index

The information set forth in
Item 14(a)(1)-(2) is amended to read in its entirety as set
forth at page 21 herein and is incorporated herein by
reference.

2



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The list of exhibits set forth in, and
incorporated by reference from the Exhibit Index, is
amended to include the following additional exhibits, filed
herewith:

| |      |  |  |                                                                                                                                        
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------
| | 23.1 |  |  | Consent of PricewaterhouseCoopers LLP,
    independent accountants.                                                                    
| | 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.






|        |                                        
|------- | ---------------------------------------
|Item 6. | Selected Financial Data
    (Unaudited)

We are filing Amendment No. 2 to our 2000
Form 10-K containing restated consolidated financial
statements for 1998 through 2000 concurrently with the filing of
our previously delayed 2002 Form 10-K and Forms 10-Q for
the first and second quarters of 2003. You should read the
following selected financial data with the consolidated
financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this Amendment No. 2 to our Form 10-K. You should also
read our concurrent filings to fully consider factors affecting
future results and subsequent events to the financial
information contained in this Form 10-K/A.

|                                                            |  |                                          |          |               |  |               |          |                |  |             |          |   |  |   |         |  |  |   |         | 
|----------------------------------------------------------- |  | ---------------------------------------- | -------- | ------------- |  | ------------- | -------- | -------------- |  | ----------- | -------- | - |  | - | ------- |  |  | - | ------- | 
|                                                            |  |                                         
|                                                            |  | Years Ended December 31,                
|                                                            |  |                                         
|                                                            |  | 2000                                     |          | 1999          |  | 1998          |          | 1997 (1)(2)(3) |  | 1996 (1)(2)
|                                                            |  |                                          |          |               |  |               |          |                |  |            
|                                                            |  |                                         
|                                                            |  | (In thousands, except per share amounts)
|                                                            |  | (As restated)                            |          | (As restated) |  | (As restated) |          | (As restated)  |  |            
|Statements of Operations Data:                              |  |                                          |          |               |  |               |          |                |  |             |          |   |  |   |         |  |  |   |         | 
|Net revenue                                                 |  | $                                        | 709,372  |               |  | $             | 660,337  |                |  | $           | 427,767  |   |  | $ | 723,450 |  |  | $ | 514,997 | 
|Income (loss) from operations                               |  |                                          | (127,541 | )             |  |               | (136,725 | )              |  |             | (402,826 | ) |  |   | 79,054  |  |  |   | 57,568  | 
|Income (loss) before income taxes and minority
    interest |  |                                          | (70,924  | )             |  |               | (127,776 | )              |  |             | (386,211 | ) |  |   | 100,352 |  |  |   | 65,419  | 
|Net income (loss)                                           |  |                                          | (108,014 | )             |  |               | (151,964 | )              |  |             | (319,074 | ) |  |   | 19,760  |  |  |   | 10,711  | 
|Net income (loss) per share, basic                          |  | $                                        | (0.78    | )             |  | $             | (1.10    | )              |  | $           | (2.40    | ) |  | $ | 0.16    |  |  | $ | 0.09    | 
|Net income (loss) per share, diluted                        |  | $                                        | (0.78    | )             |  | $             | (1.10    | )              |  | $           | (2.40    | ) |  | $ | 0.15    |  |  | $ | 0.09    | 
|Shares used in per share calculation 
    basic            |  |                                          | 138,072  |               |  |               | 138,695  |                |  |             | 133,075  |   |  |   | 126,662 |  |  |   | 115,626 | 
|Shares used in per share calculation 
    diluted          |  |                                          | 138,072  |               |  |               | 138,695  |                |  |             | 138,609  |   |  |   | 132,729 |  |  |   | 125,502 | 

|                                     |  |               |           |               |  |               |           |               |  |      |           |  |  |   |         |  |  |   |         | 
|------------------------------------ |  | ------------- | --------- | ------------- |  | ------------- | --------- | ------------- |  | ---- | --------- |  |  | - | ------- |  |  | - | ------- | 
|                                     |  |              
|                                     |  | December 31, 
|                                     |  |              
|                                     |  | 2000          |           | 1999          |  | 1998          |           | 1997          |  | 1996
|                                     |  |               |           |               |  |               |           |               |  |     
|                                     |  | (As restated) |           | (As restated) |  | (As restated) |           | (As restated) |  |     
|Balance Sheet Data:                  |  |               |           |               |  |               |           |               |  |      |           |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents            |  | $             | 275,539   |               |  | $             | 329,732   |               |  | $    | 418,899   |  |  | $ | 157,031 |  |  | $ | 165,785 | 
|Working capital                      |  |               | 79,591    |               |  |               | 64,560    |               |  |      | 159,856   |  |  |   | 270,998 |  |  |   | 307,478 | 
|Total assets                         |  |               | 1,465,623 |               |  |               | 1,510,388 |               |  |      | 1,461,936 |  |  |   | 824,521 |  |  |   | 613,867 | 
|Deferred revenue and taxes           |  |               | 531,555   |               |  |               | 446,778   |               |  |      | 349,590   |  |  |   | 140,324 |  |  |   | 91,020  | 
|Other Long-Term Debt and liabilities |  |               | 400,456   |               |  |               | 382,517   |               |  |      | 375,234   |  |  |   | 2,353   |  |  |   |        | 
|Total equity                         |  | $             | 222,923   |               |  | $             | 355,938   |               |  | $    | 378,994   |  |  | $ | 502,279 |  |  | $ | 425,671 | 



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating results for 1997 and 1996 reflect the
    sell-in method for revenue recognition on our sales to
    distributors and resellers (with the exception of our largest
    distributor, which beginning in 1997 is on sell-through revenue
    recognition) and are not necessarily comparable to results for
    2000, 1999 and 1998, which reflect revenue recognition for
    distributors on the sell-through basis of revenue recognition.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Net revenue for 1997 and 1996 has not been
    reduced for consideration, including sales incentives and
    rebates, paid by us to our resellers or customers as required by
    EITF 01-09 because we determined it to be impractical to do
    so.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(3) | Net revenues and net income have been increased
    (decreased) from previously reported amounts by
    $(12.2) million and $9.1 million, respectively. Net
    revenues in 1997 were determined to be overstated as a result of
    $5.2 million in revenue recorded when collectibility was
    not reasonably assured, $22.0 million in revenue for
    conversion of a distributor to sell through basis of accounting,
    $8.9 million of revenue related to 90-day free upgrade
    rights that had not expired at the end of 1997, $3.2 million of other
    errors which had the effect of recognizing revenue in 1997 that
    should have been deferred to later periods offset by
    $27.0 million in excess revenue
    allowances (contra revenue accounts). Expenses in 1997 were
    determined to be overstated by $29.8 million previously,
principally as a result of
    $15.3 million in excess acquisition related expenses,
    excess cost of sales of $13.4 million related to
    the reduction of revenue, and $1.1 million of marketing and other
costs. As a result
    of these adjustments, there was an $8.4 million increase in
    income tax expense for 1997 and a $9.1 million reduction in
    net income.






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

Impact of Restatement of Consolidated
Financial Statements

The following discussion gives effect to the
restatement of our consolidated financial statements for 1998
through 2000 and should be read in conjunction with the
consolidated financial statements and related notes, including
note 3 describing the restatement. 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;                        
|
| |  | to correct errors previously made in the
    application of the revenue recognition principles under
    SOP 97-2 in connection with multi-element revenue
    transactions in 1998 through 2000; and  
|
| |  | to adjust revenue from distributors and
    resellers, where in error we initially recognized revenue at the
    time of sale but subsequently determined collection was not
    probable at that time.

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



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

We sell certain of our products through retail
distribution channels and other resellers. Through December
2000, revenue transactions with our distributors and resellers
generally required payment within a

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customary collection period and included limited
return rights under specific circumstances and revenue was
recognized on a sell-in basis, net of allowances for estimated
returns. Under the provisions of Statement of Financial
Accounting Standard (SFAS) No. 48,
Revenue Recognition When Right-of-Return
Exists, (SFAS 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 to a third party. Accordingly, we adjusted revenue on
our distributor and reseller transactions prior to 2001 to
reflect the sell-through basis of revenue recognition.


Restatement adjustments required under our change
to a sell-through revenue recognition policy with respect to
sales to our distributors and resellers had the effect of
deferring recognition of revenue to periods later than
originally recorded. We have concluded, except for the effect of
foreign currency adjustments, no revenue was lost as a result of
this change. The total correcting adjustments required under our
change to a sell-through revenue recognition policy resulted in
previously announced (2002) or reported net revenue
increasing by $25.2 million, $82.4 million,
$49.4 million and $137.0 million in 2002, 2001, 2000
and 1999, respectively, and net revenue decreasing in 1998 by
$303.0 million.



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

The accounting treatment with respect to certain
revenue arrangements in 1998 through 2000 with multiple elements
was adjusted to correct certain errors. Our 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,
Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions,
provides that for arrangements with multiple elements, such as
the sale of software licenses with undelivered PCS, revenue is
allocated to each element of the arrangement based on evidence
of fair value of the undelivered elements. Where evidence of
fair value of the undelivered element is determinable and the
fair value of the delivered element (e.g. the license) is not
determinable, we defer revenue from the arrangement equivalent
to the fair value of the undelivered elements (e.g. PCS) and
recognize 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
delivered element is recognized as license revenue. As more
fully described below and in note 3 to our consolidated
financial statements, we recorded correcting adjustments to
comply with the applicable accounting guidance.

For our enterprise 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 enterprise software licenses in
1998 through 2000, amounts were allocated based on the list
prices of the license and the PCS element. 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 in 1998 through 2000, the discount was
allocated proportionately based on list price to the license and
PCS. 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 were 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.
For other products, evidence of fair value existed, but the
amount of deferred revenue should have been greater. These
correcting adjustments cumulatively will result in the
recognition of additional services and support revenue of
$139.5 million, $46.0 million, and $0 in
2001, 2002 and 2003, respectively.

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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 (i.e., updates to virus definition files) of
these arrangements. As we 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 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.

Overall correcting adjustments to multi-element
revenue arrangements in 1998 through 2000, including those
described above, resulted in the same amount of revenue
recognized in total, excluding foreign currency adjustments.
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 will be recognized
in later periods as service and support revenue. The total
restatement adjustments regarding allocation of revenue in
multiple-element arrangements in 1998 through 2000 resulted in
net revenue decreasing by $161.7 million,
$77.9 million and $9.0 million in 1998, 1999 and 2000,
respectively, and increasing in 2001 and 2002 by
$157.5 million and $71.2 million, respectively.



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

Several of our distributors were undergoing
financial difficulty during 1998, 1999 and 2000; however, in
error, we continued to recognize revenue on 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. In addition, upon
review of transactions recorded into the provision for doubtful
accounts in 1998 through 2000, we identified excess allowances
for doubtful accounts transferred to our revenue allowances
account (a contra revenue account reflecting, among other things
anticipated product returns, estimates for price adjustments and
product incentives). Correcting adjustments were recorded in
1998 through 2000 to reduce revenue for the amounts
misclassified in error with an offsetting decrease in the
provision for doubtful accounts.

Overall adjustments to revenue resulting from
arrangements where collection was not reasonably assured
resulted in permanent decreases in net revenue with net revenue
decreasing in 1998 and 2000 by $46.9 million and
$2.7 million, respectively, and net revenue increasing in
1999 and 2001 by $40.8 million, and $3.0 million,
respectively.



| |                                       
| | --------------------------------------
| | Additional Adjustments and Information

Additional information regarding the restatement
adjustments described above and our other restatement
adjustments is included in note 3 of our consolidated
financial statements set forth elsewhere in this Form 10-K/A.

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##### Table of Contents



Results of Operations



| |                                                         
| | --------------------------------------------------------
| | Fiscal Years Ended December 31, 2000,
    1999, and 1998

The following table, which reflects restated
amounts, describes for the periods indicated the percentage of
net revenue represented by certain items in our consolidated
statements of operations:

|                                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |     |     |   
|---------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------- | -- | ---- | --- | ---- | -- | --- | --- | -- | --- | --- | --- | --
|                                                           |                                                                                 |                              
|                                                           |                                                                                 | Years Ended                  
|                                                           |                                                                                 | December 31,                 
|                                                           |                                                                                 |                              
|                                                           |                                                                                 | 2000                          |    | 1999 |     | 1998
|                                                           |                                                                                 |                               |    |      |     |     
|                                                           |                                                                                 |                              
|                                                           |                                                                                 | (As restated)                
|Net revenue:                                               |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           | Product                                                                         |                               |    | 62   | %   |      |    | 66  | %   |    |     | 56  | %  
|                                                           | Services and support                                                            |                               |    | 38   |     |      |    | 34  |     |    |     | 44  |    
|                                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           |                                                                                 | Total net revenue             |    |      | 100 |      |    |     | 100 |    |     |     | 100 |   
|Cost of net revenue:                                       |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           | Product                                                                         |                               |    | 17   |     |      |    | 14  |     |    |     | 28  |    
|                                                           | Services and support                                                            |                               |    | 6    |     |      |    | 6   |     |    |     | 9   |    
|                                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           |                                                                                 | Total cost of net revenue     |    |      | 23  |      |    |     | 20  |    |     |     | 37  |   
|Operating costs:                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           | Research and development                                                        |                               |    | 23   |     |      |    | 23  |     |    |     | 32  |    
|                                                           | Marketing and sales                                                             |                               |    | 51   |     |      |    | 50  |     |    |     | 64  |    
|                                                           | General and administrative                                                      |                               |    | 15   |     |      |    | 24  |     |    |     | 23  |    
|                                                           | Amortization of intangibles                                                     |                               |    | 8    |     |      |    | 8   |     |    |     | 10  |    
|                                                           | Provision for (recovery of) bad debt                                            |                               |    | (2   | )   |      |    | (4  | )   |    |     | 1   |    
|                                                           | Acquisition and other related costs                                             |                               |    |     |     |      |    |    |     |    |     | 27  |    
|                                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           |                                                                                 | Total operating costs         |    |      | 95  |      |    |     | 101 |    |     |     | 157 |   
|                                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           |                                                                                 | Loss from operations          |    |      | (19 | )    |    |     | (21 | )  |     |     | (94 | ) 
|Interest and other income                                  |                                                                                 |                               | 6  |      |     |      | 5  |     |     |    | 7   |    
|Interest and other expense                                 |                                                                                 |                               | (3 | )    |     |      | (3 | )   |     |    | (3  | )  
|Gain (loss) on investments, net                            |                                                                                 |                               | 4  |      |     |      | (1 | )   |     |    |    |    
|                                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           | Loss before provision for (benefit from) income
    taxes and minority interest |                               |    | (12  | )   |      |    | (20 | )   |    |     | (90 | )  
|Provision for (benefit from) income taxes                  |                                                                                 |                               | 6  |      |     |      | 4  |     |     |    | (16 | )  
|                                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           |                                                                                 | Loss before minority interest |    |      | (18 | )    |    |     | (24 | )  |     |     | (74 | ) 
|Minority interest in loss of consolidated
    subsidiaries |                                                                                 |                               | 1  |      |     |      |   |     |     |    |    |    
|                                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    
|                                                           |                                                                                 | Net loss                      |    |      | (17 | )%   |    |     | (24 | )% |     |     | (74 | )%
|                                                           |                                                                                 |                               |    |      |     |      |    |     |     |    |     |    

Net Revenue.Net
revenue increased 7% to $709.4 million in 2000 from
$660.3 million in 1999. Net revenue increased 54% to
$660.3 million in 1999 from $427.8 million in 1998.

Net revenue in 1998 was adversely impacted by a
$161.7 million reduction in product revenue in connection
with revenue arrangements with multiple elements, with a related
increase in PCS deferred revenue recognized ratably as services
and support revenue over the estimated life of the product. Net
revenue in 1998 also reflects a reduction of approximately
$46.9 million in connection with sales to distributors
where collection was not reasonably assured and revenue should
have been recognized on the related sales based on actual cash
receipts. For example, in 1999, CHS, our largest European
distributor, filed for insolvency. Finally, as a result of
adoption of the sell-through method of accounting in 1998, we
did not recognize revenue on approximately $12.1 million of inventory
held at the beginning of 1998 by those distributors and
resellers where we had previously recognized revenue under the
sell-in method.

Net revenue in 1999 reflects the benefit of
(i) a full

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year of ratable PCS revenue being recognized for
arrangements that beginning in 1998 were subject to three-year
ratable revenue recognition versus only a partial year of
revenue for 1998 on those arrangements and (ii) a full year
of operating results from our purchases of Magic Solutions and
CyberMedia, acquired in April 1998 and September 1998,
respectively. Offsetting this was (i) a $77.9 million
overall reduction in product revenue in connection with revenue
arrangements from 1999 with multiple elements and
(ii) beginning in the first quarter of 1999, a lessening of
distributor and reseller demand, with a corresponding
lengthening of their sales cycle, due to among other factors,
Year 2000 concerns.


Net revenue in 2000 includes $20.0 million
of revenue recognized in connection with our establishing
evidence of fair value for the PCS element of various
multi-element retail arrangements which allowed us to recognize
the remaining related deferred license revenue using the
residual method. Net revenue also reflects improved sales
through by our distributors and resellers.

Product revenue includes revenue from product
licenses and hardware. Product revenue increased 0% to
$438.5 million in 2000 from $438.3 million in 1999.
Product revenue increased 84% to $438.3 million in 1999
from $238.4 million in 1998. These increases in product
revenue are due to the same factors discussed above.

Services and support revenues include revenues
from software support and maintenance contracts, education and
consulting services, which are deferred and recognized over the
related service period. Service revenues increased 22% to
$270.9 million in 2000 from $222.1 million in 1999.
Service revenue increased 17% to $222.1 million in 1999
from $189.3 million in 1998. In 1999, $32.8 million
more of services and support revenue was recognized as compared
to 2000 due to the deferral of services and support revenue from
1998 with respect to multi-element revenue contracts. Also,
after establishing evidence of fair value for PCS for various
multi-element retail arrangements late in 2000, a smaller
portion of the total license fee was allocated to service and
support. The general increase in services and support
revenues resulted from growth in all categories of service
revenues, principally due to the growth of our installed
customer base and the resulting renewal of support and
maintenance contracts. In addition, services and support
revenues increased from sales of software licenses that include
PCS where we do not have evidence of fair value for the PCS and,
consequently, must recognize the entire amount of the
arrangement over the PCS term as services and support revenue.

International revenue accounted for approximately
34%, 34%, and 51% of net revenue for 2000, 1999, and 1998,
respectively. The decrease in international net revenue as a
percentage of net revenue from 1998 to 1999 was due to under
performance in sales operations, changes in sales management,
the insolvency of our major European distributor, a slow down
due to softening market conditions and continued weakness of the
Euro. To minimize the impact of foreign currency fluctuations,
we use non-leveraged forward currency contracts. However, our
future results of operations may be adversely affected by
currency fluctuations or by costs associated with currency risk
management strategies. Other 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, uncertainties relative to regional
economic circumstance, political instability in emerging markets
and difficulties staffing and managing foreign operations. These
factors may have a material adverse effect on our future
international license revenue. Further, in countries with a high
incidence of software piracy, we may experience a higher rate of
piracy of our products.

Cost of Net Revenue.Cost of net revenue increased 21% to
$160.1 million in 2000 from $132.7 million in 1999.
From 1998 to 1999, cost of net revenue decreased 17% from
$160.6 million in 1998 to $132.7 million in 1999.

Our cost of product revenue consists primarily of
the cost of media, manuals and packaging for products
distributed through traditional channels, royalties and, with
respect to hardware-based products, computer platforms and other
hardware components. Cost of product revenues increased 30% to
$117.8 million in 2000 from $90.6 million in 1999.
From 1998 to 1999, cost of product revenues decreased 25% from
$120.9 million in 1998 to $90.6 million in 1999. As a
percentage of net product revenue, cost of product revenue was
27% in 2000, 28% in 1999, and 52% in 1998. Cost of product
revenue as a percentage of net product revenue in 1999

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and 2000 reflects the favorable impact of
services and support revenue deferred from earlier periods,
primarily 1998, and recognized in those periods.


The increase in cost of product revenues from
1999 to 2000 was due to a $27.0 million increase in
materials cost attributable to computer platform and other
hardware product costs resulting from an increase in hardware
product revenues, offset by a decrease in costs associated with
government contracts. The decrease in cost of products revenues
from 1998 to 1999 was partly due to the shift in the mix of
higher margin volume priced software licenses versus
hardware-based sales. In addition, in 1998 additional cost of
product revenues was incurred in connection with sales to
distributors, such as CHS which filed for insolvency in 1999,
where no related revenue was recognized in 1998 as collection
was not reasonably assured.

Cost of services and support revenue consists
principally of salaries and benefits related to employees
providing customer support and consulting services. In 2000, the
cost of services and support revenue remained relatively flat at
$42.3 million from $42.1 million in 1999. From 1998 to
1999, cost of services and support revenue increased 6% to
$42.1 million in 1999 from $39.7 million in 1998. Cost
of services and support revenue as a percentage of net services
and support revenue was 16% in 2000, 12% in 1999, and 21% in
1998.

Expenses.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.

Operating Costs Including
Stock-Based Compensation (in thousands):

|                                              |                                                                              |                          |         |               |  |               |         |         |  |   |         |         | 
|--------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------ | ------- | ------------- |  | ------------- | ------- | ------- |  | - | ------- | ------- | 
|                                              |                                                                              |                         
|                                              |                                                                              | Years Ended December 31,
|                                              |                                                                              |                         
|                                              |                                                                              | 2000                     |         | 1999          |  | 1998         
|                                              |                                                                              |                          |         |               |  |              
|                                              |                                                                              | (As restated)            |         | (As restated) |  | (As restated)
|Research and development                      |                                                                              | $                        | 164,218 |               |  | $             | 152,728 |         |  | $ | 135,475 |        
|Marketing and sales                           |                                                                              |                          | 358,295 |               |  |               | 327,508 |         |  |   | 273,696 |        
|General and administrative                    |                                                                              |                          | 91,277  |               |  |               | 114,521 |         |  |   | 97,851  |        
|Amortization of intangibles                   |                                                                              |                          | 58,236  |               |  |               | 50,354  |         |  |   | 40,969  |        
|Provision for (recovery of) doubtful accounts |                                                                              |                          | 4,785   |               |  |               | 19,246  |         |  |   | 4,828   |        
|Acquisition and other related costs           |                                                                              |                          |        |               |  |               |        |         |  |   | 117,170 |        
|                                              |                                                                              |                          |         |               |  |               |         |         |  |   |         |        
|                                              | Total operating costs, including the
    effects of stock-based compensation |                          | $       | 676,811       |  |               | $       | 664,357 |  |   | $       | 669,989 | 
|                                              |                                                                              |                          |         |               |  |               |         |         |  |   |         |        

Operating Costs Excluding
Stock-Based Compensation (in thousands):

|                                              |                                                                              |                          |         |               |  |               |         |         |  |   |         |         | 
|--------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------ | ------- | ------------- |  | ------------- | ------- | ------- |  | - | ------- | ------- | 
|                                              |                                                                              |                         
|                                              |                                                                              | Years Ended December 31,
|                                              |                                                                              |                         
|                                              |                                                                              | 2000                     |         | 1999          |  | 1998         
|                                              |                                                                              |                          |         |               |  |              
|                                              |                                                                              | (As restated)            |         | (As restated) |  | (As restated)
|Research and development(1)                   |                                                                              | $                        | 162,324 |               |  | $             | 148,213 |         |  | $ | 134,807 |        
|Marketing and sales(2)                        |                                                                              |                          | 353,725 |               |  |               | 320,346 |         |  |   | 273,696 |        
|General and administrative(3)                 |                                                                              |                          | 87,625  |               |  |               | 105,495 |         |  |   | 97,851  |        
|Amortization of intangibles                   |                                                                              |                          | 58,236  |               |  |               | 50,354  |         |  |   | 40,969  |        
|Provision for (recovery of) doubtful accounts |                                                                              |                          | 4,785   |               |  |               | 19,246  |         |  |   | 4,828   |        
|Acquisition and other related costs           |                                                                              |                          |        |               |  |               |        |         |  |   | 117,170 |        
|                                              |                                                                              |                          |         |               |  |               |         |         |  |   |         |        
|                                              | Total operating costs, excluding the
    effects of stock-based compensation |                          | $       | 666,695       |  |               | $       | 643,654 |  |   | $       | 669,321 | 
|                                              |                                                                              |                          |         |               |  |               |         |         |  |   |         |        

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---



|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Excludes stock-based compensation charge of
    $1,894, $4,515, and $668 for 2000, 1999, and 1998, respectively.
|   
|(2) | Excludes stock-based compensation charge of
    $4,570, $7,162, and none for 2000, 1999, and 1998, respectively.
|   
|(3) | Excludes stock-based compensation charge of
    $3,652, $9,026, and none for 2000, 1999, and 1998, respectively.

Research and Development.Research and development expenses
consist primarily of salary and benefits for our development and
technical support staff. Excluding the effects of stock-based
compensation of $1.9 million and $4.5 million in 2000
and 1999, respectively, research and development expenses
increased 10% to approximately $162.3 million in 2000 from
$148.2 million in 1999. From 1998 to 1999, excluding the
effects of stock-based compensation of $4.5 million in 1999
and $0.7 million, research and development expenses
increased 10% from $134.8 million in 1998 to
$148.2 million in 1999. These increases from 1998 to 1999
and 2000 were primarily due to the increase in staffing and
equipment expense to support growth in our product and service
offerings. As a percentage of net revenue, research and
development expenses were 23% in 2000, 23% in 1999, and 32% in
1998. Excluding the effects of stock-based compensation, as a
percentage of net revenue, research and development expenses
were 23% in 2000, 22% in 1999, and 32% in 1998. Research and
development expenses as a percent of net revenue were
disproportionately impacted in 1998 by the extent of 1998
revenue deferred to subsequent periods resulting from fair value
allocations of revenue in multi-element arrangements and the change
to a sell-through revenue recognition policy.

We believe that our ability to maintain our
competitiveness depends in large part upon our ability to
enhance existing products, develop and acquire new products and
develop and integrate acquired products. The market for computer
software is characterized by low barriers to entry and rapid
technological change, and is highly competitive with respect to
timely product introductions. The timing and amount of research
and development expenses may vary significantly based upon the
number of new products and significant upgrades under
development and products acquired during a given period.

Marketing and Sales.Marketing and sales expenses consist
primarily of salary, commissions and benefits for marketing,
sales and customer support personnel and costs associated with
advertising and promotions. Excluding the effects of stock-based
compensation of $4.6 million and $7.2 million in 2000
and 1999, respectively, marketing and sales expenses increased
10% to $353.7 million from $320.3 million in 1999.
From 1998 to 1999, excluding the effect of stock-based
compensation in 1999, marketing and sales expenses increased 17%
from $273.7 million in 1998 to $320.3 million in 1999.
These increases were primarily due to continued investment in
the marketing of our products and services, hiring and training
of our enterprise level sales force, and advertising and
promotions for McAfee.com. As a percentage of net revenue,
marketing and sales expense was 51% in 2000, 50% in 1999, and
64% in 1998. Excluding the effects of stock-based compensation,
as a percentage of net revenue, marketing and sales expense was
50% in 2000, 48% in 1999, and 64% in 1998. Marketing and sales
expenses as a percent of net revenue were disproportionately
impacted in 1998 by the extent of 1998 revenue deferred to
subsequent periods resulting from fair value allocations of
revenue in multi-element arrangements. We frequently incur
marketing and sales expense prior to the realization of sales
revenue and, as a result, may expect significant fluctuations in
marketing and sales expenses as a percentage of net revenue.

General and Administrative.General and administrative expenses
consist principally of salary and benefit costs for
administrative personnel and general operating costs. Excluding
the effects of stock-based compensation of $3.7 million and
$9.0 million for 2000 and 1999, respectively, general and
administrative expenses decreased 32% to $103.4 million in
2000 from $151.3 million in 1999. In 1999, we recorded
charges relative to the development of our E-commerce business
systems, expansion of our IT infrastructure and the
implementation of our new SAP Human Resources module. From 1998
to 1999, excluding the effects of stock-based compensation in
1999, general and administrative expenses in 1999 increased 54%
from $98.0 million in 1998 to $151.3 million. As a
percentage of net revenues, general and administrative expenses
were 15%, 24%, and 23% in the years ended December 31,
2000, 1999, and 1998, respectively. Excluding the effects of
stock-based compensation, as a percentage of net revenues,
general and administrative expenses

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were 15%, 23%, and 23% in the years ended
December 31, 2000, 1999, and 1998, respectively. General
and administrative expenses as a percent of net revenue were
disproportionately impacted in 1998 by the extent of 1998
revenue deferred to subsequent periods resulting from fair value
allocations of revenue in multi-element arrangements.


Amortization of Intangibles.We expensed $58.2 million,
$50.4 million, and $41.0 million of amortization
related to intangibles in the years ended December 31,
2000, 1999 and 1998, respectively. Intangibles consist of
purchased goodwill and certain acquired technology. The increase
in amortization in 2000 was partly a result of the
$5.8 million additional amortization of goodwill related to
McAfee.coms acquisitions during 2000. In addition,
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 in 2000. The
impairment charge was recorded as a result of McAfee.coms
year-end review of technology acquired in 2000 and an assessment
of its future potential. McAfee.com determined that certain
storage technology purchased as part of the original acquisition
was not to be incorporated into future products as a result of
the nonviable Internet advertising business model. Accordingly,
the full carrying value of the unamortized goodwill and
purchased technology was written off. The increase in
amortization in 1999 related to a full year of amortization of
intangibles that resulted from the 1998 acquisitions of Magic
Solutions and CyberMedia.

Interest and Other Income.Interest and other income increased to
$43.0 million in 2000 from $30.8 million in 1999 and
decreased to $30.8 million in 1999 from $32.0 million
in 1998. Interest and other income increased from 1999 to 2000
due to an increase in higher average cash balances invested at
slightly higher interest rates.

Interest Expense.Interest expense increased to
$18.2 million in 2000 from $16.8 million in 1999 and
decreased to $16.8 million in 1999 from $14.2 million
in 1998. The increase in interest expense reflects increased
short-term borrowings secured by our expected cash flows
resulting from amounts invoiced to our distributors. The
increase each year also results, in part, from the accretion of
interest on our zero coupon convertible subordinated debentures
issued in February 1998. We apply the effective interest method
that results in a consistent yield to maturity of 4.75%
resulting in an increasing level of interest expense each year
due to the accretion of the discount on the debentures to the
aggregate face amount at maturity.

Gain (Loss) on Investments, net.In 2000, we recognized a total gain of
$40.6 million on the sale of our venture and strategic
investments, including an $11.9 million gain on the sale of
shares of Network Associates Japan offset by a $7.3 million
other than temporary impairment charge. In 1999 and 1998, we
recognized a loss of $15.8 million and a gain of
$1.3 million, respectively from sales of marketable
securities. Additionally, in 1999 we recognized an other than
temporary impairment loss of $2.5 million on our Direct Web
investment.

Provision for (benefit from) Income Taxes.Our provision for (benefit from)
income taxes was $40.9 million, $24.7 million, and
$(67.1) million in 2000, 1999, and 1998, respectively. Our
tax expense (benefit) for 2000, 1999, and 1998 was 58%, 19%, and
(17%), respectively, of pretax book income. Each year, our tax
expense is mainly influenced by the amount of non-deductible
expenses (primarily goodwill) that are incurred and the mix of
income between geographic jurisdictions, including taxable
income in certain foreign countries. In 2000, our tax expense
was also significantly impacted by the consolidation of
McAfee.com losses for which no benefit was recognized.

The valuation allowance for our deferred tax
assets increased from 1999 to 2000, as well as, from 1998 to
1999. The increase was due to uncertainty in our ability to
utilize certain deferred tax assets, primarily foreign tax
credits.

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##### Table of Contents



Stock-Based Compensation

We recognized stock-based compensation expense of
$0.7 million, $20.7 million and $10.1 million in
1998, 1999 and 2000, respectively. Our stock-based compensation
charges are made up of the following for the years presented (in
thousands):

|                                                                         |                                |                          |       |               |  |               |        |        |  |   |     |     | 
|------------------------------------------------------------------------ | ------------------------------ | ------------------------ | ----- | ------------- |  | ------------- | ------ | ------ |  | - | --- | --- | 
|                                                                         |                                |                         
|                                                                         |                                | Years Ended December 31,
|                                                                         |                                |                         
|                                                                         |                                | 2000                     |       | 1999          |  | 1998         
|                                                                         |                                |                          |       |               |  |              
|                                                                         |                                | (As restated)            |       | (As restated) |  | (As restated)
|McAfee.com options and shares issued to Network
    Associates personnel |                                | $                        |      |               |  | $             | 11,869 |        |  | $ |    |    
|Repriced options                                                         |                                |                          | 8,714 |               |  |               | 8,834  |        |  |   |    |    
|Warrants to outside consultants                                          |                                |                          | 1,402 |               |  |               |       |        |  |   |    |    
|Other                                                                    |                                |                          |      |               |  |               |       |        |  |   | 668 |    
|                                                                         |                                |                          |       |               |  |               |        |        |  |   |     |    
|                                                                         | Total stock-based compensation |                          | $     | 10,116        |  |               | $      | 20,703 |  |   | $   | 668 | 
|                                                                         |                                |                          |       |               |  |               |        |        |  |   |     |    

McAfee.com Options and Shares Issued to
Network Associates Personnel.In
January 1999, executives of Network Associates were granted
options to purchase approximately 1.7 million shares of
McAfee.com common stock. In September and October 1999 certain
Networks Associates employees were also granted options to
purchase approximately 334,000 shares of McAfee.com common
stock. As of December 31, 1999, all these options were
fully vested. These options originally vested over four years.
All options expire ten years after grant. Since these officers
and Networks associates employees were not employees of
McAfee.com, these options were accounted for at fair market
value in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, and
its interpretations. The fair market value of the options
granted was calculated using the Black-Scholes option pricing
model using various assumptions including the options contract
life. In connection with these grants, McAfee.com recorded total
compensation expense for 1999 of approximately
$11.9 million.

Repriced Options.On
April 22, 1999, we offered to substantially all our
employees, excluding executive officers, the right to cancel
certain outstanding stock options and receive new options with
exercise prices at the current fair value of the stock. Options
to purchase a total of approximately 10.3 million shares
were canceled and the same number of new options were granted at
an exercise price of $11.063, which was based on the closing
price of our common stock on April 22, 1999. The new
options vest at the same rate that they would have vested under
previous option plans. As a result, options to purchase
approximately 3.4 million shares at an exercise price of
$11.063 were vested and outstanding at December 31, 2000.

In accordance with Accounting Principles Board
(APB) Opinion No. 25 Accounting for
Stock Issued to Employees (APB 25),
we recorded an initial stock-based compensation charge in
connection with this repricing. 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 $6.7 million and $8.8 million was
expensed in the years ended December 31, 2000 and 1999,
respectively.

As a result of the introduction of Financial
Accounting Standards Board (FASB) Interpretation
No. 44, Accounting for Certain Transactions
Involving Stock Compensation
(FIN 44), stock options repriced by us on
April 22, 1999 are subject to variable plan accounting
treatment from July 1, 2000. Accordingly, we have and will
continue to remeasure compensation costs for the repriced
options until the options are exercised, forfeited or canceled
without replacement. The first valuation period began with the
effective date of FIN 44, which was July 1, 2000. The
valuation has and will be based on any excess of the closing
stock price at the end of the reporting period or date of
exercise, forfeiture or cancellation without replacement, if
earlier, over the fair value of our common stock on July 1,
2000, which was $20.375. The resulting compensation charge to
earnings will be recorded over the remaining vesting period,
using the accelerated method of amortization discussed in FASB
Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans. When options are fully vested, the charge will
be recorded to earnings immediately. Depending upon movements in
the market value of our

12



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common stock, this accounting treatment may
result in significant additional compensation charges in future
periods.


During fiscal year 2000, we recorded a
stock-based compensation expense of approximately
$2.0 million related to repriced options issued to
employees of McAfee.com and myCIO.com. As of December 31,
2000, we, McAfee.com and myCIO.com had options outstanding and
subject to variable plan accounting amounting to approximately
4.5 million, 0.1 million, and 0.3 million,
respectively.

Warrants to Outside Consultants.In January 2000, we issued fully
vested warrants to consultants. As a result, we recorded a
stock-based compensation charge of approximately
$1.4 million based on the Black-Scholes option pricing 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%.

Acquisition and Other Related Costs

The following table is a summary of our
acquisitions in the three years ended December 31, 2000:

|                        |  |                      |                   |                |  |   |               | 
|----------------------- |  | -------------------- | ----------------- | -------------- |  | - | ------------- | 
|                        |  | Common Stock         |                   | Purchase Price
|                        |  | Issued in            |                   | of Purchase   
|                        |  | Pooling of Interests |                   | Transactions  
|                        |  |                      |                   |               
|2000                    |  |                      |                   |                |  |   |               | 
|McAfee.com acquisitions |  |                      |                   |                |  | $ | 22.6 million  | 
|1999                    |  |                      |                   |                |  |   |               | 
| none                 |  |                      |                   |                |  |   |               | 
|1998                    |  |                      |                   |                |  |   |               | 
|Syscon                  |  |                      | 1,230 shares      |                |  |   |               | 
|Nordic                  |  |                      | 30,508 shares     |                |  |   |               | 
|Magic Solutions         |  |                      |                   |                |  | $ | 113.0 million | 
|TIS                     |  |                      | 6,755,540 shares  |                |  |   |               | 
|Secure                  |  |                      | 567,000 shares    |                |  |   |               | 
|CSB                     |  |                      | 9,815 shares      |                |  |   |               | 
|QA                      |  |                      | 305,557 shares    |                |  |   |               | 
|Anyware                 |  |                      | 228,204 shares    |                |  |   |               | 
|Dr. Solomons           |  |                      | 15,813,142 shares |                |  |   |               | 
|CyberMedia              |  |                      |                   |                |  | $ | 133.7 million | 

In addition to the acquisition related matters
discussed below, for a description of these business
combinations and other acquisition related expenses and accruals
in 1998 totaling $117.2 million, see Note 4 to our
consolidated financial statements.



| |                                        
| | ---------------------------------------
| | Acquisition and Other Related
    Costs

In connection with several acquisitions in 1998,
we assessed and formulated restructuring plans affecting the
acquired company or our operations related to the acquisition.
The restructuring plans provided for exiting an activity of the
acquired company, terminating employees thereby incurring
severance and benefit costs, closing facilities and incurring
liabilities on terminated leases, and disposing of related
leasehold improvements, property and equipment. We recorded
acquisition and restructuring accruals in 1998 that were used in
the year of accrual and the subsequent year as amounts were paid
or charged against the restructuring accrual.

During the year ended December 31, 1998, in
connection with acquisitions accounted for as
pooling-of-interests, we incurred direct transaction costs and
other restructuring and related charges in the amount of
$49.0 million. In connection with the acquisitions
accounted for as purchase transactions, we incurred charges of
$49.8 million in the year ended December 31, 1998,
consisting principally of the write-off of acquired in-process
research and development.

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We also incurred severance and benefits charges
of $10.0 million related to company-wide reductions in
workforce, following our major acquisitions in the second and
third quarters of 1998 and lease and asset write-down related
costs of $8.3 million.

At December 31, 1999, all expenditures
related to these accruals were complete.



| |                                                                       
| | ----------------------------------------------------------------------
| | CyberMedia and Magic Solutions In-process
    Research and Development

In conjunction with our acquisition of Magic
Solutions and CyberMedia, we expensed $27.0 million and
$22.8 million as purchased in-process research and
development, which amounts are included in acquisition related
expenses and accruals.

The ongoing projects at CyberMedia at the time of
the purchase included upgrade versions of four products (First
Aid 6.0 and 7.0, UnInstaller 6.0, Guard Dog 3.0, and Oil
Change 3.0) as well as development on technologies to be
used in two of our projects (a replacement product for PC Medic
and McAfee Office). These upgrades would include new interfaces
with the Internet, enhanced use of Active-X controls and Java
and enhanced user interfaces. At the date we acquired
CyberMedia, we estimated that, on average, 42% of the
development effort had been completed and that the remaining 58%
of the development effort would take approximately
12 months to complete and would cost $2.7 million. The
efforts required to complete the development of these projects
principally relate to additional design efforts to integrate the
technologies into our line of products, finalization of coding,
and completion of prototyping, verification, and testing
activities required to establish that products associated with
the technologies can be successfully introduced. The value of
the in-process technologies was determined by estimating the
projected net cash flows related to products, including costs to
complete the development of the technologies or products, and
the future net revenues that may be earned from the products,
excluding the value attributed to integration with our products
or that may have been achieved due to efficiencies resulting
from the combined sales force or the use of our more effective
distribution channel. These cash flows were discounted back to
their net present value using a discount rate of 28% (which
represents a premium of approximately 5% over our weighted
average cost of capital) and excluding the value attributable to
the use of the in-process technologies in future products. As of
December 31, 1999, the projects related to this acquisition
were complete.

The ongoing projects at Magic Solutions at the
time of the purchase comprised an upgrade version of Support
Magic 4.0, Magic Solutions' then current product. This upgrade,
known as Merlin Enterprise, represents new technologies with
significant enhanced functionality, including increased
scalability, a 32-bit browser-based technology, an enhanced user
interface and integrated management features. At the date we
acquired Magic Solutions, we estimated that, on average, 80% of
the development effort had been completed and that the remaining
20% of the development effort would take approximately
12 months to complete and would cost $1.8 million. The
efforts required to complete the development of these projects
principally relate to additional design efforts to integrate the
technologies into our line of products, finalization of coding,
and completion of prototyping, verification, and testing
activities required to establish that products associated with
the technologies can be successfully introduced. The value of
the in-process technologies was determined by estimating the
projected net cash flows related to products, including costs to
complete the development of the technologies or products, and
the future net revenues that may be earned from the products,
excluding the value attributed to integration with our products
or that may have been achieved due to efficiencies resulting
from the combined sales force or the use of the our more
effective distribution channel. These cash flows were discounted
back to their net present value using a discount rate of 28%
(which represents a premium of approximately 5% over our
weighted average cost of capital) and excluding the value
attributable to the use of the in-process technologies in future
products. As of December 31, 1999, the projects related to
this acquisition were complete.



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

During 2000, McAfee.com completed two
acquisitions (Signal 9 Solutions Canada and Tufans) 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

14



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related expenses of $0.8 million. The value
of the stock issued was based on the average of the market price
of McAfee.com stock 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 were largely dependent on the core
technology and that new versions are released frequently and
contain incremental rather than fundamental improvements. Based
on this analysis, $22.3 million was recorded as goodwill
and purchased technology, and is being amortized on a
straight-line basis over three years.


Liquidity and Capital Resources

At December 31, 2000, we had
$275.5 million in cash and cash equivalents and
$418.6 million in marketable securities, for a combined
total of $694.1 million.

Net cash provided by operating
activities was $7.6 million, $56.2 million and
$33.1 million in 2000, 1999 and 1998, respectively. Net
cash provided by operating activities in 2000 consisted
primarily of net loss before depreciation and amortization, provision
for (recovery of) doubtful accounts, impairment of strategic investments and goodwill,
stock-based compensation charge, non-cash interest on our debentures
and deferred taxes, offset by minority interest and gain on sale of
investments. In addition, there were increases in accounts
receivables and prepaid expenses and other current assets which
was offset by a decrease in prepaid expenses and other assets
and increases in accounts payable, accrued liabilities and
deferred revenue. Net cash used in operating activities in 1999
consisted primarily of net loss before depreciation and
amortization, provision for doubtful accounts, impairment of strategic
investments and goodwill, stock-based compensation charge,
interest on our debentures, realized loss on investments, and
deferred taxes. In addition, in 1999, there were decreases in
accounts receivable and a decrease in accounts payable and
accrued liabilities, which amounts were offset by a decrease in
prepaid expenses and other assets and an increase in deferred
revenue. Net cash provided by operating activities in 1998
consisted primarily of net loss before acquired in-process
research and development, depreciation and amortization, provision for doubtful accounts, write-down of property and equipment
and interest on our debentures as well as an increase in deferred revenue and accounts payable
and accrued liabilities and the tax benefit from exercise of
non-qualified stock options offset by increases in prepaid and
other assets and change in deferred taxes.

Net cash used in investing activities was
$3.7 million, $162.8 million and
$333.3 million in 2000, 1999 and 1998, respectively,
primarily reflecting purchases of marketable securities and
additions to property and equipment. In 2000, we obtained
proceeds of $36.8 million and $11.9 million from our
sale of Goto.com shares and the sale of less than 5% of the
shares of our Japanese subsidiary, Network Associates Japan,
respectively. In 1998, we used approximately $243 million to fund the
acquisitions of Cybermedia and Magic Solutions.

Net cash used in financing activities was
$50.0 million in 2000 consisting primarily of the
repurchase of our common stock for approximately
$100.4 million. The repurchases of our common stock were
offset by proceeds associated with the exercise of
stock options purchase of new common stock under our Employee Stock Purchase Plan and the sale of put options. Net
cash provided by financing activities was $19.8 million in
1999 consisting primarily of the proceeds from McAfee.coms
initial public offering as well as proceeds associated with the
exercise of non-qualified stock options, offset by the net repayment of short-term borrowings during the year. Net cash provided by
financing activities was $561.9 million in 1998 and
consisted primarily of the proceeds associated the issuance on
the debentures noted above together with proceeds from the
exercise of stock options and purchase of new common stock under our Employee Stock Purchase Plan and
the net proceeds from short-term borrowings during the year.

In February 2001, we settled all outstanding put
options for a payment of approximately $53.8 million.

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

Euro

On January 1, 1999, the Euro
was introduced. On that day, the
exchange ratios of the currencies of the eleven countries
participating in the first phase of the European Economic and
Monetary Union were

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fixed. The Euro became a currency in its own
right and the currencies of the participating countries, while
continuing to exist for a three-year transition period, are now
fixed denominations of the Euro. The conversion to the Euro will
have significant effects on the foreign exchange markets and
bond markets and is requiring significant changes in the
operations and systems within the European banking industry. Our
information system is designed to accommodate multi-currency
environments. As a result, we have the flexibility to transact
business with vendors and customers in either Euro or
traditional national currency units.


Financial Risk Management

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

As a global concern, we face exposure to adverse
movements in foreign currency exchange rates. These exposures
may change over time as business practices evolve and could have
a material adverse impact on our financial results.
Historically, our primary exposures related to
nondollar-denominated sales and operating expenses in Japan,
Canada, Australia, Europe, Latin America, and Asia. We have
recently expanded our business activities in Europe. As a
result, we expect to see an increase in exposures related to
nondollar-denominated sales in several European currencies. 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 Euro, Japanese
yen, Canadian dollar, Australian dollar, and certain European
currencies. To the extent that these estimates are overstated or
understated during periods of currency volatility, we could
experience unanticipated currency gains or losses.

We maintain investment portfolio holdings of
various issuers, types and maturities. These securities are
classified as available-for-sale, and consequently are recorded
on the consolidated 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
non-publicly traded companies. These investments amounting to
approximately $18.0 million as of December 31, 2000
are carried at cost less reductions for other-than-temporary
impairments. Reasons for reductions for other-than-temporary
impairments include but are not limited to, a decline in value
resulting from the related company having insufficient cash flow
to operate for the next twelve months.

The following tables present the hypothetical
changes in fair values in the securities held at
December 31, 2000 that are sensitive to the changes in
interest rates. The modeling technique used measures the change
in fair values arising from hypothetical parallel shifts in the
yield curve of plus or minus 50 basis points
(BPS), 100 BPS and 150 BPS over six and twelve-month
time horizons. Beginning fair values represent the market
principal plus accrued interest and dividends at
December 31, 2000. Ending fair values are the market
principal plus accrued interest, dividends and reinvestment
income at six and twelve month time horizons.

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

|                                           |       |                            |       |             |  |                            |       |       |  |        |       |         |  |         |       |       |  |   |       |       |  |   |       |       |  |   |       |       | 
|------------------------------------------ | ----- | -------------------------- | ----- | ----------- |  | -------------------------- | ----- | ----- |  | ------ | ----- | ------- |  | ------- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                           |       |                            |       |             |  |                           
|                                           |       | Valuation of Securities    |       |             |  | Valuation of Securities   
|                                           |       | Given an Interest Rate     |       | No          |  | Given an Interest Rate    
|                                           |       | Decrease of X Basis Points |       | Change      |  | Increase of X Basis Points
|                                           |       |                            |       | in Interest |  |                           
|Issuer                                     |       | 150 BPS                    |       | 100 BPS     |  | 50 BPS                     |       | Rate  |  | 50 BPS |       | 100 BPS |  | 150 BPS
|                                           |       |                            |       |             |  |                            |       |       |  |        |       |         |  |        
|U.S. Government notes and Bonds            |       | $                          | 194.2 |             |  | $                          | 193.3 |       |  | $      | 192.4 |         |  | $       | 191.6 |       |  | $ | 190.7 |       |  | $ | 189.8 |       |  | $ | 189.0 |      
|Municipal notes and bonds                  |       |                            | 35.7  |             |  |                            | 35.8  |       |  |        | 35.9  |         |  |         | 35.9  |       |  |   | 35.9  |       |  |   | 36.0  |       |  |   | 36.1  |      
|Corporate notes, bonds and preferred stock |       |                            | 359.5 |             |  |                            | 359.2 |       |  |        | 358.8 |         |  |         | 358.4 |       |  |   | 358.2 |       |  |   | 357.9 |       |  |   | 357.6 |      
|                                           |       |                            |       |             |  |                            |       |       |  |        |       |         |  |         |       |       |  |   |       |       |  |   |       |       |  |   |       |      
|                                           | Total |                            | $     | 589.4       |  |                            | $     | 588.3 |  |        | $     | 587.1   |  |         | $     | 585.9 |  |   | $     | 584.8 |  |   | $     | 583.7 |  |   | $     | 582.7 | 
|                                           |       |                            |       |             |  |                            |       |       |  |        |       |         |  |         |       |       |  |   |       |       |  |   |       |       |  |   |       |      

16



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##### Table of Contents



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

|                                           |       |                            |       |             |  |                            |       |       |  |        |       |         |  |         |       |       |  |   |       |       |  |   |       |       |  |   |       |       | 
|------------------------------------------ | ----- | -------------------------- | ----- | ----------- |  | -------------------------- | ----- | ----- |  | ------ | ----- | ------- |  | ------- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                           |       |                            |       |             |  |                           
|                                           |       | Valuation of Securities    |       |             |  | Valuation of Securities   
|                                           |       | Given an Interest Rate     |       | No          |  | Given an Interest Rate    
|                                           |       | Decrease of X Basis Points |       | Change      |  | Increase of X Basis Points
|                                           |       |                            |       | in Interest |  |                           
|Issuer                                     |       | 150 BPS                    |       | 100 BPS     |  | 50 BPS                     |       | Rate  |  | 50 BPS |       | 100 BPS |  | 150 BPS
|                                           |       |                            |       |             |  |                            |       |       |  |        |       |         |  |        
|U.S. Government notes and bonds            |       | $                          | 198.8 |             |  | $                          | 198.0 |       |  | $      | 197.1 |         |  | $       | 196.2 |       |  | $ | 194.8 |       |  | $ | 194.5 |       |  | $ | 194.3 |      
|Municipal notes and bonds                  |       |                            | 36.7  |             |  |                            | 36.7  |       |  |        | 36.8  |         |  |         | 36.8  |       |  |   | 36.8  |       |  |   | 36.9  |       |  |   | 37.1  |      
|Corporate notes, bonds and preferred stock |       |                            | 363.4 |             |  |                            | 363.2 |       |  |        | 362.9 |         |  |         | 362.6 |       |  |   | 362.1 |       |  |   | 362.0 |       |  |   | 361.8 |      
|                                           |       |                            |       |             |  |                            |       |       |  |        |       |         |  |         |       |       |  |   |       |       |  |   |       |       |  |   |       |      
|                                           | Total |                            | $     | 598.9       |  |                            | $     | 597.9 |  |        | $     | 596.8   |  |         | $     | 595.6 |  |   | $     | 593.7 |  |   | $     | 593.4 |  |   | $     | 593.2 | 
|                                           |       |                            |       |             |  |                            |       |       |  |        |       |         |  |         |       |       |  |   |       |       |  |   |       |       |  |   |       |      

Convertible Debt

On February 13, 1998, we completed a private
placement of our Zero Coupon Convertible Subordinated Debentures
due in 2018. The debentures, with an aggregate face amount at
maturity of $885.5 million, generated net proceeds to us of
approximately $337.6 million (after deducting the fee paid
to the initial purchaser of our debentures, but no other
expenses of the placement). The initial price to the public for
our debentures was $391.06 per $1,000 of face amount at
maturity, which equates to a yield to maturity over the term of
the bonds of 4.75% (on a semi-annual bond 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.
As of June 30, 2003, all the debentures had been redeemed.






|        |                                                            
|------- | -----------------------------------------------------------
|Item 8. | Financial Statements and Supplementary Data
    (Unaudited)




Quarterly Operating Results

|                                         |                                                                           |                                       |   |               |  |           |   |           |   |              |   |               |   |           |   |           |   |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------- | - | ------------- |  | --------- | - | --------- | - | ------------ | - | ------------- | - | --------- | - | --------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                         |                                                                           |                                      
|                                         |                                                                           | Three Months Ended                   
|                                         |                                                                           |                                      
|                                         |                                                                           | December 31,                          |   | September 30, |  | June 30,  |   | March 31, |   | December 31, |   | September 30, |   | June 30,  |   | March 31,
|                                         |                                                                           | 2000                                  |   | 2000          |  | 2000      |   | 2000      |   | 1999         |   | 1999          |   | 1999      |   | 1999     
|                                         |                                                                           |                                       |   |               |  |           |   |           |   |              |   |               |   |           |   |          
|                                         |                                                                           |                                      
|                                         |                                                                           | (In thousands, except per share data)
|                                         |                                                                           | (As                                   |   | (As           |  | (As       |   | (As       |   | (As          |   | (As           |   | (As       |   | (As      
|                                         |                                                                           | restated)                             |   | restated)     |  | restated) |   | restated) |   | restated)    |   | restated)     |   | restated) |   | restated)
|STATEMENTS OF OPERATIONS AND OTHER DATA: |                                                                           |                                       |   |               |  |           |   |           |   |              |   |               |   |           |   |           |   |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        
|                                         | Net revenues                                                              |                                       | $ | 231,995       |  |           | $ | 159,762   |   |              | $ | 158,689       |   |           | $ | 158,926   |   |  | $ | 165,437 |   |  | $ | 194,185 |   |  | $ | 137,139 |   |  | $ | 163,577 |  
|                                         | Gross margin                                                              |                                       |   | 177,132       |  |           |   | 118,910   |   |              |   | 121,228       |   |           |   | 132,002   |   |  |   | 130,760 |   |  |   | 158,453 |   |  |   | 112,690 |   |  |   | 125,729 |  
|                                         | Income (loss) from operations                                             |                                       |   | 3,743         |  |           |   | (50,976   | ) |              |   | (60,021       | ) |           |   | (29,038   | ) |  |   | (31,253 | ) |  |   | (23,889 | ) |  |   | (49,410 | ) |  |   | (32,175 | )
|                                         | Income (loss) before provision for income taxes
    and minority interest |                                       |   | 5,742         |  |           |   | (46,217   | ) |              |   | (59,400       | ) |           |   | 28,951    |   |  |   | (24,627 | ) |  |   | (20,353 | ) |  |   | (50,226 | ) |  |   | (32,573 | )
|                                         | Net income (loss)                                                         |                                       |   | 34,116        |  |           |   | (78,248   | ) |              |   | (101,320      | ) |           |   | 37,438    |   |  |   | (28,034 | ) |  |   | (24,218 | ) |  |   | (60,867 | ) |  |   | (38,845 | )
|                                         | Basic income (loss) per share                                             |                                       | $ | 0.25          |  |           | $ | (0.57     | ) |              | $ | (0.73         | ) |           | $ | 0.27      |   |  | $ | (0.19   | ) |  | $ | (0.17   | ) |  | $ | (0.44   | ) |  | $ | (0.28   | )
|                                         | Diluted income (loss) per share                                           |                                       | $ | 0.25          |  |           | $ | (0.55     | ) |              | $ | (0.71         | ) |           | $ | 0.26      |   |  | $ | (0.19   | ) |  | $ | (0.17   | ) |  | $ | (0.44   | ) |  | $ | (0.27   | )

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,

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seasonality, trends in the computer industry,
general economic conditions (such as the recent economic
slowdown), extraordinary events such as acquisitions or
litigation and the occurrence of unexpected events.


Significant quarterly fluctuations in revenues
will cause significant fluctuations in our cash flows and the
cash and cash equivalents, accounts receivable and deferred
revenue accounts on our consolidated 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 unaudited quarterly results of operation information for
the two year period ending December 31, 2000 with
reconciliation of our as reported net revenue and net income
(loss) to the restated net revenue and net income (loss) (in
thousands). For a description of the various adjustments set
forth below, see Note 3 to our consolidated financial
statements:

|                                                                                       |                                                                |                                       |          |               |   |          |         |           |   |              |         |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |          |         |   |   |         |         |   |  | 
|-------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------- | -------- | ------------- | - | -------- | ------- | --------- | - | ------------ | ------- | ------------- | - | -------- | ------- | --------- | - | - | ------- | ------- | - | - | ------- | ------- | - | - | -------- | ------- | - | - | ------- | ------- | - |  | 
|                                                                                       |                                                                |                                      
|                                                                                       |                                                                | Three Months Ended                   
|                                                                                       |                                                                |                                      
|                                                                                       |                                                                | December 31,                          |          | September 30, |   | June 30, |         | March 31, |   | December 31, |         | September 30, |   | June 30, |         | March 31,
|                                                                                       |                                                                | 2000                                  |          | 2000          |   | 2000     |         | 2000      |   | 1999         |         | 1999          |   | 1999     |         | 1999     
|                                                                                       |                                                                |                                       |          |               |   |          |         |           |   |              |         |               |   |          |         |          
|                                                                                       |                                                                |                                      
|                                                                                       |                                                                | (In thousands, except per share data)
|                                                                                       |                                                                | (Unaudited
as restated)              
|Statements of Operations and Other Data:                                               |                                                                |                                       |          |               |   |          |         |           |   |              |         |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |          |         |   |   |         |        
|Net revenue, as reported                                                               |                                                                | $                                     | 68,740   |               |   | $        | 221,773 |           |   | $            | 220,041 |               |   | $        | 187,188 |           |   | $ | 172,530 |         |   | $ | 195,099 |         |   | $ | 15,145   |         |   | $ | 228,210 |        
|Revenue adjustments:                                                                   |                                                                |                                       |          |               |   |          |         |           |   |              |         |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |          |         |   |   |         |        
|                                                                                       | Restatement to sell-through basis of revenue
    recognition   |                                       |          | 138,021       |   |          |         | (29,838   | ) |              |         | (38,692       | ) |          |         | (20,132   | ) |   |         | 12,855  |   |   |         | 24,213  |   |   |          | 125,761 |   |   |         | (25,811 | )
|                                                                                       | Allocation of revenue in multi- element
    arrangements       |                                       |          | 25,238        |   |          |         | (12,603   | ) |              |         | (19,406       | ) |          |         | (2,238    | ) |   |         | (40,053 | ) |   |         | (10,130 | ) |   |          | (10,070 | ) |   |         | (17,669 | )
|                                                                                       | Collection not reasonably assured                              |                                       |          | 86            |   |          |         | 850       |   |              |         | (3,559        | ) |          |         | (51       | ) |   |         | 20,723  |   |   |         | 2,467   |   |   |          | 14,220  |   |   |         | 3,415   |  
|                                                                                       | Business combinations and related restructuring
    charges    |                                       |          |              |   |          |         |          |   |              |         |              |   |          |         |          |   |   |         |        |   |   |         | (4,204  | ) |   |          | (255    | ) |   |         | (6,279  | )
|                                                                                       | Allowances for sales returns and other revenue
    adjustments |                                       |          | (645          | ) |          |         | (5,111    | ) |              |         | (1,644        | ) |          |         | (737      | ) |   |         | 2,792   |   |   |         | (1,032  | ) |   |          | 1,089   |   |   |         | 2,233   |  
|                                                                                       | General and administrative expense                             |                                       |          |              |   |          |         | (7,519    | ) |              |         | 5,000         |   |          |         | (1,000    | ) |   |         |        |   |   |         | (2,191  | ) |   |          | 1,101   |   |   |         | (800    | )
|                                                                                       | Reclassification for payments to distributors                  |                                       |          | (5,079        | ) |          |         | (848      | ) |              |         | (1,658        | ) |          |         | (6,529    | ) |   |         | (3,547  | ) |   |         | (26     | ) |   |          | (26     | ) |   |         | (466    | )
|                                                                                       | Investments in customers                                       |                                       |          | (1,063        | ) |          |         | (1,500    | ) |              |         |              |   |          |         |          |   |   |         |        |   |   |         |        |   |   |          | (230    | ) |   |         | (9,000  | )
|                                                                                       | Other revenue adjustments                                      |                                       |          | 6,697         |   |          |         | (5,442    | ) |              |         | (1,393        | ) |          |         | 2,425     |   |   |         | 137     |   |   |         | (10,011 | ) |   |          | (9,596  | ) |   |         | (10,256 | )
|                                                                                       |                                                                |                                       |          |               |   |          |         |           |   |              |         |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |          |         |   |   |         |        
|Total revenue adjustments                                                              |                                                                |                                       | 163,255  |               |   |          | (62,011 | )         |   |              | (61,352 | )             |   |          | (28,262 | )         |   |   | (7,093  | )       |   |   | (914    | )       |   |   | 121,994  |         |   |   | (64,633 | )      
|                                                                                       |                                                                |                                       |          |               |   |          |         |           |   |              |         |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |          |         |   |   |         |        
|Net revenue, as restated                                                               |                                                                | $                                     | 231,995  |               |   | $        | 159,762 |           |   | $            | 158,689 |               |   | $        | 158,926 |           |   | $ | 165,437 |         |   | $ | 194,185 |         |   | $ | 137,139  |         |   | $ | 163,577 |        
|                                                                                       |                                                                |                                       |          |               |   |          |         |           |   |              |         |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |          |         |   |   |         |        
|Gross margin, as reported                                                              |                                                                | $                                     | 23,986   |               |   | $        | 181,747 |           |   | $            | 181,139 |               |   | $        | 155,175 |           |   | $ | 137,205 |         |   | $ | 160,630 |         |   | $ | (9,512   | )       |   | $ | 191,838 |        
|Gross margin, as restated                                                              |                                                                |                                       | 177,132  |               |   |          | 118,910 |           |   |              | 121,228 |               |   |          | 132,002 |           |   |   | 130,760 |         |   |   | 158,453 |         |   |   | 112,690  |         |   |   | 128,729 |        
|Income (loss) from operations, as reported                                             |                                                                |                                       | (165,301 | )             |   |          | 120     |           |   |              | 3,147   |               |   |          | (7,158  | )         |   |   | (17,020 | )       |   |   | (828    | )       |   |   | (194,303 | )       |   |   | 44,228  |        
|Income (loss) from operations, as restated                                             |                                                                |                                       | 3,743    |               |   |          | (50,976 | )         |   |              | (60,021 | )             |   |          | (29,038 | )         |   |   | (31,253 | )       |   |   | (23,889 | )       |   |   | (49,410  | )       |   |   | (32,175 | )      
|Income (loss) before provision for income taxes
    and minority interest, as reported |                                                                |                                       | (167,763 | )             |   |          | 5,456   |           |   |              | 9,464   |               |   |          | 40,467  |           |   |   | (15,200 | )       |   |   | 1,081   |         |   |   | (192,405 | )       |   |   | 45,802  |        
|Income (loss) before provision for income taxes
    and minority interest, as restated |                                                                |                                       | 5,742    |               |   |          | (46,217 | )         |   |              | (59,400 | )             |   |          | 28,951  |           |   |   | (24,627 | )       |   |   | (20,353 | )       |   |   | (50,226  | )       |   |   | (32,573 | )      
|Net income (loss), as restated                                                         |                                                                | $                                     | (144,623 | )             |   | $        | (3,071  | )         |   | $            | 3,177   |               |   | $        | 20,591  |           |   | $ | 13,875  |         |   | $ | (241    | )       |   | $ | (196,760 | )       |   | $ | 26,241  |        
|Total revenue adjustments                                                              |                                                                |                                       | 163,255  |               |   |          | (62,011 | )         |   |              | (61,352 | )             |   |          | (28,262 | )         |   |   | (7,093  | )       |   |   | (914    | )       |   |   | 121,994  |         |   |   | (64,633 | )      

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|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |        |   | 
|------------------------------- | ----------------------------------------------------------- | ------------------------------------- | ------- | ------------- | - | -------- | ------- | --------- | - | ------------ | -------- | ------------- | - | -------- | ------- | --------- | - | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------ | - | 
|                                |                                                             |                                      
|                                |                                                             | Three Months Ended                   
|                                |                                                             |                                      
|                                |                                                             | December 31,                          |         | September 30, |   | June 30, |         | March 31, |   | December 31, |          | September 30, |   | June 30, |         | March 31,
|                                |                                                             | 2000                                  |         | 2000          |   | 2000     |         | 2000      |   | 1999         |          | 1999          |   | 1999     |         | 1999     
|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |          
|                                |                                                             |                                      
|                                |                                                             | (In thousands, except per share data)
|                                |                                                             | (Unaudited,
as restated)             
|Expense adjustments:            |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |       
|                                | Provision for doubtful accounts                             |                                       |         | 12,900        |   |          |         | 1,481     |   |              |          | 923           |   |          |         | (1,966    | ) |   |         | (5,574  | ) |   |         | (1,124  | ) |   |         | 34,495  |   |   |         | 171    |  
|                                | Business combinations and related restructuring
    charges |                                       |         | 2,047         |   |          |         | 1,986     |   |              |          | (1,031        | ) |          |         | (871      | ) |   |         | (11,506 | ) |   |         | (14,764 | ) |   |         | (12,141 | ) |   |         | (4,545 | )
|                                | General and administrative expense                          |                                       |         |              |   |          |         | 7,519     |   |              |          | (5,000        | ) |          |         | 1,000     |   |   |         |        |   |   |         | 2,191   |   |   |         | (1,101  | ) |   |         | 800    |  
|                                | Reclassification for payments to distributors               |                                       |         | 3,819         |   |          |         | 955       |   |              |          | 5,864         |   |          |         | 4,524     |   |   |         | 3,521   |   |   |         |        |   |   |         |        |   |   |         |       |  
|                                | Investments in customers                                    |                                       |         | 4,230         |   |          |         |          |   |              |          |              |   |          |         | 5,000     |   |   |         |        |   |   |         |        |   |   |         |        |   |   |         |       |  
|                                | Cumulative translation adjustment                           |                                       |         | (3,533        | ) |          |         | 4,316     |   |              |          | (2,120        | ) |          |         | 418       |   |   |         | (1,605  | ) |   |         | (490    | ) |   |         | 1,422   |   |   |         | (2,827 | )
|                                | Cost of revenue                                             |                                       |         | (10,107       | ) |          |         | (828      | ) |              |          | 1,441         |   |          |         | 5,089     |   |   |         | 648     |   |   |         | (1,263  | ) |   |         | 208     |   |   |         | (1,475 | )
|                                | Stock-based compensation                                    |                                       |         | (42           | ) |          |         | (12       | ) |              |          |              |   |          |         | (1,348    | ) |   |         |        |   |   |         | (4,623  | ) |   |         | (312    | ) |   |         | (198   | )
|                                | Other                                                       |                                       |         | 622           |   |          |         | (5,328    | ) |              |          | (7,860        | ) |          |         | 4,635     |   |   |         | 12,221  |   |   |         | (377    | ) |   |         | (2,342  | ) |   |         | (5,643 | )
|                                | Income tax effect of restatement adjustments                |                                       |         | 5,549         |   |          |         | (23,254   | ) |              |          | (35,363       | ) |          |         | 28,628    |   |   |         | (32,521 | ) |   |         | (2,613  | ) |   |         | (6,330  | ) |   |         | 13,264 |  
|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |       
|Total expense adjustments       |                                                             |                                       | 15,485  |               |   |          | (13,165 | )         |   |              | (43,146  | )             |   |          | 45,109  |           |   |   | (34,816 | )       |   |   | (23,063 | )       |   |   | 13,899  |         |   |   | (453    | )     
|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |       
|Net restatement adjustments     |                                                             |                                       | 178,140 |               |   |          | (75,176 | )         |   |              | (104,498 | )             |   |          | 16,847  |           |   |   | (41,909 | )       |   |   | (23,977 | )       |   |   | 135,893 |         |   |   | (65,086 | )     
|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |       
|Net income (loss), as restated  |                                                             | $                                     | 34,116  |               |   | $        | (78,248 | )         |   | $            | (101,320 | )             |   | $        | 37,438  |           |   | $ | (28,034 | )       |   | $ | (24,218 | )       |   | $ | (60,867 | )       |   | $ | (38,845 | )     
|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |       
|Basic income (loss) per share   |                                                             | $                                     | 0.25    |               |   | $        | (0.57   | )         |   | $            | (0.73    | )             |   | $        | 0.27    |           |   | $ | (0.19   | )       |   | $ | (0.17   | )       |   | $ | (0.44   | )       |   | $ | (0.28   | )     
|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |       
|Diluted income (loss) per share |                                                             | $                                     | 0.25    |               |   | $        | (0.55   | )         |   | $            | (0.71    | )             |   | $        | 0.26    |           |   | $ | (0.19   | )       |   | $ | (0.17   | )       |   | $ | (0.44   | )       |   | $ | (0.27   | )     
|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |       
|Basic shares                    |                                                             |                                       | 137,857 |               |   |          | 137,482 |           |   |              | 138,072  |               |   |          | 138,877 |           |   |   | 143,783 |         |   |   | 139,038 |         |   |   | 138,478 |         |   |   | 138,395 |       
|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |       
|Diluted shares                  |                                                             |                                       | 137,857 |               |   |          | 140,989 |           |   |              | 142,238  |               |   |          | 144,372 |           |   |   | 143,783 |         |   |   | 139,038 |         |   |   | 138,478 |         |   |   | 142,607 |       
|                                |                                                             |                                       |         |               |   |          |         |           |   |              |          |               |   |          |         |           |   |   |         |         |   |   |         |         |   |   |         |         |   |   |         |       

The adjustment in the table above related to the
conversion to a sell-through revenue recognition policy adjusts
previously reported net revenue to reflect actual sales of our
products by our distributors and resellers under the
sell-through revenue recognition method. This adjustment is most
pronounced in the quarters ended June 30, 1999 and
December 31, 2000. In the quarter ended June 30, 1999,
we limited distributor and reseller orders, which resulted in a
reduction of revenue on a sell-in basis. In the quarter ended
December 31, 2000, we began a transition from the sell-in
to the sell-through business model and, subject to certain
limitations, agreed to accept requests from certain distributors
to return inventory, which also resulted in a reduction of
revenue on a sell-in basis.

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PART IV






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

(a)(1) Financial Statements:

|                                                                           |                                               |        |    |    | 
|-------------------------------------------------------------------------- | --------------------------------------------- | ------ | -- | -- | 
|                                                                           |                                               | Page  
|                                                                           |                                               | Number
|                                                                           |                                               |       
|Report of Independent Auditors                                             |                                               |        | 22 |   
|Consolidated Balance Sheets:                                               |                                               |        |    |   
|                                                                           | December 31, 2000 and 1999                    |        |    | 23 | 
|Consolidated Statements of Operations and
    Comprehensive Income (loss): |                                               |        |    |   
|                                                                           | Years ended December 31, 2000, 1999, and 1998 |        |    | 24 | 
|Consolidated Statements of Stockholders
    Equity:                       |                                               |        |    |   
|                                                                           | December 31, 2000, 1999 and 1998              |        |    | 25 | 
|Consolidated Statements of Cash Flows:                                     |                                               |        |    |   
|                                                                           | December 31, 2000, 1999, and 1998             |        |    | 26 | 
|Notes to Consolidated Financial Statements                                 |                                               |        | 27 |   

(a)(2) Financial Statement Schedule

The following financial statement schedule of
Networks Associates, Inc. for the years ended December 31,
2000, 1999 and 1998 is filed as part of this Form 10-K/A
Amendment No. 2 and should be read in conjunction with
Networks Associates, Incs Consolidated Financial
Statements.

|                                                    |  |  |    | 
|--------------------------------------------------- |  |  | -- | 
|Report of Independent Auditors                      |  |  | 75 | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | 76 | 

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

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##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of

Networks Associates, Inc.


In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations and comprehensive income (loss), of stockholders equity
and of cash flows present fairly, in all material respects, the
financial position of Networks Associates, Inc. and its
subsidiaries at December 31, 2000 and 1999, and the results
of their operations and cash flows for each of the three years
in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As indicated in Note 3 to these accompanying
consolidated financial statements, the Company has restated its
consolidated financial statements for the years ended
December 31, 2000, 1999 and 1998.

/s/ PRICEWATERHOUSECOOPERS LLP

Dallas, Texas

October 31, 2003


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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |         |           | 
|-------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------- | ------------- | --------- |  | -------- | ------- | --------- | 
|                                                                                 |                                                                                                                                                                 |                                                                  
|                                                                                 |                                                                                                                                                                 | December 31,                                                     
|                                                                                 |                                                                                                                                                                 |                                                                  
|                                                                                 |                                                                                                                                                                 | 2000                                                              |          | 1999         
|                                                                                 |                                                                                                                                                                 |                                                                   |          |              
|                                                                                 |                                                                                                                                                                 |                                                                  
|                                                                                 |                                                                                                                                                                 | (In thousands, except share data)                                
|                                                                                 |                                                                                                                                                                 | (As restated)                                                     |          | (As restated)
|ASSETS                                                                          
|Current assets:                                                                  |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 | Cash and cash equivalents                                                                                                                                       |                                                                   | $        | 275,539       |           |  | $        | 329,732 |          
|                                                                                 | Short-term marketable securities                                                                                                                                |                                                                   |          | 195,469       |           |  |          | 164,763 |          
|                                                                                 | Accounts receivable, net of provision for
    doubtful accounts of $7,165 and $7,658,
    respectively                                                          |                                                                   |          | 116,172       |           |  |          | 99,079  |          
|Prepaid expenses, income taxes and other current
    assets                      |                                                                                                                                                                 |                                                                   | 79,644   |               |           |  | 56,943   |        
|Deferred taxes                                                                   |                                                                                                                                                                 |                                                                   | 161,063  |               |           |  | 108,664  |        
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 |                                                                                                                                                                 | Total current assets                                              |          |               | 827,887   |  |          |         | 759,181   | 
|Long-term marketable securities                                                  |                                                                                                                                                                 |                                                                   | 223,145  |               |           |  | 286,420  |        
|Property and equipment, net                                                      |                                                                                                                                                                 |                                                                   | 76,253   |               |           |  | 50,840   |        
|Deferred taxes                                                                   |                                                                                                                                                                 |                                                                   | 136,177  |               |           |  | 182,825  |        
|Intangible and other assets, net                                                 |                                                                                                                                                                 |                                                                   | 202,161  |               |           |  | 231,122  |        
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 |                                                                                                                                                                 | Total assets                                                      |          | $             | 1,465,623 |  |          | $       | 1,510,388 | 
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|LIABILITIES                                                                     
|Current liabilities:                                                             |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 | Accounts payable                                                                                                                                                |                                                                   | $        | 46,817        |           |  | $        | 4,768   |          
|                                                                                 | Accrued liabilities                                                                                                                                             |                                                                   |          | 245,678       |           |  |          | 235,694 |          
|                                                                                 | Deferred revenue                                                                                                                                                |                                                                   |          | 449,600       |           |  |          | 378,609 |          
|                                                                                 | Deposits from distributors                                                                                                                                      |                                                                   |          | 6,161         |           |  |          | 62,491  |          
|                                                                                 | Notes payable                                                                                                                                                   |                                                                   |          | 40            |           |  |          | 13,059  |          
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 |                                                                                                                                                                 | Total current liabilities                                         |          |               | 748,296   |  |          |         | 694,621   | 
|Deferred revenue, less current portion                                           |                                                                                                                                                                 |                                                                   | 81,955   |               |           |  | 68,169   |        
|Convertible debt                                                                 |                                                                                                                                                                 |                                                                   | 400,456  |               |           |  | 382,517  |        
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 |                                                                                                                                                                 | Total liabilities                                                 |          |               | 1,230,707 |  |          |         | 1,145,307 | 
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|Commitments and contingencies (Notes 8 and 16)
Minority interest                 |                                                                                                                                                                 |                                                                   | 11,993   |               |           |  | 9,143    |        
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|STOCKHOLDERS EQUITY                                                            
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|Preferred stock, $0.01 par value:                                                |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 | Authorized: 5,000,000 shares; Issued and
    outstanding: none in 2000 and 1999                                                                                 |                                                                   |          |              |           |  |          |        |          
|Common stock, $0.01 par value:                                                   |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 | Authorized: 300,000,000 shares; Issued:
    139,328,528 shares in 2000 and 1999; Outstanding:
    138,070,906 shares in 2000 and 138,715,659 shares in
    1999 |                                                                   |          | 1,381         |           |  |          | 1,387   |          
|Treasury stock, at cost: 1,238,753 shares in
    2000 and 594,000 shares in 1999 |                                                                                                                                                                 |                                                                   | (23,186  | )             |           |  | (11,023  | )      
|Additional paid-in capital                                                       |                                                                                                                                                                 |                                                                   | 695,388  |               |           |  | 653,384  |        
|Accumulated other comprehensive income                                           |                                                                                                                                                                 |                                                                   | 6,788    |               |           |  | 15,766   |        
|Accumulated deficit                                                              |                                                                                                                                                                 |                                                                   | (457,448 | )             |           |  | (303,576 | )      
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 |                                                                                                                                                                 | Total stockholders equity                                        |          |               | 222,923   |  |          |         | 355,938   | 
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        
|                                                                                 |                                                                                                                                                                 | Total liabilities, minority interest and
    stockholders equity |          | $             | 1,465,623 |  |          | $       | 1,510,388 | 
|                                                                                 |                                                                                                                                                                 |                                                                   |          |               |           |  |          |        

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

23



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF OPERATIONS
AND


COMPREHENSIVE INCOME (LOSS)


|                                                             |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |         |          |  
|------------------------------------------------------------ | ---------------------------------------------------- | ------------------------------------------------------------------------------- | -------- | ------------- | -------- | ------------- | -------- | ------- | -------- | - | -------- | ------- | -------- | -
|                                                             |                                                      |                                                                                
|                                                             |                                                      | Years Ended December 31,                                                       
|                                                             |                                                      |                                                                                
|                                                             |                                                      | 2000                                                                            |          | 1999          |          | 1998         
|                                                             |                                                      |                                                                                 |          |               |          |              
|                                                             |                                                      | (As Restated)                                                                   |          | (As Restated) |          | (As Restated)
|                                                             |                                                      |                                                                                
|                                                             |                                                      | (In thousands, except per share data)                                          
|Net revenue:                                                 |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             | Product                                              |                                                                                 | $        | 438,485       |          |               | $        | 438,265 |          |   | $        | 238,426 |         
|                                                             | Services and support                                 |                                                                                 |          | 270,887       |          |               |          | 222,072 |          |   |          | 189,341 |         
|                                                             |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             |                                                      | Total net revenue                                                               |          |               | 709,372  |               |          |         | 660,337  |   |          |         | 427,767  |  
|Cost of net revenue:                                         |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             | Product                                              |                                                                                 |          | 117,801       |          |               |          | 90,611  |          |   |          | 120,930 |         
|                                                             | Services and support                                 |                                                                                 |          | 42,301        |          |               |          | 42,094  |          |   |          | 39,674  |         
|                                                             |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             |                                                      | Total cost of net revenue                                                       |          |               | 160,102  |               |          |         | 132,705  |   |          |         | 160,604  |  
|Operating costs:                                             |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             | Research and development(1)                          |                                                                                 |          | 164,218       |          |               |          | 152,728 |          |   |          | 135,475 |         
|                                                             | Marketing and sales(2)                               |                                                                                 |          | 358,295       |          |               |          | 327,508 |          |   |          | 273,696 |         
|                                                             | General and administrative(3)                        |                                                                                 |          | 91,277        |          |               |          | 114,521 |          |   |          | 97,851  |         
|                                                             | Amortization of intangibles                          |                                                                                 |          | 58,236        |          |               |          | 50,354  |          |   |          | 40,969  |         
|                                                             | Provision for doubtful accounts, net                 |                                                                                 |          | 4,785         |          |               |          | 19,246  |          |   |          | 4,828   |         
|                                                             | Acquisition and other related costs                  |                                                                                 |          |              |          |               |          |        |          |   |          | 117,170 |         
|                                                             |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             |                                                      | Total operating costs                                                           |          |               | 676,811  |               |          |         | 664,357  |   |          |         | 669,989  |  
|                                                             |                                                      | Loss from operations                                                            |          |               | (127,541 | )             |          |         | (136,725 | ) |          |         | (402,826 | )
|Interest and other income                                    |                                                      |                                                                                 | 43,018   |               |          |               | 30,808   |         |          |   | 31,958   |        
|Interest and other expenses                                  |                                                      |                                                                                 | (18,202  | )             |          |               | (16,833  | )       |          |   | (14,195  | )      
|Gain (loss) on investments, net                              |                                                      |                                                                                 | 31,801   |               |          |               | (5,026   | )       |          |   | (1,148   | )      
|                                                             |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             |                                                      | Loss before provision for (benefit from) income
    taxes and minority interest |          |               | (70,924  | )             |          |         | (127,776 | ) |          |         | (386,211 | )
|Provision for (benefit from) income taxes                    |                                                      |                                                                                 | 40,944   |               |          |               | 24,702   |         |          |   | (67,137  | )      
|                                                             |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             |                                                      | Loss before minority interest                                                   |          |               | (111,868 | )             |          |         | (152,478 | ) |          |         | (319,074 | )
|Minority interest in loss of consolidated
    subsidiaries   |                                                      |                                                                                 | 3,854    |               |          |               | 514      |         |          |   |         |        
|                                                             |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             |                                                      | Net loss                                                                        |          | $             | (108,014 | )             |          | $       | (151,964 | ) |          | $       | (319,074 | )
|                                                             |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|Other comprehensive income (loss):                           |                                                      |                                                                                 |          |               |          |               |          |         |          |   |          |        
|                                                             | Unrealized gain (loss) on marketable securities, net |                                                                                 | $        | (318          | )        |               | $        | (1,803  | )        |   | $        | 388     |         
|                                                             | Foreign currency translation gain (loss)             |                                                                                 |          | (8,660        | )        |               |          | 19,986  |          |   |          | (4,340  | )       
|Comprehensive loss                                           |                                                      | $                                                                               | (116,992 | )             |          | $             | (133,781 | )       |          | $ | (323,026 | )      
|Net loss per share  basic and diluted                       |                                                      | $                                                                               | (0.78    | )             |          | $             | (1.10    | )       |          | $ | (2.40    | )      
|Shares used in per share calculation 
    basic and diluted |                                                      |                                                                                 | 138,072  |               |          |               | 138,695  |         |          |   | 133,075  |        



---



|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes stock-based compensation charge of
    $1,894 and $4,515 and $668 for the years ended December 31,
    2000, 1999, and 1998, respectively.
|   
|(2) | Includes stock-based compensation charge of
    $4,570 and $7,162 and none for the years ended December 31,
    2000, 1999, and 1998, respectively.
|   
|(3) | Includes stock-based compensation charge of
    $3,652 and $9,026 and none for the years ended December 31,
    2000, 1999, and 1998, respectively.

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

24



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   |               |         |               |   |               |         |               |   |   |      |     |  |   |        |        |   |   |          |          |   |   |          |          |  
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | -------------- | ------- | -------- | - | ---------- | ----- | ------------- | - | ------------- | ------- | ------------- | - | ------------- | ------- | ------------- | - | - | ---- | --- |  | - | ------ | ------ | - | - | -------- | -------- | - | - | -------- | -------- | -
|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   |               |         | Accumulated   |   |               |         |              
|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   | Other         |         | Retained      |   |              
|                                                                           |                                                                                                       | Common Stock   |         |          |   | Additional |       | Deferred      |   | Comprehensive |         | Earnings      |   | Total        
|                                                                           |                                                                                                       |                |         | Treasury |   | Paid-In    |       | Stock         |   | Income/       |         | (Accumulated  |   | Stockholders
|                                                                           |                                                                                                       | Shares         |         | Amount   |   | Stock      |       | Capital       |   | Compensation  |         | (Loss)        |   | Deficit)      |         | Equity       
|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   |               |         |               |   |               |         |              
|                                                                           |                                                                                                       |                |         |          |   |            |       | (As Restated) |   | (As Restated) |         | (As Restated) |   | (As Restated) |         | (As Restated)
|                                                                           |                                                                                                       |               
|                                                                           |                                                                                                       | (In thousands)
|Balances, December 31, 1997, as reported
    prior to pooling-of-interests |                                                                                                       |                | 128,040 |          |   | $          | 1,117 |               |   |               |        |               |   | $             | 300,735 |               |   | $ | (668 | )   |  | $ | 1,778  |        |   | $ | 152,489  |          |   | $ | 455,451  |         
|Adjustments in connection with pooling-of-interests                        |                                                                                                       |                |        |          |   |            | 164   |               |   |               |        |               |   |               | 30,674  |               |   |   |     |     |  |   |       |        |   |   | 6,212    |          |   |   | 37,050   |         
|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   |               |         |               |   |               |         |               |   |   |      |     |  |   |        |        |   |   |          |          |   |   |          |         
|Balances, December 31, 1997, as reported
    after pooling of interests    |                                                                                                       |                | 128,040 |          |   |            | 1,281 |               |   |               |        |               |   |               | 331,409 |               |   |   | (668 | )   |  |   | 1,778  |        |   |   | 158,701  |          |   |   | 492,501  |         
|Adjustments in connection with restatement                                 |                                                                                                       |                |        |          |   |            |      |               |   |               |        |               |   |               | 900     |               |   |   |     |     |  |   | (243   | )      |   |   | 9,121    |          |   |   | 9,778    |         
|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   |               |         |               |   |               |         |               |   |   |      |     |  |   |        |        |   |   |          |          |   |   |          |         
|Balances, December 31, 1997, (As Restated)                                 |                                                                                                       |                | 128,040 |          |   |            | 1,281 |               |   |               |        |               |   |               | 332,309 |               |   |   | (668 | )   |  |   | 1,535  |        |   |   | 167,822  |          |   |   | 502,279  |         
|                                                                           | Issuance of common stock upon exercise of stock
    options                                           |                |         | 8,561    |   |            |       | 86            |   |               |         |              |   |               |         | 144,560       |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 144,646  |  
|                                                                           | Issuance of common stock from Employee Stock
    Purchase Plan                                        |                |         | 445      |   |            |       | 4             |   |               |         |              |   |               |         | 6,363         |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 6,367    |  
|                                                                           | Tax benefits from exercise of non-qualified stock
options                                             |                |         |         |   |            |       |              |   |               |         |              |   |               |         | 43,500        |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 43,500   |  
|                                                                           | Stock options issued in connection with
    acquisitions                                              |                |         |         |   |            |       |              |   |               |         |              |   |               |         | 2,616         |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 2,616    |  
|                                                                           | Foreign currency translation                                                                          |                |         |         |   |            |       |              |   |               |         |              |   |               |         |              |   |   |      |    |  |   |        | (4,340 | ) |   |          |         |   |   |          | (4,340   | )
|                                                                           | Unrealized gain on investments                                                                        |                |         |          |   |            |       |              |   |               |         |              |   |               |         |              |   |   |      |    |  |   |        | 388    |   |   |          |         |   |   |          | 388      |  
|                                                                           | Amortization of deferred stock-based compensation                                                     |                |         |         |   |            |       |              |   |               |         |              |   |               |         |              |   |   |      | 668 |  |   |        |       |   |   |          |         |   |   |          | 668      |  
|                                                                           | Exercise of warrants                                                                                  |                |         | 59       |   |            |       |              |   |               |         |              |   |               |         | 1,944         |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 1,944    |  
|                                                                           | Net loss (As Restated)                                                                                |                |         |         |   |            |       |              |   |               |         |              |   |               |         |              |   |   |      |    |  |   |        |       |   |   |          | (319,074 | ) |   |          | (319,074 | )
|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   |               |         |               |   |               |         |               |   |   |      |     |  |   |        |        |   |   |          |          |   |   |          |         
|Balances, December 31, 1998 (As Restated)                                  |                                                                                                       |                | 137,105 |          |   |            | 1,371 |               |   |               |        |               |   |               | 531,292 |               |   |   |     |     |  |   | (2,417 | )      |   |   | (151,252 | )        |   |   | 378,994  |         
|                                                                           | Issuance of common stock upon exercise of stock
    options                                           |                |         | 1,196    |   |            |       | 12            |   |               |         | 1,414         |   |               |         | 17,471        |   |   |      |    |  |   |        |       |   |   |          | (360     | ) |   |          | 18,537   |  
|                                                                           | Issuance of common stock from Employee Stock
    Purchase Plan                                        |                |         | 578      |   |            |       | 6             |   |               |         |              |   |               |         | 8,929         |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 8,935    |  
|                                                                           | Repurchase of common stock                                                                            |                |         | (685     | ) |            |       | (7            | ) |               |         | (12,437       | ) |               |         |              |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | (12,444  | )
|                                                                           | FSA conversion of preferred stock to common stock                                                     |                |         | 438      |   |            |       | 4             |   |               |         |              |   |               |         |              |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 4        |  
|                                                                           | Exercise of warrants                                                                                  |                |         | 85       |   |            |       | 1             |   |               |         |              |   |               |         | 458           |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 459      |  
|                                                                           | Proceeds from sale of put options                                                                     |                |         |         |   |            |       |              |   |               |         |              |   |               |         | 5,250         |   |   |      |    |  |   |        |        |   |   |          |          |   |   |          | 5,250    |  
|                                                                           | Compensation charge due to repricing of stock
    options and McAfee.com options, as restated         |                |         |         |   |            |       |              |   |               |         |              |   |               |         | 20,703        |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 20,703   |  
|                                                                           | Capital contributed by minority stockholders of
    subsidiary                                        |                |         |         |   |            |       |              |   |               |         |              |   |               |         | 69,281        |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 69,281   |  
|                                                                           | Foreign currency translation                                                                          |                |         |         |   |            |       |              |   |               |         |              |   |               |         |              |   |   |      |    |  |   |        | 19,986 |   |   |          |         |   |   |          | 19,986   |  
|                                                                           | Unrealized loss on investments                                                                        |                |         |         |   |            |       |              |   |               |         |              |   |               |         |              |   |   |      |    |  |   |        | (1,803 | ) |   |          |         |   |   |          | (1,803   | )
|Net loss (As Restated)                                                     |                                                                                                       |                |        |          |   |            |      |               |   |               |        |               |   |               |        |               |   |   |     |     |  |   |       |        |   |   | (151,964 | )        |   |   | (151,964 | )       
|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   |               |         |               |   |               |         |               |   |   |      |     |  |   |        |        |   |   |          |          |   |   |          |         
|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 McAfee.com common stock upon exercise of stock
    options                                |                |         |         |   |            |       |              |   |               |         |              |   |               |         | 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 other compensation charges, as restated |                |         |         |   |            |       |              |   |               |         |              |   |               |         | 10,116        |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 10,116   |  
|                                                                           | Issuance of stock by consolidated subsidiary in
acquisition                                           |                |         |         |   |            |       |              |   |               |         |              |   |               |         | 19,600        |   |   |      |    |  |   |        |       |   |   |          |         |   |   |          | 19,600   |  
|                                                                           | Minority interest                                                                                     |                |         |         |   |            |       |              |   |               |         |              |   |               |         | (6,385        | ) |   |      |    |  |   |        |       |   |   |          |         |   |   |          | (6,385   | )
|                                                                           | Foreign currency translation                                                                          |                |         |         |   |            |       |              |   |               |         |              |   |               |         |              |   |   |      |    |  |   |        | (8,660 | ) |   |          |         |   |   |          | (8,660   | )
|                                                                           | Unrealized gain on investments                                                                        |                |         |         |   |            |       |              |   |               |         |              |   |               |         |              |   |   |      |    |  |   |        | (318   | ) |   |          |         |   |   |          | (318     | )
|                                                                           | Net loss (As Restated)                                                                                |                |         |         |   |            |       |              |   |               |         |              |   |               |         |              |   |   |      |    |  |   |        |       |   |   |          | (108,014 | ) |   |          | (108,014 | )
|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   |               |         |               |   |               |         |               |   |   |      |     |  |   |        |        |   |   |          |          |   |   |          |         
|Balances, December 31, 2000 (As Restated)                                  |                                                                                                       |                | 138,072 |          |   | $          | 1,381 |               |   | $             | (23,186 | )             |   | $             | 695,388 |               |   | $ |     |     |  | $ | 6,788  |        |   | $ | (457,448 | )        |   | $ | 222,923  |         
|                                                                           |                                                                                                       |                |         |          |   |            |       |               |   |               |         |               |   |               |         |               |   |   |      |     |  |   |        |        |   |   |          |          |   |   |          |         

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

25



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |          |          |         |          |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------- | -------- | ------------- | ------- | -------- | ------- | ------- | -------- | -------- | -------- | ------- | -------- | -
|                                                                 |                                                                                     |                                                            
|                                                                 |                                                                                     | Years Ended December 31,                                   
|                                                                 |                                                                                     |                                                            
|                                                                 |                                                                                     | 2000                                                        |                                                         | 1999                                                    |          | 1998         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |              
|                                                                 |                                                                                     |                                                            
|                                                                 |                                                                                     | (In thousands)                                             
|                                                                 |                                                                                     | (As Restated)                                               |                                                         | (As Restated)                                           |          | (As Restated)
|Cash flows from operating activities:                            |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|                                                                 | Net loss                                                                            |                                                             | $                                                       | (108,014                                                | )        |               | $       | (151,964 | )       |         | $        | (319,074 | )       
|                                                                 | Adjustments to reconcile net loss to net cash
    provided by operating activities: |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |          |         
|                                                                 |                                                                                     | Depreciation and amortization                               |                                                         |                                                         | 80,827   |               |         |          | 71,016  |         |          |          | 64,000   |        
|                                                                 |                                                                                     | Provision for doubtful accounts                             |                                                         |                                                         | 4,785    |               |         |          | 19,246  |         |          |          | 4,828    |        
|                                                                 |                                                                                     | Impairment of goodwill                                      |                                                         |                                                         | 3,600    |               |         |          |        |         |          |          |         |        
|                                                                 |                                                                                     | Write-down of property and equipment                        |                                                         |                                                         |         |               |         |          |        |         |          |          | 14,898   |        
|                                                                 |                                                                                     | Non-cash interest expense on convertible debt               |                                                         |                                                         | 18,857   |               |         |          | 19,308  |         |          |          | 17,811   |        
|                                                                 |                                                                                     | Stock-based compensation charge                             |                                                         |                                                         | 10,116   |               |         |          | 20,703  |         |          |          | 668      |        
|                                                                 |                                                                                     | Deferred taxes                                              |                                                         |                                                         | (13,175) |               |         |          | (42,451 | )       |          |          | (214,135 | )      
|                                                                 |                                                                                     | Realized (gain) loss on investments                         |                                                         |                                                         | 19,290   |               |         |          | (1,037  | )       |          |          | 1,148    |        
|                                                                 |                                                                                     | Gain on the sale of Goto.com investment                     |                                                         |                                                         | (39,772  | )             |         |          |        |         |          |          |         |        
|                                                                 |                                                                                     | Gain on the sale of Network Associates Japan
    Investment |                                                         |                                                         | (11,319  | )             |         |          |        |         |          |          |         |        
|                                                                 |                                                                                     | Minority interest in loss of consolidated
subsidiaries      |                                                         |                                                         | (3,854   | )             |         |          | (514    | )       |          |          |         |        
|                                                                 |                                                                                     | Tax benefit from exercise of nonqualified stock
    options |                                                         |                                                         |         |               |         |          |        |         |          |          | 43,500   |        
|                                                                 |                                                                                     | Acquired in-process research and development                |                                                         |                                                         |         |               |         |          |        |         |          |          | 49,844   |        
|                                                                 |                                                                                     | Changes in assets and liabilities:                          |                                                         |                                                         |          |               |         |          |         |         |          |          |          |        
|                                                                 |                                                                                     |                                                             | Accounts receivable                                     |                                                         |          | (22,516       | )       |          |         | (43,820 | )        |          |          | 108,437 |         
|                                                                 |                                                                                     |                                                             | Prepaid expenses, income taxes and other current assets |                                                         |          | (24,097       | )       |          |         | 13,633  |          |          |          | (13,671 | )       
|                                                                 |                                                                                     |                                                             | Accounts payable and accrued liabilities                |                                                         |          | (1,168        | )       |          |         | 28,671  |          |          |          | 96,805  |         
|                                                                 |                                                                                     |                                                             | Deferred revenue                                        |                                                         |          | 93,248        |         |          |         | 123,423 |          |          |          | 177,950 |         
|                                                                 |                                                                                     |                                                             | Other                                                   |                                                         |          | 766           |         |          |         |        |          |          |          | 114     |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|                                                                 |                                                                                     |                                                             |                                                         | Net cash provided by operating
    activities           |          |               | 7,574   |          |         |         | 56,214   |          |          |         | 33,123   |  
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|Cash flows from investing activities:                            |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|                                                                 | Purchase of marketable securities                                                   |                                                             |                                                         | (510,247                                                | )        |               |         | (368,650 | )       |         |          | (856,746 | )       
|                                                                 | Sale of marketable securities                                                       |                                                             |                                                         | 547,354                                                 |          |               |         | 233,499  |         |         |          | 801,776  |         
|                                                                 | Purchase of acquired technology                                                     |                                                             |                                                         | (12,500                                                 | )        |               |         |         |         |         |          |         |         
|                                                                 | Purchase of other investments                                                       |                                                             |                                                         | (20,999                                                 | )        |               |         | (19,669  | )       |         |          |         |         
|                                                                 | Purchase of property and equipment                                                  |                                                             |                                                         | (54,031                                                 | )        |               |         | (20,458  | )       |         |          | (34,818  | )       
|                                                                 | Proceeds from sale of property and equipment                                        |                                                             |                                                         |                                                        |          |               |         | 6,518    |         |         |          |         |         
|                                                                 | Proceeds from sale of Goto.com investment                                           |                                                             |                                                         | 36,750                                                  |          |               |         |         |         |         |          |         |         
|                                                                 | Proceeds from the sale of Direct Web                                                |                                                             |                                                         |                                                        |          |               |         | 6,000    |         |         |          |         |         
|                                                                 | Proceeds from sale of Network Associates Japan
    investment Investment            |                                                             |                                                         | 11,947                                                  |          |               |         |         |         |         |          |         |         
|                                                                 | Acquisition of CyberMedia, net of cash acquired                                     |                                                             |                                                         |                                                        |          |               |         |         |         |         |          | (131,030 | )       
|                                                                 | Acquisition of Magic Solutions, net of cash acquired                                |                                                             |                                                         |                                                        |          |               |         |         |         |         |          | (112,480 | )       
|                                                                 | Acquisitions by McAfee.com, net of cash acquired                                    |                                                             |                                                         | (1,961                                                  | )        |               |         |         |         |         |          |         |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|                                                                 |                                                                                     |                                                             |                                                         | Net cash used in investing activities                   |          |               | (3,687  | )        |         |         | (162,760 | )        |          |         | (333,298 | )
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|Cash flows from financing activities:                            |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|                                                                 | Proceeds from short-term financing                                                  |                                                             |                                                         | 12,758                                                  |          |               |         | 49,293   |         |         |          | 180,836  |         
|                                                                 | Repayment of short-term financing                                                   |                                                             |                                                         | (13,009                                                 | )        |               |         | (139,043 | )       |         |          | (109,555 | )       
|                                                                 | Repayment of notes payable                                                          |                                                             |                                                         | (333                                                    | )        |               |         | (3,085   | )       |         |          |         |         
|                                                                 | Bank overdraft                                                                      |                                                             |                                                         |                                                        |          |               |         | 12,948   |         |         |          |         |         
|                                                                 | Repayment of bank overdraft                                                         |                                                             |                                                         | (12,948                                                 | )        |               |         |         |         |         |          |         |         
|                                                                 | Issuance of common stock under stock option and
    purchase plans                  |                                                             |                                                         | 46,548                                                  |          |               |         | 27,472   |         |         |          | 151,013  |         
|                                                                 | Proceeds from sale of put options                                                   |                                                             |                                                         | 13,890                                                  |          |               |         | 5,250    |         |         |          |         |         
|                                                                 | Proceeds from exercise of McAfee.com stock options                                  |                                                             |                                                         | 3,461                                                   |          |               |         |          |         |         |          |          |         
|                                                                 | Repurchase of common stock                                                          |                                                             |                                                         | (100,416                                                | )        |               |         | (12,444  | )       |         |          |         |         
|                                                                 | Proceeds of McAfee.com initial public offering,
    net                             |                                                             |                                                         |                                                        |          |               |         | 78,938   |         |         |          |         |         
|                                                                 | Issuance of convertible debt, net of
    issuance costs                             |                                                             |                                                         |                                                        |          |               |         |         |         |         |          | 337,624  |         
|                                                                 | Exercise of warrants                                                                |                                                             |                                                         |                                                        |          |               |         | 459      |         |         |          | 1,944    |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|                                                                 |                                                                                     |                                                             |                                                         | Net cash provided by (used in) financing
    activities |          |               | (50,049 | )        |         |         | 19,788   |          |          |         | 561,862  |  
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|                                                                 | Effect of exchange rate changes on cash and cash
    equivalents                    |                                                             |                                                         | (8,031                                                  | )        |               |         | (2,409   | )       |         |          | 181      |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                     |                                                             | (54,193                                                 | )                                                       |          |               | (89,167 | )        |         |         | 261,868  |         
|Cash and cash equivalents at beginning of year                   |                                                                                     |                                                             | 329,732                                                 |                                                         |          |               | 418,899 |          |         |         | 157,031  |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|Cash and cash equivalents at end of year                         |                                                                                     | $                                                           | 275,539                                                 |                                                         |          | $             | 329,732 |          |         | $       | 418,899  |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|Non-cash investing activities:                                   |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|                                                                 | Unrealized gain (loss) on marketable investments                                    |                                                             | $                                                       | (318                                                    | )        |               | $       | (1,803   | )       |         | $        |         |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|Supplemental disclosure of cash flow information:                |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|Cash paid (refund received) during the year for
    income taxes |                                                                                     | $                                                           | 46,715                                                  |                                                         |          | $             | (17,544 | )        |         | $       | 66,205   |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|Cash paid during the year for interest                           |                                                                                     | $                                                           | 12                                                      |                                                         |          | $             | 13      |          |         | $       | 721      |         
|Stock options issued in conjunction with acquisition             |                                                                                     |                                                             |                                                        |                                                         |          |               |        |          |         | $       | 2,616    |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         
|Issuance of stock by consolidated subsidiary in
acquisition      |                                                                                     | $                                                           | 19,600                                                  |                                                         |          |               |        |          |         |         |         |         
|                                                                 |                                                                                     |                                                             |                                                         |                                                         |          |               |         |          |         |         |          |         

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

26



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




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

Networks Associates, Inc. and its majority owned
subsidiaries (the Company) develops, markets,
distributes and supports network security and network management
software products. The Companys markets are worldwide and
include corporate, governmental, and institutional users as well
as resellers and distributors throughout the world.
International sales and support are provided by subsidiaries in
principal European markets and independent agents and
distributors elsewhere internationally. The Company changed its
name from McAfee Associates, Inc. to Networks Associates, Inc.
in connection with the combination of McAfee Associates and
Network General, in December 1997.



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



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

The accompanying consolidated financial
statements include the accounts of the Company and majority
owned subsidiaries, including McAfee.com. All significant
intercompany accounts and transactions have been eliminated.



| |                  
| | -----------------
| | Minority Interest

Minority interest in loss of consolidated
subsidiaries represents the minority stockholders share of
the income or loss of two 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 earnings or losses of these subsidiaries.



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

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make certain estimates and assumptions that affect the reported
amount of assets and disclosure of contingent assets and
liabilities at the date of the consolidated 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
business combinations including amounts accounted for as in-process
research and development, allowances for doubtful accounts,
sales returns and price adjustments and valuation allowances for
deferred tax assets. Actual results could differ from those
estimates.

Additionally, the foregoing restatement
adjustments, discussed in Note 3 in the Notes to
Consolidated Financial Statements, required an evaluation of a
number of complex criteria and significant accounting judgments
by the Company.



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

The Companys revenues are derived primarily
from the license of its software products. The markets in which
the Company operates 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. 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 changes.

27



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company sells a significant amount of its
products through intermediaries such as distributors and
resellers. The Companys top five distributors in the
United States typically represent approximately 40% to 45% of
net revenue in any quarter. The Companys two largest
distributors accounted for approximately 35% of sales for
2000.

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.

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

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 provision for doubtful accounts. The
Companys provision for doubtful accounts was
$7.2 million at December 31, 2000 and
$7.7 million at December 31, 1999. The Companys
uncollectible accounts could exceed our current or future
provisions.

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.

28



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##### Table of Contents



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 income. Foreign currency
transaction gains and losses are included in the determination
of net loss.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash equivalents are comprised of highly liquid
debt instruments with original 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 in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115). Short-term
marketable securities are those with maturities greater than
90 days but less than one year. Long-term marketable
securities have original maturities greater than one year.
Unrealized gains and losses on marketable securities are
reported net of related taxes as a component of accumulated
other comprehensive income (loss). Realized gains and losses on
sales of all such investments are reported in earnings and
computed using the specific identification cost method.



| |            
| | -----------
| | Inventories

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.



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

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



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

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.

29



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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



| |                  
| | -----------------
| | Intangible Assets

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

The Company assesses the impairment of
identifiable intangibles and related goodwill in accordance with
the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of. The Company also assesses
the impairment of enterprise level goodwill in accordance with
the provision of Accounting Principles Board (APB)
Opinion No. 17, Intangible Assets. An
impairment review is performed whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors that are 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 use of the acquired assets or the strategy for the
Companys overall business, significant negative industry
or economic trends, a significant decline in the Companys
stock price for a sustained period, and the Companys
market capitalization relative to net book value. When the
Company determines that the carrying value of goodwill may not
be recoverable based upon the existence of one or more of the
above indicators of impairment, it measures any impairment based
on a projected discounted cash flow method using a discount rate
commensurate with the risk inherent in its current business
model.



| |            
| | -----------
| | 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 with no concurrent revenue
arrangements are included in other assets on the Companys
consolidated 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, Accounting
for Nonmonetary Transactions (APB29), 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 consolidated
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

30



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 $16.5 million in 2000.



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

Carrying amounts of the Companys financial
instruments including cash and cash equivalents, investments,
accounts receivable, accounts payable and accrued liabilities
and approximate fair value due to their short maturities. The
fair value of the Companys marketable securities is
disclosed in Note 5 of the Notes to the Consolidated
Financial Statements. The Companys Senior Subordinated
Convertible Debentures are not traded in a public market. The
fair market value of the debentures are based on, among other
factors, market interest rates, the status of the Companys
technology, and other general business and market conditions as
of the date of the offering, February 13, 1998. As the
Company was unable to reliably estimate these factors as of
December 31, 2000, the fair value of the debentures could
not be estimated.



| |            
| | -----------
| | Derivatives

The Company uses forward foreign exchange
contracts to hedge certain assets denominated in foreign
currencies. The instruments are designated as a hedge and are
highly inversely correlated to the hedged item. Gains and losses
on the contracts are reported in other income and offset gains
and losses from the revaluation of nonfunctional currency assets
and liabilities. If a hedging instrument ceases to qualify for
hedge accounting, it is accounted for on a mark to market basis
and any subsequent gains and losses are recognized currently in
income. The Company does not use any derivatives for trading or
speculative purposes.



| |                    
| | -------------------
| | 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 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.

Product revenue from the license of the
Companys software products and sale of hardware products
where the software 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 customer support is deferred and recognized ratably over the
service period. On-line subscription revenue is

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. 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.

Fees due under an arrangement with the
Companys end-user customers 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 products have been sold by the
distributors or resellers to their 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 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. These 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.
The 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
(VSOE) 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 loss. Revenue from
cost-plus-fixed-fee contracts is recognized on the
basis of reimbursable contract costs incurred during the period,
plus a percentage of the fixed fee. Revenue from time and
material contracts is recognized on the basis of hours
utilized, plus other reimbursable contract costs incurred during
the period. Revenue from firm-fixed-price contracts
is recognized on the percentage of completion method. Under this
method, individual contract revenues are recorded based on the
percentage relationship that contract costs incurred bear to
costs incurred plus managements estimate of costs to
complete. Losses, if any, are accrued when their occurrence
becomes known and the amount of the loss is reasonably
determinable.

Under government contracts, the Company is
subject to audit by the Defense Contract Audit Agency which
could result in the renegotiations of amounts previously billed.

32



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                         
| | ------------------------
| | 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 (TV and print) placement costs are expensed in
the period the advertising first appears. Total advertising and
promotional expenses were $43.7 million,
$36.4 million, and $27.6 million for the years ended
December 31, 2000, 1999, and 1998, respectively.



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

The Company applies APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations
in accounting for stock-based compensation. 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.

In addition, the Company provides pro forma
information regarding net loss as if the Company accounted for
its employee stock options under the fair value method of
SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) and related
interpretations.

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.



| |             
| | ------------
| | 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 Companys current tax liability and the
change in deferred tax assets and liabilities. Deferred tax
assets are reduced by a valuation allowance when it is more
likely than not that some portion or all of the deferred tax
assets will not be realized.



| |                   
| | ------------------
| | Net Loss Per Share

Net loss per share has been computed in
accordance with SFAS No. 128, Earnings Per
Share. Basic net loss per share is computed using the
weighted average common shares outstanding during the period.
Diluted net loss per share is computed using the weighted
average common shares and potentially dilutive shares
outstanding during the period.

33



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company uses the guidance in
SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting
comprehensive income and its components in the financial
statements. 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).



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

In September of 2001, the Emerging Issues Task
Force (EITF) issued EITF Issue No. 01-09,
Accounting for Consideration Given by Vendor to a
Customer or a Reseller of the Vendors Products
(EITF 01-09) which addresses whether consideration,
including sales incentives and rebates, from a vendor to a
reseller or customer is (i) an adjustment of the selling
price of the vendors products that should be deducted from
revenue when recognized in the vendors statement of
operations or (ii) a cost incurred by the vendor for assets
or services received from the reseller that should be included
as a cost or expense when recognized in the vendors
statement of operations. After adopting EITF 01-09 in 2002, the
Company reclassified the 2000, 1999 and 1998 financial
statements for comparative purposes to comply with the income
statement display requirements of EITF 01-09. The Company
reduced net revenue by $37.8 million, $51.2 million
and $28.4 million in 2000, 1999 and 1998, respectively, to
reclassify amounts previously treated as marketing expense to
offset net revenue under the display requirements of EITF 01-09.

In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities(SFAS 133) as amended by
SFAS 137 and SFAS 138. SFAS 133 establishes
methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other
hedging activities, and is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company
believes that the impact of SFAS 133, as amended, will not
have a material effect on the financial position or results of
operations of the Company.

In March 2000 the FASB issued FASB Interpretation
No. 44, Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB Opinion
No. 25 (FIN 44). FIN 44 is
intended to clarify certain problems that have arisen in
practice since the issuance of APB 25. The Interpretation
provides guidance, some of which is a significant departure from
current practice. The Interpretation provides for prospective
application for grants or modifications to existing stock
options or awards made after June 30, 2000. However, for
certain transactions the guidance is effective after
December 15, 1998 and January 12, 2000.



|   |                                                            
|-- | -----------------------------------------------------------
|3. | Restatement of Consolidated Financial
    Statement 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 (DOJ) investigations into its
previously issued consolidated financial statements, the Company
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 since the beginning of 2001. In the course
of preparing these 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 2000, 1999, 1998 and 1997 and subsequent periods.

In June 2002, the Company filed an Annual Report
on Form 10-K/A (Amendment No. 1) with the SEC to
restate financial statements for 2000, 1999 and 1998. In
addition, to give effect to accumulated prior period adjustments
and their related tax impacts, December 31, 2001 and
March 31, 2002 consolidated balance sheets were restated. This previous
restatement (i) corrected certain inaccuracies found in the

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys accounts for 1998 through 2000 and (ii) gave
retroactive effect to the adoption of 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 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 within
Form 10-K/A (Amendment No. 1) represents the most
recent reported financial information for 2000, 1999 and 1998
and is referenced herein as reported. All restated
information in this Form 10-K/A (Amendment No. 2) is
referenced herein as restated.

The revenue
restatement adjustments recorded in this restatement primarily
result in revenue being deferred and recognized in subsequent
periods, although certain adjustments 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 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
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 $11.6 million and $49.4 million in 2000 and 1999,
respectively, and to decrease total revenue by
$533.9 million in 1998. The Company has also made certain
deferrals and other adjustments to its expenses and other
accounts in connection with these revenue adjustments and has
made certain other adjustments to its expenses. For example, the
Company made adjustments to defer cost of revenue to the period
in which the related deferred revenue was recognized. The net
effect of these expense and other account adjustments is to
decrease 2000 expense by $28.7 million, increase
1999 expense by $16.2 million and reduce
1998 expense by $15.7 million. As a result of these
adjustments to revenues and expenses and other accounts, the
Company is also making certain income tax-related adjustments
which decrease (increase) the provision for income taxes by
$(24.4) million $(28.2) million and
$166.7 million in 2000, 1999 and 1998, respectively. The
consolidated statement of operations impact of all of these
adjustments is to reduce 2000 and 1999 net loss by
$15.9 million and $4.9 million, respectively, and to
restate our previously reported net income of $32.4 million
in 1998 to a net loss of $319.1 million.

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

35



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the net effect of
the restatement adjustments on cumulative net revenues for 1998
through 2000 and reflects the amount of net revenue from this
period deferred to later periods (in millions). The primary net
effect of the revenue restatement adjustments is to defer
revenue in 1998 and recognize a greater amount of
revenue in 2000 through 2003. 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
affected periods. Several adjustments, such as the reduction in
revenue as a result of the concurrent investments in customers
and misclassifications between revenue and expense, have caused
a permanent reduction in the Companys revenues.

|                                                                                          |                                                              |           |         |        |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------ | --------- | ------- | ------ | -
|                                                                                          |                                                              | 1998-2000
|                                                                                          |                                                              |          
|Cumulative 1998 through 2000 net revenue, as
    previously reported                      |                                                              | $         | 2,270.4 |       
|Permanent reductions in revenue:                                                          |                                                              |           |         |       
|                                                                                          | Collection not reasonably assured                            |           |         | (8.8   | )
|                                                                                          | Business combinations and related restructuring
    charges  |           |         | (44.6  | )
|                                                                                          | General and administrative expenses                          |           |         | (5.3   | )
|                                                                                          | Reclassifications for payments to distributors and customers |           |         | (18.2  | )
|                                                                                          | Investments in customers                                     |           |         | (11.8  | )
|                                                                                          | Other revenue adjustments                                    |           |         | (30.2  | )
|                                                                                          |                                                              |           |         |       
|                                                                                          | Total permanent reductions in revenue                        |           |         | (118.9 | )
|1997 revenue deferred and recognized in 1998
    through 2000                             |                                                              |           | 12.2    |       
|Revenue deferred as of December 31, 2000 to
    be recognized in subsequent periods       |                                                              |           | (366.3  | )     
|                                                                                          |                                                              |           |         |       
|Total decrease in cumulative net revenue, as
    previously reported in 1998 through 2000 |                                                              |           | (473.0  | )     
|                                                                                          |                                                              |           |         |       
|Cumulative 1998 through 2000 net revenue, as
    restated                                 |                                                              | $         | 1,797.4 |       
|                                                                                          |                                                              |           |         |       

36



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the net effect of
the restatement adjustments on the cumulative net loss for 1998
through 2000 (in millions):

|                                                   |                                                             |           |        |       |  
|-------------------------------------------------- | ----------------------------------------------------------- | --------- | ------ | ----- | -
|                                                   |                                                             | 1998-2000
|                                                   |                                                             |          
|Cumulative net loss, as previously reported        |                                                             | $         | (248.4 | )    
|Restatement adjustments to net revenue (see above) |                                                             |           | (473.0 | )    
|Expense adjustments:                               |                                                             |           |        |      
|                                                   | Provision for doubtful accounts                             |           |        | 35.9  |  
|                                                   | Business combinations and related restructuring
    charges |           |        | (26.8 | )
|                                                   | General and administrative expenses                         |           |        | 5.3   |  
|                                                   | Reclassification for payments to distributors               |           |        | 18.7  |  
|                                                   | Investments in customers                                    |           |        | 9.2   |  
|                                                   | Cumulative translation adjustment                           |           |        | (7.0  | )
|                                                   | Cost of revenue                                             |           |        | 10.2  |  
|                                                   | Stock-based compensation                                    |           |        | (6.5  | )
|                                                   | Other                                                       |           |        | (7.8  | )
|                                                   | Income tax effect of restatement adjustments                |           |        | 111.2 |  
|                                                   |                                                             |           |        |      
|Total restatement expense adjustments              |                                                             |           | 142.4  |      
|                                                   |                                                             |           |        |      
|Net restatement adjustments                        |                                                             |           | (330.6 | )    
|                                                   |                                                             |           |        |      
|Restated net loss                                  |                                                             | $         | (579.0 | )    
|                                                   |                                                             |           |        |      

The consolidated financial statements for 2000,
1999 and 1998 have been restated to incorporate all the
restatement adjustments and the related tax effects, as
described herein. In addition, the restatement affected periods
prior to 1998. The impact of the restatement on such prior
periods was reflected as an adjustment to opening consolidated retained
earnings as of January 1, 1998.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth selected
consolidated balance sheets data for the Company, showing
previously reported amounts and restated amounts for 2000 and
1999:

Consolidated Balance Sheets

(In thousands)


|                                       |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |         |         | 
|-------------------------------------- | ----------------------------------------------------------- | ------------------------- | ------- | ---------------- | --------- | ---------- | ------- | -------- | --------- | ----------- | -------- | ---------- | ------- |  | ------- | ------- | --------- |  | ------- | ------- | --------- |  | -------- | ------- | ------- | 
|                                       |                                                             |                           |         |                 
|                                       |                                                             | December 31, 2000         |         | December 31,1999
|                                       |                                                             |                           |         |                 
|                                       |                                                             | As                        |         |                  |           | As         |         |         
|                                       |                                                             | Previously                |         |                  |           | Previously |         |         
|                                       |                                                             | Reported                  |         | As Restated      |           | Difference |         | Reported |           | As Restated |          | Difference
|                                       |                                                             |                           |         |                  |           |            |         |          |           |             |          |           
|ASSETS                                 |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |         |        
|Current assets:                        |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |        
|                                       | Cash and cash equivalents                                   |                           | $       | 275,539          |           |            | $       | 275,539  |           |             | $        |           |         |  | $       | 316,784 |           |  | $       | 329,732 |           |  | $        | 12,948  |        
|                                       | Short-term marketable securities                            |                           |         | 85,721           |           |            |         | 195,469  |           |             |          | 109,748    |         |  |         | 72,135  |           |  |         | 164,763 |           |  |          | 92,628  |        
|                                       | Accounts receivable, net                                    |                           |         | 122,315          |           |            |         | 116,172  |           |             |          | (6,143     | )       |  |         | 174,646 |           |  |         | 99,079  |           |  |          | (75,567 | )      
|                                       | Prepaid expenses, income taxes and other current
    assets |                           |         | 50,346           |           |            |         | 79,644   |           |             |          | 29,298     |         |  |         | 33,038  |           |  |         | 56,943  |           |  |          | 23,905  |        
|                                       | Deferred taxes                                              |                           |         | 86,771           |           |            |         | 161,063  |           |             |          | 74,292     |         |  |         | 79,186  |           |  |         | 108,664 |           |  |          | 29,478  |        
|                                       |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |        
|                                       |                                                             | Total current assets      |         |                  | 620,692   |            |         |          | 827,887   |             |          |            | 207,195 |  |         |         | 675,789   |  |         |         | 759,181   |  |          |         | 83,392  | 
|Long-term marketable securities        |                                                             |                           | 332,893 |                  |           |            | 223,145 |          |           |             | (109,748 | )          |         |  | 397,447 |         |           |  | 286,420 |         |           |  | (111,027 | )      
|Property and equipment, net            |                                                             |                           | 75,499  |                  |           |            | 76,253  |          |           |             | 754      |            |         |  | 45,392  |         |           |  | 50,840  |         |           |  | 5,448    |        
|Deferred taxes                         |                                                             |                           | 120,261 |                  |           |            | 136,177 |          |           |             | 15,916   |            |         |  | 104,307 |         |           |  | 182,825 |         |           |  | 78,518   |        
|Intangible assets and other assets     |                                                             |                           | 242,275 |                  |           |            | 202,161 |          |           |             | (40,114  | )          |         |  | 266,862 |         |           |  | 231,122 |         |           |  | (35,740  | )      
|                                       |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |        
|                                       |                                                             | Total assets              |         | $                | 1,391,620 |            |         | $        | 1,465,623 |             |          | $          | 74,003  |  |         | $       | 1,489,797 |  |         | $       | 1,510,388 |  |          | $       | 20,591  | 
|                                       |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |        
|LIABILITIES                            |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           | 
|Current liabilities:                   |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |        
|                                       | Accounts payable                                            |                           | $       | 46,817           |           |            | $       | 46,817   |           |             | $        |           |         |  | $       | 13,723  |           |  | $       | 4,768   |           |  | $        | (8,955  | )      
|                                       | Accrued liabilities                                         |                           |         | 254,281          |           |            |         | 245,678  |           |             |          | (8,603     | )       |  |         | 264,453 |           |  |         | 235,694 |           |  |          | (28,759 | )      
|                                       | Deferred revenue                                            |                           |         | 151,566          |           |            |         | 449,600  |           |             |          | 298,034    |         |  |         | 123,236 |           |  |         | 378,609 |           |  |          | 255,373 |        
|                                       | Deposits from customers                                     |                           |         |                 |           |            |         | 6,161    |           |             |          | 6,161      |         |  |         |        |           |  |         | 62,491  |           |  |          | 62,491  |        
|                                       | Note payable                                                |                           |         |                 |           |            |         | 40       |           |             |          | 40         |         |  |         | 103     |           |  |         | 13,059  |           |  |          | 12,956  |        
|                                       |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |        
|                                       |                                                             | Total current liabilities |         |                  | 452,664   |            |         |          | 748,296   |             |          |            | 295,632 |  |         |         | 401,515   |  |         |         | 694,621   |  |          |         | 293,106 | 
|Deferred taxes                         |                                                             |                           | 7,971   |                  |           |            |        |          |           |             | (7,971   | )          |         |  | 10,575  |         |           |  |        |         |           |  | (175     | )      
|Deferred revenue, less current portion |                                                             |                           | 26,592  |                  |           |            | 81,955  |          |           |             | 55,363   |            |         |  | 30,005  |         |           |  | 68,169  |         |           |  | 38,164   |        
|Convertible debentures                 |                                                             |                           | 396,336 |                  |           |            | 400,456 |          |           |             | 4,120    |            |         |  | 378,304 |         |           |  | 382,517 |         |           |  | 4,213    |        
|Other long-term debt and liabilities   |                                                             |                           | 532     |                  |           |            |        |          |           |             | (532     | )          |         |  | 963     |         |           |  |        |         |           |  | (963     | )      
|                                       |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |        
|                                       |                                                             | Total liabilities         |         |                  | 884,095   |            |         |          | 1,230,707 |             |          |            | 346,612 |  |         |         | 821,362   |  |         |         | 1,145,307 |  |          |         | 334,345 | 
|                                       |                                                             |                           |         |                  |           |            |         |          |           |             |          |            |         |  |         |         |           |  |         |         |           |  |          |        
|Minority interest                      |                                                             |                           | 11,067  |                  |           |            | 11,993  |          |           |             | 926      |            |         |  | 9,317   |         |           |  | 9,143   |         |           |  | (174     | )      

38



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                             |                                                                   |                   |          |                  |  |            |          |           |  |             |          |            |   |  |         |           |  |  |          |           |  |  |          |          |  
|-------------------------------------------- | ----------------------------------------------------------------- | ----------------- | -------- | ---------------- |  | ---------- | -------- | --------- |  | ----------- | -------- | ---------- | - |  | ------- | --------- |  |  | -------- | --------- |  |  | -------- | -------- | -
|                                             |                                                                   |                   |          |                 
|                                             |                                                                   | December 31, 2000 |          | December 31,1999
|                                             |                                                                   |                   |          |                 
|                                             |                                                                   | As                |          |                  |  | As         |          |          
|                                             |                                                                   | Previously        |          |                  |  | Previously |          |          
|                                             |                                                                   | Reported          |          | As Restated      |  | Difference |          | Reported  |  | As Restated |          | Difference
|                                             |                                                                   |                   |          |                  |  |            |          |           |  |             |          |           
|STOCKHOLDERS EQUITY                         |                                                                   |                   |          |                  |  |            |          |           |  |             |          |            |   |  |         |           |  |  |          |           |  | 
|Preferred stock                              |                                                                   |                   |         |                  |  |            |         |           |  |             |         |            |   |  |        |           |  |  |         |           |  |  |         |         
|Common stock                                 |                                                                   |                   | 1,381    |                  |  |            | 1,381    |           |  |             |         |            |   |  | 1,387   |           |  |  | 1,387    |           |  |  |         |         
|Treasury stock                               |                                                                   |                   | (23,186  | )                |  |            | (23,186  | )         |  |             |         |            |   |  | (11,023 | )         |  |  | (11,023  | )         |  |  |         |         
|Additional paid-in capital                   |                                                                   |                   | 685,423  |                  |  |            | 695,388  |           |  |             | 9,965    |            |   |  | 644,821 |           |  |  | 653,384  |           |  |  | 8,563    |         
|Cumulative other comprehensive income (loss) |                                                                   |                   | (31,266  | )                |  |            | 6,788    |           |  |             | 38,054   |            |   |  | (9,957  | )         |  |  | 15,766   |           |  |  | 25,723   |         
|Accumulated deficit                          |                                                                   |                   | (135,894 | )                |  |            | (457,448 | )         |  |             | (321,554 | )          |   |  | 33,890  |           |  |  | (303,576 | )         |  |  | (337,466 | )       
|                                             |                                                                   |                   |          |                  |  |            |          |           |  |             |          |            |   |  |         |           |  |  |          |           |  |  |          |         
|                                             | Total stockholders equity                                        |                   |          | 496,458          |  |            |          | 222,923   |  |             |          | (273,535   | ) |  |         | 659,118   |  |  |          | 355,938   |  |  |          | (303,180 | )
|                                             |                                                                   |                   |          |                  |  |            |          |           |  |             |          |            |   |  |         |           |  |  |          |           |  |  |          |         
|                                             | Total liabilities, minority interest and
    stockholders equity |                   | $        | 1,391,620        |  |            | $        | 1,465,623 |  |             | $        | 74,003     |   |  | $       | 1,489,797 |  |  | $        | 1,510,388 |  |  | $        | 20,591   |  
|                                             |                                                                   |                   |          |                  |  |            |          |           |  |             |          |            |   |  |         |           |  |  |          |           |  |  |          |         

39



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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 statements of operations data
for the Company, showing previously reported annual amounts, and
restated amounts, for the years ended December 31, 2000,
1999 and 1998:

Consolidated Statements of Operations for the
Years Ended December 31, 2000, 1999 and 1998

|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |          |   |          |  
|---------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------- | ----------------- | ---------------------------- | - | ---------------------------- | -------- | -------- | - | ------------- | ------- | ---------- | - | -------- | -------- | ----------- | - | ---------- | -------- | ------- | - | -------- | ------ | ------- | - | ----- | ------- | ------- | - | ------ | -------- | ------- | - | -------- | -------- | -------- | - | -------- | -
|                                                                                         |                                       |                                       |                   |                              |   |                             
|                                                                                         |                                       | Year Ended December 31, 2000          |                   | Year Ended December 31, 1999 |   | Year Ended December 31, 1998
|                                                                                         |                                       |                                       |                   |                              |   |                             
|                                                                                         |                                       | As Previously                         |                   |                              |   | As Previously                |          |          |   | As Previously |         |           
|                                                                                         |                                       | Reported                              |                   | As Restated                  |   | Difference                   |          | Reported |   | As Restated   |         | Difference |   | Reported |          | As Restated |   | Difference
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |           
|                                                                                         |                                       |                                      
|                                                                                         |                                       | (In thousands, except per share data)
|Net revenue:                                                                             |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|                                                                                         | Product                               |                                       | $                 | 457,964                      |   |                              | $        | 438,485  |   |               | $       | (19,479    | ) |          | $        | 423,668     |   |            | $        | 438,265 |   |          | $      | 14,597  |   |       | $       | 803,001 |   |        | $        | 238,426 |   |          | $        | (564,575 | )
|                                                                                         | Services and support                  |                                       |                   | 239,778                      |   |                              |          | 270,887  |   |               |         | 31,109     |   |          |          | 187,316     |   |            |          | 222,072 |   |          |        | 34,756  |   |       |         | 158,682 |   |        |          | 189,341 |   |          |          | 30,659   |  
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Total net revenue                                                                        |                                       |                                       | 697,742           |                              |   |                              | 709,372  |          |   |               | 11,630  |            |   |          | 610,984  |             |   |            | 660,337  |         |   |          | 49,353 |         |   |       | 961,683 |         |   |        | 427,767  |         |   |          | (533,916 | )       
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Cost of net revenue:                                                                     |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|                                                                                         | Product                               |                                       |                   | 113,394                      |   |                              |          | 117,801  |   |               |         | 4,407      |   |          |          | 88,729      |   |            |          | 90,611  |   |          |        | 1,882   |   |       |         | 137,374 |   |        |          | 120,930 |   |          |          | (16,444  | )
|                                                                                         | Services and support                  |                                       |                   | 42,301                       |   |                              |          | 42,301   |   |               |         |           |   |          |          | 42,094      |   |            |          | 42,094  |   |          |        |        |   |       |         | 39,674  |   |        |          | 39,674  |   |          |          |         |  
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Total cost of net revenue                                                                |                                       |                                       | 155,695           |                              |   |                              | 160,102  |          |   |               | 4,407   |            |   |          | 130,823  |             |   |            | 132,705  |         |   |          | 1,882  |         |   |       | 177,048 |         |   |        | 160,604  |         |   |          | (16,444  | )       
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Operating costs:                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|                                                                                         | Research and development              |                                       |                   | 172,968                      |   |                              |          | 164,218  |   |               |         | (8,750     | ) |          |          | 152,728     |   |            |          | 152,728 |   |          |        |        |   |       |         | 135,475 |   |        |          | 135,475 |   |          |          |         |  
|                                                                                         | Marketing and sales                   |                                       |                   | 377,001                      |   |                              |          | 358,295  |   |               |         | (18,706    | ) |          |          | 326,160     |   |            |          | 327,508 |   |          |        | 1,348   |   |       |         | 266,450 |   |        |          | 273,696 |   |          |          | 7,246    |  
|                                                                                         | General and administrative            |                                       |                   | 85,064                       |   |                              |          | 91,277   |   |               |         | 6,213      |   |          |          | 129,528     |   |            |          | 114,521 |   |          |        | (15,007 | ) |       |         | 90,106  |   |        |          | 97,851  |   |          |          | 7,745    |  
|                                                                                         | Amortization of intangibles           |                                       |                   | 66,282                       |   |                              |          | 58,236   |   |               |         | (8,046     | ) |          |          | 58,400      |   |            |          | 50,354  |   |          |        | (8,046  | ) |       |         | 43,182  |   |        |          | 40,969  |   |          |          | (2,213   | )
|                                                                                         | Provision for doubtful accounts       |                                       |                   | 9,924                        |   |                              |          | 4,785    |   |               |         | (5,139     | ) |          |          |            |   |            |          | 19,246  |   |          |        | 19,246  |   |       |         |        |   |        |          | 4,828   |   |          |          | 4,828    |  
|                                                                                         | Acquisition and other related costs   |                                       |                   |                             |   |                              |          |         |   |               |         |           |   |          |          | (18,732     | ) |            |          |        |   |          |        | 18,732  |   |       |         | 135,616 |   |        |          | 117,170 |   |          |          | (18,446  | )
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Total operating costs                                                                    |                                       |                                       | 711,239           |                              |   |                              | 676,811  |          |   |               | (34,428 | )          |   |          | 648,084  |             |   |            | 664,357  |         |   |          | 16,273 |         |   |       | 670,829 |         |   |        | 669,989  |         |   |          | (840     | )       
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Income (loss) from operations                                                            |                                       |                                       | (169,192          | )                            |   |                              | 127,541  |          |   |               | 41,651  |            |   |          | (167,923 | )           |   |            | (136,725 | )       |   |          | 31,198 |         |   |       | 113,806 |         |   |        | (402,826 | )       |   |          | (516,632 | )       
|Interest and other income                                                                |                                       |                                       | 44,624            |                              |   |                              | 43,018   |          |   |               | (1,606  | )          |   |          | 30,678   |             |   |            | 30,808   |         |   |          | 130    |         |   |       | 33,257  |         |   |        | 31,958   |         |   |          | (1,299   | )       
|Interest and other expenses                                                              |                                       |                                       | (18,169           | )                            |   |                              | (18,202  | )        |   |               | (33     | )          |   |          | (17,332  | )           |   |            | (16,833  | )       |   |          | 499    |         |   |       | (15,246 | )       |   |        | (14,195  | )       |   |          | 1,051    |         
|Gain (loss) on investments, net                                                          |                                       |                                       | 30,361            |                              |   |                              | 31,801   |          |   |               | 1,440   |            |   |          | (6,145   | )           |   |            | (5,026   | )       |   |          | 1,119  |         |   |       | 190     |         |   |        | (1,148   | )       |   |          | (1,338   | )       
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Income (loss) before provision for (benefit from)
    income taxes and minority interest |                                       |                                       | (112,376          | )                            |   |                              | (70,924  | )        |   |               | 41,452  |            |   |          | (160,722 | )           |   |            | (127,776 | )       |   |          | 32,946 |         |   |       | 132,007 |         |   |        | (386,211 | )       |   |          | (518,218 | )       
|Provision for (benefit from) income taxes                                                |                                       |                                       | 16,504            |                              |   |                              | 40,944   |          |   |               | 24,440  |            |   |          | (3,497   | )           |   |            | 24,702   |         |   |          | 28,199 |         |   |       | 99,573  |         |   |        | (67,137  | )       |   |          | (166,710 | )       
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Income (loss) before minority interest                                                   |                                       |                                       | (128,880          | )                            |   |                              | (111,868 | )        |   |               | 17,012  |            |   |          | (157,225 | )           |   |            | (152,478 | )       |   |          | 4,747  |         |   |       | 32,434  |         |   |        | (319,074 | )       |   |          | (351,508 | )       
|Minority interest in loss of consolidated
    subsidiaries                               |                                       |                                       | 4,954             |                              |   |                              | 3,854    |          |   |               | (1,100  | )          |   |          | 340      |             |   |            | 514      |         |   |          | 174    |         |   |       |        |         |   |        |         |         |   |          |         |         
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|                                                                                         |                                       |                                       | Net income (loss) |                              | $ | (123,926                     | )        |          | $ | (108,014      | )       |            | $ | 15,912   |          |             | $ | (156,885   | )        |         | $ | (151,964 | )      |         | $ | 4,921 |         |         | $ | 32,434 |          |         | $ | (319,074 | )        |          | $ | (351,508 | )
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Other comprehensive income (loss):                                                       |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|                                                                                         | Unrealized gain (loss) on investments |                                       | $                 | 2,654                        |   |                              | $        | (318     | ) |               | $       | (1,797     | ) |          | $        | (1,610      | ) |            | $        | (1,803  | ) |          | $      | (193    | ) |       | $       | 1,793   |   |        | $        | 388     |   |          | $        | (1,405   | )
|                                                                                         | Foreign currency gain (loss)          |                                       |                   | (23,963                      | ) |                              |          | (8,660   | ) |               |         | 14,129     |   |          | $        | (6,813      | ) |            |          | 19,986  |   |          |        | 26,799  |   |       |         | (5,101  | ) |        |          | (4,339  | ) |          |          | 762      |  
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Comprehensive income (loss)                                                              |                                       | $                                     | (145,235          | )                            |   | $                            | (116,992 | )        |   | $             | 28,244  |            |   | $        | (165,308 | )           |   | $          | (133,781 | )       |   | $        | 31,527 |         |   | $     | 29,126  |         |   | $      | (323,025 | )       |   | $        | (352,151 | )       
|Net income (loss) per share-basic                                                        |                                       | $                                     | (0.90             | )                            |   | $                            | (0.78    | )        |   | $             | 0.12    |            |   | $        | (1.13    | )           |   | $          | (1.10    | )       |   | $        | 0.03   |         |   | $     | 0.24    |         |   | $      | (2.40    | )       |   | $        | (2.64    | )       
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Shares used in per share calculation- basic                                              |                                       |                                       | 138,072           |                              |   |                              | 138,072  |          |   |               |        |            |   |          | 138,695  |             |   |            | 138,695  |         |   |          |       |         |   |       | 133,075 |         |   |        | 133,075  |         |   |          |         |         
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Net income (loss) per share- diluted                                                     |                                       | $                                     | (0.90             | )                            |   | $                            | (0.78    | )        |   | $             | 0.12    |            |   | $        | (1.13    | )           |   | $          | (1.10    | )       |   | $        | 0.03   |         |   | $     | 0.23    |         |   | $      | (2.40    | )       |   | $        | (2.63    | )       
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         
|Shares used in per share calculation- diluted                                            |                                       |                                       | 138,072           |                              |   |                              | 138,072  |          |   |               |        |            |   |          | 138,695  |             |   |            | 138,695  |         |   |          |       |         |   |       | 138,609 |         |   |        | 133,075  |         |   |          |         |         
|                                                                                         |                                       |                                       |                   |                              |   |                              |          |          |   |               |         |            |   |          |          |             |   |            |          |         |   |          |        |         |   |       |         |         |   |        |          |         |   |          |          |         

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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,
|                                      |                                                                |                         
|                                      |                                                                | 2000                     |         | 1999    |   | 1998
|                                      |                                                                |                          |         |         |   |     
|Net revenue, as previously reported   |                                                                | $                        | 697,742 |         |   | $    | 610,984 |         |   | $ | 961,683  |         
|Revenue restatement adjustments:      |                                                                |                          |         |         |   |      |         |         |   |   |          |         
|                                      | Restatement to sell-through basis of revenue
    recognition   |                          |         | 49,359  |   |      |         | 137,017 |   |   |          | (302,962 | )
|                                      | Allocation of revenue in multi-element
    arrangements        |                          |         | (9,009  | ) |      |         | (77,922 | ) |   |          | (161,676 | )
|                                      | Collection not reasonably assured                              |                          |         | (2,674  | ) |      |         | 40,826  |   |   |          | (46,937  | )
|                                      | Business combinations and related restructuring
    charges    |                          |         |        |   |      |         | (10,737 | ) |   |          | (33,849  | )
|                                      | Allowances for sales returns and other revenue
    adjustments |                          |         | (8,136  | ) |      |         | 5,082   |   |   |          | (8,293   | )
|                                      | General and administrative expenses                            |                          |         | (3,519  | ) |      |         | (1,890  | ) |   |          | 77       |  
|                                      | Reclassifications for payments to distributors                 |                          |         | (14,114 | ) |      |         | (4,065  | ) |   |          |         |  
|                                      | Investments in customers                                       |                          |         | (2,563  | ) |      |         | (9,230  | ) |   |          |         |  
|                                      | Other revenue adjustments                                      |                          |         | 2,286   |   |      |         | (29,727 | ) |   |          | 19,724   |  
|                                      |                                                                |                          |         |         |   |      |         |         |   |   |          |         
|Total revenue restatement adjustments |                                                                |                          | 11,630  |         |   |      | 49,354  |         |   |   | (533,916 | )       
|                                      |                                                                |                          |         |         |   |      |         |         |   |   |          |         
|Net revenue, as restated              |                                                                | $                        | 709,372 |         |   | $    | 660,338 |         |   | $ | 427,767  |         
|                                      |                                                                |                          |         |         |   |      |         |         |   |   |          |         



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

The Company sells certain of its products through
distributors and other resellers. 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 was 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
(SFAS 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 had previously concluded that the criteria of
SFAS 48 and SOP 97-2 had been satisfied. The Company
has determined that in 1998, 1999 and 2000 it did not meet the
SFAS 48 and SOP 97-2 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. The
Company provided concessions, including return rights and stock
rotation rights, outside the contractual terms, and, in some
instances, facilitated the resale of Company products by its
distributors. In addition, in some cases, distributors and
resellers were not obligated to pay for delivered inventory
until they had sold the inventory. Accordingly, the Company has
corrected the recording of its revenue from distributor and
reseller transactions prior to 2001 to reflect the sell-through
basis of revenue recognition, which is how the Company has
reported revenue from sales to distributors and resellers since
January 1, 2001.

Adjustments required under the change to a
sell-through revenue recognition policy had the effect of
deferring recognition of revenue to periods later than
originally recorded. The Company has concluded that, except for
currency adjustments, no revenue was lost as a result of this
correction although revenue has been restated and recognized in
later periods and certain amounts have been reclassified to
service and support revenue. The impact of foreign currency
adjustments is included in Other Revenue
Adjustmentsdescribed below. Also, see Cost of
Product Revenue below.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The accounting treatment with respect to certain
revenue arrangements with multiple elements 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
elements, 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 fee 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. The Company has recorded correcting
adjustments, as more fully described below, to comply with the
applicable accounting guidance.

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, during 1998 through 2000 the
discount was allocated proportionately based on list price to
the license and PCS. The Company has determined that these
discounts should have been allocated entirely to the delivered
license elements. In addition, the Company has revaluated
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 in 1998
through 2000. 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 revenue during that
period and the recognition of service and support revenue of
$139.5 million and $46.0 million in 2001 and 2002,
respectively.

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 arrangements 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, 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 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 our 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

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 considered the
effect of the 90-day free upgrade right on 1997 sales when the
Company was under the then-current revenue recognition guidance
of SOP 91-1, Software Revenue
Recognition. That guidance requires that, if a vendor
has a PCS obligation and the separate price for the PCS cannot
be derived, both the PCS and the licensing fee should be
recognized ratably over the PCS period. Consequently, for
licenses with unexpired upgrade rights, the Company deferred
revenue of approximately $8.9 million as of
December 31, 1997, which increased revenue in the first
quarter of 1998 when the deferred revenue was recognized over
the remainder of the 90-day free upgrade right period.

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 that will be
recognized over the PCS term (generally two to three years).
Additional adjustments were recorded in 1998 through 2000 for
other arrangements 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, adjustments to multi-element revenue
arrangements in 1998 through 2000 resulted in the same amount of
revenue recognized in total over all periods affected, excluding
foreign currency adjustments. However, as there was a
significant increase in deferred revenue for 1998 through 2000,
service and support revenue will be increased in subsequent
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 these
distributors. Revenue from these distributors should have been
recognized upon receipt of cash since one of the criteria for
revenue recognition under SOP 97-2 is that collectibility
is reasonably assured. As a result, restatement adjustments were
recorded to (i) reduce the provision for doubtful accounts
by $18.9 million and $9.2 million in 1999 and 2000,
respectively, and reduce revenue or accounts receivable and
(ii) reduce revenue by $50.7 million in 1998 for one
distributor and recognize revenues related to this distributor
based on cash receipts in 1999, 2000 and subsequent periods.

The Company recorded restatement adjustments to
revenue and the provision for doubtful accounts during 2000,
1999 and 1998. 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 provisions
for doubtful accounts transferred to the Companys Revenue
Allowances. Net revenue was increased by releasing excess
provisions 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.

Additional adjustments to the provision for
doubtful accounts were also made based on the restated balances
of accounts receivable.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                            
| | -----------------------------------------------------------
| | Business Combinations and Related
    Restructuring Charges

The Company has determined that certain
previously recognized restructuring liabilities were recorded in
error as liabilities as they did not meet the requirements for
liability recognition at the commitment date as the accrued
amounts benefited future periods or were not incremental to
other costs incurred. The Company also determined, based on
subsequent events, that certain accruals were in excess of
amounts required. For some cases in which the accrual was not
required, the Company evaluated the original support for the
estimate and determined that it was more appropriate to reduce
the original accrual rather than reverse the excess accruals in
a subsequent period as a change in estimate. The Company
recorded correcting adjustments in 1997, 1998 and 1999 that
effectively reduced acquisition and restructuring accruals by
$9.2 million and $18.4 million in 1997 and 1998,
respectively, with offsetting increases in related expenses of
$17.7 million and $22.4 million in 1998 and 1999. The
Company also recorded a $17.0 million reduction to revenue
in 1998 related to the reversal of an acquisition-related
accrual to channel allowances (a contra revenue account).

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 and deferred tax
assets. The net effect of the adjustments was to reduce certain
assumed liabilities, including deferred revenue and allowances
related to certain assets 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 1998 through
2001. Approximately $27.6 million of the adjustments to the
purchase price resulted in an offsetting reduction in revenue in
1998 and 1999 as the originally recorded excess liabilities had
periodically been reclassified to contra-revenue accounts.

The Company identified options held by the
employees of three acquired companies assumed by the Company as
part of the acquisitions. The Company determined that the fair
value of the Company options exchanged for the acquired company
options should be included in the aggregate acquisition cost.
This adjustment increases the total purchase price of
CyberMedia, Magic Solutions, and Pretty Good Privacy by
$0.7 million, $1.8 million and $0.9 million,
respectively, with a resulting increase in goodwill and related
amortization of goodwill in 1998 through 2001.

During 1998, the Company acquired five foreign
distributors in pooling-of-interests transactions. In
transactions accounted under pooling-of-interests accounting
method, the historical operations of the combining entities are
restated on a combined basis. The Company determined, however,
that upon combination of the historical operations of the
acquired foreign distributors with those of the Company
inter-company revenue and cost of sales had not been eliminated.
Revenue was reduced by approximately $2.2 million in 1998
upon recording this elimination entry.



| |                                                               
| | --------------------------------------------------------------
| | 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 increased
or decreased revenue in specific periods, there was no overall
reduction in revenue when considering all periods affected.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Company 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 and
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 certain excess
accruals were in error
reclassified to Revenue Allowances causing revenue and expenses
to be overstated. Correcting adjustments have been recorded to
reduce revenue by $5.3 million, with an offsetting
reduction in general and administrative expense of
$5.3 million, in 1998, 1999 and 2000, collectively.



| |                                                                
| | ---------------------------------------------------------------
| | Reclassification for Payments to
    Distributors and Customers

During the three months ended March 31,
2002, the Company adopted EITF 01-09. EITF 01-09
requires that payments made to or reductions in accounts
receivable associated with customers in order to account for
certain marketing-related amounts (previously classified as
charges to marketing expense), should be reclassified as
reductions of revenue. As a result, upon adoption of
EITF 01-09, the Company was required to retroactively
reclassify amounts recognized for such payments in previously
issued consolidated financial statements. 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s 2002
restatement of the consolidated financial statements for 2000,
1999 and 1998 reclassified approximately $32.7 million,
$44.5 million and $28.4 million, respectively, from
marketing expense to reduction of revenue. As a result of
further investigation, the Company has determined the provisions
of EITF 01-09 required additional reclassifications
reducing revenue by $18.2 million with an offsetting
reduction of $0.4 million in cost of revenue and
$18.7 million in marketing expense for 2000 and 1999,
collectively.



| |                         
| | ------------------------
| | 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 transactions 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
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. This has resulted in a reduction
in revenues of $9.2 million and $2.6 million in 2000
and 1999, respectively, and has reduced previously reported
impairment losses and cost of revenues by $9.2 million and
$0.8 million, in 2000 and 1999, respectively.



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

Other revenue adjustments relate to the Net
Tools, foreign currency translation and beginning balance
adjustments described below.

Net Tools.In the
third quarter of 1998, the Company began operating a wholly
owned subsidiary, Net Tools, Inc. Net Tools acted as an in-house
reseller. Net Tools purchased inventory previously sold to
distributors by the Company to fulfill orders previously placed
by end-users. A total of $72.0 million of product was
purchased at the sales price charged to the end user by Net
Tools from the Companys distributors in 1998, 1999 and
2000 in order to fulfill orders previously placed by end-users.
As a result of the change to the

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

sell-through method of revenue recognition, no
revenue related to these previous sales by the Company to those
distributors and resellers is recognized prior to sale to the
end-users. Upon examination of the original elimination entries
recorded upon consolidation of the subsidiary, the Company
determined that revenue was overstated by approximately
$2.7 million and $0.6 million in 1998 and 1999,
respectively, and understated by $0.3 million in 2000. Cost
of sales was overstated by $2.4 million and
$0.6 million in 1999 and 2000, respectively. Adjustments
were recorded to reduce revenue and cost of sales in their
respective periods.

Foreign Currency Translation Effects on
Restatement Adjustments.The Company
recorded adjustments to increase deferred revenue by
$0.6 million and reduce revenue by a total of approximately
$1.1 million and increase foreign currency loss by
$5.4 million in the three years ended December 31,
2000, 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 translation adjustments, the Company
determined that no revenue was lost as a result of its change to
the sell-through revenue recognition method for years prior to
2001 or the corrections made in connection with multi-element
arrangements in 1998 through 2000. The impact of the related
currency translation adjustments is included in this line item.
In addition, see further adjustments relating to translation of
foreign subsidiaries financial statements in
Cumulative Translation Adjustment below.

Beginning Balance Adjustments.The Company recorded several
adjustments in 1997 that resulted in a net $12.0 million
increase in 1998 revenue, including the two offsetting
adjustments described below.

In addition to the $17.0 million in excess
Revenue Allowances in 1997 discussed in Business
Combinations and Related Restructuring Charges above,
the Company identified through examination of subsequent events
$10.0 million of excess Revenue Allowances as of
December 31, 1997 and has reversed this amount increasing
fiscal 1997 revenue by $10.0 million. Since the overstated
Revenue Allowances originally caused revenue in 1998 to be
overstated through a reversal of this excess allowance in 1998,
the restatement adjustments resulted in a $10.0 million
decrease to 1998 revenue. Additionally, the Company examined the
effects of restatement to the sell-through method of revenue
recognition and other subsequent events on the December 31,
1997 balances. As a result the Company determined that one
distributor did not meet all the criteria required under
SFAS No. 48 to recognize revenue net of an allowance
for estimated returns upon shipment of product. As a result the
Company recorded a decrease in 1997 revenue and a commensurate
$22.0 million increase in 1998 revenue when the product was
sold by the distributor.



| |                              
| | -----------------------------
| | Expense and Other Adjustments



| |                                      
| | -------------------------------------
| | Cumulative Translation
    Adjustment

The Company has several foreign subsidiaries
which together accounted for approximately 38% of its net revenues
in 2000, 1999 and 1998. In preparing its consolidated financial
statements, the Company is required to translate the financial
statements of the foreign subsidiaries from the currency in
which their accounting records are maintained, generally in 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 the Companys
stockholders equity under the caption cumulative
translation adjustment (CTA). While
considering the effects of foreign currency translation on the
restated consolidated balance sheets, as discussed above, the
Company determined that inaccurate accounting entries were
recorded to the CTA account during 1998 through 2000. The
inaccuracies resulted from unsupported adjustments to the CTA
account from inter-company account eliminating entries. The
Company recorded restatement adjustments in the CTA account
totaling $5.9 million for 1998, 1999 and 2000 with
offsetting adjustments increasing general and administrative
expense.

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

The Companys 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 products,
computer platforms and other hardware components. The cost of
net product revenue has been adjusted to reflect the
Companys conversion to sell-through revenue recognition as
discussed in Restatement to Sell-through Revenue
Recognitionabove. Adjustments have been recorded to
defer and recognize certain portions of the cost of net product
revenue in the same periods that the related revenue is
recognized. As of December 31, 2000, cost of net product
revenue deferred to future fiscal periods was $15.7 million.



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

In September 1999, executives of the Company were granted options to purchase 1.7 million
shares of McAfee.com common stock, which vested over four years
and expired ten years after grant. Since these executives were
not employees of McAfee.com, these options were accounted for at
fair market value in accordance with SFAS 123 and its
interpretations. McAfee.com recorded total compensation expense
for 1999 of approximately $6.7 million. The fair market
value of the options granted was calculated using the
Black-Scholes option pricing model using various assumptions,
including an expected life for the options. The Company has
determined that using an expected life assumption for options
granted to non-employee is not consistent with SFAS 123 and
its interpretations, which require the use of the options
contract term of ten years for non-employee options. Additional
stock-based compensation of approximately $5.1 million was
recorded in 1999 primarily in general and administrative expense
to reflect the appropriate fair value estimate of the McAfee.com
options granted to other non-McAfee.com employees.

In addition, the Company determined stock-based
compensation charges of $1.4 million originally recorded in
the second quarter of 2002 should have been recorded in 2000 and
recorded an increase in stock-based compensation of that amount
in 2000 in general and administrative expense.



| |                      
| | ---------------------
| | Short Term Borrowings

During the period from December 31, 1997
through December 31, 2000, the Company entered into several
accounts receivable purchase agreements in which the Company
sold to banks portfolios of accounts receivable at discounts ranging
from 2.9% to 4.3%. However, the Company assets that were sold
under these arrangements did not represent a right to receive
cash from the distributors as the distributors had limited
obligations to pay until the Companys products were sold
by the distributor. Upon further review of the transactions, the
Company determined that the arrangements do not represent sales
of receivables under FAS 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. Adjustments have been recorded to
reflect the arrangements as short-term debt transactions.



| |                                              
| | ---------------------------------------------
| | Provision for (Benefit From) Income
    Taxes

The provision for (benefit from) income taxes 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 accruals for
tax exposure items.

Net tax expense was decreased by
$2.9 million in 1998 by adjustments to purchase accounting
related to the Magic and CyberMedia acquisitions, reflecting a
$6.5 million CyberMedia tax increase and a
$9.4 million Magic related tax decrease. See further
discussion of the purchase accounting adjustments at
Business Combinations and Related Restructuring
Charges.

47



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##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Marketable Securities Adjustments

In 2000 and 1999, the Company made adjustments to
reclassify $109.7 million and $92.6 million,
respectively, from long-term marketable securities to short-term
marketable securities and other current assets. The Company also
recorded a reclassification between cash and cash equivalents
and accrued liabilities of $12.9 million to properly
disclose a cash overdraft in 1999.



| |           
| | ----------
| | 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 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 variable royalty on
certain related revenue. In December 1999, McAfee.com completed
its initial public offering. As of December 31, 2000, the
Company owned approximately 81% of McAfee.coms outstanding
common stock and 93% of its total voting power. In September
2002, the Company acquired all the outstanding publicly held
shares of McAfee.com and McAfee.com was merged into the Company.

For the years ended December 31, 2000 and
1999, on a stand-alone basis, McAfee.com reported net revenue of
$46.9 million and $24.5 million, respectively, and a
net loss of $27.5 million and $27.9 million,
respectively. In 2000, the effect of the restatement adjustments
(described in the sections above) 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. In 1999, the effect of the restatement
adjustments on McAfee.coms stand-alone results was to
(i) decrease net revenue by $9.3 million, primarily
reflecting a VSOE of fair value related decrease of
$7.6 million and a concurrent equity investment related
decrease of $0.2 million, and (ii) increase expense by
$5.1 million, reflecting a stock-based compensation charge.
The aggregate impact on 1999 was to increase reported net loss
by $16.0 million. Over the two-year period 1999 and 2000,
revenue decreased by $2.6 million, stock-based compensation
expense increased by $5.1 million and net loss increased by
$8.6 million.

The effect of the restatement adjustments on
McAfee.coms stand-alone results of operations from
January 1, 2001 through the merger date in September 2002,
is a net decrease in revenue of $0.2 million resulting from
a $3.6 million decrease in revenue in 2001 and a
$3.4 million revenue increase in 2002. These revenue
adjustments are expected to increase net loss in 2001 to
$4.7 million and increase net income in 2002 (through the
merger date) to $7.3 million with an aggregate
$0.2 million decrease in McAfee.coms stand-alone net
income from $2.8 million to $2.6 million for the
period beginning on January 1, 2001 through the merger date.



| |                              
| | -----------------------------
| | Subsequent Effect on Revenues

As previously discussed, the primary effect of
the revenue restatement adjustments over all the periods
affected is to defer revenue in 1998 and recognize a greater
amount of revenue in 1999 and subsequent periods. The following
table summarizes the total increase in deferred revenue and
related accounts as of

48



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2000 and the resulting net
effect of the restatement adjustments on revenues in periods
subsequent to December 31, 2000 (in millions):

|                                                                                                       |  |   |       | 
|------------------------------------------------------------------------------------------------------ |  | - | ----- | 
|Increase in deferred revenue and related accounts
    as of December 31, 2000                          |  | $ | 366.4 | 
|                                                                                                       |  |   |       | 
|Increases in revenue:                                                                                  |  |   |       | 
|2001                                                                                                   |  |   | 259.2 | 
|2002                                                                                                   |  |   | 101.2 | 
|2003                                                                                                   |  |   | 5.7   | 
|2004                                                                                                   |  |   | 0.3   | 
|                                                                                                       |  |   |       | 
|Revenue recognition deferred as of
    December 31, 2000 to be recognized in 2001, 2002, 2003 and
2004 |  | $ | 366.4 | 
|                                                                                                       |  |   |       | 

Additional information regarding the effect of
the restatement adjustments on subsequent periods is located in
the Companys 2002 consolidated financial statements as
filed in its 2002 Form 10-K.



|   |                                           
|-- | ------------------------------------------
|4. | Business Combinations and
    Acquisitions

The following table is a summary of acquisitions
by the Company in the three years ended December 31, 2000:

|                                |  |                       |                   |                       |  |   |               | 
|------------------------------- |  | --------------------- | ----------------- | --------------------- |  | - | ------------- | 
|                                |  | Common Stock          |                   |                      
|                                |  | Issued in Pooling-of- |                   | Purchase Price       
|                                |  | Interests             |                   | Purchase Transactions
|                                |  |                       |                   |                      
|2000                            |  |                       |                   |                       |  |   |               | 
|McAfee.com acquisitions         |  |                       |                   |                       |  | $ | 22.6 million  | 
|1999                            |  |                       |                   |                       |  |   |               | 
| none                         |  |                       |                   |                       |  |   |               | 
|1998                            |  |                       |                   |                       |  |   |               | 
|Syscon                          |  |                       | 1,230 shares      |                       |  |   |               | 
|Nordic                          |  |                       | 30,508 shares     |                       |  |   |               | 
|Magic Solutions                 |  |                       |                   |                       |  | $ | 113.0 million | 
|Trusted Information Systems     |  |                       | 6,755,540 shares  |                       |  |   |               | 
|Secure Networks                 |  |                       | 567,000 shares    |                       |  |   |               | 
|CSB                             |  |                       | 9,815 shares      |                       |  |   |               | 
|QA Information Security Holding |  |                       | 305,557 shares    |                       |  |   |               | 
|Anyware Seguridad Informatica   |  |                       | 228,204 shares    |                       |  |   |               | 
|Dr. Solomons                   |  |                       | 15,813,142 shares |                       |  |   |               | 
|CyberMedia                      |  |                       |                   |                       |  | $ | 133.7 million | 



| |                 
| | ----------------
| | CyberMedia, Inc.

On September 9, 1998, the Company obtained
control of CyberMedia, Inc. (CyberMedia), a provider
of desktop utility software solutions, when CyberMedias
stockholders tendered approximately 97% of the outstanding
shares to the Company for $9.50 per share in cash. The
results of operations of CyberMedia have been included within
the consolidated results from the date of acquisition. On
September 10, 1998, a subsidiary of the Company merged into
CyberMedia in a transaction in which CyberMedia shares not
tendered were converted into the right to receive the same per
share cash price paid in the tender offer. Total cash paid to stockholders was
$131.2 million. The total purchase price, including
transaction costs was approximately
$133.7 million.

49



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As the Company had assessed and formulated its
plans to terminate certain CyberMedia employees and close
certain CyberMedia facilities as of the acquisition date, the
purchase price plus assumed liabilities of
$4.8 million was allocated to the assets acquired. Of the
purchase price, $12.2 million was
allocated to existing technology and other intangibles and
$101.8 million to goodwill, to be amortized over 3 and
7 years, respectively. In addition, $22.8 million was
allocated to in-process research and development projects that
had not yet reached technological feasibility and did not have
alternative future use. To determine the value of the in-process
research and development, the Company considered, among other
factors, the stage of development of each project at the time of
acquisition, the time and cost needed to complete each project,
expected income from the projects, and the projected incremental
cash flows from the projects when completed and any associated
risks. Associated risks include the inherent difficulties and
uncertainties in completing a project and thereby achieving
technological feasibility and risks related to the impact of
potential changes in future target markets.



| |                                        
| | ---------------------------------------
| | Magic Solutions International,
    Inc.

On April 1, 1998, the Company acquired all
of the outstanding capital stock and options of Magic Solutions
International, Inc. (Magic Solutions), a privately
held provider of internal help desk and asset management
solutions, for cash of $113.0 million ($112.5 million, net of
cash acquired). The results of operations of Magic Solutions
have been included with the Companys consolidated results
of operations from the date of acquisition.

As the Company had assessed and formulated its
plans to terminate certain Magic Solutions employees and close
the Magic Solutions facilities as of the acquisition date, the
total purchase price included related liabilities assumed of
$1.3 million.
Of the total purchase price, $20.3 million was
recorded as trademarks, purchased technology and assembled
workforce and
$79.9 million as goodwill, to be amortized on a
straight-line basis over 5 and 7 years, respectively. In
addition, $27.0 million of the total purchase price was
allocated to in-process research and development projects that
had not yet reached technological feasibility and did not have
alternative future use. To determine the value of the in-process
research and development, the Company considered, among other
factors, the stage of development of each project at the time of
acquisition, the time and cost needed to complete each project,
expected income from the projects, and the projected incremental
cash flows from the projects when completed and any associated
risks. Associated risks include the inherent difficulties and
uncertainties in completing a project and thereby achieving
technological feasibility and risks related to the impact of
potential changes in future target markets.



| |                                    
| | -----------------------------------
| | Pro forma Results of
    Operations

The following summary, prepared on a pro forma
basis, shows the results of operations as if CyberMedia and
Magic Solutions had been acquired as of January 1, 1998,
after including the impact of certain adjustments, such as
amortization of intangibles and the related income tax effects (dollars in
millions, except per share amounts):

|                   |  |               |        |  
|------------------ |  | ------------- | ------ | -
|                   |  | Year Ended   
|                   |  | December 31, 
|                   |  | 1998         
|                   |  |              
|                   |  | (Unaudited)  
|                   |  | (As restated)
|Revenue            |  | $             | 452.6  |  
|Net loss           |  | $             | (354.6 | )
|Net loss per share |  | $             | (2.66  | )

50



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The pro forma information set forth above with
respect to the CyberMedia and Magic Solutions acquisitions is
not necessarily indicative of the operating results that would
have occurred if these acquisitions had been consummated as of
January 1, 1998, nor is it necessarily indicative of future
operating results. The pro forma information does not give
effect to any potential revenue enhancements or cost synergies
or other operating efficiencies that could result from the
acquisitions.



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

During 2000, McAfee.com completed two
acquisitions (Signal 9 Solutions Canada and Tufans) for a total
purchase price of $22.6 million, including the
issuance of approximately 550,000 shares of its
Class A common stock, valued at approximately
$19.6 million, cash of approximately $2.2 million and
acquisition related expenses of $0.8 million. The value of
the stock issued was based on the average of the market price of
McAfee.com stock 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 were largely dependent on the core technology and that
new versions are released frequently and contain incremental
rather than fundamental improvements. Based on this analysis,
$22.3 million was recorded as goodwill and purchased
technology, and is being amortized on a straight-line basis over
three years. A summary of the fair value of the assets acquired
as a result of these transactions, is as follows (in thousands):

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

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

In December 2000, McAfee.com performed a review
of the carrying 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.



| |                                      
| | -------------------------------------
| | Pooling-of-Interests
    Combinations



| |                        
| | -----------------------
| | Dr. Solomons Group PLC

On August 13, 1998, the Company acquired Dr.
Solomons Group PLC (Dr. Solomons), a
European-based publicly-held provider of anti-virus software
products, for approximately 15.8 million shares of the
Companys common stock (including 1.7 million shares
held in trust pending the exercise of certain outstanding and
fully vested Dr. Solomons options). In the acquisition,
each outstanding ordinary share of Dr. Solomons was
exchanged for 0.27625 shares of common stock of the Company.

The Company assumed all outstanding options to
acquire Dr. Solomons ordinary shares. The acquisition was
accounted for as a pooling-of-interests and therefore all prior
period consolidated financial statements have been restated to
include the results of Dr. Solomons for all periods
presented. The results of operations

51



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

for the year ended December 31, 1998 reflect
the consolidated results of operations of the Company for the
year ended December 31, 1998 and the results of operations
of Dr. Solomons for the thirteen months ended
December 31, 1998.

Separate and combined results of operations for
the period prior to the merger are as follows (in thousands,
except per share data):

|                              |                    |               |   |          |  
|----------------------------- | ------------------ | ------------- | - | -------- | -
|                              |                    | Year Ended   
|                              |                    | December 31, 
|                              |                    | 1998         
|                              |                    |              
|                              |                    | (As restated)
|Revenue:                      |                    |               |   |         
|                              | Network Associates |               | $ | 371,869  |  
|                              | Dr. Solomons      |               |   | 55,898   |  
|                              |                    |               |   |         
|                              | Combined           |               | $ | 427,767  |  
|                              |                    |               |   |         
|Net loss:                     |                    |               |   |         
|                              | Network Associates |               | $ | (318,572 | )
|                              | Dr. Solomons      |               |   | (502     | )
|                              |                    |               |   |         
|                              | Combined           |               | $ | (319,074 | )
|                              |                    |               |   |         
|Comprehensive loss:           |                    |               |   |         
|                              | Network Associates |               | $ | (322,523 | )
|                              | Dr. Solomons      |               |   | (502     | )
|                              |                    |               |   |         
|                              | Combined           |               | $ | (323,025 | )
|                              |                    |               |   |         
|Net loss per share  diluted: |                    |               |   |         
|                              | Network Associates |               | $ | (2.4     | )
|                              | Dr. Solomons      |               | $ |         |  
|                              | Combined           |               | $ | (2.4     | )
|                              |                    |               |   |         



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

On April 28, 1998, the Company acquired
Trusted Information Systems (TIS), a publicly-held
provider of comprehensive security systems for computer
networks. The acquisition was accounted for as a
pooling-of-interests and therefore all prior period consolidated
financial statements have been restated to include the results
of TIS for all periods presented. In the acquisition, a wholly
owned subsidiary of the Company merged with and into TIS; TIS
became a wholly owned subsidiary of the Company; and all
outstanding common stock of TIS was converted into approximately
6.8 million shares of common stock of the Company, at an
exchange ratio of 0.4845. The Company also assumed all
outstanding options and other rights to acquire TIS capital
stock.

On May 15, 1998, the Company acquired Secure
Networks, Inc. (Secure), a developer and licensor of
network security auditing software based in Canada. The
aggregate consideration payable in the acquisition was
567,000 shares of the Companys common stock. The
acquisition was accounted for as a pooling-of-interests and
therefore all prior period consolidated financial statements
have been restated to include the results of Secure for all
periods presented.

On August 31, 1998, the Company acquired QA
Information Security Holding AB (QA), based in
Sweden, a distributor of network security products. The
aggregate consideration payable in the acquisition was
305,557 shares of the Companys common stock. The
acquisition was accounted for as a pooling-of-interests

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and therefore all prior period consolidated
financial statements have been restated to include the results
of QA for all periods presented.

On July 30, 1998, the Company acquired
Anyware Seguridad Informatica S.A. (Anyware), based
in Madrid, Spain and is a developer and distributor of
anti-virus software products. The aggregate consideration
payable in the acquisition was 228,204 shares of the
Companys common stock. The acquisition was accounted for
as a pooling-of-interests, and therefore all prior period
consolidated financial statements have been restated to include
the results of Anyware for all periods presented.

The Companys consolidated financial
statements have been restated for these poolings, the effect of
which was not material.



| |                                        
| | ---------------------------------------
| | Acquisition and Other Related
    Costs

In connection with several acquisitions the
Company assessed and formulated restructuring plans affecting
the acquired company or the Companys operations related to
the acquisition. The restructuring plans provided for exiting an
activity of the acquired company, terminating employees (thereby
incurring severance and benefit costs), closing facilities and
incurring liabilities on terminated leases, and disposing of
related leasehold improvements, property and equipment. The
Company recorded acquisition and restructuring accruals in 1997
and 1998 that were substantially used in the year of accrual and
the subsequent year as amounts were paid or charged against the
asset.

During 1998, in connection with acquisitions
accounted for as pooling of interests, the Company incurred
direct transaction costs and other restructuring and related
charges in the amount of $49.0 million. In connection with
the acquisitions accounted for as purchase transactions, the
Company incurred charges of $49.8 million in 1998,
consisting principally of the write-off of acquired in-process
research and development. The following is a summary of these
charges together with charges for certain restructuring
activities taken by the Company during 1998, as restated (in
thousands):

|                    |                |             |        |             |  |             |        |            |  |       |        |       |  |   |        |   |  |   |         |        | 
|------------------- | -------------- | ----------- | ------ | ----------- |  | ----------- | ------ | ---------- |  | ----- | ------ | ----- |  | - | ------ | - |  | - | ------- | ------ | 
|                    |                | Direct      |        |             |  | Lease Costs |        |            |  |      
|                    |                | Transaction |        | Severance & |  | and Asset   |        | In-Process |  |      
|                    |                | Costs       |        | Benefits    |  | Write Downs |        | R&D        |  | Total
|                    |                |             |        |             |  |             |        |            |  |      
|TIS                 |                | $           | 11,311 |             |  | $           | 1,000  |            |  | $     | 85     |       |  | $ |       |   |  | $ | 12,396  |       
|Dr. Solomons       |                |             | 12,672 |             |  |             | 9,000  |            |  |       | 12,615 |       |  |   |       |   |  |   | 34,287  |       
|Secure              |                |             | 500    |             |  |             | 500    |            |  |       | 1,300  |       |  |   |       |   |  |   | 2,300   |       
|Magic               |                |             |       |             |  |             |       |            |  |       |       |       |  |   | 27,014 |   |  |   | 27,014  |       
|CyberMedia          |                |             |       |             |  |             |       |            |  |       |       |       |  |   | 22,830 |   |  |   | 22,830  |       
|Restructuring Costs |                |             |        |             |  |             |        |            |  |       |        |       |  |   |        |   |  |   |         |       
|                    | Second Quarter |             |        |            |  |             |        | 7,774      |  |       |        | 7,942 |  |   |        |  |  |   |         | 15,716 | 
|Restructuring Costs |                |             |        |             |  |             |        |            |  |       |        |       |  |   |        |   |  |   |         |       
|                    | Third Quarter  |             |        |            |  |             |        | 2,257      |  |       |        | 370   |  |   |        |  |  |   |         | 2,627  | 
|                    |                |             |        |             |  |             |        |            |  |       |        |       |  |   |        |   |  |   |         |       
|Total Charges       |                | $           | 24,483 |             |  | $           | 20,531 |            |  | $     | 22,312 |       |  | $ | 49,844 |   |  | $ | 117,170 |       
|                    |                |             |        |             |  |             |        |            |  |       |        |       |  |   |        |   |  |   |         |       

For the years ended December 31, 1998 and
1999, activity with respect to accruals established in the
second and third quarters of 1998 consisted principally of the
payment of accrued direct transaction costs and

53



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

severance benefits. All expenditures related to
these accruals were completed as of December 31, 1999. The
following table summarizes the activity during 1998 and 1999 in
these accruals as restated (in thousands):

|                                               |  |             |         |             |  |             |         |       |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ----------- | ------- | ----------- |  | ----------- | ------- | ----- |  | - | ------- | - |  | - | ------- | -
|                                               |  | Direct      |         |             |  | Lease Costs |         |      
|                                               |  | Transaction |         | Severance & |  | and Asset   |         |      
|                                               |  | Costs       |         | Benefits    |  | Write Downs |         | Total
|                                               |  |             |         |             |  |             |         |      
|Charged in 1998                                |  | $           | 24,483  |             |  | $           | 20,531  |       |  | $ | 22,312  |   |  | $ | 67,326  |  
|Paid out or charged against the related asset  |  |             | (18,771 | )           |  |             | (18,982 | )     |  |   | (21,250 | ) |  |   | (59,003 | )
|                                               |  |             |         |             |  |             |         |       |  |   |         |   |  |   |         |  
|Balance, December 31, 1998                     |  | $           | 5,712   |             |  | $           | 1,549   |       |  | $ | 1,062   |   |  | $ | 8,323   |  
|Paid out or charged against the related assets |  |             | (5,712  | )           |  |             | (1,549  | )     |  |   | (1,062  | ) |  |   | (8,323  | )
|                                               |  |             |         |             |  |             |         |       |  |   |         |   |  |   |         |  
|Balance, December 31, 1999                     |  | $           |        |             |  | $           |        |       |  | $ |        |   |  | $ |        |  
|                                               |  |             |         |             |  |             |         |       |  |   |         |   |  |   |         |  

Direct transaction costs included
$16.5 million in investment banking fees, $6.7 million
in legal and accounting fees, and $1.3 million in filing
fees, travel and other costs. Lease costs and asset write downs
include the costs of closing approximately 33 facilities
throughout the world of $6.8 million, the disposal of
excess and obsolete assets $8.4 million, and the write-off
of goodwill and intangibles associated with discontinued
Dr. Solomons products of $7.1 million. The
Dr. Solomons write-off related to two minor products
that were discontinued with no sales subsequent to the
Dr. Solomons acquisition.

The severance and benefits charges related to
company-wide reductions in workforce, following the
Companys major acquisitions in the second and third
quarters of 1998, of approximately 784 employees of which 107
were in research and development functions, 302 were in sales
and marketing functions and the remainder were in administrative
and other support functions. Substantially all terminated
employees left the Companys employment in the period the
related accounting charge was recorded. The Company retained a
limited number of employees from each acquisition for short
transition periods. The cost of these employees was charged to
operating expenses during the transition period. The lease costs
represent an estimate of lease expense during the period prior
to re-leasing the property together with losses on subleases, if
any. The leased facilities were substantially vacated in the
period in which the related accounting charges were recorded.
The costs related to any facilities that the Company used during
this period were charged to operations. All the facilities
acquired in the Companys 1998 acquisitions identified for
closure have been disposed of or subleased as of
December 31, 1999.

At December 31, 1998 accruals for
acquisition and other costs consisted
of approximately $8.7 million, of which approximately
$1.5 million was for accrued lease termination costs which
was paid during 1999. All expenditures related to these accruals
have been completed.



|   |                       
|-- | ----------------------
|5. | Marketable Securities:

At December 31, 2000 and 1999, marketable
securities are summarized as follows (in thousands):

Available-for-Sale-Securities

|                                |  |           |         |            |  |             |         |  |  |   |       |  
|------------------------------- |  | --------- | ------- | ---------- |  | ----------- | ------- |  |  | - | ----- | -
|                                |  | Amortized |         | Aggregate  |  | Unrealized 
|2000                            |  | Cost      |         | Fair Value |  | Gain/(Loss)
|                                |  |           |         |            |  |            
|U.S. Government debt securities |  | $         | 180,523 |            |  | $           | 181,624 |  |  | $ | 1,101 |  
|Municipal debt securities       |  |           | 36,882  |            |  |             | 36,839  |  |  |   | (43   | )
|Corporate debt securities       |  |           | 354,133 |            |  |             | 354,391 |  |  |   | 258   |  
|Equity securities               |  |           | 16,547  |            |  |             | 16,020  |  |  |   | (527  | )
|                                |  |           |         |            |  |             |         |  |  |   |       |  
|                                |  | $         | 588,085 |            |  | $           | 588,874 |  |  | $ | 789   |  
|                                |  |           |         |            |  |             |         |  |  |   |       |  

54



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Available-for-Sale-Securities

|                                |  |           |         |            |  |             |         |  |  |   |        |  
|------------------------------- |  | --------- | ------- | ---------- |  | ----------- | ------- |  |  | - | ------ | -
|                                |  | Amortized |         | Aggregate  |  | Unrealized 
|1999                            |  | Cost      |         | Fair Value |  | Gain/(Loss)
|                                |  |           |         |            |  |            
|U.S. Government debt securities |  | $         | 192,730 |            |  | $           | 191,121 |  |  | $ | (1,609 | )
|Municipal debt securities       |  |           | 69,676  |            |  |             | 68,954  |  |  |   | (722   | )
|Corporate debt securities       |  |           | 450,113 |            |  |             | 449,136 |  |  |   | (977   | )
|Equity securities               |  |           | 5,627   |            |  |             | 10,042  |  |  |   | 4,415  |  
|                                |  |           |         |            |  |             |         |  |  |   |        |  
|                                |  | $         | 718,146 |            |  | $           | 719,253 |  |  | $ | 1,107  |  
|                                |  |           |         |            |  |             |         |  |  |   |        |  

At December 31, 1999, all marketable debt
securities had scheduled maturities of less than three years.
Marketable debt securities totaling $268.1 million have
maturities of less than three months and are classified as cash
equivalents.



|   |            
|-- | -----------
|6. | Derivatives

The Company conducts business globally. As a
result, it is exposed to movements in foreign currency exchange
rates. The Company uses forward foreign exchange contracts to
hedge certain assets denominated in foreign currencies. The
Company enters into forward exchange contracts to hedge
exposures associated with nonfunctional currency accounts
receivable and accounts payable denominated in Euro, Canadian,
Australian and several European currencies. For these
instruments, risk reduction is assessed on a transaction basis
and the instruments are designated as a hedge and are highly
inversely correlated to the hedged item as required by generally
accepted accounting principles. Gains and losses on the
contracts are reported in interest and other income and offset
gains or losses from the revaluation of nonfunctional currency
assets and liabilities. The forward contracts range from one to
three months in original maturity. If a hedging instrument
ceases to qualify for hedge accounting, it is accounted for on a
mark to market basis and any subsequent gains and losses are
recognized currently in income. 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.

In June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133). SFAS 133 requires the Company
to recognize all derivatives on the consolidated balance sheet
at fair value. Derivatives that are not hedges must be adjusted
to fair value through net income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value
of the derivative are either offset against the change in fair
value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income 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. SFAS 133, as amended, is effective
beginning in the first fiscal quarter of 2001.

55



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The forward contracts outstanding and there
unrealized gains and (losses) are presented below as restated
(in thousands):

|                          |  |           |        |          |  |             |        |  |  |   |     |  
|------------------------- |  | --------- | ------ | -------- |  | ----------- | ------ |  |  | - | --- | -
|                          |  | Notional  |        | Notional |  |            
|                          |  | Value     |        | Value    |  | Unrealized 
|                          |  | Purchased |        | Sold     |  | Gain/(Loss)
|                          |  |           |        |          |  |            
|Australian Dollar         |  | $         |       |          |  | $           | 3,700  |  |  | $ | 8   |  
|Canadian Dollar           |  |           |       |          |  |             | 14,557 |  |  |   | (27 | )
|Dutch Guilder             |  |           |       |          |  |             |       |  |  |   |    |  
|Euro                      |  |           | 16,749 |          |  |             |       |  |  |   | 50  |  
|Other European Currencies |  |           |       |          |  |             | 10,391 |  |  |   | 1   |  
|                          |  |           |        |          |  |             |        |  |  |   |     |  
|                          |  | $         | 16,749 |          |  | $           | 28,648 |  |  | $ | 32  |  
|                          |  |           |        |          |  |             |        |  |  |   |     |  



|   |                                                       
|-- | ------------------------------------------------------
|7. | Consolidated Balance Sheets Detail (in
    thousands):

|                        |                                   |               |         |               |   |   |         |          |  
|----------------------- | --------------------------------- | ------------- | ------- | ------------- | - | - | ------- | -------- | -
|                        |                                   |              
|                        |                                   | December 31, 
|                        |                                   |              
|                        |                                   | 2000          |         | 1999         
|                        |                                   |               |         |              
|                        |                                   | (As restated) |         | (As restated)
|Property and equipment: |                                   |               |         |               |   |   |         |         
|                        | Furniture and fixtures            |               | $       | 18,837        |   |   | $       | 15,918   |  
|                        | Computers equipment               |               |         | 150,047       |   |   |         | 114,386  |  
|                        | Leasehold improvements            |               |         | 20,068        |   |   |         | 13,191   |  
|                        |                                   |               |         |               |   |   |         |         
|                        |                                   |               | 188,952 |               |   |   | 143,495 |         
|                        | Less accumulated depreciation     |               |         | (112,699      | ) |   |         | (92,655  | )
|                        |                                   |               |         |               |   |   |         |         
|                        |                                   | $             | 76,253  |               |   | $ | 50,840  |         
|                        |                                   |               |         |               |   |   |         |         
|Intangibles assets:     |                                   |               |         |               |   |   |         |         
|                        | Goodwill                          |               | $       | 287,147       |   |   | $       | 270,691  |  
|                        | Purchased technology              |               |         | 81,906        |   |   |         | 71,920   |  
|                        | Other                             |               |         | 1,261         |   |   |         | 1,261    |  
|                        |                                   |               |         |               |   |   |         |         
|                        |                                   |               | 370,314 |               |   |   | 343,872 |         
|                        | Less accumulated amortization     |               |         | (186,922      | ) |   |         | (135,541 | )
|                        |                                   |               |         |               |   |   |         |         
|                        |                                   |               | 183,392 |               |   |   | 208,331 |         
|Other assets            |                                   |               | 18,769  |               |   |   | 22,791  |         
|                        |                                   |               |         |               |   |   |         |         
|                        |                                   | $             | 202,161 |               |   | $ | 231,122 |         
|                        |                                   |               |         |               |   |   |         |         
|Accrued liabilities:    |                                   |               |         |               |   |   |         |         
|                        | Accrued taxes                     |               | $       | 100,419       |   |   | $       | 152,345  |  
|                        | Accrued compensation              |               |         | 36,483        |   |   |         | 37,551   |  
|                        | Accrued marketing costs           |               |         | 21,242        |   |   |         | 19,393   |  
|                        | Accrued inventory costs           |               |         | 6,830         |   |   |         | 10,193   |  
|                        | Accrued legal and accounting fees |               |         | 5,440         |   |   |         | 776      |  
|                        | Other accrued expenses            |               |         | 75,264        |   |   |         | 15,436   |  
|                        |                                   |               |         |               |   |   |         |         
|                        |                                   | $             | 245,678 |               |   | $ | 235,694 |         
|                        |                                   |               |         |               |   |   |         |         

56



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Depreciation and amortization expense, excluding
goodwill amortization, for 2000,
1999 and 1998 were $35.5 million, $32.3 million and
$37.1 million respectively.

In connection with the settlement of patent
litigation (i) the Company provided the other party a
license to their patent portfolio and (ii) the Company paid
$12.5 million to acquire a cross-license to the patent
portfolio of the other party. The $12.5 million of
purchased technology is included in intangible assets and is
being amortized over its useful life
of 5 years.



|   |       
|-- | ------
|8. | Leases



| |                 
| | ----------------
| | Operating Leases

The Company leases its operating facilities under
non-cancelable operating leases, which expire at various times
ranging from the year 2001 through 2013. In addition, the
Company has leased certain equipment with various lease
expiration dates.

At December 31, 2000, future minimum
payments under non-cancelable operating leases are as follows
(in thousands):

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Year Ending December 31, |  |  
|                         |  |  
|2001                     |  | $ | 24,799 | 
|2002                     |  |   | 23,628 | 
|2003                     |  |   | 17,576 | 
|2004                     |  |   | 14,102 | 
|2005 and thereafter      |  |   | 12,536 | 
|                         |  |   |        | 
|                         |  | $ | 92,641 | 
|                         |  |   |        | 

Rent expense for the years ended
December 31, 2000, 1999 and 1998 amounted to
$18.4 million, $15.1 million, and $10.8 million,
respectively. Future rental income to be received under
non-cancelable subleases amounted to $3.8 million as of
December 31, 2000.



|   |                                                     
|-- | ----------------------------------------------------
|9. | Short Term Borrowings and Convertible
    Debentures



| |                      
| | ---------------------
| | Short Term Borrowings

During the period from December 31, 1997
through December 31, 2000, the Company entered into several
accounts receivable purchase agreements in which the Company
sold portfolios of accounts receivable to banks at discounts ranging from 2.9% to 4.3%. However, the Company assets that
were sold under these arrangements do not represent a right to
receive cash from the distributors as the distributors had
limited obligations to pay until the Companys products
were sold by the distributor. Consequently, the arrangements
have been recorded as short-term debt transactions as the
arrangements do not represent sales of receivables under
SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. The Company incurred approximately
$2.5 million, $1.5 million and $0.3 million of
interest expense under the arrangements in 1998, 1999 and 2000,
respectively. All amounts under the arrangements were paid in
full as of December 31, 2000.

In addition, the Company classifies bank
overdrafts resulting from its banking arrangements as short term
borrowings. The Company had short term borrowings of
$12.9 million at December 31, 1999 resulting from bank
overdrafts which were fully paid during 2000.

57



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Convertible Debentures

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 bonds of 4.75% (on a semi-annual bond 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 accretion of the discount on
the debentures is calculated using the effective interest
method. As of June 30, 2003, all Debentures had been
repurchased by the Company for approximately $417.1 million
in cash.



|    |                       
|--- | ----------------------
|10. | Employee Benefit Plans

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 provided by the Company under
the plan to date have not been material.



|    |           
|--- | ----------
|11. | McAfee.com

McAfee.com is an Internet destination dedicated
to updating, upgrading, and managing personal computers over the
web for single use retail, non-corporate, consumers. In December
1998, the Company incorporated McAfee.com Corporation in
Delaware as a wholly owned subsidiary. Since January 1,
1999, the Company has contributed certain assets and liabilities
to McAfee.com and has entered into certain inter-company
arrangements including technology, licenses, shared facilities,
functions, services and tax sharing agreements. In December
1999, McAfee.com completed its initial public offering and began
publicly trading under the symbol of MCAF. The
Company received net proceeds of $78.9 million. The Company
owns approximately 36.0 million shares of the outstanding
Class B common stock, representing approximately 81% of
McAfee.coms outstanding common stock at December 31,
2000.

In January 1999, executives of Network Associates
were granted options to purchase 1.7 million shares (after
restatement for the effects of a 2 for 1 stock split in June
1999, a reverse 3 for 5 stock split in July 1999, and share
reduction/cancellation in September 1999) of McAfee.com common
stock. In September and October 1999, certain Network Associates
employees were also granted options to purchase approximately
334,000 shares of McAfee.com common stock. As of
December 31, 1999, all these options were fully vested. In
connection with these options, McAfee.com recorded total
compensation expense for the year ended December 31, 1999
of approximately $11.9 million.

In September 2002, the Company repurchased the
25% minority interest in its McAfee.com subsidiary for
$219.9 million in cash and stock.



|    |                     
|--- | --------------------
|12. | Stockholders Equity



| |                
| | ---------------
| | Preferred Stock

The Company has authorized five 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.

58



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 1998 there was one share of
Series A preferred stock outstanding, which was issued in
connection with the 1996 acquisition of FSA. The share of
Series A preferred stock had no preferential rights other
than the right to cast a number of votes equal to the number of
common shares issuable in exchange for certain exchangeable
non-voting shares of FSA. During 1999, that single preferred
share was converted into 437,589 of the Companys common
stock. At December 31, 2000 and 1999, there was no
preferred stock outstanding.



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

In June 1997, the Board of Directors approved the
1997 Stock Incentive Plan (the 1997 Plan) to replace
the 1995 Stock Incentive Plan. Under the amended 1997 Plan, the
Company has reserved 16.5 million shares for issuance to
employees, officers, directors, third-party contractors and
consultants. The plan provides for an option price no less than
100% of the fair value of the Companys common stock on the
date of grant for incentive stock options granted to employees
and officers (including directors who are also employees) or 85%
of the fair value on the date of grant for all others. The
options may be exercisable immediately, or over time, generally
vest 25% one year after commencing employment or from date of
grant and vest thereafter in monthly increments over three
years. All options under the option plan expire ten years after
grant.

Under the amended Stock Option Plan for Outside
Directors, the Company has reserved 1.1 million shares for
issuance to certain members of its board 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 vest after three years from the
date of grant. All options under the option plan expire ten
years after grant.

In December 1999, the board of directors approved
the 2000 Nonstatutory Stock Option Plan. Under the plan, as
amended in January 2001, the Company has reserved
8.5 million shares for issuance to employees, officers,
directors, third-party contractors 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 vest over a
period of four years: 25% vest one year from the date of grant
and the remaining vest ratably in monthly increments over three
years. All options under the option plan expire ten years after
grant.

59



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                             |  |           |         |                     |  |                 |         |           |  |          |                 |  |  |   |          |   |  |   |       | 
|---------------------------- |  | --------- | ------- | ------------------- |  | --------------- | ------- | --------- |  | -------- | --------------- |  |  | - | -------- | - |  | - | ----- | 
|                             |  |           |         |                    
|                             |  |           |         | Outstanding Options
|                             |  |           |         |                    
|                             |  |           |         |                     |  | Weighted       
|                             |  | Shares    |         |                     |  | Average        
|                             |  | Available |         | Number              |  |                 |         | Aggregate |  | Exercise
|                             |  | for Grant |         | of Shares           |  | Price per Share |         | Price     |  | Price   
|                             |  |           |         |                     |  |                 |         |           |  |         
|Balances, December 31, 1997  |  |           | 7,093   |                     |  |                 | 20,070  |           |  | $        | 0.23 - $44.42   |  |  | $ | 401,038  |   |  | $ | 19.98 | 
|Additional shares authorized |  |           | 3,000   |                     |  |                 |        |           |  |          |                 |  |  |   |          |   |  |   |       | 
|Shares granted               |  |           | (11,397 | )                   |  |                 | 11,397  |           |  | $        | 21.41 - $121.80 |  |  |   | 419,775  |   |  | $ | 36.83 | 
|Shares exercised             |  |           |        |                     |  |                 | (8,560  | )         |  | $        | 0.06 - $44.42   |  |  |   | (144,646 | ) |  | $ | 16.90 | 
|Shares canceled              |  |           | 3,587   |                     |  |                 | (3,587  | )         |  | $        | 0.65 - $48.38   |  |  |   | (92,013  | ) |  | $ | 25.65 | 
|                             |  |           |         |                     |  |                 |         |           |  |          |                 |  |  |   |          |   |  |   |       | 
|Balances, December 31, 1998  |  |           | 2,283   |                     |  |                 | 19,320  |           |  | $        | 0.06 - $121.80  |  |  |   | 584,154  |   |  | $ | 30.24 | 
|Additional shares authorized |  |           | 9,200   |                     |  |                 |        |           |  |          |                 |  |  |   |          |   |  |   |       | 
|Shares granted               |  |           | (16,882 | )                   |  |                 | 16,882  |           |  | $        | 11.06 - $56.00  |  |  |   | 242,970  |   |  | $ | 14.39 | 
|Shares exercised             |  |           |        |                     |  |                 | (1,196  | )         |  | $        | 0.06 - $44.42   |  |  |   | (18,537  | ) |  | $ | 15.50 | 
|Shares canceled              |  |           | 14,922  |                     |  |                 | (14,922 | )         |  | $        | 0.48 - $121.80  |  |  |   | (482,329 | ) |  | $ | 33.08 | 
|                             |  |           |         |                     |  |                 |         |           |  |          |                 |  |  |   |          |   |  |   |       | 
|Balances, December 31, 1999  |  |           | 9,523   |                     |  |                 | 20,084  |           |  | $        | 0.06 - $56.00   |  |  |   | 326,258  |   |  | $ | 16.24 | 
|Additional shares authorized |  |           | 6,000   |                     |  |                 |        |           |  |          |                 |  |  |   |          |   |  |   |       | 
|Option plan expirations      |  |           | (1,808  | )                   |  |                 |        |           |  |          |                 |  |  |   |          |   |  |   |       | 
|Shares granted               |  |           | (8,478  | )                   |  |                 | 8,478   |           |  | $        | 3.31 - $36.69   |  |  |   | 184,852  |   |  | $ | 21.80 | 
|Shares exercised             |  |           |        |                     |  |                 | (3,036  | )         |  | $        | 0.48 - $28.17   |  |  |   | (35,757  | ) |  | $ | 11.78 | 
|Shares 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   |  |  | $ | 374,981  |   |  | $ | 18.51 | 
|                             |  |           |         |                     |  |                 |         |           |  |          |                 |  |  |   |          |   |  |   |       | 

At December 31, 2000, approximately
9.2 million options to purchase common stock 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.

At December 31, 1999 and December 31,
1998, approximately 8.1 million and 3.7 million
outstanding options, respectively, were exercisable. The
weighted average exercise prices for exercisable options were
$16.98 and $21.59 at December 31, 1999 and
December 31, 1998, respectively.

The following information regarding the stock
option program and employee stock purchase programs is provided
in compliance with SFAS 123. The Company has elected to
continue accounting for such plans in accordance with
APB 25.

60



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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 at
December 31, 2000 were as follows (in thousands, except per share data):

|                         |  |                     |        |                     |  |                |     |             |  |                  |       |  |  |  |       |  |  |   |       | 
|------------------------ |  | ------------------- | ------ | ------------------- |  | -------------- | --- | ----------- |  | ---------------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                         |  |                     |        |                    
|                         |  | Options Outstanding |        | Options Exercisable
|                         |  |                     |        |                    
|                         |  |                     |        | Weighted Average    |  |                |     | Number      |  |                 
|                         |  | Number              |        | Remaining           |  | Weighted       |     | Exercisable |  |                 
|                         |  | Outstanding         |        | Contractual Life    |  | Average        |     | at          |  | Weighted Average
|Range of Exercise Prices |  | at 12/31/00         |        | (Yrs)               |  | Exercise Price |     | 12/31/00    |  | Exercise Price  
|                         |  |                     |        |                     |  |                |     |             |  |                 
|$0.00  $6.00            |  |                     | 143    |                     |  |                | 4.1 |             |  | $                | 4.77  |  |  |  | 140   |  |  | $ | 4.80  | 
|$6.01  $12.00           |  |                     | 6,078  |                     |  |                | 6.7 |             |  | $                | 10.62 |  |  |  | 4,139 |  |  | $ | 10.41 | 
|$12.01  $20.00          |  |                     | 3,647  |                     |  |                | 8.4 |             |  | $                | 16.25 |  |  |  | 1,463 |  |  | $ | 19.37 | 
|$20.01  $36.00          |  |                     | 10,170 |                     |  |                | 8.0 |             |  | $                | 25.84 |  |  |  | 3,345 |  |  | $ | 28.02 | 
|$36.01  $60.90          |  |                     | 216    |                     |  |                | 7.4 |             |  | $                | 42.91 |  |  |  | 116   |  |  | $ | 43.15 | 
|                         |  |                     |        |                     |  |                |     |             |  |                  |       |  |  |  |       |  |  |   |       | 
|$0.00  $60.90           |  |                     | 20,254 |                     |  |                | 7.6 |             |  | $                | 19.26 |  |  |  | 9,203 |  |  | $ | 17.93 | 
|                         |  |                     |        |                     |  |                |     |             |  |                  |       |  |  |  |       |  |  |   |       | 

The fair value of options granted 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.

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2000 |      | 1999 |  | 1998
|                        |  |      |      |      |  |     
|Risk free interest rate |  |      | 6.31 | %    |  |      | 5.47 | % |  |  | 5.04 | %
|Expected life (years)   |  |      | 4    |      |  |      | 4    |   |  |  | 4    |  
|Volatility              |  |      | 0.91 |      |  |      | 0.97 |   |  |  | 0.63 |  
|Dividend yield          |  |      |     |      |  |      |     |   |  |  |     |  

The weighted average expected life of the option
grants was estimated based on examination of previously
exercised options over the life of the program. Volatility was
estimated on a monthly basis since the Company became public in
October of 1992. The average volatility for the 48-month period
from January 1997 through December 2000 was 91%. The Company has
not paid a dividend, and has no plans to do so.

The weighted average fair value of options
granted in 2000, 1999, and 1998 was $16.07, $10.11, and $19.26
respectively.

The Company has also estimated the fair value of
purchase rights issued under the Employee Stock Purchase
Program. Rights under this plan were also evaluated using the
Black-Scholes option-pricing model. The Companys plan is
described below under Employee Stock Purchase Plan.
Purchase periods occur twice yearly and each effectively
contains a six and twelve month option.

|                        |  |      |           |      |  |      |            |   |  |  |            |  
|----------------------- |  | ---- | --------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                        |  | 2000 |           | 1999 |  | 1998
|                        |  |      |           |      |  |     
|Risk free interest rate |  |      | 6.31      | %    |  |      | 4.52%-5.01 | % |  |  | 5.36%-5.28 | %
|Expected life           |  |      | 6, 12 mos |      |  |      | 6, 12 mos  |   |  |  | 6, 12 mos  |  
|Volatility              |  |      | 0.91      |      |  |      | 0.66       |   |  |  | 0.63       |  
|Dividend yield          |  |      |          |      |  |      |           |   |  |  |           |  

The weighted average fair value of rights issued
pursuant to the Employee Stock Purchase Program in 2000, 1999,
and 1998 was $9.44, $21.43, and $14.81, respectively.



| |                                             
| | --------------------------------------------
| | Pro Forma Stock-based Compensation
    Costs

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

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

grant date for awards from 1997 through 2000
consistent with the provisions of SFAS 123, the
Companys net loss and net loss per share would have been
as follows:

|                                             |  |               |          |               |  |               |          |   |  |   |          |  
|-------------------------------------------- |  | ------------- | -------- | ------------- |  | ------------- | -------- | - |  | - | -------- | -
|                                             |  | 2000          |          | 1999          |  | 1998         
|                                             |  |               |          |               |  |              
|                                             |  | (As restated) |          | (As restated) |  | (As restated)
|Net loss  pro forma (thousands)             |  | $             | (221,252 | )             |  | $             | (187,917 | ) |  | $ | (390,514 | )
|Net loss per share 
    diluted  pro forma |  | $             | (1.61    | )             |  | $             | (1.36    | ) |  | $ | (2.93    | )

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



| |                       
| | ----------------------
| | Stock Option Repricing

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 exercise prices at the current fair
value of the stock. Options to purchase a total of
10.3 million shares were canceled and the same number of
new options were granted at an exercise price of $11.063, which
was based on the closing price of the Companys common
stock on April 22, 1999. The new options vest at the same
rate that they would have vested under previous option plans. As
a result, options to purchase approximately 3.4 million
shares at $11.063 were vested at December 31, 2000.

In accordance with APB 25, the Company
incurred an initial stock-based compensation charge in
connection with this repricing. 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 $6.7 million and $8.8 million was
expensed for the years ended December 31, 2000 and 1999,
respectively.

In March 2000, the FASB issued FIN 44. Among
other issues, FIN identifies (a) the definition of employee
for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock-based
compensation awards in a business combination. As of
July 1, 2000 this guidance was effective.

As a result of the introduction of FIN 44,
stock options repriced by the Company on April 22, 1999 are
subject to variable plan accounting treatment from July 1,
2000. Accordingly, the Company has and will continue to
remeasure compensation cost for the repriced options until the
options are exercised, cancelled, or forfeited without
replacement. The first valuation period began with the effective
date of FIN 44 which was July 1, 2000. The valuation
has and will be based on any excess of the closing stock price
at the end of the reporting period or date of exercise,
forfeiture or cancellation without replacement, if earlier, over
the fair value of the Companys common stock on
July 1, 2000, which was $20.375. The resulting compensation
charge to earnings will be recorded over the remaining vesting
period, using the accelerated method of amortization discussed
in FASB Interpretation No. 28. When options are fully
vested, the charge will be recorded to earnings immediately.
Depending upon movements in the market value of the
Companys common stock, this accounting treatment may
result in significant additional compensation charges in future
periods.

In addition, variable plan accounting as
described above, applies to options issued to employees of
McAfee.com and myCIO.com as a replacement for Company options
that were subject to the repricing described above. As a result,
the Company will record variable charges based on the movements
in the fair value of McAfee.com and myCIO.com common stock from
July 1, 2000.

As a result, during the year ended
December 31, 2000, the Company recorded a compensation
charge to earnings of approximately $2.0 million, which is
based on a year-end per share price of $4.19 of the Company

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and per share price of $5.00 for McAfee.com,
respectively. As of December 31, 2000, the Company,
McAfee.com and myCIO.com had options, outstanding and subject to
variable plan accounting, amounting to 4.5 million,
0.1 million, and 0.3 million, respectively. Depending
upon movements in the market value of the Companys common
stock, this accounting treatment may result in significant
additional compensation charges in future periods.



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

Under the 1994 Employee Qualified Stock Purchase
Plan, the Company can 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 $21,250 worth of common stock
in any one calendar year. The Company issued 445,000, 578,000
and 666,000 shares in 1998, 1999 and 2000, respectively,
under the plan.



| |         
| | --------
| | Warrants

Pursuant to the acquisition of Pretty Good
Privacy, Inc. (PGP) in 1997, the Company issued
warrants to purchase 375,000 shares of common stock at a
price of $40.00 per share, which expire, subject to certain
extensions, on June 5, 2000. As of December 31, 2000,
such warrants were exercised (59,000 and 85,000 in 1998 and
1999, respectively) or expired. The warrants issued pursuant to
the acquisition of PGP were valued using the Black Scholes
model, using the following parameters: stock price $50.44 (prior
to a 3:2 stock split in May 1998); exercise price $60.00 (prior
to the 3:2 stock split); the contract term; volatility 66%;
annual dividend 0%; discount rate 5.5%. The resulting valuation
of the 375,000 warrants was $2,722,500, the total amount of
which was included in the purchase price allocation. In
addition, warrants for the purchase of 6,340 shares of
Common Stock issued in connection with the Companys 1995
acquisition of Assurdata were exercised during the year ended
December 31, 1998.

In January 2000, the Company issued fully vested
warrants to consultants. As a result, the Company recorded a
stock-based compensation charge 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%.



| |                                          
| | -----------------------------------------
| | 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 million in the open market. Through
December 31, 2000, the Company repurchased 5.0 million
shares of its common stock bringing total cash outlay to date to
approximately $112.9 million. The timing and size of any
future stock repurchases are subject to market conditions, stock
prices, the Companys cash position and other cash
requirements. Such repurchases are intended to cover the
Companys reissuances under the Employee Stock Purchase
Plan (ESPP), the 1997 Plan, and issuances related to
potential mergers and acquisitions.

On August 2, 1999, February 16, 2000,
and May 31, 2000, Network Associates sold European
style put options for three million shares of the
Companys common stock as part of its stock repurchase
plan. European style put options can only be exercised on the
expiry date, remaining expiry dates are February 16, 2001
and May 31, 2001. The strike price for these remaining put
options are $30.00 and $24.07, respectively. On August 3,
2000, put options sold on August 2, 1999 for one million
shares were exercised in the Companys stock. The strike
price for these put options was $20.00. The Company has the
right to settle the put options by

63



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

physical settlement of the options or by net
share settlement using shares of the Companys common
stock. The Company received total proceeds of $19.1 million
from the sale. In February 2001, the Company settled the
remaining put options which resulted in the purchase of two
million shares of the Companys common 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, 2000, the following shares
of the Companys common stock were reserved for potential
future issuances (in millions):

|                                             |  |  |      | 
|-------------------------------------------- |  |  | ---- | 
|1997 Stock Incentive Plan                    |  |  | 16.5 | 
|Stock Option Plan for Outside Directors      |  |  | 1.1  | 
|2000 Nonstatutory Stock Option Plan          |  |  | 8.5  | 
|1994 Employee Qualified Stock Purchase Plan  |  |  | 3.8  | 
|Convertible Subordinated Debentures due 2018 |  |  | 5.0  | 
|                                             |  |  |      | 
|Total                                        |  |  | 34.9 | 
|                                             |  |  |      | 



|    |                           
|--- | --------------------------
|13. | Provision for Income Taxes

Loss before provision for (benefit from) income
taxes was earned in the following jurisdictions (in thousands):

|         |  |                          |         |               |  |               |          |   |  |   |          |  
|-------- |  | ------------------------ | ------- | ------------- |  | ------------- | -------- | - |  | - | -------- | -
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  | 2000                     |         | 1999          |  | 1998         
|         |  |                          |         |               |  |              
|         |  | (As restated)            |         | (As restated) |  | (As restated)
|Domestic |  | $                        | (49,510 | )             |  | $             | (197,243 | ) |  | $ | (251,584 | )
|Foreign  |  |                          | (21,414 | )             |  |               | 69,467   |   |  |   | (134,627 | )
|         |  |                          |         |               |  |               |          |   |  |   |          |  
|         |  | $                        | (70,924 | )             |  | $             | (127,776 | ) |  | $ | (386,211 | )
|         |  |                          |         |               |  |               |          |   |  |   |          |  

64



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant components of the provision for
(benefit from) income taxes are as follows (in thousands):

|                                          |          |                          |        |               |        |               |        |         |        |   |         |          |         |  
|----------------------------------------- | -------- | ------------------------ | ------ | ------------- | ------ | ------------- | ------ | ------- | ------ | - | ------- | -------- | ------- | -
|                                          |          |                         
|                                          |          | Years Ended December 31,
|                                          |          |                         
|                                          |          | 2000                     |        | 1999          |        | 1998         
|                                          |          |                          |        |               |        |              
|                                          |          | (As restated)            |        | (As restated) |        | (As restated)
|Federal:                                  |          |                          |        |               |        |               |        |         |        |   |         |         
|                                          | Current  |                          | $      | 24,681        |        |               | $      | 47,235  |        |   | $       | 76,374   |        
|                                          | Deferred |                          |        | (5,542        | )      |               |        | (44,080 | )      |   |         | (144,315 | )      
|                                          |          |                          |        |               |        |               |        |         |        |   |         |         
|                                          |          | Total federal            |        |               | 19,139 |               |        |         | 3,155  |   |         |          | (67,941 | )
|State:                                    |          |                          |        |               |        |               |        |         |        |   |         |         
|                                          | Current  |                          |        | 3,208         |        |               |        | 6,141   |        |   |         | 9,929    |        
|                                          | Deferred |                          |        | (6,437        | )      |               |        | (10,359 | )      |   |         | (20,582  | )      
|                                          |          |                          |        |               |        |               |        |         |        |   |         |         
|                                          |          | Total state              |        |               | (3,229 | )             |        |         | (4,218 | ) |         |          | (10,653 | )
|Foreign:                                  |          |                          |        |               |        |               |        |         |        |   |         |         
|                                          | Current  |                          |        | 18,805        |        |               |        | 21,194  |        |   |         | 22,258   |        
|                                          | Deferred |                          |        | 6,229         |        |               |        | 4,571   |        |   |         | (10,800  | )      
|                                          |          |                          |        |               |        |               |        |         |        |   |         |         
|                                          |          | Total Foreign            |        |               | 25,034 |               |        |         | 25,765 |   |         |          | 11,458  |  
|                                          |          |                          |        |               |        |               |        |         |        |   |         |         
|Provision for (benefit from) income taxes |          | $                        | 40,944 |               |        | $             | 24,702 |         |        | $ | (67,136 | )       
|                                          |          |                          |        |               |        |               |        |         |        |   |         |         

Significant components of net deferred tax assets
at December 31 are as follows (in thousands):

|                                   |  |                          |          |               |  |   |         |  
|---------------------------------- |  | ------------------------ | -------- | ------------- |  | - | ------- | -
|                                   |  |                         
|                                   |  | Years Ended December 31,
|                                   |  |                         
|                                   |  | 2000                     |          | 1999         
|                                   |  |                          |          |              
|                                   |  | (As restated)            |          | (As restated)
|Deferred revenue                   |  | $                        | 108,171  |               |  | $ | 86,898  |  
|State taxes                        |  |                          |         |               |  |   | 546     |  
|Accrued liabilities and allowances |  |                          | 44,658   |               |  |   | 16,952  |  
|Depreciation and amortization      |  |                          | 80,761   |               |  |   | 40,805  |  
|Tax credits                        |  |                          | 90,524   |               |  |   | 56,211  |  
|Net operating loss carryover       |  |                          | 102,900  |               |  |   | 157,802 |  
|Foreign                            |  |                          |         |               |  |   | 6,230   |  
|                                   |  |                          |          |               |  |   |         |  
|                                   |  |                          | 427,014  |               |  |   | 365,444 |  
|Valuation allowance                |  |                          | (121,975 | )             |  |   | (63,555 | )
|                                   |  |                          |          |               |  |   |         |  
|                                   |  |                          | 305,039  |               |  |   | 301,889 |  
|Deferred liability                 |  |                          | (7,800   | )             |  |   | (10,400 | )
|                                   |  |                          |          |               |  |   |         |  
|Net deferred tax asset             |  | $                        | 297,239  |               |  | $ | 291,489 |  
|                                   |  |                          |          |               |  |   |         |  
|Current portion                    |  | $                        | 161,063  |               |  | $ | 108,664 |  
|Non-current portion                |  |                          | 136,177  |               |  |   | 182,825 |  
|                                   |  |                          |          |               |  |   |         |  
|Net deferred tax asset             |  | $                        | 297,240  |               |  | $ | 291,489 |  
|                                   |  |                          |          |               |  |   |         |  

Realization of net deferred tax assets of
$297.2 million as of December 31, 2000 is dependent on
generating sufficient future taxable income, which is not
assured. The amount of the deferred tax asset realizable,
however, could be reduced in the near term if estimates of
future taxable income are reduced.

65



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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 2000, the Company has
available net operating loss carry-forwards for federal income
tax purposes of approximately $170.7 million. These net
operating losses expire from 2008 to 2019. A valuation allowance
has been recorded primarily for certain loss carryforwards and
foreign tax credits due to uncertainty of future utilization.

U.S. income taxes were not provided for on a
cumulative total of approximately $17.6 million of
undistributed earnings for certain non-U.S. subsidiaries.
The Company intends to reinvest these earnings indefinitely in
operations outside the United States.

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

|                                                                 |  |                          |         |               |  |               |         |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------------------ | ------- | ------------- |  | ------------- | ------- | - |  | - | -------- | -
|                                                                 |  |                         
|                                                                 |  | Years Ended December 31,
|                                                                 |  |                         
|                                                                 |  | 2000                     |         | 1999          |  | 1998         
|                                                                 |  |                          |         |               |  |              
|                                                                 |  | (As restated)            |         | (As restated) |  | (As restated)
|U.S. Federal income tax benefit statutory
    rate               |  | $                        | (24,823 | )             |  | $             | (44,723 | ) |  | $ | (135,174 | )
|State taxes benefit                                              |  |                          | (3,229  | )             |  |               | (4,218  | ) |  |   | (10,653  | )
|Non deductible acquisition and other costs                       |  |                          | 7,958   |               |  |               | 39,108  |   |  |   | 29,284   |  
|Tax exempt interest income                                       |  |                          |        |               |  |               |        |   |  |   | (3,756   | )
|Foreign earnings taxed at rates different than
    the U.S. rate |  |                          | 22,535  |               |  |               | 32,531  |   |  |   | 40,783   |  
|Goodwill and other permanent differences                         |  |                          | 16,627  |               |  |               | 15,504  |   |  |   | 16,880   |  
|Tax credits                                                      |  |                          | (4,583  | )             |  |               | (13,500 | ) |  |   | (4,501   | )
|Subsidiary losses not benefited                                  |  |                          | 26,459  |               |  |               |        |   |  |   |         |  
|                                                                 |  |                          |         |               |  |               |         |   |  |   |          |  
|                                                                 |  | $                        | 40,944  |               |  | $             | 24,702  |   |  | $ | (67,137  | )
|                                                                 |  |                          |         |               |  |               |         |   |  |   |          |  



|    |                   
|--- | ------------------
|14. | Net Loss Per Share

In accordance with the disclosure requirements of
SFAS 128, a reconciliation of the numerator and denominator
of basic and diluted net loss per share is provided as follows
(in thousands, except per share amounts):

|                                                                           |                   |                          |          |               |   |               |          |       |   |   |          |       |  
|-------------------------------------------------------------------------- | ----------------- | ------------------------ | -------- | ------------- | - | ------------- | -------- | ----- | - | - | -------- | ----- | -
|                                                                           |                   |                         
|                                                                           |                   | Years Ended December 31,
|                                                                           |                   |                         
|                                                                           |                   | 2000                     |          | 1999          |   | 1998         
|                                                                           |                   |                          |          |               |   |              
|                                                                           |                   | (As restated)            |          | (As restated) |   | (As restated)
|Numerator  Basic and Diluted                                              |                   | $                        | (108,014 | )             |   | $             | (151,964 | )     |   | $ | (319,074 | )    
|Interest on convertible debentures(1)                                      |                   |                          |         |               |   |               |         |       |   |   |         |      
|                                                                           |                   |                          |          |               |   |               |          |       |   |   |          |      
|                                                                           |                   | $                        | (108,014 | )             |   | $             | (151,964 | )     |   | $ | (319,074 | )    
|                                                                           |                   |                          |          |               |   |               |          |       |   |   |          |      
|Denominator  Basic and Diluted weighted average common shares outstanding |                   |                          | 138,072  |               |   |               | 138,695  |       |   |   | 133,075  |      
|                                                                           |                   |                          |          |               |   |               |          |       |   |   |          |      
|Effective of dilutive securities:                                          |                   |                          |          |               |   |               |          |       |   |   |          |      
|Common stock options(2)                                                    |                   |                          |         |               |   |               |         |       |   |   |         |      
|                                                                           |                   |                          |          |               |   |               |          |       |   |   |          |      
|Diluted weighted average shares                                            |                   |                          | 138,072  |               |   |               | 138,695  |       |   |   | 133,075  |      
|                                                                           |                   |                          |          |               |   |               |          |       |   |   |          |      
|Net income (loss) per share                                               |                   |                          |          |               |   |               |          |       |   |   |          |      
|                                                                           | Basic and Diluted |                          | $        | (0.78         | ) |               | $        | (1.10 | ) |   | $        | (2.40 | )
|                                                                           |                   |                          |          |               |   |               |          |       |   |   |          |      

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NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



---



|    |                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Convertible debt interest and related as-if
    converted shares were excluded from the calculation since the
    effect was anti-dilutive. The total number of shares excluded
    from the calculation related to as-if converted shares was
    7.6 million for the years ended December 31, 2000,
    1999, and 1998.
|   
|(2) | Common stock options were excluded from the
    calculation since the effect was anti-dilutive. The total number
    of options excluded from the calculation related was
    19.2 million, 20.1 million, and 24.8 million for
    the years ended December 31, 2000, 1999, and 1998,
    respectively.                  



|    |                                                    
|--- | ---------------------------------------------------
|15. | Business Segment and Major Customer
    Information

The Company has adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS 131), effective for
fiscal years beginning after December 15, 1997. In fiscal
year 1998, the Company determined that it had a single reporting
segment consisting of the development, sale, and support of
computer security and management software. Since then, the
Company established two of its subsidiaries, McAfee.com and
myCIO.com, as separate business entities. The Company has
evaluated its product segments in accordance with SFAS 131
and has concluded that its reportable segments are computer
security and management software (Infrastructure),
consumer PC security and management software on the Internet
(McAfee.com), and a business infrastructure ASP,
which delivers managed security services
(myCIO.com). Management measures profitability for
its business based on these three segments.

The Infrastructure segment consists of
anti-virus, network management, security and help desk software.
These products are marketed and sold through a direct sales
force to distributors, retailers, and end users in the United
States, Europe, Asia Pacific and Latin America.

The McAfee.com segment is a one-stop destination
for consumer PC security and management needs on the Internet.
The McAfee.com web site provides a suite of online products and
services personalized for the user based on the users PC
configuration, attached peripherals and resident software.

The myCIO.com segment is an infrastructure ASP
targeted at business users. myCIO.com delivers network security
and availability services hosted on its servers to businesses on
the Internet.

Summarized financial information concerning the Companys
reportable segments in the years ended December 31, 2000,
1999 and 1998 is provided as follows (in thousands):

|                  |              |                          |          |               |   |               |          |          |   |   |          |          |  
|----------------- | ------------ | ------------------------ | -------- | ------------- | - | ------------- | -------- | -------- | - | - | -------- | -------- | -
|                  |              |                         
|                  |              | Years Ended December 31,
|                  |              |                         
|                  |              | 2000                     |          | 1999          |   | 1998         
|                  |              |                          |          |               |   |              
|                  |              | (As restated)            |          | (As restated) |   | (As restated)
|Infrastructure:   |              |                          |          |               |   |               |          |          |   |   |          |         
|                  | Net revenue  |                          | $        | 671,174       |   |               | $        | 628,743  |   |   | $        | 421,475  |  
|                  | Segment loss |                          |          | (42,674       | ) |               |          | (126,364 | ) |   |          | (317,081 | )
|McAfee.com:       |              |                          |          |               |   |               |          |          |   |   |          |         
|                  | Net revenue  |                          |          | 30,488        |   |               |          | 31,594   |   |   |          | 6,292    |  
|                  | Segment loss |                          |          | (40,471       | ) |               |          | (25,600  | ) |   |          | (1,993   | )
|myCIO.com:        |              |                          |          |               |   |               |          |          |   |   |          |         
|                  | Net revenue  |                          |          | 7,710         |   |               |          | N/A      |   |   |          | N/A      |  
|                  | Segment loss |                          |          | (24,869       | ) |               |          | N/A      |   |   |          | N/A      |  
|Total net revenue |              | $                        | 709,372  |               |   | $             | 660,337  |          |   | $ | 427,767  |         
|                  |              |                          |          |               |   |               |          |          |   |   |          |         
|Total net loss    |              | $                        | (108,014 | )             |   | $             | (151,964 | )        |   | $ | (319,074 | )       
|                  |              |                          |          |               |   |               |          |          |   |   |          |         

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STATEMENTS  (Continued)

|                |              |                          |           |               |  |   |           |           | 
|--------------- | ------------ | ------------------------ | --------- | ------------- |  | - | --------- | --------- | 
|                |              |                         
|                |              | Years Ended December 31,
|                |              |                         
|                |              | 2000                     |           | 1999         
|                |              |                          |           |              
|                |              | (As restated)            |           | (As restated)
|Infrastructure: |              |                          |           |               |  |   |           |          
|                | Total Assets |                          | $         | 1,348,633     |  |   | $         | 1,425,139 | 
|McAfee.com:     |              |                          |           |               |  |   |           |          
|                | Total Assets |                          |           | 98,748        |  |   |           | 95,649    | 
|myCIO.com:      |              |                          |           |               |  |   |           |          
|                | Total Assets |                          |           | 18,242        |  |   |           | N/A       | 
|                |              |                          |           |               |  |   |           |          
|Total Assets    |              | $                        | 1,465,623 |               |  | $ | 1,520,788 |          
|                |              |                          |           |               |  |   |           |          

The table below presents information about the
revenue and long-lived assets by geographical area as of and for
the years ended December 31 (in thousands):

|                   |                     |               |        |               |         |               |        |         |         |   |        |         |         | 
|------------------ | ------------------- | ------------- | ------ | ------------- | ------- | ------------- | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                   |                     | 2000          |        | 1999          |         | 1998         
|                   |                     |               |        |               |         |              
|                   |                     | (As restated) |        | (As restated) |         | (As restated)
|Revenue:           |                     |               |        |               |         |               |        |         |         |   |        |        
|                   | United States       |               | $      | 468,621       |         |               | $      | 438,752 |         |   | $      | 211,656 |        
|                   | Netherlands         |               |        | 184,366       |         |               |        | 154,853 |         |   |        | 74,972  |        
|                   | Other International |               |        | 56,385        |         |               |        | 66,732  |         |   |        | 141,139 |        
|                   |                     |               |        |               |         |               |        |         |         |   |        |        
|                   |                     | Total         |        | $             | 709,372 |               |        | $       | 660,337 |   |        | $       | 427,767 | 
|Long-Lived Assets: |                     | $             | 62,299 |               |         | $             | 39,018 |         |         | $ | 42,511 |        
|                   | United States       |               |        |               |         |               |        |         |         |   |        |         |        
|                   | United Kingdom      |               |        |              |         |               |        |        |         |   |        | 6,713   |        
|                   | Other Foreign       |               |        | 13,954        |         |               |        | 11,822  |         |   |        | 8,347   |        
|                   |                     |               |        |               |         |               |        |         |         |   |        |        
|                   |                     | Total         |        | $             | 76,253  |               |        | $       | 50,840  |   |        | $       | 57,571  | 
|                   |                     |               |        |               |         |               |        |         |         |   |        |        

Revenue from the Netherlands relates to sales
activities in Europe, Mexico, Canada, and Asia-Pacific,
excluding Japan. Revenue is categorized by the country from
which it was shipped.

Revenue information on a product and service
basis is as follows (in thousands):

|                  |       |               |         |               |  |   |         |         | 
|----------------- | ----- | ------------- | ------- | ------------- |  | - | ------- | ------- | 
|                  |       | 2000          |         | 1999         
|                  |       |               |         |              
|                  |       | (As restated) |         | (As restated)
|Software licenses |       | $             | 342,261 |               |  | $ | 358,667 |        
|Maintenance       |       |               | 195,530 |               |  |   | 189,348 |        
|Hardware          |       |               | 82,743  |               |  |   | 39,830  |        
|Consulting        |       |               | 34,061  |               |  |   | 27,076  |        
|Other             |       |               | 54,777  |               |  |   | 45,416  |        
|                  |       |               |         |               |  |   |         |        
|                  | Total |               | $       | 709,372       |  |   | $       | 660,337 | 
|                  |       |               |         |               |  |   |         |        

Due to various acquisitions during 1998, revenue
information on a product and service basis for 1998 is not
presented as it is impracticable to do so.

At December 31, 2000, one customer had
accounts receivable balance of 41% of our total accounts
receivable balance. During 2000, one customer accounted for 27%
of the total revenue for the year. No other customer accounted
for more than 10% of the total revenue in 2000. The sales
generated from this customer were reported mainly in the North
America and Europe segments.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |           
|--- | ----------
|16. | 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

In Re Network Associates, Inc. Securities
Litigation.On April 7, 1999, a
putative securities class action, captioned Knisley v.
Network Associates, Inc., et al., Civil Action
No. C-99-1729-SBA, was filed against Network Associates and
several of its officers in the United States District Court for
the Northern District of California. The complaint alleged
violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and sought unspecified damages on behalf
of a purported class of purchasers of common stock between
January 20, 1998 and April 19, 1999. Twenty-five
similar actions asserting virtually identical allegations were
filed by other plaintiffs. The Court consolidated these cases
and an amended complaint was filed. Defendants filed a motion to
dismiss on June 6, 2000. The Court granted in part and
dismissed in part the motion to dismiss. The Court allowed only
plaintiffs claims related to In-Process Research and
Development to go forward and shortened the class period to
April 6, 1999. Plaintiffs filed a First Amended
Consolidated Complaint, and defendants filed an answer. This
case was settled in February 2001 for $30.0 million and was
funded principally by the Company's Directors and Officer's
insurance carriers.

In Re Network Associates, Inc. Derivative
Litigation.On May 12, 1999, a
purported derivative action, captioned Dow Jones Investment
Club v. Network Associates, Inc. et al., Civil
Action No. CV-781854, was filed against the Company as a
nominal defendant and certain of its officers and directors in
the Superior Court of California, County of Santa Clara.
The complaint alleges violations of Sections 25402 and 1507
of the California Corporations Code, breach of fiduciary duty,
insider trading, gross negligence, and unjust enrichment. The
complaint seeks unspecified damages. Two similar derivative
actions have been filed by other plaintiffs in the Superior
Court of California, County of Santa Clara, including
Leighton v. Network Associates, Inc. et al.,
Civil Action No. CV-781947, and Katz v. Network
Associates, Inc., et al., Civil Action
No. CV-782194. The court ordered these three actions
consolidated for pretrial and trial proceedings and deemed the
complaint filed in the Leighton action the operative
complaint. Defendants demurrer to the operative complaint
was sustained with leave to amend. A First Amended Complaint was
filed by the plaintiffs. The Company and the individual
defendants demurred to the First Amended Complaint. The demurrer
was overruled, except with respect to the Sixth Cause of Action,
which was sustained without leave to amend. The parties signed a
Memorandum of Understanding settling the action and on
June 18, 2001, the Court issued a Final Judgment approving
the settlement agreement and dismissing with prejudice all
claims asserted in the action.

On October 26, 2000, a new action, captioned
The State Board of Administration of Florida v. Network
Associates, Inc. et. al., Civil Action
No. C-00-3981-WHA, naming the same defendants as the
class-action,

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

was filed in the Northern District of California
by an opt-out plaintiff. The action had been coordinated with
the class action for pretrial and trial proceedings. The
parties stipulated to dismissal of the action without prejudice
and the case was settled in 2001.

Gage v. Network Associates, Inc., et al., Civil
Action No. B C21152, has been filed in the Superior Court
of California, County of Los Angeles. Plaintiffs allege
violations of Section 25400 et seq. of the California
Corporations Code, Section 17200 of the California Business
and Professions Code, and breach of fiduciary duty. The parties
stipulated to transfer the action of Santa Clara County
Superior Court where it is now pending under Civil Action
No. CV-785715. The complaint was dismissed without
prejudice. Gage filed a First Amended Complaint asserting claims
in his individual capacity, which was dismissed without
prejudice. Gage then filed a Second Amended Complaint. The
individual defendants and the Companys demurrer to
the Second Amended Complaint was overruled in part, sustained in
part with prejudice, and sustained in part without prejudice.
Gage then filed a Third Amended Complaint. The individual
defendants and the Companys motion to Strike certain
allegations of the Third Amended Complaint was granted. Gage has
filed a Fourth Amended Complaint that defendants have answered.
On June 7, 2001, all proceedings in the Gage action were
stayed pending Gages Appeal of the Final Judgment in the
federal class action to the Ninth Circuit Court of Appeals. On
September 6, 2001, the Company settled the Gage action. On
September 8, 2001, the Court issued a final judgement
dismissing the action with prejudice.

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 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 million. The settlement has been
preliminarily approved by the court, and is
subject to notice to and opportunity to object and opt-out by members of
the Class and final 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

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. The company accepted a
settlement on July 15, 2003 and is awaiting Court approval.



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

Hilgraeve v. Network
Associates.On September 15,
1997, Network Associates was named as a defendant in a patent
infringement action filed by Hilgraeve Corporation
(Hilgraeve) in the United States District Court,
Eastern District of Michigan. Hilgraeve alleges that Network
Associates VirusScan product infringes a Hilgraeve patent
which was issued on June 7, 1994. Hilgraeves action
seeks injunctive relief and unspecified money damages. The
District Court granted Network Associates motion for
summary judgment of non-infringement on May 20, 1999 and
entered judgment in favor of Network Associates on July 7,
1999. On August 2, 2000 the United States Court of Appeal
for the Federal Circuit vacated in part, affirmed in part, and
remanded the case to the District Court for further proceedings.
In an order dated on or about June 19, 2001, the Court
denied NAIs further summary judgment motion.

Hilgraeve, Inc. and Hilgraeve Associates v.
Network Associates.On
October 10, 2000, Hilgraeve filed another complaint against
Network Associates, also in the United States District Court,
Eastern District of Michigan. Hilgraeve alleges that Network
Associates Webshield Proxy product infringes the same
Hilgraeve patent in the first suit. Hilgraeves action
seeks injunctive relief and unspecified money damages. The Court
has stayed this action until April 25, 2001, pending the
hearing on NAIs summary judgment in the related matter
(see above) that day.

These matters were settled at a
September 19, 2001 settlement conference. Under the terms
of the settlement, the Company purchased a non-exclusive
perpetual worldwide license for software products and services
under all patents owned by Hilgraeve. The formal agreements and
dismissal of the lawsuits have been finalized and the cases were
dismissed on October 25, 2001.

Homenexus Inc. f/k/a HomeRun Network, Inc. v.
DirectWeb, Inc., et al, No. 99-CV-2316 (CRW) (E.D.
Pa.).In this action, filed in federal
court in the Eastern District of Pennsylvania on May 5,
1999, plaintiff Homenexus alleges that DirectWeb successfully
conspired with all defendants, including Network

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Associates and William Larson, to wrongly
misappropriate plaintiffs purported proprietary business
plan and to deliberately infringe plaintiffs purported
trade dress in its alleged web-site. The complaint further
alleges that all defendants conspired to commit, and did commit,
the torts of conversion and unfair competition. Without
admitting any liability, the Company and William Larson entered
into a Settlement Agreement with plaintiff settling the action
and, on March 12, 2002, the Court dismissed the Company and
William Larson from the action with prejudice.

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.



|    |                           
|--- | --------------------------
|17. | Related Party Transactions

The Company purchased 3,948,199 shares of
Series A Preferred Stock of DirectWeb, Inc. for
$2.5 million, and 4,615,385 shares of Series B
Preferred Stock for $6.0 million in 1999. DirectWeb, Inc.
is a subscription-based online service offering a complete
turnkey Windows-98 based PC, unlimited Internet access and
technical support for a fixed user only fee. In connection with
the formation of DirectWeb, the Company received a warrant to
acquire 3,175,000 shares of DirectWeb common stock for
total consideration of $317.50. Prior to the transactions
described below, on an as converted basis and excluding shares
that may be acquired upon exercise of its warrant, the
Companys total DirectWeb investment represented
approximately 12.3% of DirectWebs outstanding capital
stock. With respect to this balance, approximately 35.2% was
owned by William L. Larson, a DirectWeb founder and the
Companys former Chief Executive Officer; 35.4% was owned by
Dennis Cline, a DirectWeb founder and the Companys former
Vice President of Worldwide Sales; and 17.1% was owned by
unrelated third party investors who, along with the Company,
invested in DirectWebs Series A and Series B
Preferred Stock.

In November 1999, the Company sold its 12.3%
ownership to Dennis Cline, resulting in an other than temporary
impairment charge of $2.5 million to the Company. At the
time, the Company also agreed to exchange its warrant to acquire
3,175,000 shares of DirectWeb common stock for a warrant to
acquire $2.0 million worth of DirectWeb Series C
preferred stock at the same price per share as paid by the
Series C preferred stock investors. William L. Larson sold
approximately 83.0% of his stake in DirectWeb to Dennis Cline in
November 1999. He retains an approximately 5.9% ownership
interest in DirectWeb.



|    |                              
|--- | -----------------------------
|18. | Subsequent Events (unaudited)

The Company filed with the SEC its 2002
Form 10-K and Form 10-Qs for the quarterly periods
ended March 31 and June 30, 2003, concurrent with
filing of Amendment No. 2 to its 2000 Annual Report on
Form 10-K. These concurrent filings and the subsequent
events described therein should be read in conjunction with
these restated consolidated 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 below 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                                                                              
|                                             |  |                                                                                    
|                                            
|/s/ GEORGE SAMENUK(George Samenuk)           |  | Chief Executive Officer and Chairman of the Board
    (Principal Executive Officer)
|                                            
|/s/ STEPHEN C. RICHARDS(Stephen C. Richards) |  | Chief Operating Officer and Chief Financial
    Officer                            
|                                            
|/s/ ROBERT B. BUCKNAM(Robert B. Bucknam)     |  | Director                                                                           
|                                            
|/s/ LESLIE G. DENEND(Leslie G. Denend)       |  | Director                                                                           
|                                            
|/s/ ROBERT DUTKOWSKY(Robert Dutkowsky)       |  | Director                                                                           
|                                            
|/s/ DENIS J. OLEARY(Denis J. OLeary)       |  | Director                                                                           
|                                            
|/s/ ROBERT PANGIA(Robert Pangia)             |  | Director                                                                           
|                                            
|/s/ LIANE WILSON(Liane Wilson)               |  | Director                                                                           

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REPORT OF INDEPENDENT AUDITORS ON

FINANCIAL STATEMENT SCHEDULE


To the Board of Directors and Stockholders of

Networks Associates, Inc.


Our audits of the consolidated financial
statements referred to in our report dated
October 31, 2003 appearing in
this Annual Report on Form 10-K/A also included an audit
of the financial statement schedule listed in Item 14(a)(2)
of this Form 10-K/A. In our opinion, this financial
statement schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements.

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



Dallas, Texas

October 31, 2003


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SCHEDULE II




NETWORKS ASSOCIATES, INC.


SCHEDULE OF VALUATION AND QUALIFYING
ACCOUNTS


AT DECEMBER 31, 2000, AS
RESTATED


|                             |                                      |                |   |                   |  |                   |   |            |  |  |   |         |   |  |   |        | 
|---------------------------- | ------------------------------------ | -------------- | - | ----------------- |  | ----------------- | - | ---------- |  |  | - | ------- | - |  | - | ------ | 
|                             |                                      | Balance at     |   | Additions
Charged |  | Write-Offs        |   | Balance at
|                             |                                      | Beginning of   |   | to Expense        |  | of
Previously     |   | End       
|                             |                                      | Period         |   | or Revenue        |  | Provided
Accounts |   | of Period 
|                             |                                      |                |   |                   |  |                   |   |           
|                             |                                      |               
|                             |                                      | (In thousands)
|Year Ended December 31, 2000 |                                      |                |   |                   |  |                   |   |            |  |  |   |         |   |  |   |       
|                             | Provision for Doubtful Accounts, Net |                | $ | 7,658             |  |                   | $ | 4,785      |  |  | $ | (5,278  | ) |  | $ | 7,165  | 
|Year Ended December 31, 1999 |                                      |                |   |                   |  |                   |   |            |  |  |   |         |   |  |   |       
|                             | Provision for Doubtful Accounts, Net |                | $ | 10,310            |  |                   | $ | 19,246     |  |  | $ | (21,898 | ) |  | $ | 7,658  | 
|Year Ended December 31, 1998 |                                      |                |   |                   |  |                   |   |            |  |  |   |         |   |  |   |       
|                             | Provision for Doubtful Accounts, Net |                | $ | 4,312             |  |                   | $ | 4,828      |  |  | $ | 1,170   |   |  | $ | 10,310 | 

(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
provision for doubtful accounts.

|                             |                                            |                |   |               |  |                |   |            |  |  |   |          |   |  |   |        | 
|---------------------------- | ------------------------------------------ | -------------- | - | ------------- |  | -------------- | - | ---------- |  |  | - | -------- | - |  | - | ------ | 
|                             |                                            |                |   | Provision for |  |                |   |           
|                             |                                            | Balance at     |   | Sales Returns |  |                |   | Balance at
|                             |                                            | Beginning of   |   | and           |  | Actual Returns |   | End of    
|                             |                                            | Period         |   | Allowances(2) |  | and Allowances |   | Period    
|                             |                                            |                |   |               |  |                |   |           
|                             |                                            |               
|                             |                                            | (In thousands)
|Year Ended December 31, 2000 |                                            |                |   |               |  |                |   |            |  |  |   |          |   |  |   |       
|                             | Provision for Sales Returns and Allowances |                | $ | 32,638        |  |                | $ | 115,956    |  |  | $ | (100,518 | ) |  | $ | 48,076 | 
|Year Ended December 31, 1999 |                                            |                |   |               |  |                |   |            |  |  |   |          |   |  |   |       
|                             | Provision for Sales Returns and Allowances |                | $ | 52,168        |  |                | $ | 60,973     |  |  | $ | (80,503  | ) |  | $ | 32,638 | 
|Year Ended December 31, 1998 |                                            |                |   |               |  |                |   |            |  |  |   |          |   |  |   |       
|                             | Provision for Sales Returns and Allowances |                | $ | 11,346        |  |                | $ | 156,589    |  |  | $ | (115,767 | ) |  | $ | 52,168 | 

(2) Provision for Sales Returns and
Allowances.The provision for
sales returns and allowances consists of our estimates of
potential future product returns related to current period
product revenue, and specific provisions for distributor,
reseller, and retailer sales incentives (allowances)
that are reductions in the revenue to be realized. Management
analyzes historical returns, current economic trends, and
changes in customer demand and acceptance of our products when
evaluating the adequacy of the sales returns and allowances.
Significant management judgments and estimates must be made and
used in connection with establishing the sales returns and
allowances in any accounting period. Material differences may
result in the amount and timing of our revenue for any period if
management made different judgments or utilized different
estimates. The provision for sales returns and allowances
amounted to $116.0 million in 2000. The balance at
December 31, 2000, of $48.1 million includes the
estimate of potential future product returns from the
Companys direct sales to customers amounting to
$8.1 million and specific allowances for distributor,
reseller, and retailer sales incentives amounting to
$40.0 million.

Our accounts receivable balance at
December 31, 2000 was $116.2 million, net of provision for doubtful accounts of $7.2 million and provision for
sales returns and allowances of $48.1 million.

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EXHIBIT INDEX

|        |    |    |  |               |  |                                                                                                                                       
|------- | -- | -- |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |              
|Number  |    |    |  | Exhibit Title
|        |    |    |  |              
|        | 23 | .1 |  |               |  | Consent of PricewaterhouseCoopers LLP,
    independent accountants                                                                    
|        | 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