##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K/ A



---

|                                                            |  |                                                                                                 
|----------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|þ                                                           |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                           
|For the Fiscal Year Ended December 31,
    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)


Securities Registered Pursuant to
Section 12(b) of the Act: None

Securities Registered Pursuant to
Section 12(g) of the Act:

Common Stock, $0.01 Par Value


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

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

The aggregate market value of the voting stock
held by non-affiliates of the issuer as of December 31,
2000 was approximately $559,277,366. The number of shares
outstanding of the issuers common stock as of
December 31, 2000 was 138,089,775.



---

EXPLANATORY NOTE:

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



---

DOCUMENTS INCORPORATED BY REFERENCE:

Items 10, 11, 12 and 13 of Part III are
incorporated by reference from the Registrants Proxy
Statement for the Annual Meeting of Stockholders held on
May 24, 2001.



---






---

TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|              | Item 6. Selected Financial Data                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                           
|              | Item 8. Financial Statements and Supplementary Data, as restated                             
|              | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Officers of the Registrant                                            
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 23.1 



---



##### Table of Contents






PART I




Item 1.     Business

General

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

Some of the statements contained in this Annual
Report on Form 10-K/A are forward-looking statements,
including but not limited to those specifically identified as
such, that involve risks and uncertainties. The statements
contained in the Report on Form 10-K/A that are not purely
historical are forward looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act, including without limitation statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward looking statements included in
this Report on Form 10-K/A are based on information
available to us on the date hereof, and we assume no obligation
to update any such forward-looking statements. These statements
involve known and unknown risks, uncertainties and other
factors, which may cause our actual results to differ materially
from those implied by the forward-looking statements. In some
cases, you can identify forward-looking statements by
terminology such as may, will,
should, expects, plans,
anticipates, believes,
estimates, predicts,
potential, or continue or the negative
of these terms or other comparable terminology. Although we
believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover,
neither any other person nor we assumes responsibility for the
accuracy and completeness of such statements. Important factors
that may cause actual results to differ from expectations
include those discussed in Risk Factors beginning on
page 13 in this document.

Networks Associates, Inc. was formed in December
1997, by the combination of McAfee Associates, Inc. and Network
General Corporation. Following the combination, McAfee changed
its legal name to Networks Associates, Inc. Since then, we have
acquired over 10 companies and in 1999 we publicly sold
Class A common stock of one of our subsidiaries as part of
that subsidiarys initial public offering.

Overview

We are a leading supplier of security and
availability solutions for e-business. Our products focus on two
important areas of e-business: network security and network
management. In the network security and network management
arenas, the majority of our revenue has historically been
derived from our McAfee anti-virus product group and our Sniffer
network availability and performance management product group,
respectively. These two flagship product groups form the
customer base and product base from which the balance of our
product line has developed.

In recent years, we have focused our efforts on
building a full line of complementary network security and
network management solutions. On the network security side, we
strengthened our anti-virus lineup by adding complementary
products in the firewall, intrusion protection, encryption, and
virtual private networking categories. On the network management
side, we built upon our Sniffer line by adding products in the
help desk, asset management, network monitoring, and network
reporting categories. We continuously seek to expand our product
lines. In order to more effectively market our products, we have
combined complementary products into separate product groups, as
follows:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | McAfee, which primarily markets the McAfee Active
    Virus Defense (AVD) product group;                   
|
| |  | Sniffer Technologies, which primarily markets the
    Sniffer Total Network Visibility (TNV) product group;

1



---



##### Table of Contents





| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | PGP Security, which primarily markets the PGP
    Total Network Security (TNS) product group; and
|
| |  | Magic Solutions, which primarily markets the
    Magic Total Support Desk (TSD) product group.   

The four product groups represent our
infrastructure segment. The reorganization around our product
groups is designed to allow us to, among other things, react
faster to customers changing needs and better specialize
our sales force so they know our products and their markets in
greater depth. In addition, although specialization between
security (anti-virus and security product lines) and
manageability (availability and service desk product lines)
previously existed, with the reorganization we seek to better
differentiate anti-virus from security and availability from
service desk.

For the year ended December 31, 2000, our
infrastructure segment accounted for approximately
$643.1 million in net revenue and a net loss of
approximately $71.6 million.

In addition to our product groups, we also have
two subsidiaries that are applications service providers, or
ASPs. McAfee.com, our publicly traded subsidiary, is a consumer
applications service provider. myCIO.com, a wholly owned
subsidiary, is an infrastructure ASP targeted at business users.

For the year ended December 31, 2000,
McAfee.com accounted for approximately $46.9 million in net
revenue and a net loss of $27.5 million. For the year ended
December 31, 2000, myCIO.com accounted for approximately
$7.7 million in net revenue and a net loss of
$24.9 million.

McAfee

McAfees products and services provide
solutions designed to enforce anti-virus policies and measure
the performance of anti-virus activities. The McAfee product
group consists of products and services that provide multi-layer
anti-virus protection, management and reporting for desktops,
servers, GroupWare, internet technologies, and wireless
technologies. McAfees anti-virus protection products
include VirusScan for desktop protection, NetShield for file
server protection, GroupShield for GroupWare protection,
WebShield for internet gateway protection, and VirusScan
Wireless for wireless technology protection. McAfees
anti-virus management and reporting products include Anti-Virus
Informant and ePolicy Orchestrator, an anti-virus management and
reporting tool designed specifically for the internet.
McAfees services are provided by McAfees Anti-Virus
Emergency Response Team (AVERT). AVERT augments McAfees
product offerings by identifying new viruses and deploying
anti-virus solutions to our customers. McAfee customers are
primarily corporate customers, including customers in the
managed service market (includes Application Service Providers,
ASPs, and Managed Service Providers, MSPs.)

Sniffer Technologies

Sniffer Technologies products and services
provide customers with network and application management
solutions designed to maximize network availability and
performance. Sniffer Technologies products capture data,
monitor network traffic and collect key network statistics for
small networks as well as optimizing network and application
performance and increasing network reliability by uncovering and
analyzing network problems and recommending solutions to such
problems, automatically and in real-time for mid-level and
high-speed networks. In addition, Sniffer Technologies
products proactively monitor and diagnose network and
application-level problems on complex, multi-segment networks
from centralized locations as well as troubleshooting high-speed
telecommunications and Internet service provider networks. The
Sniffer Technologies product group consists of the Sniffer
Portable Analysis Line, the Sniffer Distributed Analysis Line,
the Sniffer Reporter Line and Sniffer Pro for Packet over SONET.
Sniffer Technologies service offerings consist primarily
of network and application management education and consulting
services. Sniffer Technologies customers are primarily
corporate customers, including customers in the managed service
market (MSPs and ASPs.)

PGP Security

PGP Securitys products help organizations
worldwide secure their networks using firewall, encryption,
intrusion detection, risk assessment and Virtual Private Network
(VPN) technologies. PGP Securitys

2



---



##### Table of Contents



products include E-Business Server, Gauntlet
Firewall, CyberCop Scanner and e-ppliance. E-Business Server
provides an encryption and data authentication solution designed
to protect the integrity and security of the customers
data using self-decrypting archives for a wide range of server
platforms and integrates with our customers existing
network architectures. Gauntlet Firewall delivers integrated
anti-virus protection, a built-in standards-based VPN server,
and spam and content filtering to assure broad protection.
CyberCop Scanning tools deliver risk assessment solutions that
continually scan networks for weak spots, enabling network
administrators to prevent security breaches before they occur.
PGPs e-ppliance, a web-based configuration tool, deploys
the latest firewall technologies and continually administers
anti-virus protection. PGP Securitys security consulting
and support services are provided by its COVERT Labs which
identifies and works to resolve serious customer vulnerabilities
before attackers are able to exploit them. PGP Securitys
customers include individuals, government agencies, financial
institutions, and corporations, including e-businesses.


Magic Solutions

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

McAfee.com

Effective January 1, 1999, we contributed
our consumer e-commerce business to our then wholly owned
subsidiary, McAfee.com. In December 1999, McAfee.com completed
its initial public offering in which it sold to the public
approximately 7.2 million shares of its Class A common
stock, entitled to one vote per share. As of December 31,
2000, we owned 36,000,000 shares of McAfee.com Class B
common stock, entitled to three votes per share and representing
approximately 81% of McAfee.coms outstanding common stock
and 93% of its total voting power.

McAfee.coms products and services provide
customers with an on-line systems security solution. McAfee.com
is a security Application Service Provider (ASP) that delivers
security applications software and related services through an
Internet browser. The McAfee.com applications allow consumers to
detect and eliminate viruses on their PCs, repair their PCs from
damage caused by viruses, optimize their hard drives and update
their PCs virus protection system with current software
patches and upgrades. The McAfee.com web site provides the
online products and services personalized for consumers based on
their PC configurations, software and attached peripherals.
McAfee.coms offerings include McAfee Clinic to scan their
PCs for viruses, protect their data, clean and optimize
their hard drives and update applications and operating systems.
Additionally, McAfee.com offers customers access to McAfee.com
Personal Firewall, McAfee.com Wireless Security Center and
McAfee.com Internet Privacy Service.

In November 2000, McAfee.com expanded its home
page and offerings to include, on a preview basis, its .NET
initiative, a managed application service for small to medium
sized businesses. Services available to these businesses on a
preview basis through April 2001, include:



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | Security.NET  up-to-date anti-virus
    and firewall security at work, home, and on the road 
    all via the Internet;
|
| |  | HelpDesk.NET  self-help tutorials,
    file management, and PC maintenance services on a 24x7 basis;                    
|
| |  | Productivity.NET  anytime, anyplace
    computing with Microsoft Office compatible applications.                        

In addition, McAfee.com has developed strategic
relationships with original equipment manufacturers and
suppliers and other software companies, to incorporate
McAfee.com technology into hardware and other software
applications. McAfee.coms customers include individuals
and corporations.

3



---



##### Table of Contents



Our existing license agreement with McAfee.com
currently restricts McAfee.coms business to offering
products and services incorporating our technology to consumers
over the Internet. However, we are in the process of negotiating
arrangements which would allow McAfee.com to offer its .NET
initiative to small to medium sized businesses over the
Internet. We may not reach agreement to terms acceptable to both
parties or at all.

Mycio.com

In January 2000, we launched myCIO.com, a wholly
owned subsidiary, as an infrastructure ASP targeted at business
users. myCIO.com delivers managed security services hosted on
our servers, or certain intermediaries servers, to
businesses via the Internet or to OEMs. myCIO.coms
services are designed to be simple and cost-effective as well as
more rapidly deployable than if the customer were to internally
install network security applications. myCIO.coms services
include Virus Scan ASaP, CyberCop ASaP, Firewall ASaP,
VirusScreen ASaP and VPN ASaP.

In February 2001, we announced our plan to
reintegrate myCIO.coms operations with our own, while
continuing to offer myCIO.coms products and services as
key offerings. Going forward, myCIO.com will no longer
constitute a separate business segment.

Professional Services & Technical
Support

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

Consulting Services supports product integrations
and deployment with an array of standardized and custom
offerings. Consulting Services also offers other services
ranging from proactive and emergency troubleshooting to network
design, planning and simulation. We supplement our Consulting
Service capabilities through the use of outside professional
service providers, including our distributors, resellers and
system integrators. In conjunction with our recent
reorganization to establish product groups, we reorganized our
U.S. Consulting Services organization, in part, to enable
the service providers to become more specialized on individual
products and product lines.

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

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



| |   |                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PrimeSupport KnowledgeCenter  Consists
    of a searchable, intelligent knowledge base of technical
    solutions and links to a variety of technical documents such as
    product FAQs and technical notes. The KnowledgeCenter also
    allows users to submit questions by email if their answer is not
    found in the KnowledgeCenters technical resources.
|
| |  | PrimeSupport Connect  Provides
    toll-free telephone access to technical support during regular
    business hours and access to the online KnowledgeCenter.                                                                                                                                                                                                      

4



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PrimeSupport Priority  Provides
    support for critical operations with priority, unlimited,
    toll-free telephone access to technical support 24 hours a day,
    7 days a week and access to the online KnowledgeCenter.                                                                                                                                                                             
|
| |  | PrimeSupport Enterprise  Offers
    proactive, personalized service for the most business critical
    operations and includes an assigned technical support engineer
    from our elite Enterprise support team; proactive support
    contact (telephone or email) with customer-defined frequency;
    and election of five designated customer contacts, and access to
    the online KnowledgeCenter.

Product Licensing Model

Our product licensing model consists of one-year
subscription licenses, two-year subscription licenses and
perpetual licenses. We typically license our products to
corporate and government customers on a subscription basis, for
a period of one year or two years or on a perpetual basis. We
believe that the subscription license that includes related
maintenance offers several benefits to our customers. Under the
subscription licensing model, for one initial fee, the customer
receives the software and maintenance, which gives the customer
the right to receive all upgrades, updates and technical support
for the subscription period. Since we are able to distribute our
products and upgrades at a lower cost than companies using
traditional distribution methods, we also have the ability to
offer upgrades and updates and address user feature requirements
on a more regular basis. In addition, our one-year and two-year
licensing models create the opportunity for recurring revenue
for us through the renewal of existing licenses. By offering
one-year or two-year licenses as opposed to traditional
perpetual licenses, we are able to meet a lower initial cost
threshold for customers with annual budgetary constraints. The
renewal process also provides an opportunity to cross-sell new
products and product lines to existing customers. Since we
typically license our products on a per user basis, at the time
of renewal we have the potential to increase the number of users
licensed at existing sites and to expand our licenses to new
sites in an organization. However, we may be unable to sustain
current renewal rates in the future. We also provide single user
and corporate user licenses for our products under traditional
perpetual licenses with product updates, upgrades and support
available to customers under separate maintenance contracts.

In 2001, we will introduce two-year subscription
licenses that include only one year of maintenance. During the
first year of the two-year subscription license, the customer
has the option to purchase the second year of maintenance at a
fixed price. As the software licenses or maintenance contracts
near expiration, we contact customers to renew their licenses or
maintenance contracts, as applicable. We believe that the
two-year subscription license that includes the related first
year of maintenance offers several benefits to our customers.
For one initial fee, the customer receives the software and all
upgrades, updates and technical support for the first year.
Going forward, we believe that providing the customer the option
to purchase the second year of maintenance provides the customer
greater flexibility in selecting the appropriate level of
maintenance support.

Hosted Applications Subscription
Model

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

Sales and Marketing

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

5



---



##### Table of Contents



North American Direct Sales

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

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

International Sales

We have sales and support operations in Europe,
Asia, South America and Australia. In 2000, international
revenues accounted for approximately 38% of our net revenues. We
expect that international revenues will continue to account for
a significant percentage of net revenues.

In 2001, we intend to organize our international
direct sales force by our four product groups when and where
local demand and sales force considerations make this action
advisable.

Resellers and Distributors

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

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

Our independent software distributors are
permitted stock balancing and stock rotation rights. We often
rely on resellers and distributors, including retail outlets, to
market and support our products. Our agreements with our
distributors are not exclusive and may be terminated by either
party without cause. Terminated distributors may not continue to
represent our products.

In December 2000, in light of the business
decision by some of our distributors, including our largest
distributor, to reduce inventory levels and due to the
unpredictability of demand in the distribution channel, we began
a transition from a sell-in to a sell-through business model.
Subject to certain limitations, we agreed to accept requests
from certain distributors to return inventory over and above
permitted contractual levels. Under our new business model we
will enter into amended distribution arrangements under which we
will permit our distributors to purchase software licenses at
the same time they fill customer orders and to pay for hardware
and retail products only when these products are resold to the
distributors customers. In addition, we will permit our
distributors to make hardware and retail product returns at any
time prior to the time they sell these products to their
customers. This right of return will be unconditional. After
sale by the distributor to its customer, there will be no right
of return from the distributor to us with respect to such
product, unless we approve the return from the final customer to
the distributor. Accordingly, due to this change in business
practice, commencing on January 1, 2001, we will recognize
revenue on products when products are sold

6



---



##### Table of Contents



through by the distributor. We expect the
transition to a sell-through model will be completed in the
first quarter of 2001.


Original Equipment Manufacturers

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

Other Marketing Activities

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

Customers

We primarily market our products to large
corporate and government customers directly through our direct
sales organization and indirectly through resellers and
distributors. In terms of number of products available for sale,
a majority of our products are distributed indirectly through
resellers and distributors. In the U.S., substantially all our
indirect sales are through four major distributors. In Europe,
substantially all indirect sales are made through five major
distributors. During 2000, one customer, Ingram Micro, accounted
for approximately 21% of our net revenue. See Note 15 of Notes
to Consolidated Financial Statements for major customer
information.

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

Product Development and Acquisition

We believe that our ability to maintain our
competitiveness will depend 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 includes low barriers to entry, rapid technological
change, and is highly competitive with respect to timely product
introductions. Product enhancements or new products may not be
developed or acquired on a timely basis or at all. As part of
our growth strategy, we have made and expect to continue to make
investments in complementary businesses, products and
technologies.

In addition to developing new products, our
internal development staff is also focused on developing updates
to existing products and modifying and enhancing any acquired
products. Future upgrades and updates may include additional
functionality, respond to user problems or address compatibility
problems with changing operating systems and environments. We
believe that our ability to provide these upgrades and updates
frequently and at low cost is key to our success. For example,
the proliferation of new and changing viruses makes it
imperative to update anti-virus products frequently to avoid
obsolescence. Failure to release upgrades and updates could have
a material adverse effect on our business, results of operations
and financial condition. We may not be successful in these
efforts. In addition, future changes in Windows 98, Windows NT,
NetWare or other popular operating systems could cause
compatibility problems with our products. Further, delays in the
introduction of future versions of operating systems or lack of
market acceptance of these future versions would delay or reduce
demand for our future products which were designed to operate
with these future operating systems. Our failure to introduce in
a timely manner new products that are

7



---



##### Table of Contents



compatible with operating systems and
environments preferred by desktop computer users would have a
material adverse effect on our business, results of operations
and financial condition.


Excluding stock-based compensation charges, we
expended $171.1 million, $148.2 million and
$135.5 million in the years ended December 31, 2000,
1999, and 1998, respectively, on research and development.

Manufacturing and Suppliers

Our manufacturing operations consist primarily of
assembly, testing and quality control of materials, components,
subassemblies and systems for our Sniffer-based and E-ppliance
products. We use third-party manufacturers for these
manufacturing operations. Reliance on third-party manufacturers
involves a number of risks, including the lack of control over
the manufacturing process and the absence or unavailability of
adequate capacity.

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

Competition

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



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

We may be unable to compete effectively against
existing and potential competitors. Some of our competitors have
longer operating histories, greater name recognition, larger
technical staffs, established relationships with hardware
vendors and/or greater financial, technical and marketing
resources. As is the case in many segments of the software
industry, we have been encountering, and we expect to further
encounter, increasing competition. This increased competition
could reduce average selling prices and, therefore, profit
margins. Competitive pressures could result not only in price
reductions but also in a decline in sales volume.

Performance and quality of our anti-virus
software products are measured by number and type of viruses
detected, the speed at which the products run and ease of use.
Our principal competitor in the anti-virus market serviced by
our McAfee product group and McAfee.com is the Peter Norton
Group of Symantec. Trend Micro remains the strongest competitor
in the Asian anti-virus market. Other competitors include
numerous smaller companies and shareware authors that may in the
future develop into stronger competitors or be consolidated into
larger competitors.

8



---



##### Table of Contents



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

Our principal competitor in the network
management market is Agilent. Other competitors include Cisco,
Computer Associates, Compuware, Concord Communications, DeskTalk
Systems, GN Nettest, Network Instruments, Radcom Technologies,
Shomiti Systems and Acterna Corporation.

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

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

Finally, as the network management market
develops, we may face increased competition from a number of
large companies, as well as other companies seeking to enter the
market. The trend toward enterprise-wide network management and
security solutions may result in a consolidation of the network
management and security market around a smaller number of
companies who are able to provide the necessary software and
support capabilities.

Proprietary Technology

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

Network Associates/ McAfee.com Intercompany
Agreements

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

License Agreement:Under the terms of this agreement:

Licensed Technology.Network Associates and McAfee.com
granted to each other limited rights to each others
patents, copyrights, trademarks and trade secrets for use in
defined markets. Network Associates has worldwide, non-exclusive
rights to McAfee.coms patents and exclusive rights to use
copyrights, trademarks and trade secrets to deliver products and
services to enterprise customers and individual consumers by any
means other than the Internet. Under the agreement, McAfee.com
is granted worldwide, non-exclusive

9



---



##### Table of Contents



rights to Network Associates patents and
exclusive rights to use Network Associates copyright,
trademark and trade secret rights to create and deliver products
and services directly or indirectly to individual consumers over
the Internet or for Internet-based products. Each party is also
permitted to create products derived from the technology
licensed to it by the other. The creating party retains
ownership of their newly derived products but these derived
products are licensed to the other party subject to the terms of
the license agreement.


Royalty Payments.In
consideration for the rights granted under the license
agreement, Network Associates is required to pay McAfee.com a
flat quarterly royalty of $250,000. In consideration for the
rights granted by Network Associates to McAfee.com under the
license agreement, McAfee.com is required to pay Network
Associates a royalty on revenues recognized from product and
subscription sales that include Network Associates
technology, initially at a rate of 20% commencing on
January 1, 1999, and declining 1.625% per quarter until the
rate is 7% in the quarter beginning January 1, 2001, and
remaining at 7% thereafter.

Limitations on Offered Products.During the term of the agreement, each
party has agreed that it will not offer products incorporating
third-party technology if those products are competitive with
the products offered by the other party.

Indemnification.Under the agreement, each party has
agreed to indemnify, defend and hold harmless the other for any
losses incurred in connection with claims arising in the covered
countries if the technology licensed under the agreement
violates the patent, copyright, trademark or trade secrets or
other proprietary rights of a third party. Covered countries are
those countries that are party to the Berne Convention for the
Protection of Literary and Artistic Works, which include the
U.S. and substantially all U.N. member nations.

Term and Termination.The license agreement will remain in
effect indefinitely, but may be terminated, among other
circumstances, by the non-defaulting party, in the event of a
material breach by the other party that remains uncured for
30 days following notice of the breach, subject to
mandatory dispute resolution prior to the effectiveness of any
proposed termination.

We are currently negotiating an arrangement with
McAfee.com so that it may offer its .NET initiative to small to
medium sized businesses over the Internet. However, we may not
reach agreement on terms acceptable to both parties or at all.

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

Registration Rights Agreement:Under this agreement, Network
Associates, or any transferee of at least 10% of its McAfee.com
shares, can include its shares of McAfee.com common stock in any
future registration of common stock made by McAfee.com, other
than any registration statement relating to an acquisition or
stock option plan. In addition, after June 1, 2000, Network
Associates or any transferees of at least 10% of its McAfee.com
shares can request that McAfee.com file a registration statement
so it can publicly sell its shares of McAfee.com stock.

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

10



---



##### Table of Contents



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

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

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



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

As a result of the above indemnification, we are,
for example, required to hold McAfee.com harmless from our
existing litigation related to the anti-virus technology
licensed under the cross license agreement. In the event of a
claim relating to a product that includes components supplied by
McAfee.com and components supplied by us, Network Associates has
the right to determine whether and to what extent McAfee.com is
entitled to indemnification, after reasonable consultation with
McAfee.com.

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

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



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

11



---



##### Table of Contents



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

Employees

As of December 31, 2000, we employed 3,461
individuals worldwide. Competition for qualified management and
technical personnel is intense in the software industry. Our
continued success will depend in part upon our ability to
attract and retain qualified personnel. None of our employees is
represented by a labor union and we believe that our employee
relations are good.

12



---



##### Table of Contents



RISK FACTORS

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

Our Quarterly Financial Results Will Likely
Fluctuate

Our quarterly operating results have varied
greatly in the past and will likely vary greatly in the future
depending upon a number of factors. Many of these factors are
beyond our control. Our revenues, gross margins and operating
results may fluctuate significantly from quarter to quarter due
to, among other things:



| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | volume, size and timing of new licenses and
    renewals of existing licenses;                                                                                                    
|
| |  | our ability to timely and accurately obtain
    end-user sales information and information related to inventory
    levels from our distributors;                                 
|
| |  | introduction of new products, product upgrades or
    updates by us or our competitors;                                                                                           
|
| |  | the mix of products we sell;                                                                                                                                                      
|
| |  | the size and timing of our non-cash stock-based
    charges;                                                                                                                      
|
| |  | changes in product prices by us or our
    competitors;                                                                                                                           
|
| |  | trends in the computer industry and general
    economic conditions;                                                                                                              
|
| |  | our ability to develop, market and sell our
    products;                                                                                                                         
|
| |  | costs related to acquisitions of technology or
    businesses;                                                                                                                    
|
| |  | fluctuations in McAfee.coms expenditure
    levels related to its efforts to build brand awareness and
    establish strategic relationships with various Internet
    companies;
|
| |  | fluctuations in our expenditure levels related to
    our efforts to expand our international sales organization;                                                                 
|
| |  | our investment experience related to our
    strategic minority equity investments;                                                                                               
|
| |  | the percentage of our revenue, particularly that
    portion attributable to our ASP subscription model, that is
    deferred;                                                    
|
| |  | the effectiveness of our channel strategy and our
    mix of direct and indirect revenues;                                                                                        
|
| |  | pressure on employee wages as competition for
    skilled employees increases; and                                                                                                
|
| |  | costs related to extraordinary events including
    litigation, acquisitions or any reductions in forces.                                                                         

Our business is impacted by seasonal trends and
global or regional macroeconomic trends. For example, our net
revenue is typically higher in the fourth quarter, as many
customers complete annual budgetary cycles, and lower in the
summer months when many businesses experience lower sales,
particularly in the European market. Our European business has
been adversely impacted in recent periods primarily because of
the continued weakness of the Euro against the dollar. For some
time, our business in Asia and Latin America has been adversely
impacted by the adverse economic conditions there. Most
recently, our business in the U.S. and elsewhere has been
adversely impacted by customer concerns about weakening economic
conditions.

We have not been profitable for the last two
years. In addition to risks we face in operating our business,
continued economic weakness in the U.S. and other countries
could slow or prevent our efforts to successfully expand
internationally and regain profitability.

13



---



##### Table of Contents



The Timing and Amount of Our Revenues Are
Subject to a Number of Factors that Make It Difficult to
Estimate Operating Results Prior to the End of a
Quarter

We do not maintain a significant level of
backlog. As a result, product and service revenues in any
quarter are dependent on contracts entered into, product shipped
and services rendered in that quarter. Historically, we have
experienced a trend toward higher order receipt, and therefore a
higher percentage of revenue shipments, toward the end of the
last month of a quarter. This trend makes predicting revenues
more difficult. In the past, distributors made significant
purchases at the end of each quarter. We anticipate that our
change to a sell-through revenue model for sales to
distributors, where we recognize revenue on product sales to
distributors, when the related product is sold by our
distributors to their customers, will lead to orders being
received and shipped more evenly during each quarter. The timing
of closing larger orders sold directly to end-users of our
products increases the risk of quarter-to-quarter fluctuation.
In addition, as we transition to the sell-through revenue model
for products sold through the distribution channel, it is
essential that we gather sales information from our distributors
to accurately record our financial results for a particular
quarter in a timely manner. If orders forecasted for a specific
customer for a particular quarter are not realized or revenues
are not otherwise recognized in that quarter, our operating
results for that quarter could be materially adversely affected.

We Sell Our Products Through Intermediaries,
Who May Not Vigorously Market Our Products, May Not Accept Our
Sell-Through Business Model, May Not Provide Us Required
Information to Accurately Recognize Revenue or May Have
Difficulty in Timely Paying for Purchased Products

We market a significant portion of our products
to end-users through intermediaries, including distributors,
resellers and value-added resellers. These distributors sell
other products that are complementary to, or compete with, our
products. While we encourage our distributors to focus on our
products through market and support programs, these distributors
may give greater priority to products of other suppliers,
including competitors.

In December 2000, in light of the business
decision by some of our distributors, including our largest
distributor, to reduce inventory levels and due to the
unpredictability of demand in the distribution channel, we began
a transition from a sell-in to a sell-through business model.
Subject to certain limitations, we agreed to accept requests
from certain distributors to return inventory over and above
permitted contractual levels. Under our new business model we
will enter into amended distribution arrangements under which we
will permit our distributors to purchase software licenses at
the same time they fill customer orders and to pay for hardware
and retail products only when these products are resold to the
distributors customers. In addition, we will permit our
distributors to make hardware and retail product returns at any
time prior to the time they sell these products to their
customers. This right of return will be unconditional. After
sale by the distributor to its customer, there will be no right
of return from the distributor to us with respect to such
product, unless we approve the return from the final customer to
the distributor. Accordingly, due to this change in business
practice, commencing on January 1, 2001, we will recognize
revenue on products when products are sold by the distributor.
We expect the transition to a sell-through model will be
completed in the first quarter of 2001. Among other risks in
connection with this transition are the following:



| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our intermediaries may resist or be slow to adopt
    our new business practice;                                                                                                                                                        
|
| |  | to determine our business performance at any
    point in time or for any given period, we must timely and
    accurately gather sales information from our
    intermediaries information systems, at an increased cost
    to us; and
|
| |  | our intermediaries information systems may
    be less accurate or reliable than our internal systems.                                                                                                                                 

Some of our distributors are experiencing
financial difficulties worldwide, which may adversely impact our
collection of accounts receivable. We regularly review the
collectibility and credit worthiness of our distributors to
determine an appropriate allowance for doubtful accounts. Our
uncollectible accounts could exceed our current or future
allowance for doubtful accounts, which would adversely impact
our operating results.

14



---



##### Table of Contents



Competitors May Include Products Similar to
Ours in Their Hardware or Software and Render Our Products
Obsolete

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

We Face Risk Associated with Employee
Retention and New Employee Assimilation

Many of our employees are located in areas and
have skills in fields where there is high worker mobility and
work force turnover. The departure of a large number of our
employees or a meaningful number of key non-executive employees
could have a material adverse impact on many facets of our
business, including our ability to develop new products, upgrade
existing products, sell our products and provide adequate
internal infrastructure. After April 22, 2000, the end of
the 12-month lock-up period for options repriced in April 1999,
we experienced a larger than normal level of employee departures
as many of these employees elected to terminate their employment
with us. We anticipate that we will continue to have
difficulties in retaining employees because most of our
employees hold options to purchase our stock at prices
significantly above the current market price for our stock.

We hired a significant number of new employees in
2000 and we may continue to add new employees to fill positions
vacated by departing employees and to expand our business. We
will face challenges in attracting and assimilating qualified
new employees. We expect that there may be reduced levels of
productivity as these individuals are trained and otherwise
adapt to our organization. We also may experience employee
retention and assimilation issues in connection with the
integration of our myCIO.com service offerings into our key
offerings.

We Face Risks Related to Organizing Our Sales
Effort into Product Groups

In order to more effectively market our products,
we have combined complementary products into separate product
groups, as follows: McAfee, which markets the McAfee Active
Virus Defense (AVD) product group; Sniffer Technologies,
which markets the Sniffer Total Network Visibility
(TNV) product line; PGP Security, which markets the PGP
Total Network Security (TNS) product group; and Magic
Solutions, which markets the Magic Total Support Desk
(TSD) product group. This structure is intended to allow us
to react faster to customers needs and to focus each
product groups sales force on selling their respective
product line and the individual point products contained in
those product groups. Our U.S. professional services
organization is also organized around our product groups. Our
customers and potential customers may not respond to this
structure and our business and future financial performance
could suffer. This structure may be unsuccessful due to, among
other things:



| |   |                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | uncertainty and customer dissatisfaction
    surrounding our shift in focus to our product group strategy,
    including uncertainty as to our level of support for our
    combined product groups, previously marketed as one line and
    integration of our various product groups;
|
| |  | customer confusion or irritation related to
    multiple sales calls from different members of our reorganized
    sales force;                                                                                                                                                        
|
| |  | a loss of potential cross selling opportunities
    and a lack of lead sharing between the separate product
    groups sales representatives who are primarily compensated
    for sales made by them of products within their respective
    product groups;                         
|
| |  | the possibility that our centralized general and
    administrative group may be unable to meet on a timely basis or
    at all each product groups individualized infrastructure
    and support requirements; and                                                                   

15



---



##### Table of Contents





| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | one or more of our product groups may lack
    sufficient qualified professional services personnel to support
    its products.

We Could Experience Customer and Market
Confusion Due to Our Marketing and Advertising Efforts Targeted
at the Product Group or Subsidiary Level, Rather Than at the
Corporate Level, and Due to Similarities in the Names Used by
Our Product Groups and Subsidiaries

Networks Associates, Inc. was formed in December
1997, by the combination of McAfee Associates, Inc. and Network
General Corporation. We have spent a significant portion of our
total marketing efforts and advertising spending building
awareness of the Network Associates name. Our marketing efforts
and advertising spending have been focused on building brand
awareness at the product group and subsidiary level, rather than
at the Network Associates corporate level. This has created and
could continue to create confusion in the marketplace and in the
investor community if people are unclear about the relationships
between Network Associates and our product groups, our
McAfee.com subsidiary and myCIO.com subsidiary. Our myCIO.com
products and service offerings are being reintegrated into our
core business. These groups and subsidiaries also have
potentially confusing names and products. For example, our
online consumer anti-virus products, our retail and corporate
anti-virus products and our hosted anti-virus products to date
have been marketed and sold, respectively, by our publicly
traded McAfee.com subsidiary, our retail division which is
called McAfee Retail and our McAfee product group.

We May Experience Higher Overall Revenue in
the Near-Term But Lower Future Software License Revenue Due to
Expected Increased Levels of Perpetual Licenses

We expect an increase in the number of, and
amount of, our net revenue attributable to our sale of perpetual
software licenses. Under a perpetual license, a customer
purchases the base-line software and subsequently acquires
software upgrades and updates. In contrast, under a time-based
license model, customers license the software, including
upgrades and updates, for a specified period of time. At the end
of the initial license period, the customer must renew their
software time-based license to use our software. Sales of
perpetual licenses typically result in significantly higher
up-front revenue and lower recurring and future revenues as the
sales price for upgrades and updates tends to be significantly
lower than that of a perpetual license. Factors contributing to
this expected increase in perpetual licenses include greater
sales of hardware-based Sniffer and E-ppliance products where
software is bundled on to the hardware platform and a general
customer preference for perpetual licenses. To offset potential
reductions in future revenue, among other things, it will be
incumbent upon us to introduce new software products for sale
and we may elect to unbundle some of the products previously
offered by us on a bundled subscription basis.

Our Revenues May Be Adversely Impacted By Our
Shift to a Two-Year Subscription License that Includes Only
One-Year of Maintenance

Historically, our two-year subscription license
included two years of maintenance. However, in 2001, we will
introduce two-year subscription licenses that include the first
year of maintenance. During the first year of the subscription
license, the customer has the option to purchase the second year
of maintenance. We believe this new offering allows the customer
greater flexibility in selecting the appropriate level of
maintenance support. However, if customers delay the purchase of
their second year of maintenance support, this could adversely
affect our near term revenue and cash flows.

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

During 2000, our stock price was extremely
volatile and ranged from a per-share high of $36.69 to a low of
$4.13. Announcements, litigation developments, and our ability
to meet the expectations of investors with respect to our
operating and financial results may contribute to current and
future stock price volatility. We may not discover, or be able
to confirm, revenue or earnings shortfalls until the end of a
quarter, which could result in an immediate drop in our stock
price. In addition, similar events with respect to McAfee.com,
our publicly traded subsidiary, and fluctuations in its stock
price may also contribute to the volatility of our stock price.
In the past, following periods of volatility in the market price
of a companys stock, securities class

16



---



##### Table of Contents



action litigation has often been instituted. A
number of putative class actions were brought against our
officers, directors and us. See Note 16, Notes to the
Consolidated Financial Statements. This litigation, and any
other litigation if instituted, could result in substantial
costs and a diversion of managements attention and
resources.


We Expect Significant Stock-Based Compensation
Charges Related to Repriced Options

In light of the decline in our stock price at the
time and in an effort to retain our employee base, in April
1999, we offered to reprice options held by all employees, other
than directors and executive officers. If the employee agreed
not to exercise any of the repriced options for a period of
twelve months, the exercise price of their eligible employee
options with an exercise price in excess of $11.063 was reduced
to $11.063, the closing market price on the NASDAQ on
April 22, 1999. Option holders electing to have their
options repriced were required to acknowledge their acceptance
by April 28, 1999. As a result of the increase in price
between the date on which the options were repriced,
April 22, 1999, and the date on which the employees elected
to reprice their option grants, April 28, 1999, we have
incurred a stock-based compensation charge. In accordance with
Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees, 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 was expensed in the twelve months ended
December 31, 2000. This charge is fixed and will continue
to be amortized through the remaining vesting period of the
repriced options.

In March 2000, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of
APB Opinion No. 25
(Interpretation). The Interpretation 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.

We have incurred and will continue to incur
variable accounting charges and credits related to our repriced
options and our subsidiaries replacement options. The
valuation of this charge has and will be based on any excess of
the closing price at the end of the reporting period or date of
exercise, forfeiture, cancellation without replacements, if
earlier, over the fair value of our common stock at July 1,
2000, which was $20.375. Depending upon movements in the market
value of our 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 Network Associates
options which were subject to the repricing described above. As
a result, Network Associates will record variable charges based
on the movements in the fair value of McAfee.com and myCIO.com.
During the twelve months ended December 31, 2000, we
recorded a compensation charge to earnings of approximately
$2.0 million related to variable plan accounting.

We Have Recently Experienced a Significant
Change in Senior Management and We May Be Unable to Attract
Qualified Management Replacements on a Timely Basis

On January 3, 2001, our board of directors
appointed George Samenuk as our new chief executive officer and
president. George Samenuk was also named to the board of
directors. As part of this appointment, William Larson, our
former chairman of the board of directors and chief executive
officer, and Prabhat Goyal, our former chief financial officer,
left their former positions. In addition, Peter Watkins, our
former president and chief operating officer, left his former
position on December 31, 2000.

This change in executive management may be
disruptive to our business and may result in the departure of
existing employees and/or customers. We are currently operating
with an interim chief financial officer. It may take significant
time to locate, retain and integrate qualified management
personnel.

17



---



##### Table of Contents



Our Management and Technical Personnel Are
Critical to Our Business, These Individuals May Not Remain with
Us in the Future

We rely, and will continue to rely, on a number
of key technical and management employees. While employees are
required to sign standard agreements concerning confidentiality
and ownership of inventions, our employees are generally not
otherwise subject to employment agreements or to noncompetition
covenants. If any of our key employees leave, our business,
results of operations and financial condition could suffer.
Furthermore, we do not maintain life insurance policies on our
key employees.

Our ability to achieve our revenue and operating
performance objectives will depend in large part on our ability
to attract and retain technically qualified and highly skilled
sales, consulting, technical, marketing and management
personnel. Competition for these employees is intense and is
expected to remain so for the foreseeable future. We have seen
upward pressure on wages as a result of this intense competition
for employees, which could cause an increase in our operating
expenses. We may not be successful in retaining our existing key
personnel and in attracting and retaining the personnel we
require, and our failure to retain and hire key employees could
adversely affect our business and operating results. Additions
of new, and departures of existing, employees, particularly in
key positions, can be disruptive and can result in departures of
existing employees, which could adversely affect our business.

We Face Risks Associated with Past and Future
Transactions

Our industry has experienced, and is expected to
continue to experience, a significant amount of consolidation.
As part of our growth strategy, we may buy or make investments
in complementary companies, products and technologies. Since
1995 we have completed a large number of significant
acquisitions involving both public and private companies,
including:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | CyberMedia in September 1998;                                
|
| |  | Dr. Solomon in August 1998;                                  
|
| |  | Secure Networks in May 1998;                                 
|
| |  | Magic Solutions and TIS in April 1998;                       
|
| |  | Network General, PGP and Helix Software in
    December 1997;
|
| |  | Cinco Networks in August 1997;                               
|
| |  | Vycor Corporation in February 1996; and                      
|
| |  | Saber Software in August 1995.                               

We have also completed a number of smaller
acquisitions and acquired a number of our international
distributors. In 2000, we continued making strategic minority
investments in pre-public companies with complimentary products,
services and technologies. As of December 31, 2000, the
minority venture investments we continue to hold totaled
$18.6 million valued at cost less reductions for other than
temporary impairments. In the fourth quarter of 2000, we
recorded a $10.0 million impairment charge in connection
with these investments.

Our acquisitions and strategic investments
involve a number of risks and we may not realize the expected
benefits of these transactions. We may lose all or a portion of
our investment, particularly in the case of our strategic
minority investments. We plan to continue investing and may make
acquisitions of other strategic investments in the future.

In 1997 and 1998, we incurred significant
nonrecurring charges associated with our previous acquisitions.
Our available cash and securities may be used to buy or invest
in companies or products, which could result in significant
acquisition-related charges to earnings and dilution to our
stockholders. Moreover, if we buy a company, we may have to
incur or assume that companys liabilities, including
liabilities that are unknown at the time of acquisition, which
may result in a material adverse effect on us.

18



---



##### Table of Contents



We Will Experience Significant Amortization
Charges and Face the Risk of Future Non-Recurring Charges in the
Event of Impairment

In connection with our previous acquisitions
accounted for under the purchase method of accounting, in future
periods we will experience significant charges related to the
amortization of purchased technology and goodwill. In addition,
if we later determine that this purchased technology and
goodwill is impaired, we will be required to take a related
non-recurring charge to earnings. For the fiscal year ended
December 31, 2000, our amortization expense related to
purchased technology and goodwill was $66.3 million.

We May Be Required to Use a Large Portion of
Our Cash Balances, or Issue a Significant Amount of Our Common
Stock, If Our Debentureholders Require that We Redeem Their
Debentures in February 2003

On February 13, 1998, we issued zero coupon
debentures, which have an aggregate face amount at maturity of
$885.5 million and generated net proceeds to us of
approximately $337.6 million (after deducting fees and
expenses). The initial price for the debentures was $391.06 per
$1,000 of face amount at maturity. At the option of the holder,
we are required to redeem the debentures as of February 13,
2003, February 13, 2008 and February 13, 2013 at
purchase prices equal to the initial issue price plus the
accretion of the discount on the debentures to such dates (or
$494.52, $625.35 and $790.79 per $1,000 of face amount at
maturity, respectively). At our option, we may pay the aggregate
redemption price in cash, shares of our common stock or a
combination thereof. The number of shares of common stock
required to be issued by us will be based on the fair value of
our common stock at the time of any redemption. As of
December 31, 2000, our aggregate cash and cash equivalents
and long-term securities were approximately $694 million.
Assuming that as of February 13, 2003 all debenture holders
require that we redeem their debentures, we would be required to
pay an aggregate redemption price in cash and/or shares of
common stock equal to approximately $437.9 million.

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

Some of our Sniffer products and E-ppliance
products include, in addition to our software, a hardware
platform as well as software licensed from other companies. We
expect the number of our hardware-based products to increase as,
among other things, the data rate in computer networks
increases, making a software-only solution a less viable
solution. Third party manufacturers do the manufacturing of
these products under contract for us. Reliance on third party
manufacturers involves a number of risks, including the lack of
control over the manufacturing process and the potential absence
or unavailability of adequate capacity. In the event that any
third party manufacturers cannot or will not continue to
manufacture our products in required volumes, on a cost
effective basis, in a timely manner or at all, we will have to
secure additional manufacturing capacity. Even if such
additional capacity is available at commercially acceptable
terms, the qualification process could be lengthy and could
create delays in product shipments.

Our hardware-based products contain critical
components supplied by a single or a limited number of third
parties. We have been required to purchase certain computer
platforms around which we design our network fault and
performance management products to ensure an available supply of
these products for our 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 lead
to cancellations of customer orders or delays in placement of
orders.

Some of our hardware based products incorporate
licensed software, such as operating system software. Our
ability to successfully market these products depends on our
ability to obtain reasonably priced licenses from third party
software providers, as well as on our ability to integrate our
hardware and software with the software provided from third
parties. If we are unable to obtain software licenses from third
parties or to integrate third party software with our hardware
products, our ability to market hardware based products would
suffer.

Hardware based products may face greater
obsolescence risks than software products. If our hardware
products are not easily upgradable to meet future market needs,
they may become obsolete. In addition to lost

19



---



##### Table of Contents



future sales, we could incur losses or other
charges in disposing of obsolete inventory, both of which could
also materially adversely affect our results of operations.


We Face Risks Related to Our Application
Service Provider Strategy

With our ASP or hosted products and services,
customers rent versus buy the software. For example,
McAfee.com is dedicated to updating, upgrading and managing PCs
over the Internet for single use retail, non-corporate,
consumers. This web-based model is a relatively new concept and
there is a risk that our ASP products and services may fail to
gain market acceptance. The growth, market acceptance and
ultimate profitability of our ASP services is highly uncertain
and subject to a number of factors, including:



| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to successfully adapt existing
    products or develop new or enhanced products that operate in a
    fast, secure and reliable manner over the Internet;                                               
|
| |  | increased expenditures associated with the
    creation of a new business or delivery platform, such as product
    development, marketing and technical and administrative support;                                
|
| |  | the introduction of new products by third party
    competitors;                                                                                                                                                    
|
| |  | potential unwillingness of customers to pay for
    ASP subscription based products and services and our ability to
    properly price our products and services to generate the
    greatest revenue opportunities;
|
| |  | our ability to cost effectively offer our ASP
    products and services;                                                                                                                                            
|
| |  | reluctance by businesses and consumers to change
    their software purchasing behavior in favor of services hosted
    on our, or third parties, servers; and                                                      
|
| |  | concerns of businesses and consumers about
    whether the Internet is fast, reliable and secure enough to
    deliver critical network security and availability services
    effectively.                         

Our corporate ASP services were historically
offered through our myCIO.com subsidiary. In February 2001, we
announced our plan to reintegrate myCIO.coms operations
with our own, while continuing to offer myCIO.coms
products and services as key offerings. The success of this
decision is dependent on our ability to successfully:



| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | retain myCIO.coms existing customers and
    employees;                                                                                                                            
|
| |  | migrate myCIO.coms experience and knowledge
    in the development and marketing of hosted products and services
    to our other product groups; and                              
|
| |  | coordinate future product group and McAfee.com
    ASP offerings so as to avoid or minimize, among other things,
    customer confusion, redundant development efforts and expenses.

Our Managed Service Provider Strategy Exposes
Us to Risks in Addition to Those Generally Experienced as an
ASP

We also make our hosted products and services
available over the Internet in what we refer to as a managed
environment. These MSP solutions differ from our ASP solutions,
among other ways, in that our solutions are customized to
service a specific customers needs and are monitored and
updated by networking professionals for that customer. To
successfully offer MSP services we must:



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

20



---



##### Table of Contents



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



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

We Face Risks Related to Relationship with
McAfee.com

We have entered into various inter-company
arrangements including technology, licenses, shared facilities,
functions, services and tax sharing agreements with McAfee.com.
At December 31, 2000, we owned 36.0 million shares of
McAfee.coms Class B common stock, which is generally
entitled to three votes per share and converts to shares of
McAfee.com Class A common stock if sold by us to a third
party. McAfee.com Class A common stock is entitled to one
vote per share. At December 31, 2000, our McAfee.com
holdings represented approximately 81% of McAfee.coms
outstanding capital stock and approximately 93% of its total
voting power.

Pursuant to our cross license agreement with
McAfee.com, we have licensed all our technology to McAfee.com
for use in the markets specified below and McAfee.com has
licensed its technology to us for our use outside of
McAfee.coms markets. Under our license and other
agreements with McAfee.com, among other things:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | McAfee.com has the exclusive right to use the
    licensed technology for providing single-user consumer licenses
    for our products and services sold over the Internet or for
    Internet-based products and licensing the technology to original
    equipment manufacturers for sale to individual consumers;                                                                                                                                                                                                                                                                                                                                        
|
| |  | we are permitted to continue to sell our consumer
    products through non-online channels, such as traditional retail
    stores, however McAfee.coms sales of online products and
    services could significantly reduce sales of these products;                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | we may not offer a product incorporating third
    party technology if those products are competitive with products
    offered by McAfee.com;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | McAfee.com is required to pay us a license fee of
    7% of net revenue derived from product sales that include the
    licensed technology;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | the license agreement is perpetual and may only
    be terminated by us if McAfee.com fails to cure a material
    breach of the license within 30 days after we notify it of the
    breach, subject to mandatory dispute resolution prior to the
    effectiveness of any proposed termination;                                                                                                                                                                                                                                                                                                                                                           
|
| |  | we are required to indemnify McAfee.com with
    respect to existing litigation related to the licensed
    technology to which we are a party, including the litigation
    described in Note 16 of the Notes to the Consolidated Financial
    Statements;                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | generally, we are required to cause to be elected
    to the McAfee.com board of directors at least two independent
    directors, which term would exclude any serving Network
    Associates officer or director; and                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | if, without the prior approval of our continuing
    directors (being our current directors and directors approved or
    not objected to by our current directors), someone acquires 15%
    or more of our outstanding capital stock or our continuing
    directors cease to constitute a majority of our board
    (1) we are required to vote our shares of McAfee.com common
    stock and otherwise seek to cause to the McAfee.com board of
    directors to consist of at least a majority of independent
    directors and (2) our shares of McAfee.com Class B
    common stock will be entitled to only one vote per share instead
    of three.

21



---



##### Table of Contents



We Face Risks Related to the Allocation of
Opportunities with Respect to Products, Customers and
Territories Among Our Product Groups and Subsidiaries

We are continuing to focus our business on our
products, our customers and geographic territories. Our product
groups are primarily product focused. Our McAfee.com subsidiary
sells its products and services over the Internet to consumers
and businesses. Nihon Network Associates K.K. (Network
Associates Japan) is both geographically and customer
focused, selling Network Associates products on a
generally exclusive basis in Japan and to large Japanese
business customers outside of Japan and acting as
McAfee.coms reseller in Japan. Except as provided under
our technology licensing agreements and arrangements, we do not
currently have in place a policy to govern the pursuit or
allocation of business opportunities between our subsidiaries
and product groups. These and any future internal allocation of
products, customers and territories could result in, among other
things:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | sales force conflict;                                                                      
|
| |  | customer confusion surrounding the entity or
    party with whom they are expected to deal;
|
| |  | disputes over product and research and
    development priorities;                         
|
| |  | disputes over allocation of corporate resources
    and focus; and                         
|
| |  | loss of management focus due to efforts spent to
    resolve internal conflicts.           

We Must Adapt to the Rapidly Changing Business
Environment Brought on by the Widespread Use of the
Internet

We utilize the Internet and depend on its
functionality and reliability in many parts of our business,
including sales, distribution and support of our products. There
are still many uncertainties regarding many facets of the
Internet, including reliability, security, access, tax,
government regulation and cost. We also run the risk of not
adapting to the latest changes in the Internet, which could
affect our business operations. If growth of the Internet does
not develop at the rapid pace we expect, our operating results
could be adversely affected.

Our Market Is Characterized by Rapid
Technological Change; We Face Risk Associated with Product
Development

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



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | offer a broad range of network security and
    management software products;                                                                                                                                    
|
| |  | continue to enhance existing products and expand
    product offerings;                                                                                                                                          
|
| |  | develop and introduce in a timely manner new
    products with technological advances;                                                                                                                           
|
| |  | respond promptly to new customer requirements;                                                                                                                                                                   
|
| |  | comply with evolving industry standards without
    delays in compliance;                                                                                                                                        
|
| |  | provide upgrades and updates to users frequently
    and at low cost; and                                                                                                                                        
|
| |  | remain compatible with popular operating systems
    such as Windows 98, Windows 2000, Windows NT and NetWare, and
    develop products that are compatible with new or otherwise
    emerging operating systems.

We may not be able to successfully develop and
market, on a timely basis, enhancements to our existing products
or new products. Our product enhancements or new products may
not adequately address the changing needs of the marketplace.
New products with new technological capabilities could replace
or shorten the life cycle of our products or cause our customers
to defer or cancel purchases of our existing products.

22



---



##### Table of Contents



We may continue to experience delays in software
development as we have at times in the past. Complex software
products like ours may contain undetected errors or version
compatibility problems, particularly when first released, which
could delay or cost us market acceptance. For example, our
anti-virus software products have in the past falsely detected
viruses that did not actually exist. Difficulties and delays
associated with new product introductions, performance or
enhancements could have a material adverse effect on our
business, financial condition and results of operation.

Our product development efforts are impacted by
the adoption or evolution of industry standards. For example, no
uniform industry standard has developed in the market for
encryption security products. As industry standards are adopted
or evolve, we may have to modify existing products or develop
and support new versions of existing products. In addition, if
no industry standard develops, our products and our
competitors products could be incompatible, which could
prevent or delay overall development of the market for a
particular product. If our products fail to comply with existing
or evolving industry standards in a timely fashion, our
business, results of operation and financial condition could be
materially and adversely affected.

Our long-term success depends on our ability to
upgrade and update existing product offerings, modify and
enhance acquired products and introduce new products which meet
our customers needs. Future upgrades and updates may
include additional functionality, respond to user problems or
address compatibility problems with changing operating systems
and environments. We believe that our ability to provide these
upgrades and updates frequently and at low costs is key to our
success. For example, the proliferation of new and changing
viruses makes it imperative to update anti-virus products
frequently to avoid obsolescence. Failure to release upgrades
and updates could have a material adverse effect on our
business, results of operations and financial condition. We may
not be successful in these efforts. In addition, future changes
in Windows 98, Windows 2000, Windows NT, NetWare or other
popular operating systems could cause compatibility problems
with our products. Further, delays in the introduction of future
versions of operating systems or lack of market acceptance of
these future versions would delay or reduce demand for our
future products which were designed to operate with these future
operating systems. Our failure to introduce in a timely manner
new products that are compatible with operating systems and
environments preferred by desktop computer users would have a
material adverse effect on our business, results of operation
and financial condition.

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

We have historically derived a majority of our
net revenues from our flagship McAfee anti-virus software
products and Sniffer network fault and performance management
products. These products are expected to continue to account for
a significant portion of our net revenues for the foreseeable
future. Because of this concentration of revenue, a decline in
demand for, or in the prices of, these products as a result of
competition, technological change, a change in our pricing
model, inclusion of anti-virus or network management and
analysis software as a standard part of hardware or operating
system software or other software, or a maturation in the
markets for these products, could harm our business.

If the Network Management and Network Security
Markets Do Not Evolve as We Anticipate, Our Business Could
Suffer

The markets for our network management and
network security products are evolving, and their growth depends
upon broader market acceptance of this software, including help
desk software. Although the number of PCs attached to large-area
networks has increased dramatically, the network management and
network security markets continue to be emerging markets. These
markets may not continue to develop or may not develop rapidly
enough to benefit our business significantly. In addition, there
are a number of potential approaches to network management and
network security, including the incorporation of management and
security tools into network operating systems. Therefore, even
if network management and network security tools gain broader
market acceptance, potential purchasers may not select our
products. To the extent that either the network management or
network security market does continue to develop, we expect that
competition will increase.

23



---



##### Table of Contents



We Are Subject to Intense Competition in the
Network Management and Security Markets and We Expect to Face
Increased Competition in the Future

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



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

We may be unable to compete effectively against
existing and potential competitors. Some of our competitors have
longer operating histories, greater name recognition, larger
technical staffs, established relationships with hardware
vendors and/or greater financial, technical and marketing
resources. These factors may provide our competitors with an
advantage in penetrating the market with their network security
and management products. As is the case in many segments of the
software industry, we have been encountering, and we expect to
further encounter, increasing competition. This increased
competition could reduce average selling prices and, therefore,
profit margins. Competitive pressures could result not only in
price reductions but also in a decline in sales volume, which
could cause our business to suffer.

Performance and quality of our anti-virus
software products are measured by number and type of viruses
detected, the speed at which the products run and ease of use.
Our principal competitor in the anti-virus market serviced by
our McAfee product groups and McAfee.com is the Peter Norton
Group of Symantec. Trend Micro remains the strongest competitor
in the Asian anti-virus market. Other competitors include
numerous smaller companies and shareware authors that may in the
future develop into stronger competitors or be consolidated into
larger competitors.

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

Our principal competitor in the network
management market is Agilent. Other competitors include Cisco,
Computer Associates, Compuware, Concord Communications, DeskTalk
Systems, GN Nettest, Network Instruments, Radcom Technologies,
Shomiti Systems and Acterna Corporation.

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

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

24



---



##### Table of Contents



Finally, as the network management market
develops, we may face increased competition from a number of
large companies, as well as other companies seeking to enter the
market. The trend toward enterprise-wide network management and
security solutions may result in a consolidation of the network
management and security market around a smaller number of
companies who are able to provide the necessary software and
support capabilities.

Our Customers May Cancel or Delay Their
Purchases of Our Products, which Could Adversely Affect Our
Business

Our products may be considered to be capital
purchases by certain customers or prospective customers. Capital
purchases are often discretionary and, therefore, are canceled
or delayed if the customer experiences a downturn in its
business prospects or as a result of economic conditions in
general. Any cancellation or delay could adversely affect our
results of operations.

We Face Risks Related to Our Sales Force
Structure

Our sales force is organized by product group,
with four separately focused sales organizations selling our
McAfee, Sniffer Technologies, PGP Security and Magic Solutions
products. All four sales organizations consist of field sales
representatives who are located regionally and outbound
telesales representatives who actively focus on selling our
individual product lines. The telesales representatives focus on
small customers and transactions. McAfee.com has developed a
separate sales force of 34 employees, focusing on selling their
ASP solution directly to consumers and businesses. To succeed in
the direct sales channel, we must build a significant direct
sales organization and must attract and retain qualified
personnel. These individuals will require training about, and
knowledge of, attributes of the products and product lines sold
by them. We may not succeed in building the necessary sales
organization or in attracting, retaining or training these
individuals.

We have divided our U.S. direct sales force among
our four product groups, in part, to focus our sales force on
selling specialized products. In 2001, we intend to organize our
international direct sales force by our four product groups when
and where local demand and sales force considerations make this
action advisable. Our customers and potential customers and
sales force may not respond favorably to the restructuring and
our revenues, business and future financial performance could
suffer materially. In addition to customer and sales related
risks described above:



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | disputes may occur between our product group
    sales forces;                                                    
|
| |  | sales representatives may lose productivity while
    being retrained or while refocusing their sales efforts; and
|
| |  | sales representatives may terminate their
    employment with us.                                                 

Although our increased direct sales efforts may
also reduce our dependence on resellers and distributors, it may
also lead to conflicts for the same customers, further customer
confusion and may result in pressure by current and prospective
customers for price reductions on products.

We Need to Expand and Develop an Effective
Professional Services Organization; We Rely on Third-Party
Professional Services

As our products and computer networks in general
increase in complexity, customers require greater professional
assistance to design, install, configure and implement our
products. To date, we have relied on our limited professional
services capabilities and increasingly on outside professional
service providers, including our distributors, resellers and
system integrators. These third party service providers may
provide inadequate levels of professional services. Moreover,
reliance on these third parties places a greater burden on them
and reduces our ability to control and establish standards for
providing these support services. Our reliance on these third
parties could delay our recognition of product revenue, harm our
relationships or reputation with these third parties or the end
users of our products or result in decreased future sales of, or
prices for, our products.

25



---



##### Table of Contents



The failure to develop and maintain an effective
professional services organization could have a material adverse
effect on our business. To more effectively service our
customers evolving needs, we intend to significantly
expand and develop our worldwide professional services
organization. We may not succeed in these efforts. Effectively
expanding and developing our professional services organization
will require that we hire and train more service professionals
who must be continually trained and educated to ensure that they
possess sufficient technical skills and product knowledge. The
market for qualified professionals is intensely competitive,
making hiring and retention difficult. We expect significant
competition in this market from existing providers of
professional services and future entrants. We must also properly
price our services to attract customers, while maintaining
sufficient margins for these services. We therefore expect that
we will have lower profit margins on our service revenues. In
addition, we reorganized our U.S. professional services
organization, in part, to enable the professional services
organization to become more specialized on individual products
and product groups. As a result, a particular product group may
have insufficient qualified personnel to perform its
professional services needs as there will no longer be a
pool of professional services personnel from which
to draw. A product groups lack of sufficient professional
services personnel could lead to customer dissatisfaction,
missed revenue opportunities and a loss of future business.

We Rely on the Continued Prominence of
Microsoft Technology

Although we intend to support other operating
systems, our mission is to be the leading supplier of network
security and management products for Windows NT/ Intel based
networks. Sales of our products would be materially and
adversely affected by market developments that are adverse to
the Windows operating environments, including the failure of
users and application developers to accept Windows NT. In
addition, our ability to develop products using the Windows
operating environments is dependent on our ability to gain
timely access to, and to develop expertise in, current and
future developments by Microsoft. We may not be able to gain the
necessary access from Microsoft.

We May Fail to Support Operating Systems which
Successfully Compete with Microsofts Technology, Including
Competing Versions of the Unix Operating System

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

We Must Effectively Manage Our
Growth

Our business has grown both internally and
through acquisitions. This growth has placed, and any future
growth would continue to place, a significant strain on our
limited personnel, management and other resources. Our ability
to manage any future growth, particularly with the anticipated
expansion of our international business and our ASP businesses,
and growth in distribution business, will require us to:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | attract, train, retain, motivate and manage new
    employees successfully;                         
|
| |  | effectively integrate new employees into our
    operations; and                                    
|
| |  | continue to improve our operational, financial,
    management and information systems and controls.

If we continue to grow, our management systems
currently in place may be inadequate or we may not be able to
effectively manage this growth. We are currently investing in
our Internet infrastructure in anticipation of expected growth
from the Internet, which may fail to materialize.

We Rely Heavily on Our Intellectual Property
Rights which Offer Only Limited Protection Against Potential
Infringers; We May Face Litigation Related to Our Proprietary
Technology and Rights

Our success depends significantly upon our
proprietary software technology. We rely on a combination of
contractual rights, trademarks, trade secrets, patents and
copyrights to establish and protect proprietary rights

26



---



##### Table of Contents



in our software. However, these protections may
be inadequate or competitors may independently develop
technologies or products that are substantially equivalent or
superior to our products. We do not typically obtain signed
license agreements from our corporate, government and
institutional customers who license products directly from us.
Rather, we include an electronic version of a
shrink-wrap license in all of our electronically
distributed software and a printed license in the box for our
products distributed through traditional distributors in order
to protect our copyrights and trade secrets in those products.
Since the licensee has not signed any of these licenses, many
legal authorities believe that such licenses may not be
enforceable under the laws of many states and foreign
jurisdictions. In addition, the laws of some foreign countries
either do not protect these rights at all or offer only limited
protection for these rights. The steps taken by us to protect
our proprietary software technology may be inadequate to deter
misuse or theft of this technology. For example, we are aware
that a substantial number of users of our anti-virus products
have not paid any registration or license fees to us. Changing
legal interpretations of liability for unauthorized use of our
software, or lessened sensitivity by corporate, government or
institutional users to avoiding infringement of intellectual
property, could have a material adverse effect on our business,
results of operations and financial condition.


There has been substantial litigation regarding
the intellectual property rights of technology companies. The
increased issuance of software patents in recent years has led
to and is likely to continue to lead to increased patent and
intellectual property litigation in the software industry. In
the past we have been, and we currently are, subject to
litigation related to our intellectual property, including
patent infringement cases involving Hilgraeve. See Note 16,
Notes to the Consolidated Financial Statements. We may also be
subject to litigation in connection with our advertising and
marketing programs. Although we intend to defend ourselves
vigorously against claims asserted against us in the foregoing
actions or matters, developments arising out of this pending
litigation or any other litigation to which we are or may become
a party could have a material adverse effect on our business,
results of operation and financial condition. Adverse
determinations in litigation could:



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

The litigation process is subject to inherent
uncertainties and we may not prevail in these matters, or we may
be unable to obtain licenses with respect to any patents or
other intellectual property rights that may be held valid or
infringed upon by our products or us. Uncertainties inherent in
the litigation process include, among other things, the
complexity of the technologies involved, potentially adverse
changes in the law and discovery of facts unfavorable to us.

In addition, as we may acquire a portion of
software included in our products from third parties, our
exposure to infringement actions may increase because we must
rely upon such third parties as to the origin and ownership of
any software being acquired. Similarly, exposure to infringement
claims will increase to the extent that we employ or hire
additional software engineers previously employed by
competitors, notwithstanding measures taken by these competitors
to protect their intellectual property. In the future,
litigation may be necessary to enforce and protect trade secrets
and other intellectual property rights that we own. We may also
be subject to litigation to defend against claimed infringement
of the rights of others or determine the scope and validity of
the proprietary rights of others. This litigation could be
costly and cause diversion of managements attention,
either of which could have a material adverse effect on our
business, results of operations and financial condition.

Our International Operations Subject Us to
Foreign Currency Fluctuations and Other Inherent Risks Related
to Doing Business in Foreign Countries

For the fiscal years ended December 31,
2000, 1999 and 1998, net revenue from international sales
represented approximately 38%, 44%, and 37%, respectively, of
our net revenue. Historically, we have relied

27



---



##### Table of Contents



upon independent agents and distributors to
market our products internationally. We expect that
international revenue will continue to account for a significant
percentage of net revenue. We also expect that a significant
portion of this international revenue will be denominated in
local currencies. To reduce 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 generally 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 activities during the third quarter;                   
|
| |  | tariffs and other trade barriers;                                                                               
|
| |  | export restrictions on our encryption and other
    security products;                                          
|
| |  | uncertainties relative to regional economic
    circumstances including the continued economic weakness in Asia;
|
| |  | political instability in emerging markets and
    difficulties in staffing;                                     
|
| |  | hiring and retaining key international employees;
    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.

In addition, a portion of our international
revenue is expected to continue to be generated through
independent agents. Since these agents are not our employees and
are not required to offer our products exclusively, they may
discontinue marketing our products entirely. Also, we may have
limited control over these agents, limited access to the names
of the customers to whom these agents sell products and limited
knowledge of the information provided by, or representations
made by, these agents to customers.

Computer Hackers May Damage Our
Products and Services

Given our high profile in the security software
market, we have been a target of computer hackers who have,
among other things, created viruses to sabotage or otherwise
attack our products. While to date, these efforts have been
discovered quickly and their adverse impact has been limited,
similar viruses or efforts may be created or replicated in the
future. In this event, users computer systems could be
damaged and demand for our software products may suffer as a
result. In addition, since we do not control diskette
duplication by distributors or our independent agents, diskettes
containing our software may be infected with viruses. Given our
increased use of the Internet to deliver products and services,
any successful sabotage or other attack on our websites,
including the McAfee.com and myCIO.com web sites, could disrupt
our ability to provide products and services to customers.
Recently a number of websites have been subject to denial of
service attacks, where a web site is bombarded with information
requests eventually causing the website to overload, which
causes a delay or disruption of service. A successful sabotage
of one of our affiliates web based businesses could result
in reduced demand for our or our affiliates web based
products and services and could have a material adverse effect
on our business and our results of operation.

False Detection of Viruses and Actual or
Perceived Security Breaches Could Adversely Affect Our
Business

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

28



---



##### Table of Contents



in the future. In addition, an actual or
perceived breach of network or computer security at one of our
customers, regardless of whether the breach is attributable to
our products, could adversely affect the markets
perception of our security products. This could adversely affect
our business, results of operations and financial condition.


Our Cryptography Technology Is Subject to
Export Restrictions and May Become Obsolete

All of our products are subject to the
U.S. Export Administration Regulations, governed by the
U.S. Department of Commerce. Certain of our network
security products, technology and associated technical
assistance, particularly products and technology incorporating
encryption, may be subject to export restrictions. Recent
changes to U.S. laws enable Network Associates to export
more products without restrictions; however, certain products
still may not be exported to foreign customers without prior
approval from the U.S. government. The list of products and
end users for which export approval is required, and the
regulatory policies with respect thereto, are subject to
revision by the U.S. government at any time. The cost of
compliance with U.S. and international export laws and changes
in existing laws could affect our ability to sell certain
products in certain markets, and could have a material adverse
effect on our international revenues.

In addition, some of our network security
products are dependent on the use of public key cryptography
technology. This technology depends in part upon the application
of certain mathematical principles known as factoring and
discrete logarithms. The security afforded by public key
cryptography technology is based on our belief that the
factoring of large prime numbers and solving the discrete log
problem is not computationally practical. Should an easy
factoring method be developed or the discrete log problem is
solved, the security afforded by encryption products using
public key cryptography technology would be reduced or
eliminated. Furthermore, any significant advance in techniques
for attacking cryptographic systems could also render some or
all of our existing products and services obsolete or
unmarketable. Moreover, the cryptographic algorithms used in our
products can theoretically be solved by computer systems
significantly faster and more powerful than those presently
available. If these improved techniques for attacking
cryptographic systems were ever developed, our business would be
adversely affected.

Product Liability Claims Asserted Against Us
in the Future Could Adversely Affect Our Business

Our network security and management software
products are used to protect and manage computer systems and
networks that may be critical to organizations. As a result, our
sale and support of these products involves the risk of
potential product liability and related claims. Our license
agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability
claims. It is possible, however, that the limitation of
liability provisions contained in these license agreements may
not be effective under the laws of certain jurisdictions,
particularly in circumstances involving unsigned licenses. A
product liability claim brought against us could have a material
adverse effect on our business, results of operations and
financial condition.

We Face Risks Associated with U.S. Government
Contracting

We are currently engaged in several research and
development contracts with agencies of the U.S. government.
We believe that the willingness of these government agencies to
enter into future contracts with us will in part be dependent
upon our continued ability to meet their expectations.

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

29



---



##### Table of Contents



to perform under their contracts. In addition,
our government customers and potential customers may not respond
favorably to the division of our business into product groups
and our business and future financial performance could suffer.
Any of the foregoing events could adversely affect our results
of operations or financial conditions.


Business Interruption Risks

We face a number of potential business
interruption risks that are beyond our control. The State of
California has recently experienced intermittent power
shortages, sharp increases in the cost of energy and even
interruptions of service to some business customers. If power
shortages continue to be a problem our business may be
materially adversely effected. Additionally, we may experience
natural disasters that could interrupt our business.

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

We are in the process of installing an updated
enterprise resource planning (ERP) program. We may face
delays or difficulties in installing and implementing the
software.

Delaware Law, Our Certificate of Incorporation
and Bylaws, Our Adoption of a Rights Plan and Our Stockholders
Agreement with McAfee.com May Inhibit Potential Acquisition
Bids; this May Adversely Affect the Market Price for Our Common
Stock and Prevent Changes in Our Management.

Our board of directors has the authority to issue
up to 5,000,000 shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further
vote of action by its stockholders. The issuance of preferred
stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock.

In October 1998, our board of directors adopted a
shareholders rights plan. Each right under this plan entitles
the record holder to buy  1/1000 of a share of our 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 acquisition of 15% or more of our
common stock or announces commencement of a tender or exchange
offer the consummation of which would result in ownership by the
person or group of 15% or more of our common stock. If the
rights become exercisable, the holders of the rights (other than
the person acquiring 15% or more of our common stock) will be
entitled to acquire in exchange for the $200.00 exercise price
shares of our common stock or shares of any company in which we
are merged having a value of $400.00. We are 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
our common stock.

In October 1999, we entered into a stockholders
agreement with McAfee.com. Under this agreement we agreed that
if (1) without the prior approval of our continuing
directors, as defined below, any person acquires or agrees to
acquire 15% or more of our outstanding common stock or
(2) our continuing directors cease to constitute a majority
of our serving directors, then for so long but only for so long
as that condition exists:



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

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

30



---



##### Table of Contents



Certain provisions of Delaware law and our
certificate of incorporation and bylaws, such as a classified
board, could delay or make a merger, tender offer or proxy
contest involving Network Associates more difficult. While these
provisions and our rights plan are intended to enable our board
of directors to maximize stockholder value, and the provisions
of the McAfee.com stockholders agreement are, among other
things, intended to preserve McAfee.coms independence,
they may have the effect of discouraging takeovers, which may
not be in the best interest of certain stockholders. Our rights
plan and these provisions could have an adverse effect on the
market value of our common stock.




Item 2.     Properties

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




Item 3.     Legal
Proceedings

Information with respect to this item is
incorporated by reference to Note 16 of Notes to
Consolidated Financial Statements included in this
Form 10-K/ A.




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

No matters were submitted to a vote of
stockholders during the fourth quarter of the year ended
December 31, 2000.

31



---



##### Table of Contents






PART II




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

Price Range of Common Stock

Since our initial public offering on
October 6, 1992, our common stock has traded on the NASDAQ
National Market. Since the combination with Network General
Corporation on December 1, 1997, our common stock has
traded under the symbol NETA. Prior thereto, our common stock
traded under the symbol MCAF. The following tables set forth,
for the period indicated, the high and low closing sales prices
for our common stock for the last eight quarters, all as
reported by NASDAQ. The prices appearing in the tables below
reflect over the counter market quotations, which reflect
inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.

|                             |                |      |   |       |  |  |   |       | 
|---------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                             |                | High |   | Low  
|                             |                |      |   |      
|Year Ended December 31, 2000 |                |      |   |       |  |  |   |      
|                             | First Quarter  |      | $ | 36.69 |  |  | $ | 23.31 | 
|                             | Second Quarter |      |   | 29.25 |  |  |   | 19.75 | 
|                             | Third Quarter  |      |   | 26.25 |  |  |   | 18.19 | 
|                             | Fourth Quarter |      |   | 23.00 |  |  |   | 4.13  | 
|Year Ended December 31, 1999 |                |      |   |       |  |  |   |      
|                             | First Quarter  |      | $ | 61.25 |  |  | $ | 28.06 | 
|                             | Second Quarter |      |   | 30.75 |  |  |   | 11.06 | 
|                             | Third Quarter  |      |   | 21.63 |  |  |   | 15.56 | 
|                             | Fourth Quarter |      |   | 28.00 |  |  |   | 16.56 | 

Dividend Policy

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

Holders of Common Stock

As of February 28, 2001, there were 1,161
record owners of our common stock.






Item 6.     Selected
Financial Data


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

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

32



---



##### Table of Contents



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

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

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

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

We were unable to identify the amounts required
to be reclassified under EITF 01-09 for the income
statements for the years ended December 31, 1997 and 1996,
as this information is unavailable. We reclassified
approximately $32.7 million, $44.5 million and
$28.4 million for the years ended December 31, 2000,
1999 and 1998, respectively.

The consolidated financial statements for the
year ended December 31, 2000, 1999 and 1998 contained
herein have been restated to incorporate all these adjustments
as described in Note 3 to the Consolidated Financial
Statements, the tax effects of these adjustments and the
reclassifications described herein.

We reported in our previously filed 10-K for the
year ended December 31, 2000 that we had restated our
financial results to incorporate the following companies
acquired through pooling of interests: Anyware, CSB,

33



---



##### Table of Contents



Dr. Solomon, Nordic, QA, Secure, Syscon,
TIS, (all acquired in 1998) and Helix, Jade, Network General,
SHBV (all acquired in 1997). In addition, results for the nine
months ended September 30, 1998, and each of the years
ended December 31, 1997 and 1996, have been restated from
those previously reported to reflect a change in the purchase
price allocation and related amortization of intangibles for
acquisitions accounted for by the purchase method of accounting.
Dr. Solomon had a fiscal year ended May 31. Financial
statements for the periods through December 31, 1997,
reflect the combination of our operating results for the years
ended December 31, 1997 and 1996 and the operating results
of Dr. Solomon for the years ended November 30, 1997
and 1996. Restated financial statements for the year ended
December 31, 1998 reflect our operating results for the
year ended December 31, 1998 and the operating results of
Dr. Solomon for the thirteen months ended December 31,
1998.


|                                                            |  |                                          |          |               |  |               |          |      |  |      |         |  |  |   |         |  |  |   |         | 
|----------------------------------------------------------- |  | ---------------------------------------- | -------- | ------------- |  | ------------- | -------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                            |  |                                         
|                                                            |  | Years Ended December 31,                
|                                                            |  |                                         
|                                                            |  | 2000                                     |          | 1999          |  | 1998          |          | 1997 |  | 1996
|                                                            |  |                                          |          |               |  |               |          |      |  |     
|                                                            |  |                                         
|                                                            |  | (In thousands, except per share amounts)
|                                                            |  | (As restated)                            |          | (As restated) |  | (As restated) |          |     
|Statements of Operations Data:                              |  |                                          |          |               |  |               |          |      |  |      |         |  |  |   |         |  |  |   |         | 
|Net revenue                                                 |  | $                                        | 697,742  |               |  | $             | 610,984  |      |  | $    | 961,683 |  |  | $ | 735,692 |  |  | $ | 514,997 | 
|Income (loss) from operations                               |  |                                          | (169,192 | )             |  |               | (167,923 | )    |  |      | 113,806 |  |  |   | 61,947  |  |  |   | 57,568  | 
|Income (loss) before income taxes and
    minority interest |  |                                          | (112,376 | )             |  |               | (160,722 | )    |  |      | 132,007 |  |  |   | 82,813  |  |  |   | 65,419  | 
|Net income (loss)                                           |  |                                          | (123,926 | )             |  |               | (156,885 | )    |  |      | 32,434  |  |  |   | 10,639  |  |  |   | 10,711  | 
|Net income (loss) per share, basic                          |  | $                                        | (0.90    | )             |  | $             | (1.13    | )    |  | $    | 0.24    |  |  | $ | 0.08    |  |  | $ | 0.09    | 
|Net income (loss) per share, diluted                        |  | $                                        | (0.90    | )             |  | $             | (1.13    | )    |  | $    | 0.23    |  |  | $ | 0.08    |  |  | $ | 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) |           |      |  |     
|Balance Sheet Data:                  |  |               |           |               |  |               |           |      |  |      |           |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents            |  | $             | 275,539   |               |  | $             | 316,784   |      |  | $    | 418,899   |  |  | $ | 157,031 |  |  | $ | 165,785 | 
|Working capital                      |  |               | 168,028   |               |  |               | 274,274   |      |  |      | 533,052   |  |  |   | 247,811 |  |  |   | 307,478 | 
|Total assets                         |  |               | 1,391,620 |               |  |               | 1,489,797 |      |  |      | 1,536,721 |  |  |   | 805,350 |  |  |   | 613,867 | 
|Deferred revenue and taxes           |  |               | 186,129   |               |  |               | 163,816   |      |  |      | 205,598   |  |  |   | 129,557 |  |  |   | 91,020  | 
|Long Term Debt and other liabilities |  |               | 396,868   |               |  |               | 379,267   |      |  |      | 374,132   |  |  |   | 2,353   |  |  |   |        | 
|Total equity                         |  | $             | 496,458   |               |  | $             | 659,118   |      |  | $    | 718,834   |  |  | $ | 492,501 |  |  | $ | 425,671 | 




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

Results of Operations



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

You should read the following discussion in
conjunction with the restated audited consolidated financial
statements for the years ended December 31, 1998, 1999 and
2000 and related notes of Networks Associates appearing
elsewhere in this Form 10-K/ A.

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

34



---



##### Table of Contents



investigation, our statements of operations, cash
flows and stockholders equity for the years ended
December 31, 2000, 1999 and 1998 and the balance sheets as
of December 31, 2000, 1999 and 1998 are being restated. In
addition, to give effect to accumulated prior period adjustments
and their related tax impacts, we announced the restatement of
our December 31, 2001 and March 31, 2002 balance
sheets.


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

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

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

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

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

35



---



##### Table of Contents



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

|                                          |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |    |     | 
|----------------------------------------- | ------------------------------------------------------------------------- | ---------------------------------- | -- | ----------------- | --- | ----------------- | -- | --- | --- |  | -- | -- | --- | 
|                                          |                                                                           |                                   
|                                          |                                                                           | Years Ended December 31,          
|                                          |                                                                           |                                   
|                                          |                                                                           | 2000                               |    | 1999              |     | 1998             
|                                          |                                                                           |                                    |    |                   |     |                  
|                                          |                                                                           | (As restated                       |    | (As restated      |     | (As restated     
|                                          |                                                                           | and reclassified)                  |    | and reclassified) |     | and reclassified)
|Net revenue:                              |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          | Product                                                                   |                                    |    | 66                | %   |                   |    | 66  | %   |  |    | 84 | %  
|                                          | Services and support                                                      |                                    |    | 34                |     |                   |    | 34  |     |  |    | 16 |    
|                                          |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          |                                                                           | Total net revenue                  |    |                   | 100 |                   |    |     | 100 |  |    |    | 100 | 
|Cost of net revenue:                      |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          | Product                                                                   |                                    |    | 16                |     |                   |    | 15  |     |  |    | 14 |    
|                                          | Services and support                                                      |                                    |    | 6                 |     |                   |    | 7   |     |  |    | 4  |    
|                                          |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          |                                                                           | Total cost of net revenue          |    |                   | 22  |                   |    |     | 22  |  |    |    | 18  | 
|Operating costs and expenses:             |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          | Research and development                                                  |                                    |    | 25                |     |                   |    | 25  |     |  |    | 14 |    
|                                          | Marketing and sales                                                       |                                    |    | 54                |     |                   |    | 53  |     |  |    | 28 |    
|                                          | General and administrative                                                |                                    |    | 14                |     |                   |    | 21  |     |  |    | 9  |    
|                                          | Amortization of intangibles                                               |                                    |    | 9                 |     |                   |    | 10  |     |  |    | 5  |    
|                                          | Acquisition and other related costs                                       |                                    |    |                  |     |                   |    | (3  | )   |  |    | 14 |    
|                                          |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          |                                                                           | Total operating costs and expenses |    |                   | 102 |                   |    |     | 106 |  |    |    | 70  | 
|                                          |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          | Income (loss) from operations                                             |                                    |    | (24               | )   |                   |    | (28 | )   |  |    | 12 |    
|Interest and other income                 |                                                                           |                                    | 6  |                   |     |                   | 5  |     |     |  | 4  |   
|Interest and other expense                |                                                                           |                                    | (3 | )                 |     |                   | (3 | )   |     |  | (2 | ) 
|Gain (loss) on investments, net           |                                                                           |                                    | 4  |                   |     |                   | (1 | )   |     |  |   |   
|                                          |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          | Income (loss) before provision for income
    taxes and minority interest |                                    |    | (17               | )   |                   |    | (27 | )   |  |    | 14 |    
|Provision for (benefit from) income taxes |                                                                           |                                    | 2  |                   |     |                   | (1 | )   |     |  | 11 |   
|                                          |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          | Net income (loss) before minority interest                                |                                    |    | (19               | )   |                   |    | (26 | )   |  |    | 3  |    
|Minority interest                         |                                                                           |                                    | 1  |                   |     |                   |   |     |     |  |   |   
|                                          |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   
|                                          | Net income (loss)                                                         |                                    |    | (18               | )%  |                   |    | (26 | )%  |  |    | 3  | %  
|                                          |                                                                           |                                    |    |                   |     |                   |    |     |     |  |    |   

Net Revenue.Net
revenue increased 14% to $697.7 million in 2000 from
$611.0 million in 1999, including a $22.4 million
increase in revenue from McAfee.com. Net revenue decreased 36%
to $611.0 million in 1999 from $961.7 million in 1998,
including an $18.2 million increase in revenue from
McAfee.com. The increase in net revenue from 1999 to 2000 is due
to increases in new customer purchases and increases in customer
renewals of product licenses, as well as continued acceptance of
our support services. In addition, the increase also reflects
positive results from our recent reorganization into four
product groups, with four separate sales groups focused on
selling their respective products. The overall increase in net
revenue in 2000 occurred despite the adverse impact in the
fourth quarter of our decision to transition to a sell-through
model, which resulted in some of our distribution partners
reducing their inventory levels, as described below. The
decrease in net revenue from 1998 to 1999 is due to our decision
to limit distributor orders in an effort to realign channel
inventory levels as a result of Year 2000 concerns and
increasing sales cycles for our products.

In December 2000, in light of the business
decision by some of our distributors, including our largest
distributor, to reduce inventory levels, and due to the
unpredictability of demand in the distribution channel, we began
a transition from a sell-in to a sell-through business model.
Results reported for the quarter and year ended
December 31, 2000, include a significant reduction to net
revenue due to some of our distribution partners business
decisions to reduce their inventory levels by not replenishing
their inventory and requesting

36



---



##### Table of Contents



returns over and above their contractual rights.
We expect to complete our transition to the sell-through model
in the first quarter of 2001.


Product revenue includes revenue from product
licenses and hardware. Product revenue increased 14% to
$458.0 million in 2000 from $401.4 million in 1999.
Product revenue decreased 50% to $401.4 million in 1999
from $803.0 million in 1998. The increase in product revenue
from 1999 to 2000 is due to increases in new customer purchases
and positive results from our recent reorganization into four
product groups, with four separate sales groups focused on
selling their respective products.

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 14% to
$239.8 million in 2000 from $209.6 million in 1999.
Service revenue increased 32% to $209.6 million in 1999
from $158.7 million in 1998. The 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.

Our future profitability and rate of growth, if
any, will be directly affected by increased price competition, a
maturing anti-virus market and an increasingly higher revenue
base from which to grow. Our growth rate and net revenue depend
significantly on renewals of existing orders as well as
expanding our customer base. If our renewal rate or our pace of
new customers slows, our net revenues and operating results
would be adversely affected.

International revenue accounted for approximately
38%, 44%, and 37%, of net revenue for 2000, 1999, and 1998,
respectively. The decrease in international net revenue as a
percentage of net revenue from 1999 to 2000 was due to under
performance in sales operations, changes in sales management, 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 19% to
$155.7 million in 2000 to $130.8 million in 1999, and
decreased 26% from $177.0 million in 1998. The increase in
cost of net revenues from 1999 to 2000 was primarily due to the
increase in net revenue. From 1998 to 1999, the decrease in cost
of net revenues was primarily due to the decrease in net revenue.

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 Sniffer and E-ppliance products,
computer platforms and other hardware components. Cost of
product revenues increased 28% to $113.4 million in 2000
from $88.7 million in 1999. From 1998 to 1999, cost of
product revenues decreased 35% from $137.4 million in 1998.
The increase in product cost of revenue from 1999 to 2000 was
primarily due to an increase in product revenues. The decrease
in cost of product revenues from 1998 to 1999 was primarily due
to a corresponding decrease in product revenues. As a percentage
of net product revenue, cost of product revenue was 25% in 2000,
22% in 1999, and 17% in 1998.

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 increased 1% to
$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 from $39.7 million in 1998. Costs
remained relatively flat in 1999 and 2000. Cost of services and
support revenue as a percentage of net services and support
revenue was 18% in 2000, 20% in 1999, and 25% in 1998.

37



---



##### Table of Contents



To the extent that the percentage of our net
revenue, which is generated through traditional distribution
channels, increases, our cost of net revenue will increase.* In
future periods, we expect that cost of product revenue will
increase in absolute terms and as a percentage of net revenue in
conjunction with an expected increase in the number of hardware
based products sold by us.*

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 15% to $171.1 million in 2000 from
$148.2 million in 1999. Research and development expenses
increased from 1999 to 2000 due to the increase in staffing and
equipment expense to support growth in our product and service
offerings. From 1998 to 1999, excluding the effects of
stock-based compensation in 1999, research and development
expenses increased 9% from $135.5 million. These increases
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 25% in 2000, 25% in 1999, and 14% in 1998. We
anticipate that research and development expenses will continue
to increase in absolute dollars, but may fluctuate as a
percentage of net revenue.*

We believe that our ability to maintain our
competitiveness will depend 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
17% to $372.4 million from $319.0 million in 1999.
From 1998 to 1999, excluding the effect of stock-based
compensation in 1999, marketing and sales expenses increased 20%
from $266.5 million in 1998. 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 54%
in 2000, 53% in 1999, and 28% in 1998. We anticipate that
marketing and sales expenses will continue to increase in
absolute dollars, but will continue to fluctuate as a percentage
of net revenue.*

General and Administrative.General and administrative expenses
consist principally of salary and benefit costs for
administrative personnel and general operating costs. Excluding
the effect of stock-based compensation of $2.3 million and
$3.9 million for 2000 and 1999, respectively, general and
administrative expenses decreased 26% to $92.7 million in
2000 from $125.6 million. In 1999, we recorded charges to cover
$31.8 million in doubtful accounts, the development of our
E-commerce business systems, expansion of our IT infrastructure
and the implementation of our new SAP Human Resources module. In
2000, we recorded a charge of $10.0 million for accounts
receivable for which collection is doubtful. From 1998 to 1999,
excluding the effects of stock-based compensation in 1999,
general and administrative expenses increased 39% from
$90.1 million in 1998 for the above mentioned events. As a
percentage of net revenues, general and administrative expenses
were 14%, 21%, and 9% in the years ended December 31, 2000,
1999, and 1998, respectively.

Stock-Based Compensation

We expensed $8.7 million and
$15.6 million in 1999 and 2000, respectively. Stock-based
compensation charges relate to the repricing of employee stock
options and the issuance of McAfee.com stock options to our



---

* This statement is forward looking
statement reflecting current expectations. There can be no
assurance that our actual performance will meet our current
expectations. See Risk Factors discussion beginning
on page 13 of this document.


38



---



##### Table of Contents



executives and employees. We do not expect to
incur charges related to these McAfee.com option grants in the
future. However, we do expect significant stock-based
compensation charges related to repriced employee stock options.


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
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 $11.063
were vested and outstanding at December 31, 2000.

In accordance with Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to
Employees, 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 were expensed in
the twelve months ended December 31, 2000, respectively.

As a result of the introduction of 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. When
options are fully vested, the charge will be recorded to
earnings immediately. Depending upon movements in the market
value of our 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 our options which
were subject to the repricing described above. As a result, we
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 2000, we recorded a
compensation charge to earnings of approximately
$2.0 million. As of December 31, 2000, we, 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.

Amortization of Intangibles.We expensed $66.3 million,
$58.4 million, and $43.2 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 primarily a result of the
amortization of the additions to goodwill related to
McAfee.coms acquisitions during 2000. In addition, in
accordance with its accounting policy our subsidiary,
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. The impairment charge
was recorded as a result of McAfee.coms year-end review of
technology acquired in the year 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, Inc.,
and CyberMedia.

39



---



##### Table of Contents



Acquisition and Other Related Costs

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

|                        |  |                      |                   |                       |  |   |               | 
|----------------------- |  | -------------------- | ----------------- | --------------------- |  | - | ------------- | 
|                        |  | Common Stock         |                   |                      
|                        |  | Issued in            |                   | Purchase Price of    
|                        |  | Pooling of Interests |                   | Purchase Transactions
|                        |  |                      |                   |                      
|2000                    |  |                      |                   |                       |  |   |               | 
|McAfee.com acquisitions |  |                      |                   |                       |  | $ | 22.3 million  | 
|1999                    |  |                      |                   |                       |  |   |               | 
| none                 |  |                      |                   |                       |  |   |               | 
|1998                    |  |                      |                   |                       |  |   |               | 
|Syscon                  |  |                      | 1,230 shares      |                       |  |   |               | 
|Nordic                  |  |                      | 30,508 shares     |                       |  |   |               | 
|Magic Solutions         |  |                      |                   |                       |  | $ | 140.3 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              |  |                      |                   |                       |  | $ | 174.3 million | 

Purchase Combinations

McAfee.com completed two acquisitions for total
consideration, including the issuance of approximately 550,000
of its Class A common stock, valued at approximately
$22.3 million. The acquisitions were accounted for using
the purchase method of accounting and the total combined
purchase price was approximately $22.3 million, including
transaction costs. McAfee.com analyzed the intangible assets to
determine whether any amount should be recorded as in-process
research and development, however McAfee.com determined that the
acquired technologies and products are largely dependent on the
core technology and that new versions are released frequently
and contain incremental rather than fundamental improvements.
Based on this analysis $22.3 million was recorded as
goodwill and purchased technology, and is being amortized on a
straight-line basis over three years.

In December 2000, in accordance with its
accounting policy, McAfee.com, performed a review of the
carrying value of the goodwill associated with one of its
acquisitions and recognized an impairment charge of
$3.6 million. McAfee.com performed a review of the carrying
value of the goodwill as it had been assessed that McAfee.com
would not use the technology purchased as part of the original
acquisition. Accordingly the full value of the unamortized
goodwill was written off. The historical operations of these
acquisitions were not material to the Companys financial
position, results of operations, or cash flows.

Networks Associates, Inc. made no acquisitions in
2000 and 1999.

40



---



##### Table of Contents



The following table summarizes the activity
during the year ended December 31, 1999, in the reserves
for acquisition and other costs established in the second and
third quarters of 1998 (in thousands):

|                                               |  |             |        |             |  |       |        |       |  |       |        |       |  |   |        |   |  |   |        |   |  |   |         |  
|---------------------------------------------- |  | ----------- | ------ | ----------- |  | ----- | ------ | ----- |  | ----- | ------ | ----- |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                               |  | Direct      |        |             |  |       |        | Asset |  |       |        |      
|                                               |  | Transaction |        | Severance & |  | Lease |        | Write |  |       |        |      
|                                               |  | Costs       |        | Benefits    |  | Costs |        | Downs |  | Other |        | Total
|                                               |  |             |        |             |  |       |        |       |  |       |        |      
|Balance, December 31, 1998                     |  | $           | 9,900  |             |  | $     | 8,338  |       |  | $     | 5,508  |       |  | $ | 1,405  |   |  | $ | 2,144  |   |  | $ | 27,295  |  
|Paid out or charged against the related assets |  |             | (5,712 | )           |  |       | (1,549 | )     |  |       | (804   | )     |  |   | (140   | ) |  |   | (104   | ) |  |   | (8,309  | )
|Adjustment to liability                        |  |             | (4,188 | )           |  |       | (6,789 | )     |  |       | (4,704 | )     |  |   | (1,265 | ) |  |   | (2,040 | ) |  |   | (18,986 | )
|                                               |  |             |        |             |  |       |        |       |  |       |        |       |  |   |        |   |  |   |        |   |  |   |         |  
|Balance, December 31, 1999                     |  | $           | 0      |             |  | $     | 0      |       |  | $     | 0      |       |  | $ | 0      |   |  | $ | 0      |   |  | $ | 0       |  
|                                               |  |             |        |             |  |       |        |       |  |       |        |       |  |   |        |   |  |   |        |   |  |   |         |  

For the year ended December 31, 1999,
activity with respect to these reserves consisted principally of
the payment of accrued direct transaction costs and severance
benefits, and adjustments to remaining accruals. All
expenditures related to these accruals have been completed and
the excess reserves, $18,986,000, were credited to acquisition
and related charges.

The following table summarizes the activity
during the year ended December 31, 1999, in the reserves
for acquisition and other costs established in the year ended
December 31, 1997 (in thousands):

|                                               |  |             |      |             |  |       |      |       |  |       |       |       |  |   |      |   |  |   |      |   |  |   |        |  
|---------------------------------------------- |  | ----------- | ---- | ----------- |  | ----- | ---- | ----- |  | ----- | ----- | ----- |  | - | ---- | - |  | - | ---- | - |  | - | ------ | -
|                                               |  | Direct      |      |             |  |       |      | Asset |  |       |       |      
|                                               |  | Transaction |      | Severance & |  | Lease |      | Write |  |       |       |      
|                                               |  | Costs       |      | Benefits    |  | Costs |      | Downs |  | Other |       | Total
|                                               |  |             |      |             |  |       |      |       |  |       |       |      
|Balance, December 31, 1998                     |  | $           | (36  | )           |  | $     | 539  |       |  | $     | (422  | )     |  | $ | 484  |   |  | $ | 374  |   |  | $ | 939    |  
|Paid out or charged against the related assets |  |             | (193 | )           |  |       | (58  | )     |  |       | (942  | )     |  |   | 0    |   |  |   | 0    |   |  |   | (1,193 | )
|Adjustment to liability                        |  |             | 229  |             |  |       | (481 | )     |  |       | 1,364 |       |  |   | (484 | ) |  |   | (374 | ) |  |   | 254    |  
|                                               |  |             |      |             |  |       |      |       |  |       |       |       |  |   |      |   |  |   |      |   |  |   |        |  
|Balance, December 31, 1999                     |  | $           | 0    |             |  | $     | 0    |       |  | $     | 0     |       |  | $ | 0    |   |  | $ | 0    |   |  | $ | 0      |  
|                                               |  |             |      |             |  |       |      |       |  |       |       |       |  |   |      |   |  |   |      |   |  |   |        |  

For the year ended December 31, 1999,
activity with respect to these reserves consisted principally of
expenditures related to accrued lease termination costs and
adjustments to remaining accruals. All expenditures related to
these accruals have been completed and an additional expense,
$254,000, was charged to acquisition and related charges.

In connection with the acquisitions accounted for
as poolings of interests, we incurred direct transaction costs
and other restructuring and related charges in the amount of
$85.8 million in the year ended December 31, 1998. 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. The
following is a summary of these charges together with charges
for certain restructuring activities taken by us during the year
ended December 31, 1998 (in thousands):

|                            |  |                   |        |             |  |             |        |            |  |       |        |       |  |   |        |  |  |   |      |   |  |   |         |  
|--------------------------- |  | ----------------- | ------ | ----------- |  | ----------- | ------ | ---------- |  | ----- | ------ | ----- |  | - | ------ |  |  | - | ---- | - |  | - | ------- | -
|                            |  |                   |        |             |  | Lease Costs |        |            |  |       |        |      
|                            |  |                   |        |             |  | and Asset   |        |            |  |       |        |      
|                            |  | Direct            |        | Severance & |  | Write       |        | In-Process |  |       |        |      
|                            |  | Transaction Costs |        | Benefits    |  | Downs       |        | R&D        |  | Other |        | Total
|                            |  |                   |        |             |  |             |        |            |  |       |        |      
|TIS                         |  | $                 | 15,023 |             |  | $           | 3,818  |            |  | $     | 4,414  |       |  | $ |       |  |  | $ | (924 | ) |  | $ | 22,331  |  
|Dr. Solomons               |  |                   | 19,898 |             |  |             | 11,425 |            |  |       | 18,312 |       |  |   |       |  |  |   | 0    |   |  |   | 49,635  |  
|Secure                      |  |                   | 500    |             |  |             | 500    |            |  |       | 1,200  |       |  |   |       |  |  |   | 100  |   |  |   | 2,300   |  
|Magic                       |  |                   |       |             |  |             |       |            |  |       |       |       |  |   | 27,014 |  |  |   |     |   |  |   | 27,014  |  
|CyberMedia                  |  |                   |       |             |  |             |       |            |  |       |       |       |  |   | 22,830 |  |  |   |     |   |  |   | 22,830  |  
|Restructuring Costs  Q2    |  |                   |       |             |  |             | 11,318 |            |  |       | 8,644  |       |  |   |       |  |  |   | 610  |   |  |   | 20,572  |  
|Restructuring Costs  Q3    |  |                   |       |             |  |             | 3,285  |            |  |       | 370    |       |  |   |       |  |  |   |     |   |  |   | 3,655   |  
|Reversal of excess reserves |  |                   | (6,750 | )           |  |             | (2,276 | )          |  |       | (3,909 | )     |  |   |       |  |  |   | 214  |   |  |   | (12,721 | )
|                            |  |                   |        |             |  |             |        |            |  |       |        |       |  |   |        |  |  |   |      |   |  |   |         |  
|Total Charges               |  | $                 | 28,671 |             |  | $           | 28,070 |            |  | $     | 29,031 |       |  | $ | 49,844 |  |  | $ |     |   |  | $ | 135,616 |  
|                            |  |                   |        |             |  |             |        |            |  |       |        |       |  |   |        |  |  |   |      |   |  |   |         |  

41



---



##### Table of Contents



Direct transaction costs included
$18.0 million in investment banking fees, $9.2 million
in legal and accounting fees, and $1.5 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 ($12.2 million), the disposal of excess and
obsolete assets (primarily computer equipment which did not
comply with our standards) ($12.0 million), and the
write-off of goodwill and intangibles associated with
discontinued Dr. Solomons products
($4.8 million). The Dr. Solomons write-off
related to two minor products which we discontinued and which
had no sales subsequent to the Dr. Solomons
acquisition.

The severance and benefits charges related to
company-wide reductions in workforce following our 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
our employment in the period the related accounting charge was
recorded. We 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, which we used during this period, were charged to
operations. However, these charges were not material. Asset
write downs, exclusive of the intangible assets of Dr.
Solomons described above, comprised $5.6 million in
losses on company owned buildings (which were written down to
estimated values) and $10.3 million in net losses of
computer and other miscellaneous assets. In general, this
equipment was discarded or sold for nominal value. Due to the
immediate consolidation of facilities, depreciation allocable to
these facilities and the related assets, during the transition
period, was not material. All the facilities acquired in our
1998 acquisitions identified for closure have been disposed of
or subleased as of December 31, 1999.

The in-process research and development costs
comprise approximately $22.8 million and $27.0 million
in connection with the acquisitions of CyberMedia in the three
months ended September 30, 1998 and Magic Solutions in the
three months ended June 30, 1998, respectively. The
following is a summary of the projects acquired and the
assumptions used in determining the value of the in-process
research and development costs.



| |           
| | ----------
| | CyberMedia

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 work on technologies to be
used in two of the our projects (a replacement product for PC
Medic and McAfee Office). These upgrades will 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. In conformity with the SECs revised
guidelines for accounting for in-process technologies, 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 average weighted 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 completed.

42



---



##### Table of Contents





| |                
| | ---------------
| | Magic Solutions

The ongoing projects at Magic Solutions at the
time of the purchase comprised an upgrade version of Support
Magic 4.0, Magic Solutions 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. In conformity with the
SECs revised guidelines for accounting for in-process
technologies, 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 average weighted 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 completed.

Interest and Other Income.Interest and miscellaneous income
increased to $44.6 million in 2000 from $30.7 million
in 1999 and decreased from $33.3 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. From 1998 to 1999, interest income decreased due
to the reduced cash balances resulting from the acquisitions of
Magic and CyberMedia and cash used to fund operating activities
during the year.

Interest and Other Expense.Interest and other expense increased
to $18.2 million in 2000 from $17.3 million in 1999
and from $15.2 million in 1998. Interest and other expense
remained flat in 2000. Interest and other expense remained
relatively flat from 1998 to 1999.

Gain (Loss) on Investments.In 2000, we recognized a total gain of
$30.4 million on the sale of our venture and strategic
investments, including a gain on the sale of shares of Network
Associates Japan, amounting to $11.9 million. This gain is
offset by a $10.0 million charge in the fourth quarter of
2000 related to an other than temporary decline in the value of
certain of our venture and strategic investments. This decline
was based on the likelihood that the related company would have
insufficient cash flows to operate for the next twelve months.
In 1999 and 1998, we recognized a loss of $3.6 million and
a gain of $0.2 million, respectively from sale of
marketable securities. Additionally, we recognized a loss of
$2.5 million on the liquidation of our Direct Web
investment.

Provision for Income Taxes.Our provision (benefit) for
income taxes was $16.5 million, ($3.5) million, and
$99.6 million in 2000, 1999, and 1998, respectively. Our
tax expense (benefit) for 2000, 1999, and 1998 was 15%,
(2%), and 75%, 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.

If we cease to own at least 80% of
McAfee.coms outstanding common stock, we may be required
to include in our consolidated federal taxable income an amount
equal to the excess of the cumulative

43



---



##### Table of Contents



McAfee.com net operating losses absorbed in our
prior year consolidated tax returns over our tax basis in
McAfee.com. As of December 31, 2000, there were no excess
amounts.


Liquidity and Capital Resources, as
Restated

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 (used in) operating
activities was $26.7 million, $(18.1) million and
$94.0 million in 2000, 1999 and 1998, respectively. Net
cash provided by operating activities in 2000 consisted
primarily of net loss before depreciation and amortization, bad
debt expense, stock-based compensation charge, and interest on
our debentures offset by deferred taxes and gain on sale of
investments. In addition, there were decreases in accounts
receivable and increases in accounts payable, accrued
liabilities and deferred revenue, which amounts were offset by
an increase in prepaid expenses and other assets. Net cash used
in operating activities in 1999 consisted primarily of net loss
before depreciation and amortization, bad debt expense,
stock-based compensation charge, interest on our debentures,
realized loss on investments, and deferred taxes. In addition,
there were decreases in accounts receivable, prepaid expenses
and other assets, and an increase in accounts payable and
accrued liabilities, which amounts were offset by a decrease in
deferred revenue. Net cash provided by operating activities in
1998 consisted primarily of net income before acquired
in-process research and development, depreciation and
amortization and interest on our debentures as well as an
increase in deferred revenue and the tax benefit from exercise
of non-qualified stock options. Increases in accounts receivable
and prepaid and other assets and decreases in accounts payable
and accrued liabilities offset these factors.

Our accounts receivable balance as a percentage
of sales may increase due to our increased emphasis on
server/enterprise based sales and expanding international sales,
both of which typically have longer payment terms. Additionally,
our receivable collection has become more dependent on the
longer payment cycle for VARs, distributors and system
integrators. To address this increase in accounts receivable and
to improve cash flow, we may from time to time take actions to
encourage earlier payment of receivables and sell receivables.
To the extent that our accounts receivable balance increases, we
will be subject to greater general credit risks with respect
thereto.

Net cash provided by (used in) investing
activities was $10.4 million, $(173.8) million and
$(316.8) million in 2000, 1999 and 1998, respectively,
primarily reflecting purchases of marketable securities and
additions to fixed assets. 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.

Net cash used in financing activities was
$39.4 million in 2000 consisting primarily of the
repurchase of our common stock which represented approximately
$100.4 million. The repurchases of our common stock were
slightly offset by proceeds associated with the exercise of non
qualified stock options and the sale of put options. Net cash
provided by financing activities was $96.6 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. Net cash provided by
financing activities was $489.8 million in 1998 and
consisted primarily of the proceeds associated the issuance on
the debentures noted above together with proceeds from the
exercise of non-qualified stock options.

As discussed above, in December 2000, in light of
the business decision by some of our distributors, including our
largest distributor, to reduce inventory levels and due to the
unpredictability of demand in the distribution channel, we began
a transition from a sell-in to a sell-through business model. We
expect that our transition to the sell-through model will be
completed in the first quarter of 2001. In addition, some of our
distributors are experiencing financial difficulties worldwide.
These factors may adversely impact our collection of accounts
receivable from our distributors in 2001.

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

44



---



##### Table of Contents



As discussed below, in February 2003 we may be
required to use a significant portion of our cash balances to
redeem our outstanding zero coupon debentures.

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 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 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
$18 million 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,
decline in value as if the related company would have
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



---

|  |                                                                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | This statement is forward looking statement
    reflecting current expectations. There can be no assurance that
    our actual performance will meet our current expectations. See
    Risk Factors discussion beginning on page 13 of
    this document.

45



---



##### Table of Contents



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 preferreds |       |                            | 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 | 
|                                      |       |                            |       |             |  |                            |       |       |  |        |       |         |  |         |       |       |  |   |       |       |  |   |       |       |  |   |       |      

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 preferreds |       |                            | 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. 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 our subsidiaries. The
debentures may be redeemed for cash at our option beginning on
February 13, 2003. At the option of the holder, we will
purchase the debentures as of February 13, 2003,
February 13, 2008 and February 13, 2013 at purchase
prices (to be paid in cash or common stock or any combination
thereof and subject to certain conditions) equal to the initial
issue price plus the accretion of the discount on the debentures
to such dates. The debentures may also be redeemed at the option
of the holder if there is a Fundamental Change (as defined in
the related indenture) at a price equal to the issue price plus
the accretion of the discount on the debentures to the date of
redemption, subject to adjustment.

Assuming that as of February 13, 2003 all
debenture holders require that we redeem their debentures, we
would be required to pay an aggregate redemption price in cash
and/or shares of common stock equal to approximately
$437.9 million. The number of shares, if any, issued in
connection with any redemption will be based on the fair value
of our common stock at the time of redemption.




Item 7A.     Quantitative
and Qualitative Disclosure About Market Risk

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

46



---



##### Table of Contents








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

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

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 restated                          |   | (As restated  |   | (As restated  |   | (As restated  |   | (As restated  |   | (As restated  |  | (As restated  |   | (As restated 
|                                         |                                                                           | and                                   |   | and           |   | and           |   | and           |   | and           |   | and           |  | and           |   | and          
|                                         |                                                                           | reclassified)                         |   | reclassified) |   | reclassified) |   | reclassified) |   | reclassified) |   | reclassified) |  | reclassified) |   | reclassified)
|                                         |                                                                           |                                      
|                                         |                                                                           | (Unaudited)                          
|STATEMENTS OF OPERATIONS AND OTHER DATA: |                                                                           |                                       |   |               |   |               |   |               |   |               |   |               |  |               |   |               |   |  |   |         |   |  |   |         |   |  |   |          |   |  |   |        
|                                         | Net revenues                                                              |                                       | $ | 68,740        |   |               | $ | 221,773       |   |               | $ | 220,041       |  |               | $ | 187,188       |   |  | $ | 172,530 |   |  | $ | 195,099 |   |  | $ | 15,145   |   |  | $ | 228,210 | 
|                                         | Gross margin                                                              |                                       |   | 23,986        |   |               |   | 181,747       |   |               |   | 181,139       |  |               |   | 155,175       |   |  |   | 137,205 |   |  |   | 160,630 |   |  |   | (9,512   | ) |  |   | 191,838 | 
|                                         | Income (loss) from operations                                             |                                       |   | (165,301      | ) |               |   | 120           |   |               |   | 3,147         |  |               |   | (7,158        | ) |  |   | (17,020 | ) |  |   | (828    | ) |  |   | (194,303 | ) |  |   | 44,228  | 
|                                         | Income (loss) before provision for income
    taxes and minority interest |                                       |   | (167,763      | ) |               |   | 5,456         |   |               |   | 9,464         |  |               |   | 40,467        |   |  |   | (15,200 | ) |  |   | 1,081   |   |  |   | (192,405 | ) |  |   | 45,802  | 
|                                         | Net income (loss)                                                         |                                       |   | (144,623      | ) |               |   | (3,071        | ) |               |   | 3,177         |  |               |   | 20,591        |   |  |   | 13,875  |   |  |   | (241    | ) |  |   | (196,760 | ) |  |   | 26,241  | 
|                                         | Basic income (loss) per share                                             |                                       | $ | (1.05         | ) |               | $ | (0.02         | ) |               | $ | 0.02          |  |               | $ | 0.15          |   |  | $ | 0.10    |   |  | $ | (0.00   | ) |  | $ | (1.42    | ) |  | $ | 0.19    | 
|                                         | Diluted income (loss) per share                                           |                                       | $ | (1.05         | ) |               | $ | (0.02         | ) |               | $ | 0.02          |  |               | $ | 0.14          |   |  | $ | 0.10    |   |  | $ | (0.00   | ) |  | $ | (1.42    | ) |  | $ | 0.18    | 

We believe that period-to-period comparisons of
our financial results should not be relied upon as an indication
of future performance. For example, in the fourth quarter of
2000, our revenue decreased 60% from the fourth quarter of 1999
due to some of our distribution partners business decision
to reduce their inventory levels by not replenishing their
inventory and requesting returns over and above their
contractual rights.

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

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

47



---



##### Table of Contents



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

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

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

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

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

48



---



##### Table of Contents



|                                                                          |  |                                      |         |              |  |                   |         |                  |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------------------------ | ------- | ------------ |  | ----------------- | ------- | ---------------- |  | - | ------- | - |  | - | ------- | -
|                                                                          |  |                                     
|                                                                          |  | Three Months Ended December 31, 1999
|                                                                          |  |                                     
|                                                                          |  | As Previously                        |         |              |  | EITF No. 01-09    |         | As Restated     
|                                                                          |  | Reported                             |         | Inaccuracies |  | Reclassifications |         | and Reclassified
|                                                                          |  |                                      |         |              |  |                   |         |                 
|Net revenue                                                               |  | $                                    | 218,079 |              |  | $                 | (28,224 | )                |  | $ | (17,325 | ) |  | $ | 172,530 |  
|Gross margin                                                              |  |                                      | 182,754 |              |  |                   | (28,224 | )                |  |   | (17,325 | ) |  |   | 137,205 |  
|Income (loss) from operations                                             |  |                                      | 11,204  |              |  |                   | (28,224 | )                |  |   |        |   |  |   | (17,020 | )
|Income (loss) before provision for income
    taxes and minority interest |  |                                      | 13,024  |              |  |                   | (28,224 | )                |  |   |        |   |  |   | (15,200 | )
|Net income                                                                |  |                                      | 9,884   |              |  |                   | 3,991   |                  |  |   |        |   |  |   | 13,875  |  
|Basic and diluted net income per share                                    |  | $                                    | 0.07    |              |  |                   |         |                  |  |   |         |   |  | $ | 0.10    |  

|                                                                   |  |                                       |         |              |  |                   |   |                  |  |   |      |   |  |   |         |  
|------------------------------------------------------------------ |  | ------------------------------------- | ------- | ------------ |  | ----------------- | - | ---------------- |  | - | ---- | - |  | - | ------- | -
|                                                                   |  |                                      
|                                                                   |  | Three Months Ended September 30, 1999
|                                                                   |  |                                      
|                                                                   |  | As Previously                         |         |              |  | EITF No. 01-09    |   | As Restated     
|                                                                   |  | Reported                              |         | Inaccuracies |  | Reclassifications |   | and Reclassified
|                                                                   |  |                                       |         |              |  |                   |   |                 
|Net revenue                                                        |  | $                                     | 195,201 |              |  | $                 |  |                  |  | $ | (102 | ) |  | $ | 195,099 |  
|Gross margin                                                       |  |                                       | 160,732 |              |  |                   |  |                  |  |   | (102 | ) |  |   | 160,630 |  
|Loss from operations                                               |  |                                       | (828    | )            |  |                   |  |                  |  |   |     |   |  |   | (828    | )
|Income before provision for income taxes and
    minority interest |  |                                       | 1,081   |              |  |                   |  |                  |  |   |     |   |  |   | 1,081   |  
|Net loss                                                           |  |                                       | (241    | )            |  |                   |  |                  |  |   |     |   |  |   | (241    | )
|Basic and diluted net loss per share                               |  | $                                     | 0.00    |              |  |                   |   |                  |  |   |      |   |  | $ | 0.00    |  

|                                                                 |  |                                  |          |              |  |                   |        |                  |  |   |         |   |  |   |          |  
|---------------------------------------------------------------- |  | -------------------------------- | -------- | ------------ |  | ----------------- | ------ | ---------------- |  | - | ------- | - |  | - | -------- | -
|                                                                 |  |                                 
|                                                                 |  | Three Months Ended June 30, 1999
|                                                                 |  |                                 
|                                                                 |  | As Previously                    |          |              |  | EITF No. 01-09    |        | As Restated     
|                                                                 |  | Reported                         |          | Inaccuracies |  | Reclassifications |        | and Reclassified
|                                                                 |  |                                  |          |              |  |                   |        |                 
|Net revenue                                                      |  | $                                | 25,196   |              |  | $                 |       |                  |  | $ | (10,051 | ) |  | $ | 15,145   |  
|Gross margin                                                     |  |                                  | 539      |              |  |                   |       |                  |  |   | (10,051 | ) |  |   | (9,512   | )
|Loss from operations                                             |  |                                  | (192,803 | )            |  |                   | (1,500 | )                |  |   |        |   |  |   | (194,303 | )
|Loss before provision for income taxes and
    minority interest |  |                                  | (190,905 | )            |  |                   | (1,500 | )                |  |   |        |   |  |   | (192,405 | )
|Net loss                                                         |  |                                  | (195,785 | )            |  |                   | (975   | )                |  |   |        |   |  |   | (196,760 | )
|Basic and diluted net loss per share                             |  | $                                | (1.41    | )            |  |                   |        |                  |  |   |         |   |  | $ | (1.42    | )

|                                                                   |  |                                   |         |              |  |                   |   |                  |  |   |         |   |  |   |         | 
|------------------------------------------------------------------ |  | --------------------------------- | ------- | ------------ |  | ----------------- | - | ---------------- |  | - | ------- | - |  | - | ------- | 
|                                                                   |  |                                  
|                                                                   |  | Three Months Ended March 31, 1999
|                                                                   |  |                                  
|                                                                   |  | As Previously                     |         |              |  | EITF No. 01-09    |   | As Restated     
|                                                                   |  | Reported                          |         | Inaccuracies |  | Reclassifications |   | and Reclassified
|                                                                   |  |                                   |         |              |  |                   |   |                 
|Net revenue                                                        |  | $                                 | 245,192 |              |  | $                 |  |                  |  | $ | (16,982 | ) |  | $ | 228,210 | 
|Gross margin                                                       |  |                                   | 208,820 |              |  |                   |  |                  |  |   | (16,982 | ) |  |   | 191,838 | 
|Income from operations                                             |  |                                   | 44,228  |              |  |                   |  |                  |  |   |        |   |  |   | 44,228  | 
|Income before provision for income taxes and
    minority interest |  |                                   | 45,802  |              |  |                   |  |                  |  |   |        |   |  |   | 45,802  | 
|Net income                                                         |  |                                   | 26,241  |              |  |                   |  |                  |  |   |        |   |  |   | 26,241  | 
|Basic net income per share                                         |  | $                                 | 0.19    |              |  |                   |   |                  |  |   |         |   |  | $ | 0.19    | 
|Diluted net income per share                                       |  | $                                 | 0.18    |              |  |                   |   |                  |  |   |         |   |  | $ | 0.18    | 






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

Not applicable.

49



---



##### Table of Contents






PART III




Item 10.     Directors
and Officers of the Registrant

The information required hereunder is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on May 24, 2001.




Item 11.     Executive
Compensation

The information required hereunder is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on May 24, 2001.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required hereunder is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on May 24, 2001.




Item 13.     Certain
Relationships and Related Transactions

The information required hereunder is
incorporated by reference from our Proxy Statement to be filed
in connection with our annual meeting of stockholders to be held
on May 24, 2001.

50



---



##### Table of Contents






PART IV




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

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

|                                                                           |                                               |        |    |    | 
|-------------------------------------------------------------------------- | --------------------------------------------- | ------ | -- | -- | 
|                                                                           |                                               | Page  
|                                                                           |                                               | Number
|                                                                           |                                               |       
|Report of Independent Accountants                                          |                                               |        | 52 |   
|Consolidated Balance Sheets:                                               |                                               |        |    |   
|                                                                           | December 31, 2000, and 1999                   |        |    | 53 | 
|Consolidated Statements of Operations and
    Comprehensive Income (loss): |                                               |        |    |   
|                                                                           | Years ended December 31, 2000, 1999, and 1998 |        |    | 54 | 
|Consolidated Statements of Stockholders
    Equity:                       |                                               |        |    |   
|                                                                           | December 31, 2000, 1999 and 1998              |        |    | 55 | 
|Consolidated Statements of Cash Flows:                                     |                                               |        |    |   
|                                                                           | December 31, 2000, 1999, and 1998             |        |    | 56 | 
|Notes to Consolidated Financial Statements                                 |                                               |        | 57 |   

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

The following financial statement schedule of
Networks Associates, Inc. for the years ended December 31,
2000, 1999, 1998 is filed as part of this Form 10-K/A and
should be read in conjunction with Networks Associates,
Incs Consolidated Financial Statements.

|                                                    |  |  |    | 
|--------------------------------------------------- |  |  | -- | 
|Report of Independent Accountants                   |  |  | 92 | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | 93 | 

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

(a)(3) Exhibits: See Index to
Exhibits on Page 94. The Exhibits listed on the
accompanying Index of Exhibits are filed or incorporated by
reference as part of this report.

(b) Reports on Form 8-K: We did
not file any reports on Form 8-K during the three months
ended December 31, 2000.

51



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Networks Associates, Inc.


Santa Clara, California


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 and
reclassified its consolidated financial statements for the years
ended December 31, 2000, 1999 and 1998.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

January 24, 2001, except as to Note 3,


which is as of May 17, 2002


52



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |         |           | 
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------- | ------------ | --------- |  | ------- | ------- | --------- | 
|                                                                                 |                                                                                                                                                                                       |                                                                  
|                                                                                 |                                                                                                                                                                                       | December 31,                                                     
|                                                                                 |                                                                                                                                                                                       |                                                                  
|                                                                                 |                                                                                                                                                                                       | 2000                                                              |          | 1999        
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |             
|                                                                                 |                                                                                                                                                                                       |                                                                  
|                                                                                 |                                                                                                                                                                                       | (In thousands, except share data)                                
|                                                                                 |                                                                                                                                                                                       | (As restated                                                      |          | (As restated
|                                                                                 |                                                                                                                                                                                       | see Note 3)                                                       |          | see Note 3) 
|ASSETS                                                                          
|Current assets:                                                                  |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 | Cash and cash equivalents                                                                                                                                                             |                                                                   | $        | 275,539      |           |  | $       | 316,784 |          
|                                                                                 | Short-term marketable securities                                                                                                                                                      |                                                                   |          | 85,721       |           |  |         | 72,135  |          
|                                                                                 | Accounts receivable, net                                                                                                                                                              |                                                                   |          | 122,315      |           |  |         | 174,646 |          
|                                                                                 | Prepaid expenses, income taxes and other current
    assets                                                                                                                           |                                                                   |          | 50,346       |           |  |         | 33,038  |          
|                                                                                 | Deferred taxes                                                                                                                                                                        |                                                                   |          | 86,771       |           |  |         | 79,186  |          
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 |                                                                                                                                                                                       | Total current assets                                              |          |              | 620,692   |  |         |         | 675,789   | 
|Long-term marketable securities                                                  |                                                                                                                                                                                       |                                                                   | 332,893  |              |           |  | 397,447 |        
|Fixed assets, net                                                                |                                                                                                                                                                                       |                                                                   | 75,499   |              |           |  | 45,392  |        
|Deferred taxes                                                                   |                                                                                                                                                                                       |                                                                   | 120,261  |              |           |  | 104,307 |        
|Intangible and other assets                                                      |                                                                                                                                                                                       |                                                                   | 242,275  |              |           |  | 266,862 |        
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 |                                                                                                                                                                                       | Total assets                                                      |          | $            | 1,391,620 |  |         | $       | 1,489,797 | 
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|LIABILITIES                                                                     
|Current liabilities:                                                             |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 | Accounts payable                                                                                                                                                                      |                                                                   | $        | 46,816       |           |  | $       | 13,723  |          
|                                                                                 | Accrued liabilities                                                                                                                                                                   |                                                                   |          | 254,282      |           |  |         | 264,453 |          
|                                                                                 | Deferred revenue                                                                                                                                                                      |                                                                   |          | 151,566      |           |  |         | 123,236 |          
|                                                                                 | Notes payable                                                                                                                                                                         |                                                                   |          |             |           |  |         | 103     |          
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 |                                                                                                                                                                                       | Total current liabilities                                         |          |              | 452,664   |  |         |         | 401,515   | 
|Deferred taxes                                                                   |                                                                                                                                                                                       |                                                                   | 7,971    |              |           |  | 10,575  |        
|Deferred revenue, less current portion                                           |                                                                                                                                                                                       |                                                                   | 26,592   |              |           |  | 30,005  |        
|Convertible debentures                                                           |                                                                                                                                                                                       |                                                                   | 396,336  |              |           |  | 378,304 |        
|Other long term liabilities                                                      |                                                                                                                                                                                       |                                                                   | 532      |              |           |  | 963     |        
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 |                                                                                                                                                                                       | Total liabilities                                                 |          |              | 884,095   |  |         |         | 821,362   | 
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|Commitments and contingencies (Notes 8 and 16)                                   |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|Minority Interest                                                                |                                                                                                                                                                                       |                                                                   | 11,067   |              |           |  | 9,317   |        
|STOCKHOLDERS EQUITY                                                            
|Preferred stock, $0.01 par value:                                                |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 | Authorized: 5,000,000 shares; Issued and
    outstanding: none in 2000 and none in 1999                                                                                               |                                                                   |          |              |           |  |         |         |          
|Common stock, $0.01 par value:                                                   |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 | Authorized: 300,000,000 shares; Issued:
    139,328,528 shares in 2000 and 139,328,528 shares in 1999;
    Outstanding: 138,089,775 shares in 2000 and 138,734,528
    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                                                       |                                                                                                                                                                                       |                                                                   | 685,423  |              |           |  | 644,821 |        
|Accumulated other comprehensive loss                                             |                                                                                                                                                                                       |                                                                   | (31,266  | )            |           |  | (9,957  | )      
|Retained earnings (accumulated deficit)                                          |                                                                                                                                                                                       |                                                                   | (135,894 | )            |           |  | 33,890  |        
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 |                                                                                                                                                                                       | Total stockholders equity                                        |          |              | 496,458   |  |         |         | 659,118   | 
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        
|                                                                                 |                                                                                                                                                                                       | Total liabilities, minority interest and
    stockholders equity |          | $            | 1,391,620 |  |         | $       | 1,489,797 | 
|                                                                                 |                                                                                                                                                                                       |                                                                   |          |              |           |  |         |        

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

53



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND

COMPREHENSIVE INCOME (LOSS)


|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |         |         | 
|---------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------------------------- | -------- | ---------------- | -------- | ---------------- | -------- | ------- | -------- | - | ------- | ------- | ------- | 
|                                                           |                                       |                                                                          
|                                                           |                                       | Years Ended December 31,                                                 
|                                                           |                                       |                                                                          
|                                                           |                                       | 2000                                                                      |          | 1999             |          | 1998            
|                                                           |                                       |                                                                           |          |                  |          |                 
|                                                           |                                       |                                                                          
|                                                           |                                       | (In thousands, except per share data)                                    
|                                                           |                                       | (As Restated                                                              |          | (As Restated     |          | (As Restated    
|                                                           |                                       | and Reclassified                                                          |          | and Reclassified |          | and Reclassified
|                                                           |                                       | see Note 3)                                                               |          | see Note 3)      |          | see Note 3)     
|Net revenue:                                               |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           | Product                               |                                                                           | $        | 457,964          |          |                  | $        | 401,413 |          |   | $       | 803,001 |        
|                                                           | Services and support                  |                                                                           |          | 239,778          |          |                  |          | 209,571 |          |   |         | 158,682 |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           |                                       | Total net revenue                                                         |          |                  | 697,742  |                  |          |         | 610,984  |   |         |         | 961,683 | 
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|Cost of net revenue:                                       |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           | Product                               |                                                                           |          | 113,394          |          |                  |          | 88,729  |          |   |         | 137,374 |        
|                                                           | Services and support                  |                                                                           |          | 42,301           |          |                  |          | 42,094  |          |   |         | 39,674  |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           |                                       | Total cost of net revenue                                                 |          |                  | 155,695  |                  |          |         | 130,823  |   |         |         | 177,048 | 
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|Operating costs and expenses:                              |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           | Research and development(1)           |                                                                           |          | 172,968          |          |                  |          | 152,728 |          |   |         | 135,475 |        
|                                                           | Marketing and sales(2)                |                                                                           |          | 377,001          |          |                  |          | 326,160 |          |   |         | 266,450 |        
|                                                           | General and administrative(3)         |                                                                           |          | 94,988           |          |                  |          | 129,528 |          |   |         | 90,106  |        
|                                                           | Amortization of intangibles           |                                                                           |          | 66,282           |          |                  |          | 58,400  |          |   |         | 43,182  |        
|                                                           | Acquisition and other related costs   |                                                                           |          |                 |          |                  |          | (18,732 | )        |   |         | 135,616 |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           |                                       | Total operating costs and expenses                                        |          |                  | 711,239  |                  |          |         | 648,084  |   |         |         | 670,829 | 
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           |                                       | Income (loss) from operations                                             |          |                  | (169,192 | )                |          |         | (167,923 | ) |         |         | 113,806 | 
|Interest and other income                                  |                                       |                                                                           | 44,624   |                  |          |                  | 30,678   |         |          |   | 33,257  |        
|Interest expense                                           |                                       |                                                                           | (18,169  | )                |          |                  | (17,332  | )       |          |   | (15,246 | )      
|Gain (loss) on investments, net                            |                                       |                                                                           | 30,361   |                  |          |                  | (6,145   | )       |          |   | 190     |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           |                                       | Income (loss) before provision for income
    taxes and minority interest |          |                  | (112,376 | )                |          |         | (160,722 | ) |         |         | 132,007 | 
|Provision for (benefit from) income taxes                  |                                       |                                                                           | 16,504   |                  |          |                  | (3,497   | )       |          |   | 99,573  |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           |                                       | Net income (loss) before minority interest                                |          |                  | (128,880 | )                |          |         | (157,225 | ) |         |         | 32,434  | 
|Minority interest in loss of consolidated
    subsidiaries |                                       |                                                                           | 4,954    |                  |          |                  | 340      |         |          |   |        |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           |                                       | Net income (loss)                                                         |          | $                | (123,926 | )                |          | $       | (156,885 | ) |         | $       | 32,434  | 
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|Other comprehensive income (loss):                         |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|                                                           | Unrealized gain (loss) on investments |                                                                           | $        | 2,654            |          |                  | $        | (1,610  | )        |   | $       | 1,793   |        
|                                                           | Foreign currency translation loss     |                                                                           |          | (23,963          | )        |                  |          | (6,813  | )        |   |         | (5,101  | )      
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|Comprehensive income (loss)                                |                                       | $                                                                         | (145,235 | )                |          | $                | (165,308 | )       |          | $ | 29,126  |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|Net income (loss) per share  basic                        |                                       | $                                                                         | (0.90    | )                |          | $                | (1.13    | )       |          | $ | 0.24    |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|Shares used in per share calculation 
    basic           |                                       |                                                                           | 138,072  |                  |          |                  | 138,695  |         |          |   | 133,075 |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|Net income (loss) per share 
    diluted                  |                                       | $                                                                         | (0.90    | )                |          | $                | (1.13    | )       |          | $ | 0.23    |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        
|Shares used in per share calculation 
    diluted         |                                       |                                                                           | 138,072  |                  |          |                  | 138,695  |         |          |   | 138,609 |        
|                                                           |                                       |                                                                           |          |                  |          |                  |          |         |          |   |         |        



---



|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes stock-based compensation charge of
    $1,894 and $4,515 and none 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
    $2,250 and $3,893 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.

54



---



##### 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 |   | Stockholders
|                                          |                                                                                  | Shares         |         | Amount   |   | Stock      |       | Capital  |   | Compensation  |         | (Loss)       |   | Deficit)      |         | Equity 
|                                          |                                                                                  |                |         |          |   |            |       |          |   |               |         |              |   |               |         |        
|                                          |                                                                                  |               
|                                          |                                                                                  | (In thousands)
|Balances, December 31, 1997               |                                                                                  |                | 128,059 |          |   | $          | 1,281 |          |   |               |        |              |   | $             | 331,409 |         |  | $ | (668 | )   |  | $ | 1,778   |         |   | $ | 158,701  |          |   | $ | 492,501 |         
|                                          | Issuance of common stock upon exercise of stock
    options                      |                |         | 8,560    |   |            |       | 86       |   |               |         |             |   |               |         | 144,646 |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | 144,732  |  
|                                          | Issuance of common stock from Employee Stock
    Purchase Plan                   |                |         | 445      |   |            |       | 4        |   |               |         |             |   |               |         | 6,363   |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | 6,367    |  
|                                          | Tax benefit from exercise of nonqualified stock
    options                      |                |         |         |   |            |       |         |   |               |         |             |   |               |         | 43,500  |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | 43,500   |  
|                                          | Foreign currency translation                                                     |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      |    |  |   |         | (5,105  | ) |   |          |         |   |   |         | (5,105   | )
|                                          | Unrealized gain on investments                                                   |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      |    |  |   |         | 1,793   |   |   |          |         |   |   |         | 1,793    |  
|                                          | Amortization of deferred stock-based compensation                                |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      | 668 |  |   |         |        |   |   |          |         |   |   |         | 668      |  
|                                          | Exercise of warrants                                                             |                |         | 59       |   |            |       |         |   |               |         |             |   |               |         | 1,944   |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | 1,944    |  
|                                          | Net income (As Restated See Note 3)                                              |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      |    |  |   |         |        |   |   |          | 32,434   |   |   |         | 32,434   |  
|                                          |                                                                                  |                |         |          |   |            |       |          |   |               |         |              |   |               |         |         |  |   |      |     |  |   |         |         |   |   |          |          |   |   |         |         
|Balances, December 31, 1998 (As Restated) |                                                                                  |                | 137,123 |          |   |            | 1,371 |          |   |               |        |              |   |               | 527,862 |         |  |   |     |     |  |   | (1,534  | )       |   |   | 191,135  |          |   |   | 718,834 |         
|                                          | Issuance of common stock upon exercise of stock
    options                      |                |         | 1,196    |   |            |       | 12       |   |               |         | 1,414        |   |               |         | 17,471  |  |   |      |    |  |   |         |        |   |   |          | (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 |                |         |         |   |            |       |         |   |               |         |             |   |               |         | 15,570  |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | 15,570   |  
|                                          | Capital contributed by minority stockholders of
    subsidiary                   |                |         |         |   |            |       |         |   |               |         |             |   |               |         | 69,281  |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | 69,281   |  
|                                          | Foreign currency translation                                                     |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      |    |  |   |         | (6,813  | ) |   |          |         |   |   |         | (6,813   | )
|                                          | Unrealized loss on investments                                                   |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      |    |  |   |         | (1,610  | ) |   |          |         |   |   |         | (1,610   | )
|                                          | Net loss (As Restated See Note 3)                                                |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      |    |  |   |         |        |   |   |          | (156,885 | ) |   |         | (156,885 | )
|                                          |                                                                                  |                |         |          |   |            |       |          |   |               |         |              |   |               |         |         |  |   |      |     |  |   |         |         |   |   |          |          |   |   |         |         
|Balances, December 31, 1999 (As Restated) |                                                                                  |                | 138,735 |          |   | $          | 1,387 |          |   | $             | (11,023 | )            |   | $             | 644,821 |         |  |   |     |     |  |   | (9,957  | )       |   |   | 33,890   |          |   |   | 659,118 |         
|                                          | Issuance of common stock upon exercise of stock
    options                      |                |         | 3,036    |   |            |       | 30       |   |               |         | 72,054       |   |               |         | 2,837   |  |   |      |    |  |   |         |        |   |   |          | (39,788  | ) |   |         | 35,133   |  
|                                          | Issuance of common stock from Employee Stock
    Purchase Plan                   |                |         | 666      |   |            |       | 7        |   |               |         | 16,156       |   |               |         | 1,322   |  |   |      |    |  |   |         |        |   |   |          | (6,070   | ) |   |         | 11,415   |  
|                                          | Repurchase of common stock                                                       |                |         | (4,347   | ) |            |       | (43      | ) |               |         | (100,373     | ) |               |         |        |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | (100,416 | )
|                                          | Proceeds from sale of put options                                                |                |         |         |   |            |       |         |   |               |         |             |   |               |         | 13,890  |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | 13,890   |  
|                                          | Compensation charge due to repricing of stock
    options and McAfee.com options |                |         |         |   |            |       |         |   |               |         |             |   |               |         | 8,714   |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | 8,714    |  
|                                          | Capital contributed by minority stockholders of
    subsidiary and other         |                |         |         |   |            |       |         |   |               |         |             |   |               |         | 13,839  |  |   |      |    |  |   |         |        |   |   |          |         |   |   |         | 13,839   |  
|                                          | Foreign currency translation                                                     |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      |    |  |   |         | (23,963 | ) |   |          |         |   |   |         | (23,963  | )
|                                          | Unrealized gain on investments                                                   |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      |    |  |   |         | 2,654   |   |   |          |         |   |   |         | 2,654    |  
|                                          | Net loss (As Restated See Note 3)                                                |                |         |         |   |            |       |         |   |               |         |             |   |               |         |        |  |   |      |    |  |   |         |        |   |   |          | (123,926 | ) |   |         | (123,926 | )
|                                          |                                                                                  |                |         |          |   |            |       |          |   |               |         |              |   |               |         |         |  |   |      |     |  |   |         |         |   |   |          |          |   |   |         |         
|Balances, December 31, 2000 (As Restated) |                                                                                  |                | 138,090 |          |   | $          | 1,381 |          |   | $             | (23,186 | )            |   | $             | 685,423 |         |  | $ |     |     |  | $ | (31,266 | )       |   | $ | (135,894 | )        |   | $ | 496,458 |         
|                                          |                                                                                  |                |         |          |   |            |       |          |   |               |         |              |   |               |         |         |  |   |      |     |  |   |         |         |   |   |          |          |   |   |         |         

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

55



---



##### 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
|                                                                 |                                                                                                            | see Note 3)                                                 |                                          | see Note 3)                                             |         | see Note 3) 
|Cash flows from operating activities:                            |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|                                                                 | Net income (loss)                                                                                          |                                                             | $                                        | (123,926                                                | )       |              | $        | (156,885 | )       |         | $        | 32,434   |        
|                                                                 | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                             |                                          |                                                         |         |              |          |          |         |         |          |          |        
|                                                                 |                                                                                                            | Depreciation and amortization                               |                                          |                                                         | 90,096  |              |          |          | 81,492  |         |          |          | 75,335  |         
|                                                                 |                                                                                                            | Bad debt expense                                            |                                          |                                                         | 9,924   |              |          |          | 44,809  |         |          |          | 11,283  |         
|                                                                 |                                                                                                            | Impairment of strategic investments and goodwill            |                                          |                                                         | 13,639  |              |          |          |        |         |          |          |        |         
|                                                                 |                                                                                                            | Interest on convertible notes                               |                                          |                                                         | 18,169  |              |          |          | 17,332  |         |          |          | 14,525  |         
|                                                                 |                                                                                                            | Stock-based compensation charge                             |                                          |                                                         | 8,714   |              |          |          | 15,570  |         |          |          |        |         
|                                                                 |                                                                                                            | Deferred taxes                                              |                                          |                                                         | (27,385 | )            |          |          | (81,847 | )       |          |          | (47,266 | )       
|                                                                 |                                                                                                            | Realized (Gain)/ Loss on investments                        |                                          |                                                         | 137     |              |          |          | 6,145   |         |          |          | (190    | )       
|                                                                 |                                                                                                            | Gain on the sale of Goto.com investment                     |                                          |                                                         | (28,551 | )            |          |          |        |         |          |          |        |         
|                                                                 |                                                                                                            | Gain on the sale of Network Associates Japan
    investment |                                          |                                                         | (11,947 | )            |          |          |        |         |          |          |        |         
|                                                                 |                                                                                                            | Minority Interest                                           |                                          |                                                         | (4,954  | )            |          |          | (340    | )       |          |          |        |         
|                                                                 |                                                                                                            | Tax benefit from exercise of nonqualified stock
    options |                                          |                                                         |        |              |          |          |        |         |          |          | 43,500  |         
|                                                                 |                                                                                                            | Acquired in-process research and development                |                                          |                                                         |        |              |          |          |        |         |          |          | 49,843  |         
|                                                                 |                                                                                                            | Write down of owned facility                                |                                          |                                                         |        |              |          |          |        |         |          |          | 1,177   |         
|                                                                 |                                                                                                            | Changes in assets and liabilities:                          |                                          |                                                         |         |              |          |          |         |         |          |          |         |         
|                                                                 |                                                                                                            |                                                             | Accounts receivable                      |                                                         |         | 36,382       |          |          |         | 41,329  |          |          |         | (109,059 | )       
|                                                                 |                                                                                                            |                                                             | Prepaid expenses, taxes and other        |                                                         |         | (11,723      | )        |          |         | 22,650  |          |          |         | (28,627  | )       
|                                                                 |                                                                                                            |                                                             | Accounts payable and accrued liabilities |                                                         |         | 28,006       |          |          |         | 31,022  |          |          |         | 1,704    |         
|                                                                 |                                                                                                            |                                                             | Deferred revenue                         |                                                         |         | 30,091       |          |          |         | (39,357 | )        |          |         | 49,324   |         
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|                                                                 |                                                                                                            |                                                             |                                          | Net cash provided by (used in) operating
    activities |         |              | 26,672   |          |         |         | (18,080  | )        |         |          | 93,983   |  
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|Cash flows from investing activities:                            |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|                                                                 | Purchase of marketable securities                                                                          |                                                             |                                          | (510,247                                                | )       |              |          | (393,363 | )       |         |          | (854,001 | )      
|                                                                 | Sale of marketable securities                                                                              |                                                             |                                          | 562,132                                                 |         |              |          | 233,499  |         |         |          | 801,776  |        
|                                                                 | Purchase of acquired technology                                                                            |                                                             |                                          | (12,500                                                 | )       |              |          |         |         |         |          |         |        
|                                                                 | Purchase of other investments                                                                              |                                                             |                                          | (21,650                                                 | )       |              |          |         |         |         |          |         |        
|                                                                 | Purchase of fixed assets                                                                                   |                                                             |                                          | (54,031                                                 | )       |              |          | (20,458  | )       |         |          | (34,940  | )      
|                                                                 | Proceeds from sale of Goto.com investment                                                                  |                                                             |                                          | 36,750                                                  |         |              |          |         |         |         |          |         |        
|                                                                 | Proceeds from sale of fixed assets                                                                         |                                                             |                                          |                                                        |         |              |          | 6,518    |         |         |          |         |        
|                                                                 | Proceeds from sale of Network Associates Japan
    investment                                              |                                                             |                                          | 11,947                                                  |         |              |          |         |         |         |          |         |        
|                                                                 | Acquisition of CyberMedia                                                                                  |                                                             |                                          |                                                        |         |              |          |         |         |         |          | (119,958 | )      
|                                                                 | Acquisition of Magic                                                                                       |                                                             |                                          |                                                        |         |              |          |         |         |         |          | (109,717 | )      
|                                                                 | Other                                                                                                      |                                                             |                                          | (1,958                                                  | )       |              |          |         |         |         |          |         |        
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|                                                                 |                                                                                                            |                                                             |                                          | Net cash provided by (used in) investing
    activities |         |              | 10,443   |          |         |         | (173,804 | )        |         |          | (316,840 | )
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|Cash flows from financing activities:                            |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|                                                                 | Repayment of notes payable                                                                                 |                                                             |                                          | (367                                                    | )       |              |          | (3,085   | )       |         |          | (837     | )      
|                                                                 | Issuance of common stock under stock option and
    purchase plans                                         |                                                             |                                          | 46,548                                                  |         |              |          | 27,472   |         |         |          | 151,099  |        
|                                                                 | Proceeds from sale of put options                                                                          |                                                             |                                          | 13,890                                                  |         |              |          | 5,250    |         |         |          |         |        
|                                                                 | Repurchase of common stock                                                                                 |                                                             |                                          | (100,416                                                | )       |              |          | (12,444  | )       |         |          |         |        
|                                                                 | Proceeds of McAfee.com initial public offering,
    net                                                    |                                                             |                                          |                                                        |         |              |          | 78,945   |         |         |          |         |        
|                                                                 | Change in minority interest and other                                                                      |                                                             |                                          | 942                                                     |         |              |          |         |         |         |          |         |        
|                                                                 | Issuance of convertible debentures, net of
    issuance costs                                              |                                                             |                                          |                                                        |         |              |          |         |         |         |          | 337,624  |        
|                                                                 | Exercise of warrants                                                                                       |                                                             |                                          |                                                        |         |              |          | 459      |         |         |          | 1,944    |        
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|                                                                 |                                                                                                            |                                                             |                                          | Net cash provided by (used in) financing
    activities |         |              | (39,403  | )        |         |         | 96,597   |          |         |          | 489,830  |  
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|                                                                 | Effect of exchange rate changes on cash and cash
    equivalent                                            |                                                             |                                          | (38,957                                                 | )       |              |          | (6,828   | )       |         |          | (5,105   | )      
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                                            |                                                             | (41,245                                  | )                                                       |         |              | (102,115 | )        |         |         | 261,868  |         
|Cash and cash equivalents at beginning of year                   |                                                                                                            |                                                             | 316,784                                  |                                                         |         |              | 418,899  |          |         |         | 157,031  |         
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|Cash and cash equivalents at end of year                         |                                                                                                            | $                                                           | 275,539                                  |                                                         |         | $            | 316,784  |          |         | $       | 418,899  |         
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|Non cash investing activities:                                   |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         
|                                                                 | Unrealized gain (loss) on marketable
    investments                                                       |                                                             | $                                        | 2,654                                                   |         |              |          | (1,610   | )       |         |          | 1,793    |        
|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      |         
|                                                                 |                                                                                                            |                                                             |                                          |                                                         |         |              |          |          |         |         |          |         

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

56



---



##### 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) formerly McAfee
Associates, Inc., 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 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 intercompany
accounts and transactions have been eliminated. Certain
reclassifications have been made to the prior years
financial statements to conform to the current years
presentation. These reclassifications had no effect on the prior
years stockholders equity or results of operations.



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

Minority interest in loss of consolidated
subsidiaries represents the minority shareholders share of
the income or loss of various consolidated subsidiaries. The
minority interest in the consolidated balance sheets reflect the
original investment by these minority shareholders in these
consolidated subsidiaries, along with their proportional share
of the earnings or losses of these subsidiaries.



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

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reported period. Significant estimates include those
required in the valuation of intangible assets acquired in
purchase combinations 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.



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

The Companys product revenues are
concentrated in the computer software industry that is highly
competitive and rapidly changing. Significant technological
changes in the industry or customer requirements, or the
emergence of competitive products with new capabilities or
technologies could adversely affect operating results. Also, a
majority of the Companys revenue is derived from sales to
distributors and resellers. Significant changes in operations,
buying behavior or financial stability of our channel partners
could adversely affect operating results. In addition, a
significant portion of the Companys revenue and results of
operations is derived from international sales and distributors.
Fluctuations of the U.S. dollar against foreign currencies,
changes in local regulatory or economic conditions, piracy or
significant dislocations in local distribution channels could
adversely affect operating results.

The Company maintains the majority of cash
balances and all of its short-term investments with six
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. The Company
has significant accounts receivable from several major
distributors and from customers across a broad demographic base.
Management

57



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of the Company performs ongoing credit
evaluations of its customers and maintains allowances for
doubtful accounts.

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 so as to ensure an available supply of the
product for its 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.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The Company considers the local currency to be
the functional currency for its international subsidiaries.
Assets and liabilities denominated in foreign currencies are
translated using the exchange rate on the balance sheet date.
Translation adjustments resulting from this process are charged
or credited to accumulated other comprehensive income. Revenues
and expenses are translated at average exchange rates prevailing
during the year. Foreign currency transaction gains and losses,
which to date have not been material, are included in the
determination of net income.



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

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



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

All marketable securities are classified as
available-for-sale securities. Available-for-sale securities are
carried at fair value in accordance with Statement of Financial
Accounting Standards No. 115 (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

Inventories are included in other current
assets,and are stated at the lower of cost (first-in, first-out)
or market and include material and related manufacturing
overhead.



| |             
| | ------------
| | Fixed Assets

Fixed assets are presented at cost less
accumulated depreciation and amortization. Depreciation and
amortization of fixed assets is computed using the straight-line
method over the estimated useful lives of the related assets (2
to 5 years). Leasehold improvements are amortized on a
straight-line basis over the life of the lease or the estimated
useful life of the asset, whichever is shorter. Repairs and
maintenance expenditures, which are not considered improvements
and do not extend the useful life of fixed assets, are expensed
as incurred. The cost and related accumulated depreciation
applicable to fixed assets sold or no longer in service are
eliminated from the accounts and any gain or loss is included in
operations.



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

Intangible assets, which include goodwill,
purchased technology and other intangible assets, are carried at
cost less accumulated amortization. We amortize goodwill and
other identifiable intangibles on a straight-line

58



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

basis over their estimated useful lives. The
range of estimated useful lives on our identifiable intangibles
is three to seven years.

We assess the impairment of identifiable
intangibles and related goodwill in accordance with the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of.We also assess 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 we consider important which could trigger
an impairment review include, but are not limited to,
significant underperformance relative to expected historical or
projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for our
overall business, significant negative industry or economic
trends, a significant decline in our stock price for a sustained
period, and our market capitalization relative to net book
value. When we determine that the carrying value of goodwill may
not be recoverable based upon the existence of one or more of
the above indicators of impairment, we measure any impairment
based on a projected discounted cash flow method using a
discount rate commensurate with the risk inherent in our current
business model.



| |            
| | -----------
| | Investments

Investments consisted of minority investments in
non-publicly traded companies in which the Company holds less
than 20% interest. These investments are included in other
assets on the Companys balance sheet and are carried at
cost, less reductions related to other-than-temporary
impairments. The Company monitors these investments for
impairment and makes appropriate reductions in carrying values
when necessary.



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

Carrying amounts of the Companys financial
instruments including cash and cash equivalents, marketable
securities, investments, accounts receivable, accounts payable,
accrued liabilities and approximate fair value due to their
short maturities. The Companys Senior Subordinated
Convertible Debentures are not traded in a public market and the
fair market value of the debentures is 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.



| |                    
| | -------------------
| | Revenue Recognition

In December 1999, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin
No. 101 (SAB 101), Revenue Recognition in
Financial Statements. The Company adopted SAB 101 as of
January 1, 2000. The adoption of SAB 101 did not have an
effect on the results of operations or financial position of the
Company.

The Companys revenue is derived from
primarily two sources (i) product revenue which includes
software license, hardware, and royalty revenue and
(ii) services and support revenue which includes software
license maintenance, training, consulting, and hosting services
revenue. The Company licenses its software products on a one and
two-year time basis or on a perpetual basis.

Product revenue is recognized when persuasive
evidence of an arrangement exists (generally a purchase order or
a license agreement), product has been delivered, the fee is
fixed and determinable, and collection of the resulting account
receivable is probable.

If delivered software requires customization or
there are undelivered services that can not be accounted for
separately, the Company recognizes the arrangement fee using the
percentage of completion method.

59



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue on one-year time-based subscription
licenses is recognized ratably over the contract term. Royalty
revenue is generally recognized based on periodic royalty
reports received from customers.

Maintenance revenue for providing product updates
and customer support is deferred and recognized ratably over the
service period. Hosting revenue is recognized ratably over the
service period. Training and consulting revenue is recognized as
services are performed and billable according to the terms of
the service arrangement.

For arrangements with multiple obligations (e.g.
delivered and undelivered products, maintenance and other
services), the Company allocates revenue to each component of
the arrangement based on objective evidence of its fair value,
which is specific to the Company. If an acceptance period is
required, revenue is recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. For
revenue transactions where the fee is not fixed or determinable,
the Company recognizes revenue when payments become due.

Sales to distributors are subject to agreements
allowing certain rights of return, cooperative advertising,
stock balancing rights and price protection. Distributors have
limited rights of return which allow them to return a percentage
of the prior quarters purchases by these distributors.
Accordingly, revenue is not recognized with respect to those
shipments which management estimates will be returned. These
estimates and reserves for price protection are adjusted
periodically based upon historical rates of returns, price
protection, inventory levels at the distributors and other
related factors. While management believes it can make reliable
estimates for these matters, nevertheless unsold products in
these distribution channels are exposed to rapid changes in
consumer preferences or technological obsolescence due to new
operating environments, product updates or competing products.
Accordingly, it is possible that these estimates will change in
the near future and that the amounts of such changes could have
a material adverse effect on the Company.



| |                     
| | --------------------
| | Government Contracts

The Company enters into research and development
contracts with government agencies under various pricing
arrangements. Government contracting revenue is classified as
services and support revenue in the accompanying consolidated
statements of operations and comprehensive income (loss).
Revenue from cost-plus-fixed-fee contracts is
recognized on the basis of reimbursable contract costs incurred
during the period, plus a percentage of the fixed fee. Revenue
from time and material contracts is recognized on
the basis of hours utilized, plus other reimbursable contract
costs incurred during the period. Revenue from
firm-fixed-price contracts is recognized on the
percentage of completion method. Under this method, individual
contract revenues are recorded based on the percentage
relationship that contract costs incurred bear to
managements estimate of work completed. 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
(DCAA) which could result in the renegotiations of amounts
previously billed. The DCAA has performed audits of the
Companys costs through 1999. Management believes that the
results of such audits will not have a material adverse impact
on the Companys financial position, results of operations
or cash flows.



| |                         
| | ------------------------
| | Research and Development

Research and development expenditures are charged
to operations as incurred. Under the Companys development
process, technological feasibility is established on completing
a working model. Subsequent costs for the Company have not been
significant and all software development costs have therefore
been expensed.

60



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Advertising Costs

Advertising production costs are expensed as
incurred. Media (TV and print) placement costs are expensed in
the period the advertising appears. Total advertising and
promotional expenses were $43.7 million,
$36.4 million, and $21.5 million for the years ended
December 31, 2000, 1999, and 1998, respectively.



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

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



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes in
accordance with the liability method of accounting for income
taxes. Under the liability method, deferred assets and
liabilities are recognized based upon anticipated future tax
consequences attributable to differences between financial
statement carrying amounts of assets and liabilities and their
respective tax bases. Our provision for income taxes is
comprised of our current tax liability and the change in
deferred tax assets and liabilities.



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

Net income (loss) per share has been
computed in accordance with SFAS 128. Basic net income
(loss) per share is computed using the weighted average
common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average
common shares and potentially dilutive shares outstanding during
the period.



| |                     
| | --------------------
| | Comprehensive Income

The Company has adopted Statement of Accounting
Standards No. 130 (SFAS 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).

3.     Restatement
and Adoption of New Accounting Pronouncements

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

61



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

adjustments and their related tax impacts, the
Company announced the restatement of its December 31, 2001
and March 31, 2002 balance sheets.

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

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

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

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

The consolidated financial statements for the
years ended December 31, 2000, 1999 and 1998 contained
herein have been restated to incorporate all these adjustments,
the related tax effects and the reclassifications as described
herein.

62



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Balance Sheet as of December 31,
2000

|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |           |           | 
|----------------------------------------------------------- | -------------------------- | ----------------------------------------------------------------- | -------- | ----------------- | --------- | ------------ | ------ | ----------- | ------ | - | ------- | ------- | ------ | - | -------- | --------- | --------- | 
|                                                            |                            |                                                                   |          | Cumulative Effect |           |              |        |            
|                                                            |                            | As Previously                                                     |          | of Prior Year     |           |              |        |            
|                                                            |                            | Reported                                                          |          | Changes           |           | Inaccuracies |        | As Restated
|                                                            |                            |                                                                   |          |                   |           |              |        |            
|Cash and cash equivalents                                   |                            | $                                                                 | 275,539  |                   |           | $            |       |             |        | $ |        |         |        | $ | 275,539  |          
|Short-term marketable securities                            |                            |                                                                   | 85,721   |                   |           |              |       |             |        |   |        |         |        |   | 85,721   |          
|Accounts receivable, net                                    |                            |                                                                   | 122,315  |                   |           |              |       |             |        |   |        |         |        |   | 122,315  |          
|Prepaid expenses, income taxes and other current
    assets |                            |                                                                   | 50,346   |                   |           |              |       |             |        |   |        |         |        |   | 50,346   |          
|Deferred taxes                                              |                            |                                                                   | 86,771   |                   |           |              |       |             |        |   |        |         |        |   | 86,771   |          
|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            | Total current assets       |                                                                   |          | 620,692           |           |              |        |            |        |   |         |        |        |   |          | 620,692   |          
|Long-term marketable securities                             |                            |                                                                   | 332,893  |                   |           |              |       |             |        |   |        |         |        |   | 332,893  |          
|Fixed assets, net                                           |                            |                                                                   | 75,499   |                   |           |              |       |             |        |   |        |         |        |   | 75,499   |          
|Deferred taxes                                              |                            |                                                                   | 113,489  |                   |           |              | 10,403 |             |        |   | (3,631  | )       |        |   | 120,261  |          
|Intangible assets and other assets                          |                            |                                                                   | 242,275  |                   |           |              |       |             |        |   |        |         |        |   | 242,275  |          
|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            | Total assets               |                                                                   | $        | 1,384,848         |           |              | $      | 10,403      |        |   | $       | (3,631  | )      |   | $        | 1,391,620 |          
|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |          
|Accounts payable                                            |                            | $                                                                 | 46,816   |                   |           | $            |       |             |        | $ |        |         |        | $ | 46,816   |          
|Accrued liabilities                                         |                            |                                                                   | 225,317  |                   |           |              | 11,391 |             |        |   | 17,574  |         |        |   | 254,282  |          
|Deferred revenue                                            |                            |                                                                   | 151,566  |                   |           |              |        |             |        |   |        |         |        |   | 151,566  |          
|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |          
|Total current liabilities                                   |                            |                                                                   | 423,699  |                   |           |              | 11,391 |             |        |   | 17,574  |         |        |   | 452,664  |          
|Deferred taxes                                              |                            |                                                                   | 7,971    |                   |           |              |       |             |        |   |        |         |        |   | 7,971    |          
|Deferred revenue, less current portion                      |                            |                                                                   | 26,592   |                   |           |              |       |             |        |   |        |         |        |   | 26,592   |          
|Convertible debentures                                      |                            |                                                                   | 396,336  |                   |           |              |       |             |        |   |        |         |        |   | 396,336  |          
|Long term debt and other liabilities                        |                            |                                                                   | 532      |                   |           |              |       |             |        |   |        |         |        |   | 532      |          
|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            | Total liabilities          |                                                                   |          | 855,130           |           |              |        | 11,391      |        |   |         | 17,574  |        |   |          | 884,095   |          
|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |          
|Minority interest                                           |                            |                                                                   | 11,067   |                   |           |              |       |             |        |   |        |         |        |   | 11,067   |          
|Common stock                                                |                            |                                                                   | 1,381    |                   |           |              |       |             |        |   |        |         |        |   | 1,381    |          
|Treasury stock                                              |                            |                                                                   | (23,186  | )                 |           |              |       |             |        |   |        |         |        |   | (23,186  | )        
|Additional paid in capital                                  |                            |                                                                   | 685,423  |                   |           |              |       |             |        |   |        |         |        |   | 685,423  |          
|Cumulative other comprehensive loss                         |                            |                                                                   | (31,266  | )                 |           |              |       |             |        |   |        |         |        |   | (31,266  | )        
|Accumulated deficit                                         |                            |                                                                   | (113,701 | )                 |           |              | (988   | )           |        |   | (21,205 | )       |        |   | (135,894 | )        
|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            | Total stockholders equity |                                                                   |          | 518,651           |           |              |        | (988        | )      |   |         | (21,205 | )      |   |          | 496,458   |          
|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |          
|                                                            |                            | Total liabilities, minority interest and
    stockholders equity |          | $                 | 1,384,848 |              |        | $           | 10,403 |   |         | $       | (3,631 | ) |          | $         | 1,391,620 | 
|                                                            |                            |                                                                   |          |                   |           |              |        |             |        |   |         |         |        |   |          |          

63



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Balance Sheet as of December 31,
1999

|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |           | 
|----------------------------------------------------------- | ----------------------------------------------------------------- | ------------- | ------- | ----------------- |  | ------------ | ------ | ----------- | - | - | ------ | ------ |  | - | ------- | --------- | 
|                                                            |                                                                   |               |         | Cumulative Effect |  |              |        |            
|                                                            |                                                                   | As Previously |         | of Prior Year     |  |              |        |            
|                                                            |                                                                   | Reported      |         | Changes           |  | Inaccuracies |        | As Restated
|                                                            |                                                                   |               |         |                   |  |              |        |            
|Cash and cash equivalents                                   |                                                                   | $             | 316,784 |                   |  | $            |       |             |   | $ |       |        |  | $ | 316,784 |          
|Short-term marketable securities                            |                                                                   |               | 72,135  |                   |  |              |       |             |   |   |       |        |  |   | 72,135  |          
|Accounts receivable, net                                    |                                                                   |               | 174,646 |                   |  |              |       |             |   |   |       |        |  |   | 174,646 |          
|Prepaid expenses, income taxes and other current
    assets |                                                                   |               | 33,038  |                   |  |              |       |             |   |   |       |        |  |   | 33,038  |          
|Deferred taxes                                              |                                                                   |               | 79,186  |                   |  |              |       |             |   |   |       |        |  |   | 79,186  |          
|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |          
|                                                            | Total current assets                                              |               |         | 675,789           |  |              |        |            |   |   |        |       |  |   |         | 675,789   | 
|Long term marketable securities                             |                                                                   |               | 397,447 |                   |  |              |       |             |   |   |       |        |  |   | 397,447 |          
|Fixed assets, net                                           |                                                                   |               | 45,392  |                   |  |              |       |             |   |   |       |        |  |   | 45,392  |          
|Deferred taxes                                              |                                                                   |               | 93,904  |                   |  |              |       |             |   |   | 10,403 |        |  |   | 104,307 |          
|Intangible assets and other assets                          |                                                                   |               | 266,862 |                   |  |              |       |             |   |   |       |        |  |   | 266,862 |          
|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |          
|                                                            | Total assets                                                      |               | $       | 1,479,394         |  |              | $      |            |   |   | $      | 10,403 |  |   | $       | 1,489,797 | 
|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |          
|Accounts payable                                            |                                                                   | $             | 13,723  |                   |  | $            |       |             |   | $ |       |        |  | $ | 13,723  |          
|Accrued liabilities                                         |                                                                   |               | 253,062 |                   |  |              | 4,004  |             |   |   | 7,387  |        |  |   | 264,453 |          
|Deferred revenue                                            |                                                                   |               | 123,236 |                   |  |              |       |             |   |   |       |        |  |   | 123,236 |          
|Notes payable                                               |                                                                   |               | 103     |                   |  |              |       |             |   |   |        |        |  |   | 103     |          
|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |          
|                                                            | Total current liabilities                                         |               |         | 390,124           |  |              |        | 4,004       |   |   |        | 7,387  |  |   |         | 401,515   | 
|Deferred taxes                                              |                                                                   |               | 10,575  |                   |  |              |       |             |   |   |       |        |  |   | 10,575  |          
|Deferred revenue, less current portion                      |                                                                   |               | 30,005  |                   |  |              |       |             |   |   |       |        |  |   | 30,005  |          
|Convertible debentures                                      |                                                                   |               | 378,304 |                   |  |              |       |             |   |   |       |        |  |   | 378,304 |          
|Long term debt and other liabilities                        |                                                                   |               | 963     |                   |  |              |       |             |   |   |       |        |  |   | 963     |          
|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |          
|                                                            | Total liabilities                                                 |               |         | 809,971           |  |              |        | 4,004       |   |   |        | 7,387  |  |   |         | 821,362   | 
|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |          
|Minority interest                                           |                                                                   |               | 9,317   |                   |  |              |       |             |   |   |       |        |  |   | 9,317   |          
|Common stock                                                |                                                                   |               | 1,387   |                   |  |              |       |             |   |   |       |        |  |   | 1,387   |          
|Treasury stock                                              |                                                                   |               | (11,023 | )                 |  |              |       |             |   |   |       |        |  |   | (11,023 | )        
|Additional paid in capital                                  |                                                                   |               | 644,821 |                   |  |              |       |             |   |   |       |        |  |   | 644,821 |          
|Cumulative other comprehensive loss                         |                                                                   |               | (9,957  | )                 |  |              |       |             |   |   |       |        |  |   | (9,957  | )        
|Retained earnings                                           |                                                                   |               | 34,878  |                   |  |              | (4,004 | )           |   |   | 3,016  |        |  |   | 33,890  |          
|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |          
|                                                            | Total stockholders equity                                        |               |         | 660,106           |  |              |        | (4,004      | ) |   |        | 3,016  |  |   |         | 659,118   | 
|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |          
|                                                            | Total liabilities, minority interest and
    stockholders equity |               | $       | 1,479,394         |  |              | $      |            |   |   | $      | 10,403 |  |   | $       | 1,489,797 | 
|                                                            |                                                                   |               |         |                   |  |              |        |             |   |   |        |        |  |   |         |          

64



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Statement of Operations for the Year Ended
December 31, 2000

|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |          |          |  
|---------------------------------------------- | ---------------------------------------------------------------- | ------------------------- | ------- | ------------ | -------- | ----------------- | ----- | ---------------- | ------- | - | - | ------- | ------- | - | ------- | -------- | -------- | -
|                                               |                                                                  | As Previously             |         |              |          | EITF No. 01-09    |       | As Restated     
|                                               |                                                                  | Reported                  |         | Inaccuracies |          | Reclassifications |       | and Reclassified
|                                               |                                                                  |                           |         |              |          |                   |       |                 
|Net revenue:                                   |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               | Product                                                          |                           | $       | 505,914      |          |                   | $     | (15,288          | )       |   | $ | (32,662 | )       |   | $       | 457,964  |         
|                                               | Services and support                                             |                           |         | 239,778      |          |                   |       |                 |         |   |   |        |         |   |         | 239,778  |         
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               |                                                                  | Total net revenue         |         |              | 745,692  |                   |       |                  | (15,288 | ) |   |         | (32,662 | ) |         |          | 697,742  |  
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|Cost of net revenue:                           |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               | Product                                                          |                           |         | 114,394      |          |                   |       | (1,000           | )       |   |   |        |         |   |         | 113,394  |         
|                                               | Services and support                                             |                           |         | 42,301       |          |                   |       |                 |         |   |   |        |         |   |         | 42,301   |         
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               |                                                                  | Total cost of net revenue |         |              | 156,695  |                   |       |                  | (1,000  | ) |   |         |        |   |         |          | 155,695  |  
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|Operating costs and expenses:                  |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               | Research and development                                         |                           |         | 173,468      |          |                   |       | (500             | )       |   |   |        |         |   |         | 172,968  |         
|                                               | Marketing and sales                                              |                           |         | 400,863      |          |                   |       | 8,800            |         |   |   | (32,662 | )       |   |         | 377,001  |         
|                                               | General and administrative                                       |                           |         | 100,351      |          |                   |       | (5,363           | )       |   |   |        |         |   |         | 94,988   |         
|                                               | Amortization of intangibles                                      |                           |         | 66,282       |          |                   |       |                 |         |   |   |        |         |   |         | 66,282   |         
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               |                                                                  | Total operating costs     |         |              | 740,964  |                   |       |                  | 2,937   |   |   |         | (32,662 | ) |         |          | 711,239  |  
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               |                                                                  | Loss from operations      |         |              | (151,967 | )                 |       |                  | (17,225 | ) |   |         |        |   |         |          | (169,192 | )
|Interest and other income                      |                                                                  |                           | 42,024  |              |          |                   | 2,600 |                  |         |   |  |         |         |   | 44,624  |         
|Interest expense                               |                                                                  |                           | (18,169 | )            |          |                   |      |                  |         |   |  |         |         |   | (18,169 | )       
|Gain (loss) on investments, net                |                                                                  |                           | 30,361  |              |          |                   |      |                  |         |   |  |         |         |   | 30,361  |         
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               | Loss before provision for income taxes and
    minority interest |                           |         | (97,751      | )        |                   |       | (14,625          | )       |   |   |        |         |   |         | (112,376 | )       
|Provision for taxes                            |                                                                  |                           | 9,924   |              |          |                   | 6,580 |                  |         |   |  |         |         |   | 16,504  |         
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               | Net loss before minority interest                                |                           |         | (107,675     | )        |                   |       | (21,205          | )       |   |   |        |         |   |         | (128,880 | )       
|Minority interest in consolidated subsidiaries |                                                                  |                           | 4,954   |              |          |                   |      |                  |         |   |  |         |         |   | 4,954   |         
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|                                               | Net loss                                                         |                           | $       | (102,721     | )        |                   | $     | (21,205          | )       |   | $ |        |         |   | $       | (123,926 | )       
|                                               |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|Basic and diluted net loss per share:          |                                                                  |                           |         |              |          |                   |       |                  |         |   |   |         |         |   |         |         
|Net loss per share  basic                     |                                                                  | $                         | (0.74   | )            |          |                   |       |                  |         |   |   |         |         | $ | (0.90   | )       
|Net loss per share  diluted                   |                                                                  | $                         | (0.74   | )            |          |                   |       |                  |         |   |   |         |         | $ | (0.90   | )       
|Basic shares                                   |                                                                  |                           | 138,072 |              |          |                   |       |                  |         |   |   |         |         |   | 138,072 |         
|Diluted shares                                 |                                                                  |                           | 138,072 |              |          |                   |       |                  |         |   |   |         |         |   | 138,072 |         

65



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Statement of Operations for the Year Ended
December 31, 1999

|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |          |          |  
|---------------------------------------------------------------- | ----------------------------------- | ---------------------------------- | -------- | ------------ | -------- | ----------------- | ------- | ---------------- | ------- | - | ------- | ------- | ------- | - | -------- | -------- | -------- | -
|                                                                 |                                     | As Previously                      |          |              |          | EITF No. 01-09    |         | As Restated     
|                                                                 |                                     | Reported                           |          | Inaccuracies |          | Reclassifications |         | and Reclassified
|                                                                 |                                     |                                    |          |              |          |                   |         |                 
|Net revenue:                                                     |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|Product                                                          |                                     | $                                  | 474,097  |              |          | $                 | (28,224 | )                |         | $ | (44,460 | )       |         | $ | 401,413  |         
|Services and support                                             |                                     |                                    | 209,571  |              |          |                   |        |                  |         |   |        |         |         |   | 209,571  |         
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|                                                                 |                                     | Total net revenue                  |          |              | 683,668  |                   |         |                  | (28,224 | ) |         |         | (44,460 | ) |          |          | 610,984  |  
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|Cost of net revenue:                                             |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|Product                                                          |                                     |                                    | 88,729   |              |          |                   |        |                  |         |   |        |         |         |   | 88,729   |         
|Services and support                                             |                                     |                                    | 42,094   |              |          |                   |        |                  |         |   |        |         |         |   | 42,094   |         
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|                                                                 |                                     | Total cost of net revenue          |          |              | 130,823  |                   |         |                  |        |   |         |         |        |   |          |          | 130,823  |  
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|Operating costs and expenses:                                    |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|                                                                 | Research and development            |                                    |          | 152,728      |          |                   |         |                 |         |   |         |        |         |   |          | 152,728  |         
|                                                                 | Marketing and sales                 |                                    |          | 370,086      |          |                   |         | 534              |         |   |         | (44,460 | )       |   |          | 326,160  |         
|                                                                 | General and administrative          |                                    |          | 128,562      |          |                   |         | 966              |         |   |         |        |         |   |          | 129,528  |         
|                                                                 | Amortization of intangibles         |                                    |          | 58,400       |          |                   |         |                 |         |   |         |        |         |   |          | 58,400   |         
|                                                                 | Acquisition and other related costs |                                    |          | (18,732      | )        |                   |         |                 |         |   |         |        |         |   |          | (18,732  | )       
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|                                                                 |                                     | Total operating costs and expenses |          |              | 691,044  |                   |         |                  | 1,500   |   |         |         | (44,460 | ) |          |          | 648,084  |  
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|                                                                 |                                     | Loss from operations               |          |              | (138,199 | )                 |         |                  | (29,724 | ) |         |         |        |   |          |          | (167,923 | )
|Interest and other income                                        |                                     |                                    | 30,678   |              |          |                   |        |                  |         |   |        |         |         |   | 30,678   |         
|Interest expense                                                 |                                     |                                    | (17,332  | )            |          |                   |        |                  |         |   |        |         |         |   | (17,332  | )       
|Gain (loss) on investments, net                                  |                                     |                                    | (6,145   | )            |          |                   |        |                  |         |   |        |         |         |   | (6,145   | )       
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|Loss before provision for income taxes and
    minority interest |                                     |                                    | (130,998 | )            |          |                   | (29,724 | )                |         |   |        |         |         |   | (160,722 | )       
|Provision for (benefit from) taxes                               |                                     |                                    | 29,243   |              |          |                   | (32,740 | )                |         |   |        |         |         |   | (3,497   | )       
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|                                                                 | Net loss before minority interest   |                                    |          | (160,241     | )        |                   |         | 3,016            |         |   |         |        |         |   |          | (157,225 | )       
|Minority interest in loss of consolidated
    subsidiary         |                                     |                                    | 340      |              |          |                   |        |                  |         |   |        |         |         |   | 340      |         
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|                                                                 | Net loss                            |                                    | $        | (159,901     | )        |                   | $       | 3,016            |         |   | $       |        |         |   | $        | (156,885 | )       
|                                                                 |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|Basic and diluted net loss per share:                            |                                     |                                    |          |              |          |                   |         |                  |         |   |         |         |         |   |          |         
|Net loss per share  basic                                       |                                     | $                                  | (1.15    | )            |          |                   |         |                  |         |   |         |         |         | $ | (1.13    | )       
|Net loss per share  diluted                                     |                                     | $                                  | (1.15    | )            |          |                   |         |                  |         |   |         |         |         | $ | (1.13    | )       
|Basic shares                                                     |                                     |                                    | 138,695  |              |          |                   |         |                  |         |   |         |         |         |   | 138,695  |         
|Diluted shares                                                   |                                     |                                    | 138,695  |              |          |                   |         |                  |         |   |         |         |         |   | 138,695  |         

66



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Statement of Operations for the Year Ended
December 31, 1998

|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |         |         | 
|---------------------------------------- | ----------------------------------- | ---------------------------------- | ------- | ------------ | ------- | ----------------- | ------ | ---------------- | ------ | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                         |                                     | As Previously                      |         |              |         | EITF 01-09        |        | As Restated     
|                                         |                                     | Reported                           |         | Inaccuracies |         | Reclassifications |        | and Reclassified
|                                         |                                     |                                    |         |              |         |                   |        |                 
|Net revenue:                             |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|Product                                  |                                     | $                                  | 831,363 |              |         | $                 |       |                  |        | $ | (28,362 | )       |         | $ | 803,001 |        
|Services and support                     |                                     |                                    | 158,682 |              |         |                   |       |                  |        |   |        |         |         |   | 158,682 |        
|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|                                         |                                     | Total net revenue                  |         |              | 990,045 |                   |        |                  |       |   |         |         | (28,362 | ) |         |         | 961,683 | 
|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|Cost of net revenue:                     |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|Product                                  |                                     |                                    | 137,374 |              |         |                   |       |                  |        |   |        |         |         |   | 137,374 |        
|Services and support                     |                                     |                                    | 39,674  |              |         |                   |       |                  |        |   |        |         |         |   | 39,674  |        
|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|                                         |                                     | Total cost of net revenue          |         |              | 177,048 |                   |        |                  |       |   |         |         |        |   |         |         | 177,048 | 
|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|Operating costs and expenses:            |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|                                         | Research and development            |                                    |         | 135,475      |         |                   |        |                 |        |   |         |        |         |   |         | 135,475 |        
|                                         | Marketing and sales                 |                                    |         | 294,812      |         |                   |        |                 |        |   |         | (28,362 | )       |   |         | 266,450 |        
|                                         | General and administrative          |                                    |         | 83,946       |         |                   |        | 6,160            |        |   |         |        |         |   |         | 90,106  |        
|                                         | Amortization of intangibles         |                                    |         | 43,182       |         |                   |        |                 |        |   |         |        |         |   |         | 43,182  |        
|                                         | Acquisition and other related costs |                                    |         | 135,616      |         |                   |        |                 |        |   |         |        |         |   |         | 135,616 |        
|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|                                         |                                     | Total operating costs and expenses |         |              | 693,031 |                   |        |                  | 6,160  |   |         |         | (28,362 | ) |         |         | 670,829 | 
|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|                                         |                                     | Income from operations             |         |              | 119,966 |                   |        |                  | (6,160 | ) |         |         |        |   |         |         | 113,806 | 
|Interest and other income                |                                     |                                    | 33,257  |              |         |                   |       |                  |        |   |        |         |         |   | 33,257  |        
|Interest expense                         |                                     |                                    | (15,246 | )            |         |                   |       |                  |        |   |        |         |         |   | (15,246 | )      
|Gain (loss) on investments, net          |                                     |                                    | 190     |              |         |                   |       |                  |        |   |        |         |         |   | 190     |        
|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|Income before provision for income taxes |                                     |                                    | 138,167 |              |         |                   | (6,160 | )                |        |   |        |         |         |   | 132,007 |        
|Provision for income taxes               |                                     |                                    | 101,729 |              |         |                   | (2,156 | )                |        |   |        |         |         |   | 99,573  |        
|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|                                         |                                     | Net income                         |         | $            | 36,438  |                   |        | $                | (4,004 | ) |         | $       |        |   |         | $       | 32,434  | 
|                                         |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|Basic and diluted net income per share:  |                                     |                                    |         |              |         |                   |        |                  |        |   |         |         |         |   |         |        
|Net income per share  basic             |                                     | $                                  | 0.27    |              |         |                   |        |                  |        |   |         |         |         | $ | 0.24    |        
|Net income per share  diluted           |                                     | $                                  | 0.26    |              |         |                   |        |                  |        |   |         |         |         | $ | 0.23    |        
|Basic shares                             |                                     |                                    | 133,075 |              |         |                   |        |                  |        |   |         |         |         |   | 133,075 |        
|Diluted shares                           |                                     |                                    | 138,609 |              |         |                   |        |                  |        |   |         |         |         |   | 138,609 |        

67



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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            |                   | Purchase Price of    
|                        |  | Pooling of Interests |                   | Purchase Transactions
|                        |  |                      |                   |                      
|2000                    |  |                      |                   |                       |  |  |                | 
|McAfee.com acquisitions |  |                      |                   |                       |  |  | $22.3 million  | 
|1999                    |  |                      |                   |                       |  |  |                | 
|none                  |  |                      |                   |                       |  |  |                | 
|1998                    |  |                      |                   |                       |  |  |                | 
|Syscon                  |  |                      | 1,230 shares      |                       |  |  |                | 
|Nordic                  |  |                      | 30,508 shares     |                       |  |  |                | 
|Magic Solutions         |  |                      |                   |                       |  |  | $140.3 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              |  |                      |                   |                       |  |  | $174.3 million | 

Purchase
Combinations

McAfee.com completed two acquisitions for total
consideration, including the issuance of approximately 550,000
of its Class A common stock, valued at approximately
$22.3 million. The acquisitions were accounted for using
the purchase method of accounting and the total combined
purchase price was approximately $22.3 million, including
transaction costs. McAfee.com analyzed the intangible assets to
determine whether any amount should be recorded as in-process
research and development, however McAfee.com determined that the
acquired technologies and products are largely dependent on the
core technology and that new versions are released frequently
and contain incremental rather than fundamental improvements.
Based on this analysis $22.3 million was recorded as
goodwill and purchased technology, and is being amortized on a
straight-line basis over three years.

The results of operations of these companies have
been included within the consolidated results from the date of
acquisition.

In December 2000, in accordance with its
accounting policy, 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. The
historical operations of these acquisitions were not material to
the Companys financial position, results of operations, or
cash flows.

Networks Associates, Inc. made no acquisitions in
2000 and 1999.

68



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company made the following acquisitions
during the year ended December 31, 1998 which were accounted for
using the purchase method of accounting:



| |                 
| | ----------------
| | 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. 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 $130.4 million. The total purchase price
including transaction costs and assumed net liabilities was
approximately $174.3 million. 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 total purchase price included related
liabilities of $13.3 million. Of the total purchase price,
$22.8 million was allocated to in-process research and
development. In addition, $12.2 million was allocated to
existing technology and other intangibles and
$139.3 million to goodwill, to be amortized over 3 and
7 years, respectively. 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. This analysis resulted in $22.8 million being
assigned to in-process research and development projects that
had not yet reached technological feasibility and did not have
alternative future use.



| |                                    
| | -----------------------------------
| | 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, f for a the total purchase price of approximately
$140.3 million, including transaction costs and assumed net
liabilities. 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 of
$8.7 million. Approximately $27.0 million of the total
purchase price was expensed as purchased in-process research and
development. The remaining excess of the purchase price over the
net assets acquired was $113.3 million, of which
$20.3 million has been recorded as purchased technology and
trademarks and $92.9 million as goodwill, both being
amortized on a straight-line basis over 5 and 7 years,
respectively. 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. This analysis
resulted in $27.0 million being assigned to in-process
research and development projects, which had not yet reached
technological feasibility and did not have alternative future
use.

69



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, the write-off of in-process
technology and the related income tax effects (dollars in
thousands, except per share amounts):

|                   |  |               |         |  
|------------------ |  | ------------- | ------- | -
|                   |  | (Unaudited)  
|                   |  | (As restated)
|Revenue            |  | $             | 955,686 |  
|Net loss           |  |               | (63,761 | )
|Net loss per share |  |               | (0.48   | )

The pro forma results are not necessarily
indicative of what actually would have occurred if the
acquisition had been in effect for the year ended
December 31, 1998. In addition, they are not intended to be
a projection of future results and do not reflect any synergies
that might be achieved from combined operations.

Pooling of
Interest Combinations



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

On August 13, 1998, the Company acquired Dr
Solomons Group PLC (Dr Solomons),
(the Acquisition), a European-based publicly-held
provider of anti-virus software products for approximately
15.3 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 financial statements have been restated to include
the results of Dr Solomons for all periods presented.
The results of operations for the year ended December 31,
1998 reflect the 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.

70



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                |                    |               |   |         | 
|------------------------------- | ------------------ | ------------- | - | ------- | 
|                                |                    | Year Ended   
|                                |                    | December 31, 
|                                |                    | 1998         
|                                |                    |              
|                                |                    | (As restated)
|Revenue:                        |                    |               |   |        
|                                | Network Associates |               | $ | 905,785 | 
|                                | Dr. Solomons      |               |   | 55,898  | 
|                                |                    |               |   |        
|                                | Combined           |               | $ | 961,683 | 
|                                |                    |               |   |        
|Net income:                     |                    |               |   |        
|                                | Network Associates |               | $ | 31,932  | 
|                                | Dr. Solomons      |               |   | 502     | 
|                                |                    |               |   |        
|                                | Combined           |               | $ | 32,434  | 
|                                |                    |               |   |        
|Comprehensive income:           |                    |               |   |        
|                                | Network Associates |               | $ | 29,126  | 
|                                | Dr. Solomons      |               |   |        | 
|                                |                    |               |   |        
|                                | Combined           |               | $ | 29,126  | 
|                                |                    |               |   |        
|Net income per share  diluted: |                    |               |   |        
|                                | Network Associates |               | $ | 0.23    | 
|                                | Dr. Solomons      |               | $ |        | 
|                                | Combined           |               | $ | 0.23    | 



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

On April 28, 1998, the Company acquired
Trusted Information Systems (TIS), a publicly-held
provider of comprehensive security systems for computer networks
in an acquisition. The acquisition was accounted for as a
pooling of interests and therefore all prior period 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). 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
financial statements have been restated to include the results
of Secure for all periods presented. Secure is a developer and
licensor of network security auditing software based in Canada.

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

On July 30, 1998, the Company acquired
Anyware Seguridad Informatica S.A. (Anyware).
The aggregate consideration payable in the acquisition was
228,204 shares of the Companys Common Stock in a

71



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

transaction accounted for as a pooling of
interests. Anyware, based in Madrid, Spain, is a developer and
distributor of anti-virus software products.

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

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)
|                                |  |                |         |            |  |            
|                                |  |               
|                                |  | (In thousands)
|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               |  |                | 14,548  |            |  |             | 16,020  |  |  |   | 1,472 |  
|                                |  |                |         |            |  |             |         |  |  |   |       |  
|                                |  | $              | 586,086 |            |  | $           | 588,874 |  |  | $ | 2,788 |  
|                                |  |                |         |            |  |             |         |  |  |   |       |  

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 3 months and are classified as cash
equivalents.

Available-for-Sale-Securities

|                                |  |                |         |            |  |             |         |  |  |   |        |  
|------------------------------- |  | -------------- | ------- | ---------- |  | ----------- | ------- |  |  | - | ------ | -
|                                |  | Amortized      |         | Aggregate  |  | Unrealized 
|1999                            |  | Cost           |         | Fair Value |  | Gain/(Loss)
|                                |  |                |         |            |  |            
|                                |  |               
|                                |  | (In thousands)
|U.S. Government debt securities |  | $              | 192,730 |            |  | $           | 191,121 |  |  | $ | (1,609 | )
|Municipal debt securities       |  |                | 69,676  |            |  |             | 68,954  |  |  |   | (722   | )
|Corporate debt securities       |  |                | 468,512 |            |  |             | 467,535 |  |  |   | (977   | )
|Equity securities               |  |                | 6,600   |            |  |             | 10,042  |  |  |   | 3,442  |  
|                                |  |                |         |            |  |             |         |  |  |   |        |  
|                                |  | $              | 737,518 |            |  | $           | 737,652 |  |  | $ | 134    |  
|                                |  |                |         |            |  |             |         |  |  |   |        |  

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 3 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 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

72



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 requires
the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to
fair value through 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.

The forward contracts outstanding and their
unrealized gains and (losses) are presented below (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  |  
|                          |  |           |        |          |  |             |        |  |  |   |     |  

73



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7.     Balance Sheet
Detail (in thousands):

|                                 |                                   |               |         |               |   |   |         |          |  
|-------------------------------- | --------------------------------- | ------------- | ------- | ------------- | - | - | ------- | -------- | -
|                                 |                                   |              
|                                 |                                   | December 31, 
|                                 |                                   |              
|                                 |                                   | 2000          |         | 1999         
|                                 |                                   |               |         |              
|                                 |                                   | (As restated) |         | (As restated)
|Fixed assets:                    |                                   |               |         |               |   |   |         |         
|                                 | Furniture and fixtures            |               | $       | 18,837        |   |   | $       | 15,918   |  
|                                 | Computers equipment               |               |         | 145,558       |   |   |         | 105,203  |  
|                                 | Leasehold improvements            |               |         | 20,068        |   |   |         | 13,191   |  
|                                 |                                   |               |         |               |   |   |         |         
|                                 |                                   |               | 184,463 |               |   |   | 134,312 |         
|                                 | Less accumulated depreciation     |               |         | (108,964      | ) |   |         | (88,920  | )
|                                 |                                   |               |         |               |   |   |         |         
|                                 |                                   | $             | 75,499  |               |   | $ | 45,392  |         
|                                 |                                   |               |         |               |   |   |         |         
|Intangibles assets (see Note 2): |                                   |               |         |               |   |   |         |         
|                                 | Goodwill                          |               | $       | 343,029       |   |   | $       | 327,024  |  
|                                 | Purchased technology              |               |         | 78,476        |   |   |         | 68,490   |  
|                                 | Other                             |               |         | 1,711         |   |   |         | 1,261    |  
|                                 |                                   |               |         |               |   |   |         |         
|                                 |                                   |               | 423,216 |               |   |   | 396,775 |         
|                                 | Less accumulated amortization     |               |         | (202,961      | ) |   |         | (143,535 | )
|                                 |                                   |               |         |               |   |   |         |         
|                                 |                                   |               | 220,255 |               |   |   | 253,240 |         
|Other assets                     |                                   |               | 22,020  |               |   |   | 13,622  |         
|                                 |                                   |               |         |               |   |   |         |         
|                                 |                                   | $             | 242,275 |               |   | $ | 266,862 |         
|                                 |                                   |               |         |               |   |   |         |         
|Accrued liabilities:             |                                   |               |         |               |   |   |         |         
|                                 | Accrued taxes                     |               | $       | 146,365       |   |   | $       | 158,863  |  
|                                 | Accrued compensation              |               |         | 36,649        |   |   |         | 38,150   |  
|                                 | Accrued marketing costs           |               |         | 22,899        |   |   |         | 19,393   |  
|                                 | Accrued inventory costs           |               |         | 6,830         |   |   |         | 10,193   |  
|                                 | Accrued legal and accounting fees |               |         | 6,670         |   |   |         | 9,669    |  
|                                 | Other accrued expenses            |               |         | 34,869        |   |   |         | 28,185   |  
|                                 |                                   |               |         |               |   |   |         |         
|                                 |                                   | $             | 254,282 |               |   | $ | 264,453 |         
|                                 |                                   |               |         |               |   |   |         |         

Depreciation and amortization expense for the
years ended December 31, 2000, 1999 and 1998 were
$90.1 million, $81.5 million and $75.3 million
respectively.

74



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Commitments:



| |       
| | ------
| | 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.     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 Debentures may be redeemed for cash at the
option of the Company beginning on February 13, 2003. At
the option of the holder, the Company will purchase the
Debentures on February 13, 2003, February 13, 2008 and
February 13, 2013 at purchase prices (to be paid in cash or
Common Stock or any combination thereof, at the election of the
Company and subject to certain conditions) equal to the initial
issue price plus the accretion of the discount on the debenture
to such dates. The Debentures may also be redeemed at the option
of the holder if there is a Fundamental Change (as defined in
the related indenture) at a price equal to the issue price plus
the accretion of the discount on the debenture to the date of
redemption, subject to adjustment. The accretion of the discount
on the debentures is calculated using the effective interest
method.

10.     Employee
Benefit Plans



| |                                   
| | ----------------------------------
| | 401(k) and Profit Sharing
    Plan

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.

75



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

11.     McAfee.com

McAfee.com is an Internet destination dedicated
to updating, upgrading, and managing PCs 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 379,000 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
$6.7 million.

12.     Stockholders
Equity



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

The Company has authorized 5 million shares
of preferred stock, par value $0.01 per share. The
Companys board of directors has authority to provide for
the issuance of the shares of preferred stock in series, to
establish from time to time the number of shares to be included
in each such series and to fix the designation, powers,
preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof, without any
further vote or action by the shareholders.

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

76



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 1,132,813 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 contracts and consultants. The plan
provides for an option price at fair value of the Companys
common stock on the date of grant. The options 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.

Aggregate activity under stock option plans is as
follows:

|                             |  |           |             |                     |  |                 |             |           |  |          |                  |  |  |   |              |   |  |   |       | 
|---------------------------- |  | --------- | ----------- | ------------------- |  | --------------- | ----------- | --------- |  | -------- | ---------------- |  |  | - | ------------ | - |  | - | ----- | 
|                             |  |           |             |                    
|                             |  |           |             | Outstanding Options
|                             |  |           |             |                    
|                             |  |           |             |                     |  | Weighted       
|                             |  | Shares    |             |                     |  | Average        
|                             |  | Available |             | Number of           |  |                 |             | Aggregate |  | Exercise
|                             |  | for Grant |             | Shares              |  | Price per Share |             | Price     |  | Price   
|                             |  |           |             |                     |  |                 |             |           |  |         
|Balances, December 31, 1997  |  |           | 7,092,810   |                     |  |                 | 20,071,012  |           |  |          | $ 0.23 - $ 44.42 |  |  |   | 401,038,273  |   |  | $ | 19.98 | 
|Additional shares authorized |  |           | 3,000,000   |                     |  |                 |            |           |  |          |                  |  |  |   |              |   |  |   |       | 
|Shares granted               |  |           | (11,397,414 | )                   |  |                 | 11,397,414  |           |  |          | $21.41 - $121.80 |  |  |   | 419,774,937  |   |  | $ | 36.83 | 
|Shares exercised             |  |           |            |                     |  |                 | (8,560,824  | )         |  |          | $ 0.06 - $ 44.42 |  |  |   | (144,646,193 | ) |  | $ | 16.90 | 
|Shares canceled              |  |           | 3,587,906   |                     |  |                 | (3,587,906  | )         |  |          | $ 0.65 - $ 48.38 |  |  |   | (92,013,391  | ) |  | $ | 25.65 | 
|                             |  |           |             |                     |  |                 |             |           |  |          |                  |  |  |   |              |   |  |   |       | 
|Balances, December 31, 1998  |  |           | 2,283,302   |                     |  |                 | 19,319,696  |           |  |          | $ 0.06 - $121.80 |  |  |   | 584,153,626  |   |  | $ | 30.24 | 
|Additional shares authorized |  |           | 9,200,000   |                     |  |                 |            |           |  |          |                  |  |  |   |              |   |  |   |       | 
|Shares granted               |  |           | (16,881,939 | )                   |  |                 | 16,881,939  |           |  |          | $11.06 - $ 56.00 |  |  |   | 242,970,168  |   |  | $ | 14.39 | 
|Shares exercised             |  |           |            |                     |  |                 | (1,196,165  | )         |  |          | $ 0.06 - $ 44.42 |  |  |   | (18,537,384  | ) |  | $ | 15.50 | 
|Shares canceled              |  |           | 14,921,896  |                     |  |                 | (14,921,896 | )         |  |          | $ 0.48 - $121.80 |  |  |   | (482,328,792 | ) |  | $ | 33.08 | 
|                             |  |           |             |                     |  |                 |             |           |  |          |                  |  |  |   |              |   |  |   |       | 
|Balances, December 31, 1999  |  |           | 9,523,259   |                     |  |                 | 20,083,574  |           |  |          | $ 0.06 - $ 56.00 |  |  | $ | 326,257,618  |   |  | $ | 16.24 | 
|Additional shares authorized |  |           | 6,000,000   |                     |  |                 |            |           |  |          |                  |  |  |   |              |   |  |   |       | 
|Option plan expirations      |  |           | (2,647,325  | )                   |  |                 |            |           |  |          |                  |  |  |   |              |   |  |   |       | 
|Shares granted               |  |           | (7,624,141  | )                   |  |                 | 7,624,141   |           |  |          | $ 3.31 - $ 36.69 |  |  |   | 180,070,024  |   |  | $ | 23.62 | 
|Shares exercised             |  |           |            |                     |  |                 | (3,035,637  | )         |  |          | $ 0.48 - $ 28.17 |  |  |   | (35,133,134  | ) |  | $ | 11.57 | 
|Shares canceled              |  |           | 5,426,172   |                     |  |                 | (5,426,172  | )         |  |          | $ 0.65 - $ 56.00 |  |  |   | (92,752,842  | ) |  | $ | 17.09 | 
|                             |  |           |             |                     |  |                 |             |           |  |          |                  |  |  |   |              |   |  |   |       | 
|Balances, December 31, 2000  |  |           | 10,677,965  |                     |  |                 | 19,245,906  |           |  |          | $ 0.23 - $ 44.58 |  |  | $ | 378,441,666  |   |  | $ | 19.62 | 
|                             |  |           |             |                     |  |                 |             |           |  |          |                  |  |  |   |              |   |  |   |       | 

77



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, Accounting for
Stock-Based Compensation. The Company has elected to
continue accounting for such plans in accordance with APB
No. 25.



| |                                          
| | -----------------------------------------
| | 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 (the 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 3 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 1 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 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 2 million shares of the Companys stock
for approximately $53.8 million.

For various price ranges, weighted average
characteristics of outstanding stock options at
December 31, 2000 were as follows:

|                         |  |                     |            |                        |  |                   |     |             |  |                  |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | ---------- | ---------------------- |  | ----------------- | --- | ----------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |            |                       
|                         |  | Options Outstanding |            | Options Exercisable   
|                         |  |                     |            |                       
|                         |  | Number              |            | Weighted Average       |  | Weighted          |     | Number      |  |                 
|                         |  | Outstanding         |            | Remaining              |  | Average           |     | Exercisable |  | Weighted Average
|Range of Exercise Prices |  | at 12/31/00         |            | Contractual Life (Yrs) |  | Exercisable Price |     | at 12/31/00 |  | Exercise Price  
|                         |  |                     |            |                        |  |                   |     |             |  |                 
|$ 0.00 - $ 6.00          |  |                     | 142,780    |                        |  |                   | 4.1 |             |  | $                | 4.77  |  |  |  | 140,199   |  |  | $ | 4.80  | 
|$ 6.01 - $12.00          |  |                     | 6,077,869  |                        |  |                   | 6.7 |             |  | $                | 10.62 |  |  |  | 4,139,152 |  |  | $ | 10.41 | 
|$12.01 - $20.00          |  |                     | 3,646,926  |                        |  |                   | 8.4 |             |  | $                | 16.25 |  |  |  | 1,463,205 |  |  | $ | 19.37 | 
|$20.01 - $36.00          |  |                     | 9,162,659  |                        |  |                   | 8.0 |             |  | $                | 25.84 |  |  |  | 3,345,065 |  |  | $ | 28.02 | 
|$36.01 - $60.90          |  |                     | 215,672    |                        |  |                   | 7.4 |             |  | $                | 42.91 |  |  |  | 115,841   |  |  | $ | 43.15 | 
|                         |  |                     |            |                        |  |                   |     |             |  |                  |       |  |  |  |           |  |  |   |       | 
|$ 0.00 - $60.90          |  |                     | 19,245,906 |                        |  |                   | 7.6 |             |  | $                | 19.26 |  |  |  | 9,203,462 |  |  | $ | 17.93 | 

78



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 in Note 10. Purchase periods occur twice yearly
and each effectively contains a 6 and 12 month option.

|                        |  |          |           |        |  |          |           |        |  |          |           |        |  |  |           |   |  |  |           |   |  |  |           |  
|----------------------- |  | -------- | --------- | ------ |  | -------- | --------- | ------ |  | -------- | --------- | ------ |  |  | --------- | - |  |  | --------- | - |  |  | --------- | -
|                        |  | February |           | August |  | February |           | August |  | February |           | August
|                        |  | 2000     |           | 2000   |  | 1999     |           | 1999   |  | 1998     |           | 1998  
|                        |  |          |           |        |  |          |           |        |  |          |           |       
|Risk Free Interest Rate |  |          | 6.31      | %      |  |          | 6.31      | %      |  |          | 4.52      | %      |  |  | 5.01      | % |  |  | 5.36      | % |  |  | 5.28      | %
|Expected Life           |  |          | 6, 12 mos |        |  |          | 6, 12 mos |        |  |          | 6, 12 mos |        |  |  | 6, 12 mos |   |  |  | 6, 12 mos |   |  |  | 6, 12 mos |  
|Volatility              |  |          | 0.91      |        |  |          | 0.91      |        |  |          | 0.66      |        |  |  | 0.66      |   |  |  | 0.63      |   |  |  | 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 grant date for awards from
1997 through 2000 consistent with the provisions of
SFAS 123, our net loss, basic and diluted loss per share
would have been as follows:

|                                             |  |              |          |              |  |              |          |   |  |   |         |  
|-------------------------------------------- |  | ------------ | -------- | ------------ |  | ------------ | -------- | - |  | - | ------- | -
|                                             |  | 2000         |          | 1999         |  | 1998        
|                                             |  |              |          |              |  |             
|                                             |  | (As restated |          | (As restated |  | (As restated
|                                             |  | see Note 3)  |          | see Note 3)  |  | see Note 3) 
|Net loss  pro forma (thousands)             |  | $            | (242,518 | )            |  | $            | (203,651 | ) |  | $ | (39,006 | )
|Net loss per share 
    diluted  pro forma |  | $            | (1.76    | )            |  | $            | (1.47    | ) |  | $ | (0.28   | )

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



| |         
| | --------
| | 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 per
share, which expire, subject to certain

79



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

extensions, on June 5, 2000. As of
December 31, 1999 warrants for 315,816 shares were
outstanding. 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.



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

13.     Provision for
Income Taxes

Pre-tax book income (loss) from continuing
operations for the years ended December 31, was earned in
the following jurisdictions (in thousands):

|         |  |              |          |              |  |              |          |   |  |   |         | 
|-------- |  | ------------ | -------- | ------------ |  | ------------ | -------- | - |  | - | ------- | 
|         |  | 2000         |          | 1999         |  | 1998        
|         |  |              |          |              |  |             
|         |  | (As restated |          | (As restated |  | (As restated
|         |  | see Note 3)  |          | see Note 3)  |  | see Note 3) 
|Domestic |  | $            | (83,822  | )            |  | $            | (249,520 | ) |  | $ | 117,375 | 
|Foreign  |  |              | (28,554  | )            |  |              | 88,798   |   |  |   | 14,632  | 
|         |  |              |          |              |  |              |          |   |  |   |         | 
|         |  | $            | (112,376 | )            |  | $            | (160,722 | ) |  | $ | 132,007 | 
|         |  |              |          |              |  |              |          |   |  |   |         | 

80



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                           |          |                          |        |              |         |              |        |         |         |   |        |         |        | 
|-------------------------- | -------- | ------------------------ | ------ | ------------ | ------- | ------------ | ------ | ------- | ------- | - | ------ | ------- | ------ | 
|                           |          |                         
|                           |          | Years Ended December 31,
|                           |          |                         
|                           |          | 2000                     |        | 1999         |         | 1998        
|                           |          |                          |        |              |         |             
|                           |          | (As restated             |        | (As restated |         | (As restated
|                           |          | see Note 3)              |        | see Note 3)  |         | see Note 3) 
|Federal:                   |          |                          |        |              |         |              |        |         |         |   |        |        
|                           | Current  |                          | $      | 2,949        |         |              | $      | 30,565  |         |   | $      | 111,419 |       
|                           | Deferred |                          |        | (18,594      | )       |              |        | (68,659 | )       |   |        | (41,311 | )     
|                           |          |                          |        |              |         |              |        |         |         |   |        |        
|                           |          | Total federal            |        |              | (15,645 | )            |        |         | (38,094 | ) |        |         | 70,108 | 
|State:                     |          |                          |        |              |         |              |        |         |         |   |        |        
|                           | Current  |                          |        | 275          |         |              |        | 216     |         |   |        | 21,224  |       
|                           | Deferred |                          |        | (4,465       | )       |              |        | (5,160  | )       |   |        | (5,633  | )     
|                           |          |                          |        |              |         |              |        |         |         |   |        |        
|                           |          | Total state              |        |              | (4,190  | )            |        |         | (4,944  | ) |        |         | 15,591 | 
|Foreign:                   |          |                          |        |              |         |              |        |         |         |   |        |        
|                           | Current  |                          |        | 39,423       |         |              |        | 47,569  |         |   |        | 13,874  |       
|                           | Deferred |                          |        | (3,084       | )       |              |        | (8,028  | )       |   |        |        |       
|                           |          |                          |        |              |         |              |        |         |         |   |        |        
|                           |          | Total Foreign            |        |              | 36,339  |              |        |         | 39,541  |   |        |         | 13,874 | 
|                           |          |                          |        |              |         |              |        |         |         |   |        |        
|Provision for income taxes |          | $                        | 16,504 |              |         | $            | (3,497 | )       |         | $ | 99,573 |        
|                           |          |                          |        |              |         |              |        |         |         |   |        |        

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

|                                 |  |                          |          |              |  |              |         |   |  |   |         |  
|-------------------------------- |  | ------------------------ | -------- | ------------ |  | ------------ | ------- | - |  | - | ------- | -
|                                 |  |                         
|                                 |  | Years Ended December 31,
|                                 |  |                         
|                                 |  | 2000                     |          | 1999         |  | 1998        
|                                 |  |                          |          |              |  |             
|                                 |  | (As restated             |          | (As restated |  | (As restated
|                                 |  | see Note 3)              |          | see Note 3)  |  | see Note 3) 
|Deferred revenue                 |  | $                        | 25,372   |              |  | $            | 10,786  |   |  | $ | 10,390  |  
|State taxes                      |  |                          | 110      |              |  |              | 546     |   |  |   | 2,082   |  
|Accrued liabilities and reserves |  |                          | 61,290   |              |  |              | 54,355  |   |  |   | 53,394  |  
|Depreciation and amortization    |  |                          | 83,327   |              |  |              | 43,581  |   |  |   | 30,533  |  
|Tax credits                      |  |                          | 90,524   |              |  |              | 56,211  |   |  |   |        |  
|Net operating loss carryover     |  |                          | 68,386   |              |  |              | 81,570  |   |  |   | 30,130  |  
|                                 |  |                          |          |              |  |              |         |   |  |   |         |  
|                                 |  |                          | 329,009  |              |  |              | 247,049 |   |  |   | 126,529 |  
|Valuation allowance              |  |                          | (121,977 | )            |  |              | (63,556 | ) |  |   | (22,458 | )
|                                 |  |                          |          |              |  |              |         |   |  |   |         |  
|                                 |  |                          | 207,032  |              |  |              | 183,493 |   |  |   | 104,071 |  
|Deferred liability               |  |                          | 7,971    |              |  |              | 10,575  |   |  |   | 13,000  |  
|                                 |  |                          |          |              |  |              |         |   |  |   |         |  
|Net deferred tax asset           |  | $                        | 199,061  |              |  | $            | 172,918 |   |  | $ | 91,071  |  
|                                 |  |                          |          |              |  |              |         |   |  |   |         |  
|Current portion                  |  | $                        | 86,771   |              |  | $            | 79,186  |   |  | $ | 65,866  |  
|Non-current portion              |  |                          | 112,290  |              |  |              | 93,732  |   |  |   | 25,205  |  
|                                 |  |                          |          |              |  |              |         |   |  |   |         |  
|                                 |  | $                        | 199,061  |              |  | $            | 172,918 |   |  | $ | 91,071  |  
|                                 |  |                          |          |              |  |              |         |   |  |   |         |  

Realization of net deferred tax assets of
$199.1 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

81



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

realizable, however, could be reduced in the near
term if estimates of future taxable income are reduced. A
valuation allowance has been recorded as a result of
uncertainties related to the deferred tax asset realization.

At December 31, 2000, the Company has
available net operating loss carry-forwards for income tax
purposes of approximately $195.3 million; U.S. federal
losses of approximately $170.8 million, which expire from
2009 to 2021, and foreign losses of approximately
$24.5 million, which have no expiration. 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
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
|                                                                 |  | see Note 3)              |         | see Note 3)  |  | see Note 3) 
|U.S. Federal income tax provision
    (benefit) statutory rate   |  | $                        | (39,332 | )            |  | $            | (56,253 | ) |  | $ | 46,202 |  
|State taxes provision (benefit)                                  |  |                          | (4,790  | )            |  |              | (6,597  | ) |  |   | 6,135  |  
|Non deductible acquisition and other costs                       |  |                          | 13,733  |              |  |              | 43,371  |   |  |   | 40,900 |  
|Tax exempt interest income                                       |  |                          |        |              |  |              |        |   |  |   | (1,392 | )
|Foreign earnings taxed at rates different than
    the U.S. rate |  |                          | (337    | )            |  |              | 8,462   |   |  |   | (8,753 | )
|Goodwill and other permanent differences                         |  |                          | 25,354  |              |  |              | 21,020  |   |  |   | 22,481 |  
|Tax credits                                                      |  |                          | (4,583  | )            |  |              | (13,500 | ) |  |   | (6,000 | )
|Subsidiary losses not benefited                                  |  |                          | 26,459  |              |  |              |        |   |  |   |       |  
|                                                                 |  |                          |         |              |  |              |         |   |  |   |        |  
|                                                                 |  | $                        | 16,504  |              |  | $            | (3,497  | ) |  | $ | 99,573 |  
|                                                                 |  |                          |         |              |  |              |         |   |  |   |        |  

82



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     Net Income
(Loss) Per Share

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

|                                                 |  |                          |          |              |  |              |          |   |  |   |         | 
|------------------------------------------------ |  | ------------------------ | -------- | ------------ |  | ------------ | -------- | - |  | - | ------- | 
|                                                 |  |                         
|                                                 |  | Years Ended December 31,
|                                                 |  |                         
|                                                 |  | 2000                     |          | 1999         |  | 1998        
|                                                 |  |                          |          |              |  |             
|                                                 |  | (As restated             |          | (As restated |  | (As restated
|                                                 |  | see Note 3)              |          | see Note 3)  |  | see Note 3) 
|Numerator  Basic                                |  |                          |          |              |  |              |          |   |  |   |         | 
|Net income (loss)                                |  | $                        | (123,926 | )            |  | $            | (156,885 | ) |  | $ | 32,434  | 
|Numerator  Diluted                              |  |                          |          |              |  |              |          |   |  |   |         | 
|Net income (loss)                                |  | $                        | (123,926 | )            |  | $            | (156,885 | ) |  | $ | 32,434  | 
|Interest on convertible debentures(1)            |  |                          |         |              |  |              |         |   |  |   |        | 
|                                                 |  |                          |          |              |  |              |          |   |  |   |         | 
|                                                 |  | $                        | (123,926 | )            |  | $            | (156,885 | ) |  | $ | 32,434  | 
|                                                 |  |                          |          |              |  |              |          |   |  |   |         | 
|Denominator  Basic                              |  |                          |          |              |  |              |          |   |  |   |         | 
|Basic weighted average common shares outstanding |  |                          | 138,072  |              |  |              | 138,695  |   |  |   | 133,075 | 
|                                                 |  |                          |          |              |  |              |          |   |  |   |         | 
|Denominator  Diluted                            |  |                          |          |              |  |              |          |   |  |   |         | 
|Basic weighted average common shares outstanding |  |                          | 138,072  |              |  |              | 138,695  |   |  |   | 133,075 | 
|Effective of dilutive securities:                |  |                          |          |              |  |              |          |   |  |   |         | 
|Common stock options(2)                          |  |                          |         |              |  |              |         |   |  |   | 5,534   | 
|                                                 |  |                          |          |              |  |              |          |   |  |   |         | 
|Diluted weighted average shares                  |  |                          | 138,072  |              |  |              | 138,695  |   |  |   | 138,609 | 
|                                                 |  |                          |          |              |  |              |          |   |  |   |         | 
|Net income (loss) per share  Basic              |  | $                        | (0.90    | )            |  | $            | (1.13    | ) |  | $ | 0.24    | 
|                                                 |  |                          |          |              |  |              |          |   |  |   |         | 
|Net income (loss) per share 
    Diluted        |  | $                        | (0.90    | )            |  | $            | (1.13    | ) |  | $ | 0.23    | 
|                                                 |  |                          |          |              |  |              |          |   |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 20.1,
    and 19.3 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, 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 a 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.

83



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                |              |                          |   |                  |   |                  |   |          |   |  |   |         |  
|--------------- | ------------ | ------------------------ | - | ---------------- | - | ---------------- | - | -------- | - |  | - | ------- | -
|                |              |                         
|                |              | Years Ended December 31,
|                |              |                         
|                |              | 2000                     |   | 1999             |   | 1998            
|                |              |                          |   |                  |   |                 
|                |              | (As restated             |   | (As restated     |   | (As restated    
|                |              | and reclassified         |   | and reclassified |   | and reclassified
|                |              | see Note 3)              |   | see Note 3)      |   | see Note 3)     
|Infrastructure: |              |                          |   |                  |   |                  |   |          |   |  |   |        
|                | Net revenue  |                          | $ | 643,166          |   |                  | $ | 586,487  |   |  | $ | 955,391 |  
|                | Segment loss |                          |   | (71,588          | ) |                  |   | (128,960 | ) |  |   | 34,427  |  
|McAfee.com:     |              |                          |   |                  |   |                  |   |          |   |  |   |        
|                | Net revenue  |                          |   | 46,866           |   |                  |   | 24,497   |   |  |   | 6,292   |  
|                | Segment loss |                          |   | (27,469          | ) |                  |   | (27,925  | ) |  |   | (1,993  | )
|myCIO.com:      |              |                          |   |                  |   |                  |   |          |   |  |   |        
|                | Net revenue  |                          |   | 7,710            |   |                  |   | N/A      |   |  |   | N/A     |  
|                | Segment loss |                          |   | (24,869          | ) |                  |   | N/A      |   |  |   | N/A     |  

|                |              |              |   |              |  |  |   |           | 
|--------------- | ------------ | ------------ | - | ------------ |  |  | - | --------- | 
|                |              | December 31, |   | December 31,
|                |              | 2000         |   | 1999        
|                |              |              |   |             
|                |              | (As restated |   | (As restated
|                |              | see Note 3)  |   | see Note 3) 
|Infrastructure: |              |              |   |              |  |  |   |          
|                | Total Assets |              | $ | 1,275,247    |  |  | $ | 1,394,510 | 
|McAfee.com:     |              |              |   |              |  |  |   |          
|                | Total Assets |              |   | 98,132       |  |  |   | 95,287    | 
|myCIO.com:      |              |              |   |              |  |  |   |          
|                | Total Assets |              |   | 18,241       |  |  |   | N/A       | 

84



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
|                  |                     | see Note 3)  |   | see Note 3)  |         | see Note 3) 
|Revenue           |                     |              |   |              |         |              |   |         |         |  |   |        
|                  | United States       |              | $ | 430,638      |         |              | $ | 340,399 |         |  | $ | 606,819 |        
|                  | Netherlands         |              |   | 210,308      |         |              |   | 203,853 |         |  |   | 213,725 |        
|                  | Other International |              |   | 56,796       |         |              |   | 66,732  |         |  |   | 141,139 |        
|                  |                     |              |   |              |         |              |   |         |         |  |   |        
|                  |                     | Total        |   | $            | 697,742 |              |   | $       | 610,984 |  |   | $       | 961,683 | 
|                  |                     |              |   |              |         |              |   |         |         |  |   |        
|Long-Lived Assets |                     |              |   |              |         |              |   |         |         |  |   |        
|                  | United States       |              | $ | 61,543       |         |              | $ | 33,569  |         |  | $ | 39,429  |        
|                  | United Kingdom      |              |   |             |         |              |   |        |         |  |   | 6,713   |        
|                  | Other Foreign       |              |   | 13,956       |         |              |   | 11,823  |         |  |   | 8,347   |        
|                  |                     |              |   |              |         |              |   |         |         |  |   |        
|                  |                     | Total        |   | $            | 75,499  |              |   | $       | 45,392  |  |   | $       | 54,489  | 
|                  |                     |              |   |              |         |              |   |         |         |  |   |        

Revenue from the Netherlands relates to sales
activities in Europe, Mexico, Canada, and Asia-Pacific,
excluding Japan. Sales activities include billing and shipping
activities.

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

|                  |       |                  |         |                  |  |   |         |         | 
|----------------- | ----- | ---------------- | ------- | ---------------- |  | - | ------- | ------- | 
|                  |       | 2000             |         | 1999            
|                  |       |                  |         |                 
|                  |       | (As restated     |         | (As restated    
|                  |       | and reclassified |         | and reclassified
|                  |       | see Note 3)      |         | see Note 3)     
|Software licenses |       | $                | 364,266 |                  |  | $ | 346,850 |        
|Maintenance       |       |                  | 160,662 |                  |  |   | 160,005 |        
|Hardware          |       |                  | 80,755  |                  |  |   | 42,189  |        
|Consulting        |       |                  | 34,578  |                  |  |   | 27,311  |        
|Other             |       |                  | 57,481  |                  |  |   | 34,629  |        
|                  |       |                  |         |                  |  |   |         |        
|                  | Total |                  | $       | 697,742          |  |   | $       | 610,984 | 
|                  |       |                  |         |                  |  |   |         |        

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, two customers had
accounts receivable balances greater than 10% our total accounts
receivable balance. During 2000, one customer accounted for 21%
of the total revenue for the year. No other customer accounted
for more than 10% of the total revenue in 1999.

16.     Litigation

General

From time to time, the Company is involved in
various disputes and litigation matters that arise in the
ordinary course of business. These include disputes and lawsuits
related to intellectual property, licensing, contract law,
distribution arrangements, and employee arrangement matters.

From time to time the Company has been subject to
litigation including the pending litigation described below. At
this time, management is unable to make a reasonable estimate of
the amount or range of loss that could result from an
unfavorable outcome for the pending litigation. Pending or
future litigation could be

85



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

costly, could cause the diversion of
managements attention and could have a material adverse
effect on the Companys business, results of operations and
financial condition.

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. (See
Note 21 for a discussion of the recent settlement
agreement.)

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, 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
have stipulated to dismissal of the action without prejudice and
have entered into a tolling agreement with respect to the claims
asserted by the State Board of Administration of Florida.

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 nominal defendant Network
Associates 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
Leightonaction the operative complaint. Defendants
demurrer to the operative complaint was sustained with leave to
amend. A First Amended Complaint was filed by the plaintiffs.
Network Associates 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. Discovery is ongoing.

Gage v. Network
Associates.A similar case, captioned
Gage v. Network Associates, Inc., et al.,Civil
Action No. B C211552, has been filed in the Superior Court
of California, County of Los Angeles. Plaintiffs allege
violations of Sections 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 to 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 Network Associates
demurrer to the Second Amended Complaint was overruled in part,
sustained in part with prejudice, and sustained in part without
prejudice. Gage has filed a Third Amended Complaint. A Motion to
Strike certain allegations of the Third Amended Complaint is
pending. Discovery is ongoing.

86



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Securities Lawsuits.Between December 29, 2000 and
February 7, 2001, Network Associates 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. The
cases are encaptioned as follows: Lukoff v. Network
Associates, Inc., et al.,Case No. CV-01-0008-MEJ;
Armour v. Network Associates, Inc., et al.,Case
No. C00-4849-EDL; Ann & Wendall Prevat. v.
Network Associates, Inc., et al.,Case
No. C01-0007-WDB; Rizzuti v. Network Associates,
et al.,Case No. C-01-20008-EAI; McDougald v.
Network Associates, et al.,Case
No. CV01-20103-ADR; 539, Inc. v. Network Associates,
et al.,Case No. C 01 0599-MMC. The
Armour, Wendel, Rizzuti, McDougald,and 539, Inc.complaints assert claims against Network Associates, William
Larson and Prabhat Goyal on behalf of a putative class of
persons who purchased Network Associates stock between
July 19 and December 26, 2000; the Lukoffcomplaint asserts claims against Network Associates, William
Larson, Prabhat Goyal, Leslie Denend, Virginia Gemmell, Edwin
Harper and Enzo Torresi on behalf of a putative class of persons
who purchased and/or acquired Network Associates stock between
October 16 and December 26, 2000. All of the
complaints assert causes of action (and seek unspecified
damages) for alleged violations of Exchange Act
Section 10(b)/SEC Rule 10b-5 and Exchange Act
Section 20(a). In particular, the complaints allege that
defendants made false and misleading statements about the
Companys anticipated financial results for the fourth
fiscal quarter of 2000, and that the Companys class period
financial statements failed to comply with GAAP. The cases have
not yet been consolidated.

Derivative Lawsuit.On February 5, 2001, the Company
was nominally sued in a derivative lawsuit filed in the Superior
Court in Santa Clara County. The lawsuit, encaptioned Mean
Ann Krim v. William L. Larson, et al.,Case
No. CV795734, asserts claims against certain of its current
and former officers, directors, and other parties for breach of
fiduciary duty, unjust enrichment and professional negligence
against the accountants. In particular, the complaints allege
that the defendants engaged in a course of conduct by which they
improperly accounted for revenue from software license sales,
and that, as a result of their actions, certain of the
Companys financial statements were false and misleading
and not in compliance with GAAP. The complaint seeks an
unspecified amount of damages.



| |                 
| | ----------------
| | Other Litigation

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.
The Court has set a hearing on NAIs further summary
judgment motion for April 25, 2001.

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.

Foremost Systems v. Network Associates,
No. CV 777301 (Santa Clara
County).A former agent of Network
Associates in India, Foremost Systems Pvt. Ltd., filed this
action on October 14, 1998, in California State court and
filed a Second Amended Complaint on February 18, 2000.
Network Associates removed the action to the United States
District Court, Northern District of California, San Jose
Division. The Second

87



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Amended Complaint alleges that Network Associates
wrongly terminated Foremost Systems in breach of their agency
agreement and, in addition, contains counts for breach of oral
contract, promissory estoppel, intentional and negligent
misrepresentation, breach of fiduciary duty, tortious
interference with contractual relations, unfair competition, and
racketeering in violation of 18 U.S.C. 1962 et seq.The parties held a preliminary mediation session in this
matter on April 5, 2000 and attended a full session for
March 12, 2001. A Case Management Conference in this matter
is set to take place on April 16, 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
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. Plaintiff filed an amended
complaint on June 21, 2000, adding a new defendant, Riaz
Karamali.

17.     Recent
Accounting Pronouncements

In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities, 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 Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25
(Interpretation). The Interpretation 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.

18.     Related Party
Transactions

The Company purchased 3,948,199 shares of
Series A Preferred Stock of DirectWeb, Inc. for
$2.5 million, and 4,615,385 shares of Series B
Preferred Stock for $6.0 million in 1999. 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 Chief Executive
Officer; 35.4% was owned by Dennis Cline, a DirectWeb founder
and the Companys former Vice President of Worldwide Sales;
and 17.1% was owned by unrelated third party investors who,
along with the Company, invested in DirectWebs
Series A and Series B Preferred Stock.

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

88



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

19.     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 Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to
Employees, 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
was expensed for the year ended December 31, 2000.

In March 2000, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25
(Interpretation). Among other issues, this
Interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 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 this
Interpretation, 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 the Interpretation 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
which 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 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.

89



---



##### Table of Contents



NETWORKS ASSOCIATES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

20.     Fixed Assets
Sale-Leaseback

On September 20, 1999, the Company sold
approximately $6.6 million of fixed assets, consisting
mostly of computer equipment, to a third party and leased them
back under an operating lease. The initial term of the lease is
12 months, with an option to renew the lease for an
additional 12 months. In October 2000, the Company
repurchased the fixed assets for approximately $5.2 million.

21.     Subsequent
Events (unaudited)

On January 24, 2001, the Companys
board of directors authorized the reservation of an additional
3 million options for the 2000 Nonstatutory Stock Option
Plan.

On February 2, 2001, the Company settled the
remaining put options which resulted in us purchasing
2.0 million shares of our stock for approximately
$53.8 million.

In February 2001, the Company announced its plan
to reintegrate myCIO.coms operations with its own, while
continuing to offer myCIO.coms products and services as
key offerings. Beginning 2001, myCIO.com will no longer
constitute a separate business segment.

In February 2001, the Company settled In Re
Network Associates, Inc. Securities Litigation a consolidated
action filed in April 1999, in Federal District Court. The
amount of the settlement is $30.0 million and is being
funded principally by the Companys Directors and Officers
insurance carriers. The settlement is subject to court approval.

90



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 28 day of June, 20002.



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

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

|                                             |  |                                                                                     |  | 
|-------------------------------------------- |  | ----------------------------------------------------------------------------------- |  | 
|                                             |  |                                                                                    
|Signature                                    |  | Title                                                                              
|                                             |  |                                                                                    
|/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/ LESLIE G. DENEND(Leslie G. Denend)       |  | Director                                                                           
|/s/ ROBERT DUTKOWSKY(Robert Dutkowsky)       |  | Director                                                                           
|/s/ ROBERT PANGIA(Robert Pangia)             |  | Director                                                                           
|/s/ LIANE WILSON(Liane Wilson)               |  | Director                                                                           

91



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS ON

FINANCIAL STATEMENT SCHEDULE


To the Board of Directors and Stockholders of

Networks Associates, Inc.


Santa Clara, California


Our audits of the consolidated financial
statements referred to in our report dated January 24,
2001, except as to Note 3, which is as of May 17, 2002,
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.

/S/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

January 24, 2001, except as to Note 3,


which is as of May 17, 2002


92



---



##### Table of Contents



SCHEDULE II

NETWORKS ASSOCIATES, INC.

SCHEDULE OF VALUATION AND QUALIFYING
ACCOUNTS

At December 31, 2000, as
Restated


|                             |                                 |                |   |                   |  |            |   |                |  |  |   |         |  |  |   |        | 
|---------------------------- | ------------------------------- | -------------- | - | ----------------- |  | ---------- | - | -------------- |  |  | - | ------- |  |  | - | ------ | 
|                             |                                 | Balance at     |   | Additions Charged |  |            |   |               
|                             |                                 | Beginning of   |   | to Expense        |  |            |   | Balance at End
|                             |                                 | Period         |   | or Revenue        |  | Deductions |   | of Period     
|                             |                                 |                |   |                   |  |            |   |               
|                             |                                 |               
|                             |                                 | (In thousands)
|Year Ended December 31, 2000 |                                 |                |   |                   |  |            |   |                |  |  |   |         |  |  |   |       
|                             | Allowance for Doubtful Accounts |                | $ | 16,249            |  |            | $ | 9,924          |  |  | $ | 10,841  |  |  | $ | 15,332 | 
|                             | Allowance for Sales Returns     |                | $ | 72,298            |  |            | $ | 100,202        |  |  | $ | 121,420 |  |  | $ | 51,080 | 
|Year Ended December 31, 1999 |                                 |                |   |                   |  |            |   |                |  |  |   |         |  |  |   |       
|                             | Allowance for Doubtful Accounts |                | $ | 11,682            |  |            | $ | 44,809         |  |  | $ | 40,242  |  |  | $ | 16,249 | 
|                             | Allowance for Sales Returns     |                | $ | 85,631            |  |            | $ | 178,118        |  |  | $ | 191,451 |  |  | $ | 72,298 | 
|Year Ended December 31, 1998 |                                 |                |   |                   |  |            |   |                |  |  |   |         |  |  |   |       
|                             | Allowance for Doubtful Accounts |                | $ | 5,107             |  |            | $ | 11,283         |  |  | $ | 4,708   |  |  | $ | 11,682 | 
|                             | Allowance for Sales Returns     |                | $ | 21,294            |  |            | $ | 91,870         |  |  | $ | 27,533  |  |  | $ | 85,631 | 

93



---



##### Table of Contents






EXHIBIT INDEX

|        |      |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|------- | ---- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |      |               |  | Page                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Number  |      | Exhibit Title |  | Number                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |      |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 2.1  |               |  | Agreement and Plan of Reorganization, dated
    October 13, 1997, among McAfee Associates, Inc., Mystery
    Acquisition Corp. and Network General Corporation, as amended by
    the First Amendment dated as of October 22, 1997.(1)                                                                                                                                                                                                                                                                  |  |  |  | 
|        | 2.2  |               |  | Combination Agreement dated August 16, 1996
    among the Registrant, FSA Combination Corp., FSA Corporation and
    Daniel Freedman.(2)                                                                                                                                                                                                                                                                                                                                                                |  |  |  | 
|        | 2.3  |               |  | Stock Exchange Agreement dated January 13,
    1996 among the Registrant, FSA Combination Corp., Kabushiki
    Kaisha Jade and the shareholders of Jade.(3)                                                                                                                                                                                                                                                                                                                                             |  |  |  | 
|        | 2.4  |               |  | Agreement and Plan of Reorganization dated
    December 1, 1997 between the Registrant, Helix Software
    Company an DNA Acquisition Corp.(4)                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|        | 2.5  |               |  | Agreement and Plan of Reorganization dated
    December 1, 1997 between the Registrant, PGP and PG
    Acquisition Corp.(5)                                                                                                                                                                                                                                                                                                                                                                             |  |  |  | 
|        | 2.6  |               |  | Agreement and Plan of Reorganization dated
    February 22, 1998, between the Registrant, TIS and Thor
    Acquisition Corp.(6)                                                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|        | 2.7  |               |  | Agreement and Plan of Reorganization by and among
    the Registrant, Magic Solutions International, Inc., Merlin
    Acquisition Corp. and Igal Lichtman, Amendment Agreement by and
    among the Registrant, Magic Solutions International, Inc.,
    Merlin Acquisition Corp., and Igal Lichtman dated March 24,
    1998. Second Amendment Agreement by and among the Registrant,
    Magic Solutions International, Inc., Merlin Acquisition Corp.,
    and Igal Lichtman dated April 1, 1998.(7) |  |  |  | 
|        | 2.8  |               |  | Stock Purchase Agreement, dated as of
    February 26, 1998, by and between FSA Combination Corp.,
    and Brenda Joyce Cook.(8)                                                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|        | 2.9  |               |  | Share Purchase Agreement, dated as of
    March 30, 1998, among FSA Combination Corp., and Irina
    Karlsson and Jarmo Rouvinen.(8)                                                                                                                                                                                                                                                                                                                                                                    |  |  |  | 
|        | 2.10 |               |  | Stock Purchase Agreement, dated as of May 8,
    1998, among FSA Combination Corp., and Secure Networks, Inc.(8)                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|        | 2.11 |               |  | Transaction Agreement, dated June 9, 1998,
    by and between the Registrant and Dr. Solomons Group
    Plc.(21)                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  | 
|        | 2.12 |               |  | Agreement and Plan of Merger, dated July 28,
    1998, by and between the Registrant and CyberMedia, Inc.(22)                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  | 
|        | 3.1  |               |  | Second Restated Certificate of Incorporation of
    Networks Associates, Inc., as amended on December 1,
    1997.(6)                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|        | 3.2  |               |  | Restated Bylaws of Networks Associates, Inc.(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|        | 3.3  |               |  | Certificate of Designation of Series A
    Preferred Stock of Networks Associates, Inc.(9)                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  | 
|        | 3.4  |               |  | Certificate of Designation of Series B
    Participating Preferred Stock of the Registrant.(23)                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|        | 4.2  |               |  | Registration Rights Agreement dated
    August 30, 1996 between the Registrant and Daniel
    Freedman.(1)                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  | 
|        | 4.5  |               |  | Registration Rights Agreement dated
    December 9, 1997 between the Registrant and certain
    shareholders of PGP.(4)                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|        | 4.6  |               |  | Registration Rights Agreement, dated as of
    February 13, 1998, by and between the Registrant and Morgan
    Stanley & Co. Incorporated.(10)                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|        | 4.7  |               |  | Indenture dated as of February 13, 1998
    between the Registrant and State Street Bank and Trust Company
    of California, N.A., as Trustee.(10)                                                                                                                                                                                                                                                                                                                                                     |  |  |  | 
|        | 4.10 |               |  | Registration Rights Agreement dated May 8,
    1998, by and between the Registrant and the stockholders of
    Secure Networks, Inc.(8)                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|        | 4.11 |               |  | Registration Rights Agreement, dated
    June 29, 1998, by and between the Registrant and certain
    stockholders of CSB Consulenza Software di Base S.r.l.
    (CSB).(11)                                                                                                                                                                                                                                                                                                                           |  |  |  | 

94



---



##### Table of Contents



|        |        |               |  |                                                                                                                                                                                                                                                                              |  |  |  | 
|------- | ------ | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |        |               |  | Page                                                                                                                                                                                                                                                                        
|Number  |        | Exhibit Title |  | Number                                                                                                                                                                                                                                                                      
|        |        |               |  |                                                                                                                                                                                                                                                                             
|        | 4.12   |               |  | Registration Rights Agreement, dated
    July 30, 1998, by and between the Registrant and certain
    stockholders of Anyware Seguridad Informatica S.A.(11)                                                                                                                 |  |  |  | 
|        | 4.13   |               |  | Registration Rights Agreement, dated
    August 31, 1998, by and between the Registrant and certain
    stockholders of QA Information Security Holding AB.(24)                                                                                                              |  |  |  | 
|        | 10.1   |               |  | Standard Business Lease (Net) for Network
    Generals principal facility dated June 19, 1991,
    between Network General and Menlo Oaks Partners, L.P.(12)                                                                                                                |  |  |  | 
|        | 10.2   |               |  | First Amendment to Lease dated June 10,
    1992, between Network General and Menlo Parks Partners, L.P.(12)                                                                                                                                                                 |  |  |  | 
|        | 10.3   |               |  | Standard Business Lease (Net) for Network
    Generals principal facility dated March 11, 1992,
    between Network General and Menlo Oaks Partners L.P.(13)                                                                                                                |  |  |  | 
|        | 10.4   |               |  | First Amendment to Lease dated June 18,
    1992, between Network General and Menlo Oaks Partners, L.P.(12)                                                                                                                                                                  |  |  |  | 
|        | 10.5   |               |  | Lease dated March 31, 1992, between Network
    General and Equitable Life Assurance Society of the United
    States.(12)                                                                                                                                                   |  |  |  | 
|        | 10.6   |               |  | Second Amendment to Lease dated February 1,
    1995, between Network General and Menlo Oaks Partners, L.P.(13)                                                                                                                                                              |  |  |  | 
|        | 10.7   |               |  | Third amendment to Lease dated February 1,
    1995 between Network General and Menlo Oaks Partners L.P.(13)                                                                                                                                                                 |  |  |  | 
|        | 10.8   |               |  | Fourth Amendment to Lease dated May 31,
    1995, between Network General and Menlo Oaks Partners, L.P.(14)                                                                                                                                                                  |  |  |  | 
|        | 10.9   |               |  | Fifth Amendment to Lease dated June 13,
    1995, between Network General and Menlo Oaks Partners, L.P.(14)                                                                                                                                                                  |  |  |  | 
|        | 10.10  |               |  | Lease dated July 3, 1996 between Network
    General and Campbell Avenue Associates.(15)                                                                                                                                                                                     |  |  |  | 
|        | 10.11  |               |  | Sixth Amendment to Lease dated November 29,
    1996, between Network General and Menlo Oaks Partners, L.P.(15)                                                                                                                                                              |  |  |  | 
|        | 10.12  |               |  | Sublease Agreement for facility at 2805 Bowers
    Avenue, Santa Clara, California, dated as of February 20,
    1997, by and between McAfee Associates, Inc. and National
    Semiconductor Corporation.(16)                                                                |  |  |  | 
|        | 10.13  |               |  | Lease Agreement dated November 17, 1997 for
    facility at 3965 Freedom Circle, Santa Clara, California by and
    between Informix Corporation and McAfee Associates, Inc.(4)                                                                                              |  |  |  | 
|        | 10.14  |               |  | Consent to Assignment Agreement dated
    December 19, 1997 by and among Birk S. McCandless,
    LLC, Guaranty Federal Bank, F.S.B., Informix Corporation and
    Networks Associates, Inc.(4)                                                                               |  |  |  | 
|        | 10.15  |               |  | Subordination, Nondisturbance and Attornment
    Agreement dated December 18, 1997, between Guaranty Federal
    Bank, F.S.B., Networks Associates, Inc. and Birk S.
    McCandless, LLC.(4)                                                                                 |  |  |  | 
|        | 10.16  |               |  | Lease dated November 22, 1996 by and between
    Birk S. McCandless, LLC and Informix Corporation for facility at
    3965 Freedom Circle, Santa Clara, California.(4)                                                                                                       |  |  |  | 
|        | 10.17  |               |  | Quota Purchase Agreement, dated as of
    April 14, 1997 by and among McAfee Associates, Inc. and
    McAfee Do Brasil Ltda., Compusul-Consultoria E Comercio De
    Informatica Ltda., and the stockholders of Compusul-Consultoria
    E Comercio De Informatica Ltda.(17) |  |  |  | 
|        | 10.18* |               |  | 1997 Stock Incentive Plan.(17)                                                                                                                                                                                                                                               |  |  |  | 
|        | 10.19* |               |  | Stock Option Plan for Outside Directors.(18)                                                                                                                                                                                                                                 |  |  |  | 
|        | 10.20* |               |  | 2000 Nonstatutory Stock Option Plan, as
    amended(27)                                                                                                                                                                                                                      |  |  |  | 
|        | 10.21* |               |  | Change in control agreement between the Company
    and Peter Watkins dated May 11, 1999.(25)                                                                                                                                                                                |  |  |  | 

95



---



##### Table of Contents



|        |        |               |  |                                                                                                                                                     |  |  |  | 
|------- | ------ | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |        |               |  | Page                                                                                                                                               
|Number  |        | Exhibit Title |  | Number                                                                                                                                             
|        |        |               |  |                                                                                                                                                    
|        | 10.22* |               |  | Change in control agreement between the Company
    and William L. Larson dated May 11, 1999.(25)                                                   |  |  |  | 
|        | 10.23* |               |  | Change in control agreement between the Company
    and Prabhat K. Goyal dated May 11, 1999.(25)                                                    |  |  |  | 
|        | 10.24* |               |  | Change in control agreement between the Company
    and Zachary Nelson, dated May 11, 1999.(25)                                                     |  |  |  | 
|        | 10.25  |               |  | Corporate Management Services Agreement between
    the Registrant and McAfee.com Corporation, dated as of
    January 1, 1999.(26)                 |  |  |  | 
|        | 10.26  |               |  | Technology Cross License Agreement between the
    Registrant and McAfee.com Corporation dated as of
    January 1, 1999.(26)                       |  |  |  | 
|        | 10.27  |               |  | Registration Rights Agreement between the
    Registrant and McAfee.com Corporation, dated as of
    January 1, 1999.(26)                           |  |  |  | 
|        | 10.28  |               |  | Asset Contribution and Receivables Settlement
    Agreement between the Registrant and McAfee.com Corporation,
    dated as of January 1, 1999.(26) |  |  |  | 
|        | 10.29  |               |  | Intercompany Revolving Loan Agreement between the
    Registrant and McAfee.com Corporation, dated as of
    January 1, 1999.(26)                   |  |  |  | 
|        | 10.30  |               |  | Tax Sharing Agreement between the Registrant and
    McAfee.com Corporation dated as of January 1, 1999.(26)                                        |  |  |  | 
|        | 10.31  |               |  | Indemnification and Voting Agreement between the
    Registrant and McAfee.com Corporation, dated as of
    January 1, 1999.(26)                    |  |  |  | 
|        | 10.32  |               |  | Joint Cooperation and Master Services Agreement
    between the Registrant and McAfee.com Corporation, dated as of
    January 1, 1999.(26)         |  |  |  | 
|        | 10.33* |               |  | Employment Agreement between George Samenuk and
    Registrant, dated January 2, 2001(27)                                                           |  |  |  | 
|        | 10.34* |               |  | Agreement between the Registrant and William
    Larson, dated January 2, 2001(27)                                                                  |  |  |  | 
|        | 10.35* |               |  | Agreement between the Registrant and Prabhat
    Goyal, dated January 2, 2001(27)                                                                   |  |  |  | 
|        | 10.36* |               |  | Agreement between the Registrant and Peter
    Watkins, dated December 26, 2000(27)                                                                 |  |  |  | 
|        | 21.1   |               |  | Subsidiaries of Network Associates,
    Inc.(27)                                                                                                    |  |  |  | 
|        | 23.1   |               |  | Consent of PricewaterhouseCoopers LLP                                                                                                               |  |  |  | 



---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from the
    Registrants Registration Statement on Form S-4 filed
    with the Commission on October 31, 1997.  
|   
|(2) | Incorporated by reference from the
    Registrants Current Report on Form 8-K filed with the
    Commission on September 24, 1996.        
|   
|(3) | Incorporated by reference from the
    Registrants Current Report on Form 8-K filed with the
    Commission on March 14, 1997.            
|   
|(4) | Incorporated by reference from the
    Registrants Registration Statement on Form S-3, filed
    with the Commission on February 12, 1998.
|   
|(5) | Incorporated by reference from the
    Registrants Report on Form 8-K filed with the
    Commission on December 11, 1997.                 
|   
|(6) | Incorporated by reference from the
    Registrants Registration Statement on Form S-4 filed
    with the Commission on March 25, 1998.    
|   
|(7) | Incorporated by reference from the
    Registrants Report on Form 8-K filed with the
    Commission on April 2, 1998.                     
|   
|(8) | Incorporated by reference from the
    Registrants Registration Statement on Form S-3 filed
    with the Commission on May 26, 1998.      

96



---



##### Table of Contents





|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(9) | Incorporated by reference from the
    Registrants Report on Form 10-Q for the quarter ended
    September 30, 1996, filed with the Commission on
    November 4, 1997.



|     |                                                                                                                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the
    Registrants Registration Statement on Form S-3 filed
    with the Commission on May 6, 1998.                                                                                           
|    
|(11) | Incorporated by reference from the
    Registrants Registration Statement on Form S-3 filed
    with the Commission on August 5, 1998.                                                                                        
|    
|(12) | Incorporated by reference from the Network
    General Corporations Report on Form 10-K for the year
    ended March 31, 1992. Network Generals filings with
    the Commission were made under File Number 0-17431.         
|    
|(13) | Incorporated by reference from the Network
    General Corporations Report on Form 10-Q for the
    quarter ended December 31, 1994. Network Generals
    filings with the Commission were made under File Number 0-17431.   
|    
|(14) | Incorporated by reference from the Network
    General Corporations Report on Form 10-Q for the
    quarter ended June 30, 1995. Network Generals filings
    with the Commission were made under File Number 0-17431.       
|    
|(15) | Incorporated by reference from the Network
    General Corporations Report on Form 10-Q for the
    quarter ended June 30, 1996. Network Generals filings
    with the Commission were made under File Number 0-17431.       
|    
|(16) | Incorporated by reference from the
    Registrants Report on Form 10-Q for the quarter ended
    June 30, 1997, filed with the Commission on August 14,
    1997.                                                             
|    
|(17) | Incorporated by reference from the
    Registrants Registration Statement on Form S-4 filed
    with the Commission on July 31, 1995.                                                                                         
|    
|(18) | Incorporated by reference from the
    Registrants Report on Form S-8 filed with the
    Commission on December 2, 1997.                                                                                                      
|    
|(19) | Incorporated by reference from the
    Registrants Report on Form 10-Q for the quarter ended
    June 30, 1996, filed with the Commission on August 13,
    1996.                                                             
|    
|(20) | Incorporated by reference from the
    Registrants Report on Form 10-Q for the quarter ended
    March 31, 1998, filed with the Commission on May 15,
    1998.                                                               
|    
|(21) | Incorporated by reference from the
    Registrants Report on Form 8-K filed with the
    Commission on June 16, 1998.                                                                                                         
|    
|(22) | Incorporated by reference from CyberMedia
    Inc.s Schedule 13D filed by the Registrant with the
    Commission on August 7, 1998. CyberMedia Inc.s
    filings with the Commission were made under File
    Number 0-21289.
|    
|(23) | Incorporated by reference from the
    Registrants Report on Form 8-A filed with the
    Commission on October 22, 1998.                                                                                                      
|    
|(24) | Incorporated by reference from the
    Registrants report on form 10-Q for the quarter ended
    September 30, 1998, filed with the Commission on
    November 13, 1998.                                                      
|    
|(25) | Incorporated by reference from the
    Registrants report on Form 10-Q for the quarter ended
    March 31, 1999, filed with the Commission on May 13,
    1999.                                                               
|    
|(26) | Incorporated by reference from the Form S-1
    filed by McAfee.com Corporation with the Commission on
    September 23, 1999, under File Number 333-87609.                                                                    
|    
|(27) | Incorporated by reference from the
    Registrants Report on Form 10-K for the year ended
    December 31, 2000, filed with the Commission on
    April 2, 2001.                                                              



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

97