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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED 31 DECEMBER 1997

                                       OR

             [ ] 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.
                       (FORMERLY MCAFEE ASSOCIATES, INC.)
             (Exact name of registrant as specified in its charter)

         Delaware                                  77-0316593
 (State of incorporation)             (IRS Employer Identification Number)

                               2805 BOWERS AVENUE
                       SANTA CLARA, CALIFORNIA 95051-0963
                                 (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, $.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 [X] NO [ ]

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

   The aggregate market value of the voting stock held by non-affiliates of the
issuer as of December 31, 1997 was approximately $3.6 billion. The number of
shares outstanding of the issuer's common stock as of December 31, 1997 was
69,920,883.

   Documents incorporated by reference: Items 10, 11, 12, and 13 of Part III are
incorporated by reference from the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held May 13, 1998.

        This report contains 77 pages. The Exhibit Index is on page 72.


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                                     PART I

ITEM 1. BUSINESS

GENERAL

    This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained herein 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 the Company's expectations, beliefs, intentions
or strategies regarding the future. All forward-looking statements included in
this document or incorporated by reference herein are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in "-- Risk
Factors" and elsewhere herein.

    Networks Associates, Inc. (the "Company") was formed in December 1997 as a
result of the strategic business combination of McAfee Associates, Inc.
("McAfee") and Network General Corporation ("Network General"). Pursuant to this
strategic combination, Network General merged with a wholly owned subsidiary of
McAfee, and McAfee changed its legal name. In mid-December 1997, the Company
acquired Pretty Good Privacy, Inc. ("PGP"), a provider of applied cryptographic
solutions for securing corporate digital assets and protecting privacy.

OVERVIEW

    The Company is a leading developer and provider of network security and
management software products. The Company has historically derived a significant
majority of its revenues from the licensing of its flagship McAfee anti-virus
products and Sniffer network fault and performance management products. The
Company is currently focusing its efforts on broadening its revenue base by
providing network security and management solutions to enterprise customers,
targeting in particular the Windows NT/Intel platform. In furtherance of this
strategy, the Company recently organized its products into four product suites
-- McAfee Total Virus Defense and PGP Total Network Security (together
comprising "Net Tools Secure") and Sniffer Total Network Visibility and McAfee
Total Service Desk (together comprising "Net Tools Manager"). These four product
suites together form an integrated solution called "Net Tools".

    Many of the Company's network security and management products, including
its industry-leading network security products for anti-virus protection and
Sniffer software-based fault and performance solutions for managing computer
networks, are also available as stand-alone products or as part of smaller
product suites. The Company is also a leader in electronic software
distribution, which is the principal means by which it markets its products and
one of the principal ways it distributes its software products to its customers.
The Company generally utilizes a two-year subscription model for licensing its
non-Sniffer products to corporate clients and is in the process of developing a
two-year subscription model for licensing its Sniffer products as well.

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    The following table depicts the Company's product suites:
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
                                       NET TOOLS
-----------------------------------------------------------------------------------------
              NET TOOLS SECURE                            NET TOOLS MANAGER
--------------------------------------------- -------------------------------------------
<S>                     <C>                   <C>                   <C>
    McAfee Total            PGP Total             Sniffer Total         McAfee Total
Virus Defense           Network Security      Network Visibility    Service Desk
----------------------- --------------------- --------------------- ---------------------
    - VirusScan             -  PGP Desktop        -  Sniffer            -  McAfee Help
Security Suite          Suite                 Portable Analysis     Desk Suite
                                              Suite
----------------------- --------------------- --------------------- ---------------------
    -   Net Shield          -  PGP Server         -  Sniffer            -  Zero
Security Suite          Suite                 Distributed           Administration
                                              Analysis Suite        Client Suite
----------------------- --------------------- --------------------- ---------------------
    -   Internet            -  CyberCop           -  Sniffer            -  Self Service
Security Suite                                Service Desk Suite    Desk Suite
----------------------- --------------------- --------------------- ---------------------
</TABLE>


NET TOOLS

    Net Tools is being designed as an integrated solution to protect the
enterprise from network security threats and to reduce the cost of managing an
enterprise network. While supporting other operating systems, Net Tools is being
optimized for Microsoft Windows NT technology ("NT"), employing an Explorer
Interface, Distributed OLE, ActiveX and the DCOM object model. Net Tools is
being designed to leverage NT to bridge the gap between the disparate network
management universes of NetWare and Unix servers. In addition, Net Tools is
being engineered to employ a common graphical user interface ("GUI"), together
with common reporting, alerting and scripting functionalities. The Company is
currently developing its pricing model for the licensing of its Net Tools suite
of products. Among other things, the Company is currently developing a
centralized console for its Net Tools product suite; developing its pricing
model for the Net Tools product suite; and integrating various recently acquired
products (including certain PGP encryption products) into smaller suites sold
under the Net Tools umbrella.

NET TOOLS SECURE: MCAFEE TOTAL VIRUS DEFENSE AND PGP TOTAL NETWORK SECURITY

    The Net Tools Secure product suite is comprised of McAfee Total Virus
Defense and PGP Total Network Security. The current U.S. list price for a 1,000
node Net Tools Secure license is $79 per node. A number of the products
incorporated in the Net Tools Secure product suite may be purchased as
stand-alone products or as part of smaller product suites.

    McAfee Total Virus Defense. McAfee Total Virus Defense ("McAfee TVD") is
designed to provide a single integrated defense against computer viruses at the
desktop, server and Internet gateway. McAfee TVD is comprised of three security
product suites: VirusScan Security Suite (providing multi-platform protection
for desktop clients); NetShield Security Suite (protects file, application and
groupware servers); and Internet Security Suite (locks out viruses and hostile
applets at the Internet gateway). The current U.S. list price for a 1,000 node
McAfee Total Virus Defense license is $34 per node.

    VirusScan Security Suite. VirusScan, one of the Company's flagship products,
is a virus protection program for Windows 3.X, Windows 95, Windows NT,
Macintosh, DOS and OS/2 personal computers ("PCs"). VirusScan scans for known
viruses upon installation. When installation is completed, VirusScan becomes
memory resident and protects systems from further infection. VirusScan is
designed to detect and remove even the most sophisticated categories of known PC
viruses. Corporate users now purchase VirusScan almost exclusively as part of
the VirusScan Security Suite ("VSS"). VSS also includes: (i) WebScanX which
protects against virus infected Internet downloads and e-mails, as well as
emerging hostile Java and Active-X applets; (ii) PCMedic which automatically
diagnoses and corrects PC system problems, as well as prevents errors and
crashes which damage data; and (iii) QuickBackUp which provides fast and easy
retrieval of automatically backed up data files. The NetTools Distribution
Console 

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and Enterprise SecureCast are also included to provide automated remote
installation, updating, and management of the VSS components. The current list
price for a 1,000 user VSS site license is $25 per node. The single user retail
version of VirusScan sells at an average retail price of approximately $29.95.

    NetShield Security Suite. NetShield Security Suite ("NSS") provides virus
protection for network file servers running NT, NetWare or Solaris operating
systems. NetShield Security Suite blocks viruses from being transferred over
networks by scanning files which are accessed from the server. It can also
perform regularly scheduled scanning of the server. NSS also includes: (i)
VirusScan Unix which provides virus protection for network file servers running
Solaris, HP-UX, NCR and AIX; (ii) GroupShield for Notes which is a native Lotus
Notes application that is designed to protect the Notes server from viruses as
well as other known security threats; and (iii) GroupShield for Microsoft
Exchange which is a native NT service that prevents virus infected attachments
from being stored or transported by Microsoft Exchange. The NetTools
Distribution Console and Enterprise SecureCast are also included to provide
automated remote installation, updating, and management of the NSS components.
The current list price for a 1,000 node NetShield Security Suite site license is
$16 per node.

    Internet Security Suite. Internet Security Suite ("ISS") provides
comprehensive virus protection at the Internet gateway for all likely virus
entry points. The ISS products are designed to capture both known and new
viruses before they infect multiple users on the network. Servers are scanned in
real-time as messages pass through and downloads occur. Viruses discovered are
automatically cleaned, quarantined, or deleted as configured. In addition to
viruses, ISS products also scan for hostile Java and Active-X applets. Java and
Active-X applets offer a powerful way to make web sites more interactive for
visitors, but can also be used to execute destructive commands. ISS includes:
(i) WebShield SMTP which is designed to scan all inbound and outbound e-mail
passing through the SMTP gateway; (ii) WebShieldX Proxy which provides
protection for HTTP and FTP traffic and scans for hostile Java and Active-X
applets; and (iii) WebScanX which protects against virus infected Internet
downloads and e-mails, as well as emerging hostile Java and Active-X applets, by
filtering them out before they can cause damage to users on desktop or mobile
PC's. The NetTools Distribution Console and Enterprise SecureCast are also
included to provide automated remote installation, updating, and management of
the ISS components. The current list price for a 1,000 node Internet Security
Suite site license is $16 per node.

    PGP Total Network Security. PGP Total Network Security ("PGP TNS") is being
designed as an integrated suite of desktop and server solutions designed to
protect the digital assets of an enterprise through encryption and
authentication. All encryption algorithms used in PGP TNS provide "strong"
encryption with a minimum 128 bit key length for symmetric encryption, plus the
use of a public/private key scheme with larger keys. To the Company's knowledge,
no techniques currently exist that can "crack" these strong encryption
algorithms so they are usable even in demanding commercial and military
applications. PGP TNS is being designed as a comprehensive, scalable security
solution with central manageability and policy-based administration. PGP TNS
will comprise two network security product suites: the PGP Desktop Suite
(protects e-mails, files, disks and network communication); and the PGP Server
Suite (which is being developed to manage certificates, control encryption
policies and replicate certificate servers). Both PGP Desktop and Server suites
also include the PGPsdk which allows corporate or application developers to
create custom encryption using PGP's strong encryption algorithms. Complementing
PGP TNS is intrusion protection through the CyberCop product (described below)
which is sold separately and not as part of a suite. The current U.S. list price
for a 1,000 node PGP Total Network Security site license utilizing the Diffie-
Hellman strong encryption algorithm is $65 per node. The current list price for
CyberCop is $35,700 per unit.

    PGP Desktop Suite. The PGP Desktop Suite ("PGP DS") provides multi-platform
encryption protection for a wide range of desktop computers. The PGP DS includes
the PGP for e-mails and files ("PGPEF") product. PGPEF uses compression,
encryption and digital signatures to ensure privacy at the desktop and during
transmission over both internal and public networks. PGP provides these
capabilities by allowing end users to encrypt mail messages, files or mail
attachments easily and then mail them to other PGP users who decrypt them using
a public/private key encryption scheme. PGPEF is currently available 


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on more than 15 different platforms, including Windows 3.1/95/NT, Macintosh and
multiple versions of UNIX. In addition, PGPEF is designed to offer seamless
integration with most commonly used e-mail applications. PGP DS also includes:
(i) PGPdisk (currently available for the Macintosh platform only) which provides
hard disk protection, even if the machine is compromised, by allowing only the
correct private key to unlock encrypted data on the hard disk; and (ii) PGPsdk
(described above). The PGPsdk can also be purchased by OEMs so that they may use
it to develop applications using encryption for sale in the commercial market.
The current U.S. list price for a 1,000 node PGP Desktop Suite site license
utilizing the Diffie-Hellman strong encryption algorithm is $55 per node.

    PGP Server Suite. The PGP Server Suite ("PGP SS") is being designed to
provide management of public keys, authentication and policy-based
administration and management of security policies on an enterprise-wide basis.
The PGP SS is comprised of (i) the PGP Certificate Server, (ii) the Policy
Management Agent; and (iii) the Policy Server. The PGP Certificate Server is
designed to enable corporations to deploy, certify, revoke and store digital
certificates allowing hundreds of thousands of users to exchange and
authenticate digital information in a public/private key encryption system.
Certificate directories, also known as key rings at the single-user level, are
the equivalent of electronic address books for information security. Although
users can maintain their own key rings, large corporate customers have requested
the capability to centrally manage thousands of geographically dispersed keys
and the associated encryption processes and policies for their employees. The
PGP Certificate Server is designed to allow corporate users to easily locate
their electronic correspondents' keys in order to encrypt, decrypt, verify
and/or sign digital information. In addition, the PGP Certificate Server is
designed to allow administrators to manage keys seamlessly and centrally.
Designed to handle all certificate types, the PGP Certificate Server allows for
an integrated policy management system when coupled with other products included
in PGP SS, such as the Policy Management Agent and Policy Server (a future
component of the suite), facilitating the establishment and enforcement of
corporate information security regulations. The Policy Management Agent allows
corporations to integrate security policy enforcement as part of their
networking infrastructure. The Policy Server will enable companies to
consolidate control, coordination and enforcement of business security policies
through the centralized management of geographically dispersed clients, servers
and associated policy agents. The Policy Server is being designed to verify,
enforce and distribute policy configurations for clients, certificate servers
and their associated policy agents. PGP SS further includes PGPsdk. The current
U.S. list price for a 1,000 node PGP Server Suite site license utilizing the
Diffie-Hellman strong encryption algorithm is $31 per node.

    CyberCop. The CyberCop intrusion detection system is designed to safeguard
networks from external and internal attacks by performing real-time surveillance
of network traffic and sending out an alarm when intrusion is detected. The
CyberCop product's sensors are placed at key locations throughout a network,
from LAN segments and dial-up modem servers to connection to the internet or
other wide area networks. CyberCop is not sold as part of a suite. The current
list price for the CyberCop product is $35,700 per unit.

NET TOOLS MANAGER: SNIFFER TOTAL NETWORK VISIBILITY AND MCAFEE TOTAL SERVICE
DESK

    Net Tools Manager is a network management and service desk solution designed
to make networks more efficient and network users more productive. The Net Tools
Manager product suite is comprised of Sniffer Total Network Visibility, a
comprehensive set of products and services for network fault and performance
management; and McAfee Total Service Desk, which integrates help desk
applications with desktop management software. McAfee Total Service Desk is
licensed on a two-year subscription basis. Pricing for 10 HelpDesk Users
supporting 1000 nodes is $45.95 per node. A number of the products incorporated
in the Net Tools Manager product suite may be purchased as stand-alone products
or as part of smaller product suites.

    Sniffer Total Network Visibility. Sniffer Total Network Visibility ("Sniffer
TNV") offers comprehensive network fault and performance solutions to provide
optimum network performance. Sniffer TNV is comprised of three product suites:
Sniffer Portable Analysis Suites which consist of portable tools 


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which analyze network traffic to pinpoint and help resolve performance problems
on a variety of multi-topology, multi-protocol networks; Sniffer Distributed
Analysis Suites which perform automatic network monitoring, protocol decodes and
problem analysis for identifying and resolving network problems from a central
single- fault and performance-management console; and Sniffer Service Desk Suite
which offers proactive management, reporting and service desk tools for better
supporting business objectives and delivering a higher quality of service to end
users. The U.S. list price for Sniffer Total Network Visibility Suite starts at
$100 per network node for a two year license on a network with a minimum 5,000
nodes.

    Sniffer Portable Analysis Suite. The Sniffer Portable Analysis Suite
("Sniffer PAS") consists of portable tools designed to automatically pinpoint
and analyze network problems and to recommend solutions. To address the growing
complexity of multi-vendor, multi-protocol, multi-topology network environments,
Sniffer PAS is designed and tested to run on a variety of computer platforms.
The product is intended to be used as a portable tool, either on a portable or
notebook size computer platform, but it can also be installed on a desktop
computer platform. The Sniffer PAS addresses a variety of network needs ranging
from less-critical segment coverage to high-speed, mission-critical or backbone
networks. Products sold under the Sniffer PAS range from products which capture
data, monitor network traffic and collect key network statistics for small
networks, to products which optimize network performance and increase 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. The U.S. list price for the Sniffer Portable Analysis Suite
is $23,050 per copy.

    Sniffer Distributed Analysis Suite. The Sniffer Distributed Analysis Suite
("Sniffer DAS") is designed to allow customers to monitor and diagnose problems
on complex, multi-segment networks from centralized locations. With the addition
of expert analysis capabilities, the Sniffer DAS provides automatic problem
diagnosis and recommends solutions which are displayed on a central console. The
Sniffer DAS addresses a variety of network needs ranging from less critical
segment coverage to high-speed, mission-critical or backbone products. Products
sold under the Sniffer DAS range from easy-to-use products which feature decode
and analysis capabilities and network health and availability summaries for
small or department networks, to products which provide service level management
and proactive device analysis for enterprises employing high-speed networks. The
U.S. list price for the Sniffer Distributed Analysis Suite for 2,001 - 5,000
desktops starts at $45 per desktop.

    Sniffer Service Desk Suite. The Sniffer Service Desk Suite ("Sniffer SDS")
is a web browser-based network management suite that is designed to automate and
manage the process of resolving network problems proactively by identifying,
analyzing, tracking and resolving network problems and assessing trends. The
Sniffer SDS includes features such as trouble ticketing to problem resolution,
exception reporting and final close of ticket. The Sniffer SDS is comprised of
products designed to automatically collect data on instrumented network
components and to provide real-time and historic health and availability
summaries; to monitor and analyze the long-term performance of routers,
switches, hubs, and frame relay devices; and to provide immediate access to
service desk trouble tickets from any browser. The U.S. list price for the
Sniffer Service Desk Suite starts at $500 per network device.

    McAfee Total Service Desk. McAfee Total Service Desk ("McAfee TSD") provides
proactive network management and help desk technology in one integrated service
desk solution. McAfee TSD comprises three suites: McAfee HelpDesk Suite; Zero
Administration Suite; and Self ServiceDesk Suite. The current U.S. list price
for a ten concurrent user license for McAfee TSD is $4,595. This price also
includes support of 1000 desktops.

    McAfee HelpDesk Suite. The McAfee HelpDesk Suite is designed to provide
complete call management, problem resolution, crisis management, change
management and reporting for mid-range and departmental help desks. The McAfee
HelpDesk Suite automates the process of entering caller information and
automatically displays information about a caller allowing faster service and
minimizing duplication of efforts. In addition, the McAfee HelpDesk Suite is
designed to provide automated crisis management, by posting notices of known
problems on a centralized "white board." Related calls can be linked,


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automatically generating or resolving (and subsequently closing) all linked
trouble tickets. Finally, the McAfee HelpDesk Suite is designed to automate
change management throughout the enterprise, allowing work orders for a selected
task to be automatically sent to all appropriate parties. Detailed reports
generated by the McAfee HelpDesk Suite help measure the impact of each problem
and the use of enterprise resources to solve each problem. The current U.S. list
price for a ten concurrent user license for McAfee HelpDesk Suite is $2,428.

    Zero Administration Client Suite. The Zero Administration Client ("ZAC")
Suite is designed to provide enterprise wide control of network software with
integrated software distribution, software and hardware inventory, desktop
management/menuing, license metering and remote control features. The ZAC Suite
can automatically distribute, install and track new software and updates
throughout an enterprise and can perform an enterprise-wide hardware, software
and system file inventory without having to visit each station. The ZAC Suite
also includes management/menuing capabilities which enable central configuration
of application access and desktop layout. In addition, the ZAC Suite provides
software metering capabilities, allowing the efficient management of license
sharing, and transfers and reducing the number of licenses that need to be
purchased based on actual usage. Furthermore, the ZAC Suite allows compliance
with license limitations by restricting concurrent usage of a software product
to only the total of number of licenses purchased. Finally, the ZAC Suite allows
remote access to critical information on multiple platforms. The Zero
Administrator Client Suite console controls DOS, Windows, Windows 95 and Windows
NT-based PC assets connected to NT and NetWare file servers, and its open
database structure is designed to ensure accessibility. The current U.S. list
price for a 1,000 node ZAC Suite site license is $39 per node.

    Self ServiceDesk Suite. The Self ServiceDesk Suite provides information
services organizations with self service oriented applications designed to make
all supported PCs help desk ready. The Self ServiceDesk Suite integrates PC
diagnostic software with remote control and web-based access, allowing cost
savings for help desk and network administrators. The Self ServiceDesk Suite
allows employees to solve their own PC application problems over the web using
Knowledge Wizard, a searchable information database that gives employees instant
answers to thousands of common hardware and software application questions. The
Self ServiceDesk Suite also includes PCMedic. PCMedic automatically diagnoses
and corrects PC system problems, as well as prevents errors and crashes which
damage data. The current U.S. list price for a 1,000 node Self Service Desk
Suite site license is $39 per node.

TOTAL SERVICE SOLUTIONS

    As the Company's 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, the Company has established
Total Service Solutions. Total Service Solutions is focused on three services
segments: Consulting Services, Total Education Service and Product Support to
complete the customer's product license relationship with the Company. The
Company intends to expand and develop significantly its worldwide professional
services organization.

    Consulting Services supports product integrations, customization 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.

    Total Education Service offers an extensive curriculum of computer network
technology courses, from product training to advanced network troubleshooting
and performance management. Total Education Service is delivered from nine
training centers and 50 roadshow locations nationally, and 18 international
locations. Total Education Service emphasizes customized on-site training at
customer locations, and has trained over 35,000 individuals in Fortune 500 and
other companies.


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    Product Support technical representatives respond to customer calls and
electronic messages, resolve product issues and answer detailed questions. Three
levels of phone support are available, so that customers can choose the
availability and response times that meet their business needs. Product Support
is available to all Company customers on a worldwide basis. Additionally,
Product Support delivers advanced technology solutions on the Internet, allowing
customers to resolve issues expeditiously at any time of day or night.

SUBSCRIPTION LICENSING MODEL

    The Company typically licenses its non-Sniffer products (together with the
related maintenance) to corporate and government customers for a period of two
years during which time the licensees receive all upgrades, updates and
technical support. Upon expiration of the two-year period, customers are
contacted by the Company for renewal. The Company is currently developing a
two-year subscription model for licensing its Sniffer products, which accounted
for a significant portion of its revenues in 1997 and historically have been
licensed on a perpetual basis with annual maintenance and support contracts. The
Company believes that the two-year subscription licensing and related
maintenance offers several benefits to its customers. For one initial fee, the
customer receives the software and all upgrades, updates and support for two
years. In addition, the customer only has to make a decision on its investment
in the software every two years. Since the Company is able to distribute its
products and upgrades at a lower cost than do companies using traditional
distribution methods, the Company also has the ability to offer upgrades and
updates and address user feature requirements on a more regular basis. In
addition, by offering a two-year license, as opposed to a traditional perpetual
term license, the Company is able to meet a lower initial cost threshold for
customers with annual budgeting constraints.

    The Company's two-year subscription licensing model creates the opportunity
for recurring revenue for the Company through the renewal of existing licenses.
Since the Company typically licenses its products on a per user basis, at the
time of renewal the Company has the potential to increase the number of
computers licensed at existing sites and to expand its licenses to new sites in
an organization. The renewal process also provides an opportunity to cross-sell
new products and product suites to existing customers. There can be no assurance
that the Company will be able to sustain current renewal rates in the future.

    With the expansion of the Company's distribution channels to include
resellers and distributors, the Company also provides single user licenses for
its products under traditional, unlimited term licenses with product updates,
upgrades and support available to customers under separate maintenance
contracts.

ELECTRONIC SOFTWARE DISTRIBUTION

    The Company was the first company to successfully utilize electronic
software distribution to reach corporate and government customers. Through the
World Wide Web and various online services such as CompuServe, America Online
and the Microsoft Network, the Company is able to electronically communicate and
interact with its customers from pre-sales evaluation through product delivery
and post-sales support. The Company believes that the electronic channel is an
important source of information and support for IT professionals. By making
fully-functioning, unencrypted versions of many of its products widely available
for evaluation, the Company seeks to encourage product sampling among these
sophisticated users. Unlike traditional software evaluation programs, where
potential customers often are required to identify themselves (typically
resulting in their inclusion in a sales database), go through a qualification
process and then wait for the evaluation copy to be shipped, potential customers
desiring to evaluate Company products for a 30-day period can anonymously
download Company products from the Company's World Wide Web site. In 1996, the
Company opened the McAfee Store on the World Wide Web to distribute its own and
third party products.

    The Company uses electronic software distribution as a principal means of
delivering licensed software, as well as upgrades and updates to its customers.
Electronic software distribution offers a number 


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of advantages to the Company over traditional software distribution methods
including the ability to distribute its products and upgrades more rapidly and
at a lower cost than traditional distribution methods. Since all of the software
and documentation can be distributed electronically, the cost of internal
distribution by the customer is also lower than with traditional software and
printed documentation.

    The Company also seeks to increase awareness of its products, to provide
customer and technical support and to encourage dialogue regarding its products
by maintaining a World Wide Web site and forums on CompuServe, America Online
and The Microsoft Network. The Company also provides support through the World
Wide Web. By providing support electronically, the Company believes that it is
often able to identify and solve customer problems more rapidly.

SALES AND MARKETING

    To augment and capitalize upon the awareness of the Company's products
resulting from its electronic distribution model, the Company's 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 following channels:

    North American Direct Sales. The Company has recently reorganized its
combined direct sales force into three tiers. The first tier focuses on the sale
of the full product suite under the Net Tools umbrella to enterprise and
national account customers. The second tier consists of four separate sales
groups focused on the sale of the individual product suites (i.e., McAfee Total
Virus Defense; PGP Total Network Security; Sniffer Total Network Visibility; or
McAfee Total Service Desk) to the departmental level. The third tier consists of
four separate outbound corporate telesales forces who actively market the
Company's individual product suites to customers with less than 1,000 nodes. The
Company's corporate telesales representatives also respond to prospective
customers who contact the Company as a result of a particular marketing program
or after electronically evaluating a Company product. Another significant focus
of the Company's corporate telesales force is to contact existing customers to
cross-sell additional products and product suites. To augment its sales
organization, the Company's executives are involved with sales to many major
accounts. The Company historically has not had a large enterprise or national
accounts sales force and only recently developed a direct sales group focused on
these larger accounts. In addition, the Company has not historically had a
separate sales force focused on the sale of its suite of security products (many
of which were only recently acquired and are currently being engineered into a
common suite). Accordingly, the Company is currently expanding these direct
sales organizations in North America.

    The Company devotes a portion of its corporate telesales force to the
renewal of its existing licenses. Prior to expiration of a license, a corporate
telesales representative contacts the customer and encourages renewal of the
expiring license while determining if increasing the number of computers
licensed is appropriate and, additionally, marketing new products and product
suites to this existing customer.

    International Sales. The Company has sales and support operations in Europe,
Asia, South America and Australia. In 1997, international revenues accounted for
approximately 29% of the Company's net revenues. Historically, the Company has
relied primarily upon independent agents and distributors to market its products
internationally. The Company expects that international revenues will continue
to account for a significant percentage of net revenues. In 1997, the Company
acquired, among others, its distributors in Japan and in The Netherlands. The
Company expects to continue using independent agents primarily in smaller
markets where a direct sales presence is not currently warranted. While the
Company's agents and distributors include some large systems integrators, most
are small companies that market the Company's software along with products of
other companies that they represent. The Company typically enters into
agreements with its agents which, among other things, obligate its agents to
provide technical support and the most current versions of the Company's
products to its customers and to provide the Company with information about its
licensees. Such agreements permit either the Company or the agent to terminate
the agreement upon proper prior written notice. International agents invoice
their own orders and collect payment, remitting the license fee, net of
commissions, to the Company in United States dollars.

                                                                               9
<PAGE>   10

    Channel Sales. To complement its direct sales, the Company markets many of
its products through corporate resellers and distributors, and indirectly
through retailers. While historical sales through these distribution channels
have generated a relatively small portion of the Company's net revenue, over the
past two years the Company's presence in these channels has expanded
significantly. The Company currently utilizes corporate resellers, including
STREAM, Software Spectrum, Softmart and ASAP, which focus primarily on selling
site licenses for the Company's software to corporate customers. The Company is
currently expanding the indirect sales channel for its Sniffer products and its
PGP security products.

    Independent software distributors who market the Company's products include
Ingram Micro, Merisel America and Tech Data. These distributors stock the
Company's products in inventory for redistribution primarily to large retailers,
VARs and mail order companies. Through its authorized distributors, the Company
sells its retail packaged products to several of the large computer and software
retailers in the United States, including Staples, CompUSA, Computer City,
Software Etc. and Best Buy. Several members of the Company's channel sales force
work closely with the Company's major reseller and distributor accounts on the
management of orders and inventory level, as well as on promotion and selling
activities.

    The Company's distributors generally are permitted stock balancing and stock
rotation rights but are typically required to place offsetting orders of equal
value. The Company often relies on resellers and distributors, including retail
outlets, to market and support its products. The Company's agreements with its
distributors are not exclusive and may be terminated by either party without
cause. There can be no assurance that any distributors will continue to
represent the Company's products.

    Original Equipment Manufacturers ("OEMs"). OEMs license the Company's
products (mainly anti-virus products) and bundle them with personal computer
hardware or software. OEMs typically sublicense a single version of the
Company's products to end users who must contact the Company in order to license
updates. The Company typically receives a per copy royalty from its OEMs.

    Other Marketing Activities. The Company's principal means of marketing its
products is through the World Wide Web. Not only does the Company's Website
contain various marketing materials and information about its products, but from
the Website customers may download and purchase products and potential customers
may download Company products for a 30-day free trial. The Company also promotes
its products through advertising activities in trade publications and direct
mail campaigns. The Company is currently conducting a national television
advertising campaign in the U.S. during certain major sporting events. The
Company also attends trade shows, sponsors conferences and publishes a quarterly
newsletter which is mailed to existing and prospective customers. In addition,
the Company also maintains forums on CompuServe, America Online and The
Microsoft Network which provide electronic forums for subscribers of these
services to discuss issues related to computer viruses and make inquiries
regarding the Company's products.

CUSTOMERS

    The Company primarily markets its products directly to large corporate and
government customers as well as to resellers and distributors. No customer
accounted for more than 10% of the Company's net revenue during 1997, 1996 or
1995.

PRODUCT DEVELOPMENT AND ACQUISITION

    The software industry has experienced and is expected to continue to
experience a significant amount of consolidation. In addition, it is expected
that the Company will grow internally and through strategic acquisitions in
order, among other things, to expand the breadth and depth of its product suites
and to build its professional services organization. The Company continually
evaluates potential acquisitions of complementary businesses, products and
technologies. In addition to the Network General merger in 


                                                                              10


<PAGE>   11

December 1997, the Company has consummated a series of significant acquisitions
since 1994, including the acquisitions of PGP and Helix in December 1997, Cinco
Networks, Inc. in August 1997, 3DV Technology, Inc. in March 1997, a controlling
interest in FSA Corporation of Canada in August 1996, Vycor Corporation in
February 1996, Saber Software Corporation, Inc. in August 1995 and ProTools,
Inc. in January 1994. In addition, since 1995 the Company has acquired a number
of its international agents and distributors, including agents or distributors
in Australia, Brazil, Japan and The Netherlands and is currently investigating
acquisitions of additional foreign agents and distributors. Past acquisitions
have consisted of, and future acquisitions will likely include, acquisitions of
businesses, interests in businesses and assets of businesses.

    The Company believes that its ability to maintain its competitiveness will
depend in large part upon its 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. There can be no assurance that product enhancements or new
products will be developed or acquired on a timely basis or at all.

     In addition to developing new products, the Company's internal development
staff is also focused on developing updates to existing products and modifying
and enhancing any acquired products. For example, the Company is designing a
centralized console from which the various Net Tools component suites can be
operated, administered and maintained utilizing a common look and feel and is
integrating its various security products (such as its recently acquired PGP
encryption products and Network General CyberCop product) into a marketable
suite of products. Future updates may, among other things, include additional
functionality, respond to user problems or address issues of compatibility with
changing operating systems and environments. The Company believes that the
ability to provide these updates to users frequently and at a low cost is a key
to its success. Failure to release such updates on a timely basis could have a
material adverse impact on the Company. There can be no assurance that the
Company will be successful in these efforts. In addition, there can be no
assurance that future changes in Windows 95, Windows NT, NetWare or other
popular operating systems would not result in incompatibility with the Company's
products. The Company's failure to introduce on a timely basis new products that
are compatible with operating systems and environments preferred by desktop
computer users would have a material adverse effect on the Company's business,
financial condition and results of operations.

    The Company expended $85.8 million, $54.2 million and $37.8 million in the
years ended December 31, 1997, 1996 and 1995, respectively, on research and
development.

MANUFACTURING AND SUPPLIERS

    The Company's manufacturing operations consist primarily of final assembly,
testing and quality control of materials, components, subassemblies and systems
for its Sniffer based products. The Company believes its quality control
procedures have been instrumental in achieving the high performance and
reliability of these products. To date, the Company has experienced minimal
return of its products by users. The Company's manufacturing operations do not
require any capital expenditures for environmental control facilities or any
special activities for protection of the environment. The Company intends to
outsource the manufacturing operations related to its Sniffer based products in
1998. There can be no assurance that, among other things, the Company will be
able to outsource these manufacturing operations on a timely basis or at all.

    The Company's Sniffer products are designed to work with a variety of
network topologies and computer platforms available from multiple manufacturers.
The Company relies on a limited number of suppliers for certain critical
components of its products. Some of the Sniffer products are designed around a
specific computer platform available only from certain manufacturers. In the
case of Sniffer Analyzer products, customers purchase the required platform
either from the Company or from suppliers. As a result of product transitions by
its computer platform vendors, the Company has found it necessary to purchase

                                                                              11


<PAGE>   12

and inventory computer platforms for resale to customers. Any significant
shortage of computer platforms or other critical components for Sniffer products
could lead to cancellations or delays of purchases of these products, which
could materially and adversely affect the Company's results of operations. If
purchases of computer platforms or other components exceed demand, the Company
could incur expenses for disposing of excess inventory, which would also
adversely affect its results of operations.

    The Company is in the process of developing software only versions of its
Sniffer products. Purchasers of these Sniffer software products would be
required to already own or purchase directly from the manufacturer or other
vendors the necessary hardware products (such as computer platforms and
components). There can be no assurance that the Company can produce a software
only Sniffer product on a timely basis or at all or that customers will not
require that the Company continue to provide the necessary hardware products.

COMPETITION

    The markets for the Company's products are intensely competitive and the
Company expects competition to increase in the near-term. The Company believes
that the principal competitive factors affecting the markets for its products
include performance, functionality, quality, customer support, breadth of
product line, frequency of upgrades and updates, integration of products,
manageability of products, brand name recognition, company reputation and price.
Certain of the criteria upon which the performance and quality of the Company's
anti-virus software products compete include the number and types of viruses
detected, the speed at which the products run and ease of use. Certain of the
Company's competitors have been in the network management market longer than the
Company, and other competitors, such as Symantec Corporation ("Symantec"), Intel
Corporation ("Intel"), Seagate Technology, Inc. ("Seagate"), and Hewlett-Packard
Company ("HP"), are larger and have greater name recognition than the Company.
The Company will also need to develop name recognition for the name "Network
Associates." In addition, certain larger competitors such as Intel, Microsoft
Corporation ("Microsoft") and Novell, Inc. ("Novell") have established
relationships with hardware vendors related to their other product lines. These
relationships may provide them with a competitive advantage in penetrating the
OEM market with their network security and management products. As is the case
in many segments of the software industry, the Company has been encountering,
and expects to further encounter, increasing competition. This increased
competition could reduce average selling prices and, therefore, profit margins.
Competitive pressures could result not only in sustained price reductions but
also in a decline in sales volume, which events would materially adversely
affect the Company's business, financial condition and results of operations. In
addition, competitive pressures may make it difficult for the Company to
maintain or exceed its growth rate.

    Although there is a trend toward consolidation in the network security and
management market, the market is currently highly fragmented with products
offered by many vendors. The Company's principal competitor is the Peter Norton
Group of Symantec in the network security market and Intel's LanDesk in the
network management market. The Company's other competitors include Computer
Associates/Cheyenne Software, IBM, Seagate, the Dr. Solomon Group and Trend
Micro, Inc., as well as numerous smaller companies and shareware authors that
may in the future develop into stronger competitors or be consolidated into
larger competitors. In the encryption portion of the security market, the
Company's principal competitors are Security Dynamics Technologies, Inc., Cylink
Corporation, Entrust Technologies and VeriSign, Inc. The Company's principal
competitors in the help desk market are Remedy Corporation, Software Artistry
(recently acquired by Tivoli Systems/IBM) and Magic Solutions, Inc. The
Company's principal competitor in the software-based network fault and
performance management market is HP, with other competitors including Azure
Technologies Incorporated, Concord Communications, DeskTalk Systems, Kaspia
Systems, Shomiti Systems, Inc. and Wandel & Goltermann, Inc. The Company also
faces competition in the security market from Cisco Systems, Inc., Security
Dynamics Technologies, Inc., Checkpoint Software and other vendors in the
encryption/firewall market. In addition, the Company faces competition from
large and established software companies such as Microsoft, Intel, Novell and HP
which offer network management products as enhancements to their network
operating systems. As the 

                                                                              12


<PAGE>   13

network management market develops, the Company may face increased competition
from these 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 vendors who are able to provide the necessary
software and support capabilities. In addition, to the extent that the Company
is successful in developing its Net Tools suite of products designed around a
centralized management and administration console for the Windows NT platform,
the Company will likely compete with large computer systems management companies
such as Tivoli Systems (TME) and Computer Associates (Unicenter).

PROPRIETARY TECHNOLOGY

    The Company's success is heavily dependent upon proprietary software
technology. The Company relies on a combination of contractual rights,
trademarks, trade secrets and copyrights to establish and protect proprietary
rights in its software. There can be no assurance these protections will be
adequate or that competitors will not independently develop technologies or
products that are substantially equivalent or superior to the Company's
products.

    The Company recently changed its legal name to "Networks Associates, Inc."
and has recently begun conducting business as "Network Associates." The Company
believes that there are a number of other companies with similar names and,
although the Company has not been served in any suit, three companies (including
Network Associates Corporation in California and Network Associates, Inc. in
Oregon) have made claims (including various trademark claims) or demands with
respect to the Company's use of the name Network Associates. There can be no
assurance that the Company will be able to enforce rights in that name, that it
will be free to use the name in all jurisdictions, that there will be no
additional challenges to the use of that name or that it will not be required to
expend significant resources in securing the use of that name.

    The Company does not typically obtain signed license agreements from its
corporate, government and institutional customers who license products directly
from it. The Company includes an electronic version of a "shrink-wrap" license
in all of its electronically distributed software and a printed license in the
box for its products distributed through traditional distribution channels in
order to protect its copyrights and trade secrets in those products. Since none
of these licenses are signed by the licensee, many 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 proprietary rights or offer only limited protection for those rights.
There can be no assurance that the steps taken by the Company to protect its
proprietary software technology will be adequate to deter misappropriation of
this technology. For example, the Company is aware that a substantial number of
users of its anti-virus products have not paid any registration or license fees
to the Company. Changing legal interpretations of liability for unauthorized use
of the Company's software, or lessened sensitivity by corporate, government or
institutional users to avoiding copyright infringement, could have a material
adverse effect on the Company's business, financial condition and results of
operations.

EMPLOYEES

    As of December 31, 1997, the Company employed over 1,600 individuals
worldwide. Competition for qualified management and technical personnel is
intense in the software industry. The Company's continued success will depend in
part upon its ability to attract and retain qualified personnel. None of the
Company's employees is represented by a labor union and the Company believes
that its employee relations are good.

RISK FACTORS

    Variability of Quarterly Operating Results. The Company's results of
operations have been subject to significant fluctuations, particularly on a
quarterly basis, and the Company's future results of operations 


                                                                              13

<PAGE>   14

could fluctuate significantly from quarter to quarter and from year to year.
Causes of such fluctuations may include the volume and timing of new orders and
renewals, distributor inventory levels and return rates, Company inventory
levels, the introduction of new products, product upgrades or updates by the
Company or its 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 turbulence in Asia),
extraordinary events such as acquisitions or litigation and the occurrence of
unexpected events. The operating results of many software companies reflect
seasonal trends, and the Company's business, financial condition and results of
operations may be affected by such trends in the future. Such 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.

    Although the Company has experienced significant growth in net revenue and
net income (before acquisition and other related costs) in absolute terms, the
Company's growth rate has slowed in recent periods. The Company has experienced
increased price competition for its products and the Company expects competition
to increase in the near-term, which may result in reduced average selling prices
for the Company's products in the future. Due to these and other factors (such
as a maturing anti-virus market and an increasingly higher base from which to
grow), the Company's historic revenue growth rate will be difficult to sustain
or increase. To the extent these trends continue, the Company's results of
operations could be materially adversely affected. Renewals have historically
accounted for a significant portion of the Company's net revenue; however, there
can be no assurance that the Company will be able to sustain historic renewal
rates for its products in the future. Risks related to the Company's recent
change in business strategies could also cause fluctuations in operating results
and could make comparisons with historic operating results and balances
difficult or not meaningful. See "-- Risks Related to Certain Business
Strategies."

    The timing and amount of the Company's revenues are subject to a number of
factors that make estimating operating results prior to the end of a quarter
uncertain. The Company does not expect to maintain a significant level of
backlog and, as a result, product revenues in any quarter will be dependent on
contracts entered into or orders booked and shipped in that quarter. During
1997, the Company generally experienced a trend toward higher order receipts
toward the end of the last month of a quarter, resulting in a higher percentage
of revenue shipments during the last month of a quarter than in 1996, which
makes predicting revenues more difficult. The timing of closing larger orders
increases the risks of quarter-to-quarter fluctuation. To the extent that the
Company is successful in licensing larger product suites under the Net Tools
umbrella (particularly to large enterprise and national accounts), the size of
its orders and the length of its sales cycle are likely to increase. If orders
forecasted for a specific customer for a particular quarter are not realized or
revenues are not otherwise recognized in that quarter, the Company's operating
results for that quarter could be materially adversely affected. See
"Potentially Longer Sales and Implementation Cycles for Certain Products."

    The trading price of the Company's Common Stock has historically been
subject to wide fluctuations, with factors such as earnings announcements and
litigation developments contributing to this volatility. Failure to achieve
periodic revenue, earnings and other operating and financial results as
forecasted or anticipated by brokerage firms, industry analysts or investors
could result in an immediate and adverse effect on the market price of the
Company's Common Stock. The Company may not discover, or be able to confirm,
revenue or earnings shortfalls until the end of a quarter, which could result in
an immediate and adverse effect on the price of the Company's Common Stock.

    Risk of Inclusion of Network Management and Security Functionality in
Hardware and Other Software. In the future, vendors of hardware and of operating
system software or other software (such as firewall or electronic mail software)
may continue to enhance their products or bundle separate products to include
functionality that currently is provided primarily by network security and
management software. Such enhancements may be achieved through the addition of
functionality to operating system software or other software or the bundling of
network security and management software with operating system 

                                                                              14

<PAGE>   15

software or other products. For example, Cisco Systems, Inc. ("Cisco") recently
incorporated a firewall in certain of its hardware products and Microsoft
introduced limited anti-virus functionality into its MS-DOS versions in 1993.
The widespread inclusion of the functionality of the Company's products as
standard features of computer hardware or of operating system software or other
software could render the Company's products obsolete and unmarketable,
particularly if the quality of such functionality were comparable to that of the
Company's products. Furthermore, even if the network security and/or management
functionality provided as standard features by hardware providers or operating
systems or other software is more limited than that of the Company's products,
there can be no assurance that a significant number of customers would not elect
to accept such functionality in lieu of purchasing additional software. If the
Company were unable to develop new network security and management products to
further enhance operating systems or other software and to replace successfully
any obsolete products, the Company's business, financial condition and results
of operations would be materially adversely affected.

    Risks Associated with Recent Acquisitions. In addition to risks described
under "-- Risks Associated with Acquisitions Generally," the Company faces
significant risks associated with its recent combination with Network General
and other recent acquisitions (including the acquisitions of PGP and Helix
Software Company ("Helix"). There can be no assurance that the Company will
realize the desired benefits of these transactions. In order to successfully
integrate these companies, the Company must, among other things, continue to
attract and retain key management and other personnel; integrate, both from an
engineering and a sales and marketing perspective, the acquired products
(including Network General's Sniffer and CyberCop products, PGP's encryption
products and Helix's utilities products) into its suite of product offerings;
integrate and develop a cohesive focused direct and indirect sales force for its
product offerings; consolidate duplicate facilities; and develop name
recognition for its new name. The diversion of the attention of management from
the day-to-day operations of the Company, or difficulties encountered in the
integration process, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Need to Develop
Enterprise and National Accounts Sales Force and Security Products Sales Force;
Risks Related to Direct Sales Force" and "-- Use of Indirect Sales Channels;
Need to Develop Indirect Sales Channel for Sniffer and PGP Security Products."

    During 1997, the Company incurred significant non-recurring charges
associated with the Network General combination and the acquisitions of PGP and
Helix. There can be no assurance that the Company will not incur additional
material charges in subsequent quarters to reflect additional costs associated
with these transactions and with respect to its name change and the marketing of
its products under the "Network Associates" name.

    Risks Related to Certain Business Strategies. The Company has historically
derived a significant majority of its revenues from the licensing of its
flagship anti-virus products and Sniffer products. See "-- Dependence on Revenue
from Flagship Anti-Virus and Sniffer Products." The Company is currently
focusing its efforts on broadening its revenue base by providing network
security and management solutions to enterprise customers, targeting in
particular the Windows NT/Intel platform. In furtherance of this strategy, the
Company recently organized its products into four product suites -- McAfee Total
Virus Defense, PGP Total Network Security, and Sniffer Total Network Visibility
and McAfee Total Virus Defense. These four product suites together form an
integrated solution called "Net Tools" which utilizes a new pricing model. See
"Business -- Net Tools." There can be no assurance that potential customers will
respond favorably to the modified pricing structure and the lack of a favorable
response could materially adversely affect the Company's operating results.
Although the Company will continue to offer perpetual licenses with annual
support and maintenance contracts for its Sniffer products, it is currently
developing a subscription licensing model for those products. In addition, in an
effort to increase total Sniffer unit sales the Company intends to develop
software only versions of its Sniffer products -- meaning that the Company would
no longer sell the hardware components contained in the current Sniffer
products. There can be no assurance that the Company can produce a software only
Sniffer product on a timely basis or at all, that customers will not continue to
require that the Company provide the associated hardware platform and
components, that total unit licenses of Sniffer products will increase over
previous levels or that 

                                                                              15


<PAGE>   16

customers will react favorably to the subscription pricing model for Sniffer
products. To the extent that customers do license Sniffer products on a two-year
subscription basis or license significant amounts of software only Sniffer
products, the Company's operating results and financial condition would likely
be affected. In the case of subscription licenses, the Company would, among
other things, expect an increase in deferred revenues related to the service
portion of the two-year Sniffer license that would be capitalized on the
Company's balance sheet. In the initial year of the license, the corresponding
revenue would be lower than if the license were perpetual. In the case of the
software only Sniffer product, for any individual license, the Company would
expect lower total revenues and a higher overall gross margin related to the
transaction, as the Company would not be selling the corresponding hardware
component. Currently, the hardware component has a lower gross margin than the
total product gross margin.

    The Company has been acquiring (and is continuing to investigate the
acquisition of) existing independent agents and distributors of its products in
certain strategic markets or has been converting these independent agents into
resellers who must purchase Company products from Company approved distributors.
These actions may require, among other things, that the Company provide the
technical support to customers that was previously provided by such agents and
distributors. There can be no assurance that the Company can provide such
support as effectively or on a timely basis or at all, that the Company will
operate any acquired distributor or agent as successfully as the previous
operators, that the acquisition of any distributor or agent or the conversion of
any agent into a reseller will result in the desired increased foreign revenues
or that the Company will be able to identify and retain suitable distributors in
any market in which it converts an independent agent. See " -- Risks Associated
with Acquisitions Generally" and " -- Risks Related to International Revenue and
Activities."

    As part of the Net Tools concept, the Company is in the process of designing
a centralized console from which the various component suites can be operated,
administered and maintained utilizing a common look and feel. The Company faces
significant engineering challenges related to these efforts. In addition, the
Company faces significant engineering and other challenges related to the
integration of its various security products (such as its recently acquired PGP
encryption products and Network General CyberCop product) into a marketable
suite of products and the development of a software only Sniffer product.
Success of the Company's Net Tools suite strategy will also depend, in part,
upon successful development and coordination of the Company's sales force; on
successful development of a national accounts sales force and an effective
indirect sales channel for the Company's Sniffer and PGP security products; and
on the development and expansion of an effective professional services
organization. See " -- Risks Associated with Recent Transactions," " -- Risks
Associated with Acquisitions Generally," " -- Need to Develop Enterprise and
National Accounts Sales Force and Security Products Sales Force; Risks Related
to Direct Sales Force," " -- Use of Indirect Sales Channels; Need to Develop
Indirect Sales Channel for Sniffer and PGP Security Products" and " -- Need to
Expand and Develop An Effective Professional Services Organization."

    The foregoing factors, individually or in the aggregate, could materially
adversely affect the Company's operating results and could make comparison of
historic operating results and balances difficult or not meaningful.

Risks Associated with Acquisitions Generally. The software industry has
experienced and is expected to continue to experience a significant amount of
consolidation. In addition, it is expected that the Company will grow internally
and through strategic acquisitions in order, among other things, to expand the
breadth and depth of its product suites and to build its professional services
organization. The Company continually evaluates potential acquisitions of
complementary businesses, products and technologies. In addition to the
combination with Network General in December 1997, the Company has consummated a
series of significant acquisitions since 1994, including the acquisitions of PGP
and Helix in December 1997, Cinco Networks, Inc. in August 1997, 3DV Technology,
Inc. in March 1997, FSA Corporation of Canada in August 1996, Vycor Corporation
in February 1996, Saber Software Corporation, Inc. in August 1995 and ProTools,
Inc. in January 1994. In addition, since 1995 the Company has acquired a number
of its international distributors, including distributors in Australia, Brazil,
Japan and The Netherlands and is 

                                                                              16


<PAGE>   17

currently investigating acquisitions of additional foreign distributors. Past
acquisitions have consisted of, and future acquisitions will likely include,
acquisitions of businesses, interests in businesses and assets of businesses.
Any acquisition, depending on its size, could result in the use of a significant
portion of the Company's available cash or, if such acquisition is made
utilizing the Company's securities, could result in significant dilution to the
Company's stockholders, and could result in the incurrence of significant
acquisition related charges to earnings. Acquisitions by the Company may result
in the incurrence or the assumption of liabilities, including liabilities that
are unknown or not fully known at the time of acquisition, which could have a
material adverse effect on the Company. Furthermore, there can be no assurance
that any products acquired in connection with any such acquisition will gain
acceptance in the Company's markets or that the Company will obtain the
anticipated or desired benefits of such transactions.

    Achieving the anticipated benefits of an acquisition will depend, in part,
upon whether the integration of the acquired business, products or technology is
accomplished in an efficient and effective manner, and there can be no assurance
that this will occur. Moreover, successful acquisitions in the high technology
industry may be more difficult to accomplish than in other industries. Combining
a merged or acquired company requires, among other things, integration of
product offerings and coordination of sales and marketing and research and
development efforts. There can be no assurance that such an integration can be
accomplished smoothly or successfully. The difficulties of such integration may
be increased by the necessity of coordinating geographically separated
organizations, the complexity of the technologies being integrated, and the
necessity of integrating personnel with disparate business backgrounds and
combining two different corporate cultures. The integration of operations
following an acquisition requires the dedication of management resources that
may distract attention from the day-to-day business, and may disrupt key
research and development, marketing or sales efforts. The inability of
management to successfully integrate any acquisition could have a material
adverse effect on the business, operating results and financial condition of the
Company. In addition, as commonly occurs, during the pre-acquisition and
integration phases of technology company acquisitions, aggressive competitors
may undertake initiatives to attract customers and to recruit key employees
through various incentives.

    Rapid Technological Change; Risks Associated with Product Development. The
network security and management market is highly fragmented and is characterized
by ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. The Company's success depends upon its ability
to offer a broad range of network security and management software products, to
continue to enhance existing products, to develop and introduce in a timely
manner new products that take advantage of technological advances, and to
respond promptly to new customer requirements. While the Company believes that
it offers one of the broadest product lines in the network management and
security market, this market is continuing to evolve and customer requirements
are continuing to change. As the market evolves and competitive pressures
increase, the Company believes that it will need to further expand its product
offerings. There can be no assurance that the Company will be successful in
developing and marketing, on a timely basis, enhancements to its existing
products or new products, or that such enhancements or new products will
adequately address the changing needs of the marketplace.

    In addition, from time to time, the Company or its competitors may announce
new products with new or additional capabilities or technologies. Such
announcements of new products could have the potential to replace, or shorten
the life cycles of, the Company's existing products and to cause customers to
defer or cancel purchases of the Company's existing products.

    The Company has in the past experienced delays in software development, and
there can be no assurance that the Company will not experience delays in
connection with its current or future product development activities. Complex
software products such as those offered by the Company may contain undetected
errors or version compatibility issues, particularly when first introduced or
when new versions are released, resulting in loss of or delay in market
acceptance. For example, the Company experienced compatibility issues in
connection with its recent NetShield upgrade, and the Company's anti-virus
software products have in the past falsely detected viruses that did not
actually exist. See " -- Risk of False Detection of Viruses." Delays and
difficulties associated with new product introductions, performance or



                                                                              17


<PAGE>   18

enhancements could have a material adverse effect on the Company's business,
financial condition and results of operation.

    The Company's development efforts are impacted by the adoption or evolution
of industry standards related to its products and the environments in which they
operate. For example, no uniform industry standard has developed in the market
for encryption security products. As industry standards are adopted or evolve,
the Company may be required to modify existing products or develop and support
new versions of existing products. In addition, to the extent that no industry
standard develops, the Company's products and those of its competitors may be
incompatible if they use competing standards, which could prevent or
significantly delay overall development of the market for a particular product
or products. The failure of the Company's products to comply, or delays in
compliance, with existing or evolving industry standards could have a material
adverse effect on the Company's business, financial condition and results of
operation.

    The Company's long-term success will depend on its ability on a timely and
cost-effective basis to develop upgrades and updates to its existing product
offerings, to modify and enhance acquired products, and to introduce new
products which meet the needs of current and potential customers. Future
upgrades and updates may, among other things, include additional functionality,
respond to user problems or address issues of compatibility with changing
operating systems and environments. The Company believes that the ability to
provide these upgrades and updates to users frequently and at a low cost is a
key to success. For example, the proliferation of new and changing viruses makes
it imperative to update anti-virus products frequently in order for the products
to avoid obsolescence. Failure to release such upgrades and updates on a timely
basis could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be successful in these efforts. In addition, future changes in Windows 95,
Windows NT, NetWare or other popular operating systems may result in
compatibility problems with the Company's products. Further, delays in the
introduction of future versions of operating systems or lack of market
acceptance of future versions of operating systems would result in a delay or a
reduction in the demand for the Company's future products and product versions
which are designed to operate with such future versions of operating systems.
The Company's 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 the Company's business, financial
condition and results of operations.

    Dependence on Revenue from Flagship Anti-Virus and Sniffer Products. In
recent years, the Company has derived a substantial majority of its net revenue
from its 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 the Company's net revenue for the
foreseeable future. Because of this concentration of revenue, a decline in
demand for, or in the prices of, these anti-virus and network management
products as a result of competition, technological change, a change in the
Company's pricing model for such products, the inclusion of anti-virus or
network management and analysis functionality in system hardware or operating
system software or other software or otherwise, or a maturation in the
respective markets for these products could have a material adverse effect on
the Company's business, financial condition and results of operations.

    Dependence on Emergence of Network Management and Network Security Markets.
The markets for the Company's network management and network security products
are evolving, and their growth depends upon broader market acceptance of network
management and network security software, including help desk software. Although
the number of LAN-attached personal computers has increased dramatically, the
network management and network security markets continue to be emerging markets
and there can be no assurance that such markets will continue to develop or that
further market development will be rapid enough to benefit the Company
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,
there can be no assurance that the Company's products will be chosen by

                                                                              18


<PAGE>   19

organizations which acquire network management and network security tools.
Furthermore, to the extent that either the network management or network
security market does continue to develop, the Company expects that competition
will increase. See "-- Competition" and "-- Risk of Inclusion of Network
Security and Management Functionality in Hardware and Other Software."

    Competition. The markets for the Company's products are intensely
competitive and the Company expects competition to increase in the near-term.
The Company believes that the principal competitive factors affecting the
markets for its products include performance, functionality, quality, customer
support, breadth of product line, frequency of upgrades and updates, integration
of products, manageability of products, brand name recognition, company
reputation and price. Certain of the criteria upon which the performance and
quality of the Company's anti-virus software products compete include the number
and types of viruses detected, the speed at which the products run and ease of
use. Certain of the Company's competitors have been in the network management
market longer than the Company, and other competitors, such as Symantec, Intel,
Seagate and HP, are larger and have greater name recognition than the Company.
The Company will also need to develop name recognition for its new name,
"Network Associates." In addition, certain larger competitors such as Intel,
Microsoft and Novell have established relationships with hardware vendors
related to their other product lines. These relationships may provide them with
a competitive advantage in penetrating the OEM market with their network
security and management products. As is the case in many segments of the
software industry, the Company has been encountering, and expects to further
encounter, increasing competition. This increased competition could reduce
average selling prices and, therefore, profit margins. Competitive pressures
could result not only in sustained price reductions but also in a decline in
sales volume, which events would materially adversely affect the Company's
business, financial condition and results of operations. In addition,
competitive pressures may make it difficult for the Company to maintain or
exceed its growth rate.

    Although there is a trend toward consolidation in the network security and
management market, the market is currently highly fragmented with products
offered by many vendors. The Company's principal competitor is the Peter Norton
Group of Symantec in the network security market and Intel's LanDesk in the
network management market. The Company's other competitors include Computer
Associates/Cheyenne Software, IBM, Seagate, the Dr. Solomon Group and Trend
Micro, Inc., as well as numerous smaller companies and shareware authors that
may in the future develop into stronger competitors or be consolidated into
larger competitors. In the encryption portion of the security market, the
Company's principal competitors are Security Dynamics Technologies, Inc., Cylink
Corporation, Entrust Technologies and VeriSign, Inc. The Company's principal
competitors in the help desk market are Remedy Corporation, Software Artistry
(recently acquired by Tivoli Systems/IBM) and Magic Solutions, Inc. The
Company's principal competitor in the software-based network fault and
performance management market is HP, with other competitors including Azure
Technologies Incorporated, Concord Communications, DeskTalk Systems, Kaspia
Systems, Shomiti Systems, Inc. and Wandel & Goltermann, Inc. The Company also
faces competition in the security market from Cisco, Security Dynamics
Technologies, Inc., Checkpoint Software and other vendors in the
encryption/firewall market. In addition, the Company faces competition from
large and established software companies such as Microsoft, Intel, Novell and HP
which offer network management products as enhancements to their network
operating systems. As the network management market develops, the Company may
face increased competition from these 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 vendors who are able
to provide the necessary software and support capabilities. In addition, to the
extent that the Company is successful in developing its Net Tools suite of
products designed around a centralized management and administration console for
the Windows NT platform, the Company will likely compete with large computer
systems management companies such as Tivoli Systems (TME) and Computer
Associates (Unicenter). There can be no assurance that the Company will continue
to compete effectively against existing and potential competitors, many of whom
have substantially greater financial, technical, marketing and support resources
and name recognition than the Company. In addition, there can be no assurance
that software vendors who currently use traditional 

                                                                              19

<PAGE>   20

distribution methods will not in the future decide to compete more directly with
the Company by utilizing electronic software distribution.

    The competitive environment for anti-virus software internationally is
similar to that in North America, although local competitors in specific foreign
markets often present stronger competition and shareware authors control a more
significant portion of the European market. The international market for network
management software has developed more slowly than the North American market,
although larger competitors such as Intel and Symantec have begun to penetrate
European markets. Asian markets have lagged significantly behind North America
and Europe in their adoption of networking technology. There can be no assurance
that the Company will be able to compete successfully in international markets.

    Need to Develop Enterprise and National Accounts Sales Force and Security
Products Sales Force; Risks Related to Direct Sales Force. In connection with
its recent acquisitions and as part of its evolving strategy of offering product
suites under the Net Tools umbrella, the Company has recently reorganized its
direct sales force into three tiers. The first tier focuses on the sale of the
full product suite under the Net Tools umbrella to enterprise and national
account customers. The second tier consists of four separate sales groups
focused on the sale of the individual product suites (i.e., McAfee Total Virus
Defense; PGP Total Network Security; Sniffer Total Network Visibility; or McAfee
Total Service Desk) to the departmental level. The third tier consists of four
separate outbound corporate telesales forces who actively market the Company's
individual product suites to customers with less than 1,000 nodes. The Company
historically has not had a large enterprise or national accounts sales force and
only recently developed a direct sales group focused on these larger accounts.
In addition, the Company has not historically had a separate sales force focused
on the sale of its suite of security products (many of which were only recently
acquired and are currently being engineered into a common suite). To succeed in
the direct sales channel for the enterprise and national accounts market and for
the sale of the separate security product suite, the Company will be required to
build a significant direct sales organization and will be required to attract
and retain qualified personnel, which personnel will require training about, and
knowledge of, product attributes for the Company's suite of products. There can
be no assurance that the Company will be successful in building the necessary
sales organization or in attracting, retaining or training these individuals.
Historically, the Company has sold its products at the departmental level. To
succeed in the enterprise and national accounts market will require, among other
things, establishing relationships and contacts with senior technology officers
at these accounts. There can be no assurance that the Company or its sales force
will be successful in these efforts.

    The Company's sales organization structure may result in multiple customer
contacts by different Company sales representatives (particularly in
circumstances where the customer has multiple facilities and offices), a lack of
coordination between the Company's various sales organizations and a lack of
focus by the individual sales representatives on their designated customers or
products. The occurrence of these events could lead to customer confusion,
disputes in the sales force and lost revenue opportunities which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, while the development of a direct sales
channel reduces the Company's dependence on resellers and distributors, it may
lead to conflicts for the same customers and further customer confusion,
pressure by current and prospective customers for price reductions on products
and, consequently, in reductions in the Company's gross margin and operating
profit.

    Use of Indirect Sales Channels; Need to Develop Indirect Sales Channel for
Sniffer and PGP Security Products. The Company markets a significant portion of
its products to end-users through distributors, resellers and VARs. The
Company's distributors sell other products that are complementary to, or compete
with, those of the Company. While the Company encourages its distributors to
focus on its products through market and support programs, there can be no
assurance that these distributors will not give greater priority to products of
other suppliers, including competitors.

    The Company does not have an extensive indirect sales channel for its
Network Sniffer products or its PGP security products. To succeed in the
indirect sales channel, the Company will be required to build a 

                                                                              20


<PAGE>   21

more extensive network of distributors, resellers and VARs who will support and
market these products. These indirect channel participants will require
significant training about, and knowledge of, product attributes for these
products and the related product suites. There can be no assurance that the
Company can successfully establish such an indirect channel on a timely basis or
at all or that such a channel, once established, can be maintained.

    The Company's agreements with its distributors provide for a right of
return. This right of return may be triggered by a number of events, including
returns to distributors by end users, inaccurate estimates of end user demand by
distributors, increased purchases by distributors in response to sales
incentives or transitions to new products or versions of products. As a result
of this right of return, revenue recognized by the Company upon sales to
distributors is subject to a reserve for returns. Returns could exceed reserves
as a result of distributors holding excessive Company product inventory. There
can be no assurance that current or future reserves established by the Company
will be adequate.

    Need to Expand and Develop An Effective Professional Services Organization;
Risks Related to Third-Party Professional Services. As the Company's products
and computer networks become more complex, customers will increasingly require
greater professional assistance in the design, installation, configuration and
implementation of their networks and acquired products. To date, the Company has
relied on its limited professional services capabilities and increasingly on
outside professional service providers (including its distributors, resellers
and system integrators). There can be no assurance that third party service
providers can or will continue to be willing to provide adequate levels (both in
terms of time and quality) of professional services. Moreover, reliance on these
third parties reduces the Company's control over the provision of support
services for its products and places a greater burden on these third parties,
which, in turn, could delay the Company's recognition of product revenue, could
harm the Company's relationships or reputation with such third parties or the
end users of its products and could result in decreased future sales of, or
prices for, its products.

    To more effectively service its customer's evolving needs, the Company
intends to significantly expand and develop its worldwide professional service
organization. There can be no assurance that the Company will be successful in
its efforts to expand and develop an effective professional services
organization. This will require that the Company hire and train additional
service professional who must be continually trained and educated to ensure that
they possess sufficient technical skills and product knowledge. In particular,
the market for qualified professionals is intensely competitive, making hiring
and retention difficult. The Company expects significant competition in this
market from existing providers of professional services and future entrants. The
Company must also properly price its services to attract customers, while
maintaining sufficient margins for its services. The Company expects that it
will have lower profit margins on its service revenues. The failure to develop
an effective professional services organization could have a material adverse
effect on the Company's business, financial condition and results of operations.

    Reliance on Microsoft Technology. Although the Company intends to support
other operating systems, the Company's mission is to be the leading supplier of
network security and management products for Windows NT/Intel based networks.
Sales of the Company's products would be materially and adversely affected by
market developments which are adverse to the Windows operating environments,
including the failure of users and application developers to accept Windows NT.
In addition, the Company's ability to develop products using the Windows
operating environments is substantially dependent on its ability to gain timely
access to, and to develop expertise in, current and future developments by
Microsoft, of which there can be no assurance.

    Risks Associated with Failure to Manage Growth. The Company's growth
internally and through its numerous acquisitions has placed, and any further
expansion would continue to place, a significant strain on its limited
personnel, management and other resources. In the future, the Company's ability
to manage any growth, particularly with the anticipated expansion of the
Company's international business and growth in indirect channel business, will
require it to attract, train, motivate and manage new employees 


                                                                              21

<PAGE>   22

successfully, to effectively integrate new employees into its operations and to
continue to improve its operational, financial, management and information
systems and controls. The failure to effectively manage any further growth could
have a material adverse effect on the Company's business, financial condition
and results of operations.

    Proprietary Technology and Rights; Litigation. The Company's success is
heavily dependent upon proprietary software technology. The Company relies on a
combination of contractual rights, trademarks, trade secrets and copyrights to
establish and protect proprietary rights in its software. There can be no
assurance these protections will be adequate or that competitors will not
independently develop technologies or products that are substantially equivalent
or superior to the Company's products.

    The Company recently changed its legal name to "Networks Associates, Inc."
and has recently begun conducting business as "Network Associates." The Company
believes that there are a number of other companies with similar names and,
although the Company has not been served in any suit, three companies (including
Network Associates Corporation in California and Network Associates, Inc. in
Oregon) have made claims (including various trademark claims) or demands with
respect to the Company's use of the name Network Associates. There can be no
assurance that the Company will be able to enforce rights in that name, that it
will be free to use the name in all jurisdictions, that there will be no
additional challenges to the use of that name or that it will not be required to
expend significant resources in securing the use of that name.

    The Company does not typically obtain signed license agreements from its
corporate, government and institutional customers who license products directly
from it. The Company includes an electronic version of a "shrink-wrap" license
in all of its electronically distributed software and a printed license in the
box for its products distributed through traditional distribution channels in
order to protect its copyrights and trade secrets in those products. Since none
of these licenses are signed by the licensee, many 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 proprietary rights or offer only limited protection for those rights.
There can be no assurance that the steps taken by the Company to protect its
proprietary software technology will be adequate to deter misappropriation of
this technology. For example, the Company is aware that a substantial number of
users of its anti-virus products have not paid any registration or license fees
to the Company. Changing legal interpretations of liability for unauthorized use
of the Company's software, or lessened sensitivity by corporate, government or
institutional users to avoiding copyright infringement, could have a material
adverse effect on the Company's business, financial condition and results of
operations.

    The Company's principal assets are its intellectual property, and the
Company competes in an increasingly competitive market. There has been
substantial litigation regarding intellectual property rights of technology
companies. The Company has in the past been, and currently is, subject to
litigation related to its intellectual property (including a pending unfair
trade practice case and a patent infringement case involving Symantec and Trend
Micro Inc., respectively). There can be no assurance that there will be no
developments arising out of such pending litigation or any other litigation to
which the Company is or may become party which could have a material adverse
effect on the Company's business, financial condition and results of operation.
See "Item 3, Legal Proceedings."

    In addition, as the Company may acquire a portion of software included in
its products from third parties, its exposure to infringement actions may
increase because it must rely upon such third parties as to the origin and
ownership of any software being acquired. Similarly, exposure to infringement
claims exists and will increase to the extent that the Company employs or hires
additional software engineers previously employed by competitors,
notwithstanding measures taken by them to prevent usage by such software
engineers of intellectual property used or developed by them while employed by a
competitor. In the future, litigation may be necessary to enforce and protect
trade secrets and other intellectual property rights owned by the Company. The
Company may also be subject to litigation to defend it against claimed
infringement of the rights of others or to determine the scope and validity of
the proprietary rights of 

                                                                              22


<PAGE>   23

others. Any such litigation could be costly and cause diversion of management's
attention, either of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Adverse determinations
in such litigation could result in the loss of the Company's proprietary rights,
subject the Company to significant liabilities, require the Company to seek
licenses from third parties or prevent the Company from manufacturing or selling
its products, any one of which could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
there can be no assurance that any necessary licenses will be available on
reasonable terms, or at all.

    Risks Related to International Revenue and Activities. In 1997, 1996 and
1995, net revenue from international licenses represented approximately 29%, 25%
and 25%, respectively, of the Company's net revenue. Historically, the Company
has relied primarily upon independent agents and distributors to market its
products internationally. The Company expects that international revenues will
continue to account for a significant percentage of net revenue. The Company
also expects that a significant portion of such international revenue will be
denominated in local currencies. To reduce the impact of foreign currency
fluctuations, the Company uses non-leveraged forward currency contracts.
However, there can be no assurance that the Company's future results of
operations will not be adversely affected by such 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
activity during the third quarter, tariffs and other trade barriers,
uncertainties relative to regional economic circumstances (such as the current
economic turbulence in Asia), political instability in emerging markets and
difficulties in staffing and managing foreign operations. There can be no
assurance that these factors will not have a material adverse effect on the
Company's future international license revenue. Further, in countries with a
high incidence of software piracy, the Company may experience a higher rate of
piracy of its products. There are a number of additional risks related to the
export of the Company's PGP security products. See "-- Risks Relating to
Cryptography Technology."

    In addition, a portion of the Company's international revenue is expected to
continue to be generated through independent agents. Since these agents will not
be employees of the Company and will not be required to offer the Company's
products exclusively, there can be no assurance that they will continue to
market the Company's products. Also, the Company is likely to have limited
control over its agents, limited access to the names of the customers to whom
the agents sell its products and limited knowledge of the information provided
by, or representations made by, these agents to its customers.

    Risk of Sabotage. Given the Company's high profile in the anti-virus
software market, the Company has been a target of computer "hackers" who have
created viruses to sabotage its products. While to date these viruses have been
discovered quickly and their dissemination has been limited, there can be no
assurance that similar viruses will not be created in the future, that they will
not cause damage to users' computer systems and that demand for the Company's
software products will not suffer as a result. In addition, since the Company
does not control diskette duplication by distributors or its independent agents,
there can be no assurance that diskettes containing the Company's software will
not be infected.

    Risk of False Detection of Viruses. The Company's anti-virus software
products have in the past and may at times in the future falsely detect viruses
that do not actually exist. Such "false alarms," while typical in the industry,
may impair the perceived reliability of the Company's products and may therefore
adversely impact market acceptance of the Company's products. In addition, the
Company has in the past been subject to litigation claiming damages related to a
false alarm, and there can be no assurance that similar claims will not be made
in the future.

    Risks Relating to Cryptography Technology. Certain of the Company's PGP
network security products, technology and associated assistance are subject to
export restrictions administered by the U.S. Department of State and the U.S.
Department of Commerce, which permit the export of encryption products only with
the required level of export license. In addition, these U.S. export laws
prohibit the 


                                                                              23


<PAGE>   24

export of encryption products to a number of countries deemed hostile by the
U.S. government. U.S. export regulations regarding the export of encryption
technology require either a transactional export license or the granting of
Department of Commerce Commodity jurisdiction. As result of this regulatory
regime, foreign competitors facing less stringent controls on their products may
be able to compete more effectively than the Company in the global market. While
the Company has obtained approval from the Department of Commerce to export to
certain end users, there can be no assurance that the U.S. government will
approve pending or future export license requests. Further, there can be no
assurance that the list of products and countries for which export approval is
required, and the regulatory policies with respect thereto, will not be revised
from time to time. Failure to obtain the required licenses or the costs of
compliance could have a material adverse effect on the Company's international
revenues.

    The Company's PGP network security products are dependent on the use of
public key cryptography technology, which depends in part on the application of
certain mathematical principles known as "factoring." The security afforded by
public key cryptography technology is predicated on the assumption that the
factoring of the composite of large prime numbers is difficult. Should an easy
factoring method be developed, then the security afforded by encryption products
utilizing 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 the Company's existing products and
services obsolete or unmarketable. There can be no assurance that such
developments will not occur. Moreover, even if no breakthroughs in factoring or
other methods of attacking cryptographic systems are made, factoring problems
can theoretically be solved by computer systems significantly faster and more
powerful than those presently available. If such improved techniques for
attacking cryptographic systems are ever developed, it could have a material
adverse effect on the Company's business, operating results and financial
condition.

    Product Liability. The Company's anti-virus and network management software
products are used to protect and manage computer systems and networks that may
be critical to organizations and, as a result, the sale and support of these
products by the Company may entail the risk of product liability and related
claims. The Company's license agreements with its customers typically contain
provisions designed to limit the Company's 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 the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations.

    Dependence upon Key Personnel. The success of the Company will depend to a
significant extent upon a number of key technical and management employees.
While employees are required to sign standard agreements concerning
confidentiality and ownership of inventions, Company employees are generally not
otherwise subject to employment agreements or to noncompetition covenants. The
loss of the services of any key employees could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company does not maintain life insurance policies on its key employees. The
ability of the Company to achieve its revenue and operating performance
objectives will depend in large part on its ability to attract and retain
technically qualified and highly skilled sales, consulting, technical, marketing
and management personnel. Competition for such personnel is intense and is
expected to remain so for the foreseeable future. There can be no assurance the
Company will be successful in retaining its existing key personnel and in
attracting and retaining the personnel it requires, and failure of the Company
to retain and grow its key employee population could adversely affect the
Company's business and operating results. Further, additions of new and
departures of existing personnel, particularly in key positions, can be
disruptive and can result in departures of existing personnel, which could have
a material adverse effect upon the Company's business, operating results and
financial condition.

    Customer Purchase Decisions; Potentially Longer Sales and Implementation
Cycles for Certain Products Suites. The products offered by the Company may be
considered to be capital purchases by 

                                                                              24


<PAGE>   25

certain customers or prospective customers. Capital purchases are often
considered discretionary and, therefore, are canceled or delayed if the customer
experiences a downturn in its business or prospects or as a result of economic
conditions in general. Any such cancellation or delay could adversely affect the
Company's results of operations. In addition, as the Company proceeds with its
strategy of selling product suites under the Net Tools umbrella (particularly to
larger enterprise and national accounts), its sales cycle is likely to lengthen.
Such sales may involve a lengthy education process and a significant technical
evaluation and commitment of capital and other resources and may be subject to
the risk of delays associated with customers' internal budget and other
procedures for approving large capital expenditures, deploying new technologies
within their networks and testing and accepting new technologies that affect key
operations. Because of the potentially lengthy sales cycle and the potentially
large size of such orders, if orders forecasted for a specific customer for a
particular quarter are not realized or revenues are not otherwise recognized in
that quarter, the Company's operating results for that quarter could be
materially adversely affected. See "-- Variability of Quarterly Operating
Results" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

    Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although the Company believes that
its products and systems are Year 2000 compliant, the Company utilizes
third-party equipment and software that may not be Year 2000 compliant. Failure
of such third-party equipment or software to operate properly with regard to the
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, operating results and financial condition. The business,
operating results and financial condition of the Company's customers could be
adversely affected to the extent that they utilize third-party software products
which are not Year 2000 compliant. Furthermore, the purchasing patterns of
customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase products and services such as those offered by the Company, which could
have a material adverse effect on the Company's business, operating results and
financial condition.

    Supplier Dependence; Third Party Manufacturing. 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 network fault and
performance management products 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 lead to cancellations of customer orders or delays in placement of orders
which could materially adversely affect the Company's results of operations. If
the Company's purchase of such components or platforms exceeds demand, the
Company could incur losses or other charges in disposing of excess inventory,
which could also materially adversely affect the Company's results of
operations.

    The Company's manufacturing operations consist primarily of final assembly,
testing and quality control of materials, components, subassemblies and systems
for its Sniffer based products. The Company intends to outsource these
manufacturing operations in 1998. There can be no assurance that the Company
will be able to qualify and secure on commercially acceptable terms satisfactory
third party manufacturers on a timely basis or at all. In addition, reliance on
third party manufacturers will involve a number of risks, including the lack of
direct control over the manufacturing process, the absence or unavailability of
adequate capacity and reduced control over delivery schedules, quality control
and costs. In the event that, once initially secured, the Company's third party
manufacturers are unable or unwilling to continue to manufacture the Sniffer
based products in required volumes, on a cost effective basis, in a timely
manner or at all, the Company will have to secure additional manufacturing
capacity. Even if such additional 


                                                                              25


<PAGE>   26

capacity is available at commercially acceptable terms, the qualification
process could be lengthy and could create delay in product shipments.

    Possible Price Volatility of Common Stock. The trading price of the
Company's Common Stock has historically been, and is expected to be, subject to
wide fluctuations. The market price of the Common Stock may be significantly
impacted by quarterly variations in financial performance, shortfalls in revenue
or earnings from levels forecast by securities analysts, changes in estimates by
such analysts, market conditions in the computer software or hardware
industries, product introductions by the Company or its competitors,
announcements of extraordinary events such as acquisitions or litigation or
general economic conditions. Statements or changes in opinions, ratings, or
earnings estimates made by brokerage firms or industry analysts relating to the
market in which the Company does business or relating to the Company
specifically could result in an immediate and adverse effect on the market price
of the Common Stock. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. These fluctuations have had a
substantial effect on the market prices for many high technology and emerging
growth companies, often unrelated to the operating performance of the specific
companies. There can be no assurances that the market price of the Common Stock
will not decline below the levels prevailing at the time of this offering.
Securities class action lawsuits are often brought against companies following
periods of volatility in the market price of their securities. Any such
litigation against the Company could result in substantial costs and a diversion
of resources and management attention.

    Effect of Certain Provisional Anti-Takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The board of directors of the Company
has the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by its
stockholders. The rights of the holders of Company Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. 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. Further,
certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws, such as a classified board, could delay or make more
difficult a merger, tender offer or proxy contest involving the Company. While
such provisions are intended to enable the Company's Board to maximize
stockholder value, they may have the effect of discouraging takeovers which
could be in the best interest of certain stockholders. There is no assurance
that such provisions will not have an adverse effect on the market value of the
Company's Common Stock.

ITEM 2. PROPERTIES

    The Company's headquarters currently occupy approximately 62,000 square feet
in facilities located in Santa Clara, California under leases expiring in 2000.
As a result of the merger with Network General, the Company now also maintains
administrative marketing, manufacturing and product development facilities
consisting of some 170,000 square feet in Menlo Park, California. The Company
occupies this space under lease agreements that expire no later than June 2002.
The Company also maintains regional offices in New Jersey, Virginia and Texas as
well as development facilities in Illinois and Oregon. The Company also leases
space to maintain several domestic and foreign sales offices.

    The Company presently intends to relocate its headquarters to larger
facilities in Santa Clara, California. To that end, the Company has agreed, as
the assignee of certain rights of the existing tenant, to rent a facility of
approximately 200,000 square feet commencing on or about April 1, 1988. The
underlying lease is set to expire in 2013. The Company believes that these
facilities, together with its existing facilities, are adequate for the present
and that additional space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS


                                                                              26

<PAGE>   27

    The Company's principal assets are its intellectual property, and the
Company competes in an increasingly competitive market. There has been
substantial litigation regarding intellectual property rights of technology
companies. The Company has in the past been, and currently is, subject to
litigation related to its intellectual property. There can be no assurance that
there will be no developments arising out of such pending litigation or any
other litigation to which the Company is or may become party which could have a
material adverse effect on the Company's business, financial condition and
results of operation.

    On April 24, 1997, the Company was served by Symantec with a suit filed in
the United States District Court, Northern District of California, San Jose
Division, alleging copyright infringement and unfair competition by the Company.
Symantec alleges that the Company's computer software program called "PC Medic"
copied portions of Symantec's computer software program entitled "CrashGuard."
Symantec's complaint sought injunctive relief and unspecified money damages. On
July 20, 1997, Symantec sought leave to amend its complaint to include
additional allegations of copyright infringement and trade secret
misappropriation pertaining to the Company's "VirusScan" product. Symantec
sought injunctive relief and unspecified money damages. On October 6, 1997, the
Court issued an order granting Symantec's motion to amend its complaint and
enjoining the Company from shipping any product containing either an
approximately 30-line routine found in Crash Guard or an approximately 100-line
routine found in a Symantec DLL. The Court's order expressly stated that "the
court is not enjoining the sale or distribution of [McAfee's] current product."
On December 19, 1997, the Court denied Symantec's motion to enjoin sale or
distribution of the Company's current PC Medic product. On February 11, 1998,
Symantec filed another motion seeking leave to again amend its complaint to
include additional allegations of trade secret misappropriation, interference
with economic advantage and business relations and violations of the Racketeer
Influenced and Corrupt Organization Act ("RICO"), in connection with the alleged
use at the Company by a former Symantec employee of allegedly proprietary
Symantec customer information. Symantec also filed a motion for a preliminary
injunction relating to these new allegations, and has scheduled both motions for
hearing on May 15, 1998. Trial is currently set for September 1998.

    On May 13, 1997, Trend Micro, Inc. ("Trend") filed suit in United States
District Court for the Northern District of California against both the Company
and Symantec. Trend alleges that the Company's "WebShield" and "GroupShield"
products infringe a Trend patent which issued on April 22, 1997. Trend's
complaint seeks injunctive relief and unspecified money damages. On June 6,
1997, the Company filed its answer denying any infringement. The Company also
filed a counterclaim against Trend alleging unfair competition, false
advertising, trade libel, and interference with prospective economic advantage.
On September 19, 1997, Symantec filed a motion to sever Trend's action against
the Company from its action against Symantec. The Company did not oppose
Symantec's motion to sever, other than to recommend a joint hearing on patent
claim interpretation. On December 19, 1997, the Court granted Symantec's motion
to sever and adopted the Company's recommendation regarding a joint hearing on
patent claim interpretation. As a result of the Court's decision, Trend's
actions against the Company and Symantec will proceed separately. The exact
terms of the severance order have not yet been approved by the Court, and the
Court has yet to reset key dates for discovery and trial in the two cases. The
Company anticipates that the Court will shortly reset the date for the joint
patent claim interpretation hearing for late June or July, 1998. Thirty days
after the joint patent claim interpretation hearing, the Court has indicated it
will set further dates for discovery and trial.

    On May 6, 1997, RSA Data Security, Inc. ("RSA") filed a lawsuit against PGP,
a wholly owned subsidiary of the Company since December 9, 1997, in San Mateo
County Superior Court. RSA seeks a declaration from the court that certain
paragraphs of a license agreement between PGP and Public Key Partners (the
"License Agreement") have been terminated and certain other paragraphs have
survived RSA's purported termination of the License Agreement. RSA, which
purports to act on behalf of Public Key Partners, also seeks an accounting of
PGP's sales of products subject to the License Agreement. PGP denies that RSA
has the authority to act on behalf of Public Key Partners, and denies that the
License Agreement has been breached or terminated in whole or in part. On May
22, 1997, PGP filed a motion to compel arbitration of the action pursuant to an
arbitration clause in the License Agreement. PGP's motion 

                                                                              27


<PAGE>   28

was granted on October 9, 1997. The Court stayed the state court proceedings and
ordered the action to arbitration. The arbitration proceedings are in the
preliminary stages.

    On October 14, 1997, RSA filed a patent infringement lawsuit against PGP in
the United States District Court for the Northern District of California. RSA
alleges PGP has infringed one of the patents which was licensed to PGP under the
License Agreement. On November 4, 1997, PGP moved to stay the federal action,
or, in the alternative, compel it to arbitration. On December 23, 1997, RSA
filed a motion to amend its complaint to include the Company as defendant. PGP's
motion to stay and RSA's motion to amend its complaint are scheduled to be heard
by the federal court in February 1998.

    On September 15, 1997, the Company 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 the
Company's VirusScan product infringes a Hilgraeve patent which was issued on
June 7, 1994. Hilgraeve's action seeks injunctive relief and unspecified money
damages. The case is in discovery.

    Although the Company has not been served in any suit, three companies
(including Network Associates Corporation in California and Network Associates,
Inc. in Oregon) have made claims (including various trademark claims) or demands
with respect to the Company's use of the name Network Associates.

   Although the Company intends to defend itself vigorously against the claims
asserted against it in the foregoing actions or matters, there can be no
assurance that such pending litigation will not have a material adverse effect
on the Company's business, financial condition or operating results. The
litigation process is subject to inherent uncertainties and no assurance can be
given that the Company will prevail in any such matters, or will be able to
obtain licenses, on commercially reasonable terms, or at all, under any patents
or other intellectual property rights that may be held valid or infringed by the
Company or its products. Uncertainties inherent in the litigation process
involve, among other things, the complexity of the technologies involved,
potentially adverse changes in the law and discovery of facts unfavorable to the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    At a Special Meeting of Stockholders of the Company on December 1, 1997, the
following matters were acted upon by the stockholders of the Company:

        1. The approval of the issuance of Company Common Stock to the
stockholders of Network General Corporation ("Network General") pursuant to the
Agreement and Plan of Reorganization, dated as of October 13, 1997, as amended
by the First Amendment thereto dated as of October 22, 1997, among the Company,
Network General and Mystery Acquisition Corp., a wholly-owned subsidiary of the
Company, providing for the merger of Mystery Acquisition Corp. with and into
Network General (the "Network General Merger");

        2. The approval of an amendment to the Company's Second Restated
Certificate of Incorporation (the "Certificate") to change the corporate name of
the Company to "Network Associates, Inc.," or, if that name was unavailable, to
"Networks Associates, Inc." (and not to "Network Associates, Inc.");

        3. The approval of an amendment to the Company's Certificate increasing
the number of authorized shares of the Company's Common Stock by 200,000,000
shares to 300,000,000 shares; and

        4. The approval of an amendment to the Company's 1997 Stock Incentive
Plan to (a) increase the number of shares of Company Common Stock authorized
thereunder by 3.4 million shares to 5.85 million shares and (b) eliminate the
ability of the Company's Board of Directors (the "Board") to grant options
thereunder with an exercise price less than the fair market value of the
Company's Common Stock on the date of grant.


                                                                              28

<PAGE>   29

    The number of shares of Common Stock outstanding and entitled to vote at the
Special Meeting was 51,403,965, and 46,895,610 shares were represented in person
or by proxy. The results of the voting on each of the matters presented to
stockholders at the Special Meeting are set forth below:
<TABLE>
<CAPTION>

                                     Votes           Votes                         Broker
                                      For           Against      Abstentions      Non-Votes
                                   ----------     -----------    -----------     -----------
<S>                                <C>            <C>            <C>             <C>      
1.  Share Issuance in
    connection with Network
    General Merger                 38,448,089          383,477        83,600        7,980,444


2.  Amendment to Company
    Certificate--Name Change       41,220,333          435,766        86,221        5,153,290


3.  Amendment to Company
    Certificate--Authorized
    Capital Increase               32,785,856       14,023,191        86,563               --


4.  Amendment to Company's
    1997 Stock Incentive
    Plan                           24,126,526       14,926,148       102,841        7,740,095

</TABLE>



PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

PRICE RANGE OF COMMON STOCK

    Since the Company's Common initial public offering on October 6, 1992, the
Company's Common Stock has traded on the NASDAQ National Market. Since the
combination with Network General Corporation on December 1, 1997, the Company's
Common Stock has traded under the symbol NETA. Prior thereto, the Company's
Common Stock traded under the symbol MCAF. The following tables set forth, for
the period indicated, the high and low closing sales prices for the 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.

<TABLE>
<CAPTION>

                                       High          Low
<S>                                <C>          <C>      
YEAR ENDED DECEMBER 31, 1997
    First Quarter                  $   64.50    $   38.50
    Second Quarter                     68.50        42.25
    Third Quarter                      77.75        49.50
    Fourth Quarter                     66.38        44.56

YEAR ENDED DECEMBER 31, 1996
    First Quarter                  $   28.50    $   14.33
    Second Quarter                     35.00        23.78
    Third Quarter                      46.92        30.83
    Fourth Quarter                     52.50        41.75
</TABLE>

    Per share amounts have been restated to give effect retroactively to three
separate stock dividends, which each effected a three-for-two stock split, in
October 1995, April 1996 and October 1996.

                                                                              29
<PAGE>   30

    On December 1, 1997, the Company acquired all the outstanding stock in Helix
through a merger in which the Company issued an aggregate of 550,000 shares of
Company Common Stock to the shareholders of Helix. The transaction was exempt
from the registration requirements of Section 5 of the Securities Act pursuant
to Section 4(2).

    On December 9, 1997, the Company acquired PGP through a merger in which the
Company paid an aggregate consideration of approximately $35 million in cash
(including the assumption of certain liabilities) and issued warrants to acquire
250,000 shares of Company Common Stock to the Series B Preferred shareholders of
PGP. The warrants to purchase up to an aggregate of 250,000 shares are
exercisable for a purchase price of $60.00 per share and expire, subject to
certain extensions, on June 5, 1999. The transaction was exempt from the
registration requirements of Section 5 of the Securities Act pursuant to Section
4(2).

DIVIDEND POLICY

    The Company has not paid any cash dividends since its reorganization into a
corporate form in October 1992. The Company intends to retain future earnings
for use in its business and does not anticipate paying cash dividends in the
foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

    On December 1, 1997 the Company acquired Network General Corporation in a
transaction accounted for as a pooling of interests. Network General had a
fiscal year ended March 31. Restated financial statements combine Network
General's results for the fiscal years ended March 31, 1997 and 1996 with the
Company's results for the years ended December 31, 1996 and 1995, respectively.
In order to conform Network General's fiscal year end to the Company's fiscal
year end, the consolidated statement of income for the year ended December 31,
1997 includes the three months ended March 31, 1997 for Network General which
are also included in the consolidated statement of income for the year ended
December 31, 1996. Revenue and net loss of Network General for such period were
$68.0 million and $6.4 million, respectively.

    The company also acquired three other companies through pooling transactions
in 1997, and FSA corporation in 1996. The Company's financial statements have
been restated to reflect the results of these pooling transactions. In addition
to the restatement for the above pooling of interest transactions, the following
selected financial data has been restated, from amounts previously reported, for
certain adjustments relating to acquisitions accounted for by the purchase
method and certain adjustments relating to acquisition and other related costs
in the fourth quarter of 1997, each as described in Note 3 to the consolidated
financial statements. The following selected financial data should be read in
conjunction with the Company's financial statements and notes thereto appearing
on pages 43 through 70.


                                                                              30

<PAGE>   31

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                       ------------------------
                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                      1997           1996          1995          1994             1993
                                      ----           ----          ----          ----             ----
<S>                                <C>            <C>            <C>            <C>            <C>     
STATEMENTS OF OPERATIONS DATA:
Net revenue .....................  $600,803       $435,998       $286,943       $192,692       $145,939
Income from operations ..........    65,109        111,622         67,705         35,053         27,265
Income before income taxes ......    79,885        121,481         76,585         41,254         31,397
Net income ......................  $ 17,723       $ 69,207       $ 49,766       $ 28,016       $ 19,782
Net income per share-diluted ....  $   0.24       $   0.94       $   0.71       $   0.43       $   0.32
Shares used in per share
  Calculation-diluted ...........    73,005         73,305         70,177         64,771         61,768
</TABLE>

<TABLE>
<CAPTION>

                                                            DECEMBER 31,
                                                            ------------
                                   1997           1996           1995           1994           1993
                                 --------       --------       --------       --------       --------

<S>                              <C>            <C>            <C>            <C>            <C>     
BALANCE SHEET DATA:
Working capital ...............  $207,711       $247,967       $179,503       $133,130       $ 88,451
Total assets ..................   641,670        474,892        337,346        269,947        204,941
Deferred revenue and taxes ....    82,650         59,500         55,310         48,149         34,256
Total equity ..................   414,898        340,899        249,314        200,728        150,272
</TABLE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

  FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

    The following table sets forth for the periods indicated the percentage of
net revenue represented by certain items in the Company's Statements of
Operations.
<TABLE>
<CAPTION>

                                                             YEARS ENDED DECEMBER 31,
                                                            --------------------------
                                                            1997       1996       1995
                                                            ----       ----       ----
<S>                                                         <C>        <C>        <C>
Net revenue:
   Product ...............................................    83%        82%        91%
   Services and support ..................................    17         18          9
Total revenue ............................................   100        100        100

Cost of revenue:
   Product ...............................................    14         14         14
   Services and support ..................................     5          4          4
Total cost of revenue ....................................    19         18         18

Operating costs and expenses:
  Research and development ...............................    14         12         13
  Marketing and sales ....................................    31         29         33
  General and administrative .............................     7          8          8
  Amortization of intangibles ............................     1          2          1
  Contingent compensation related to Cinco acquisition ...     3         --         --
  Acquisition and other related costs ....................    13          5          4
                                                             ---        ---        ---
          Total operating costs and expenses .............    70         56         59
                                                             ---        ---        ---
            Income from operations .......................    11         26         23
Other income, net ........................................     2          2          3
                                                             ---        ---        ---
            Income before provision for income taxes .....    13         28         26
Provision for income taxes ...............................    10         12          9
                                                             ---        ---        ---
            Net income (loss) ............................     3%        16%        17%
                                                             ---        ---        ---
</TABLE>

                                                                              31

<PAGE>   32

    Net Revenue. Net revenue increased 38% to $600.8 million in 1997 from $436.0
million in 1996, and 52% from $286.9 million in 1995. The increases in net
revenue are due to the increases in product revenue and services and support
revenues described below.

    Product revenue increased 39% to $499.4 million from $358.1 million in 1996,
and 38% from $260.3 million in 1995. The increase in the growth rate in product
revenues was primarily due to increases in the licensing of anti-virus software
products to new customers, renewing expiring anti-virus licenses, continued
acceptance of the Company's Sniffer products and continued acceptance of the
Company's consulting and support services. The increase is also attributable to
a lessor extent to the licensing of products (other than anti-virus and Sniffer
products) to new and existing customers as well as expansion into indirect
product distribution channels and international markets. Finally, the change in
anti-virus revenue recognition described below contributed to the increase in
product revenue in both 1996 and 1995.

    Prior to July 1, 1995 revenue from subscription licenses for anti-virus
software was recognized ratably over a two year period as the Company did not
separately sell the product license and maintenance. Effective July 1, 1995, the
Company began to sell these components separately and currently recognizes, upon
the initial sale, 80% of the total fee as product license revenue and defers 20%
of the fee as maintenance. The maintenance fee is recognized over the service
period, generally two years.

    As a result of the change in revenue recognition for anti-virus licenses in
July 1995, period-to-period results are not directly comparable and should not
be relied upon as indicative of future performance. As a decreasing percentage
of the Company's net revenue is attributable to the recognition of previously
deferred anti-virus revenue, the Company's net revenue in future periods may be
subject to greater fluctuations. In addition to generating net revenue through
licenses, the Company sells certain of its network security and management
products with shrink-wrap licenses through traditional distribution channels.
The Company recognizes revenue from sales to distributors upon shipment, subject
to a reserve for returns.

    Services and support revenues include revenues from software support,
maintenance contracts, education and consulting services, as well as those
revenues from warranty, customer support and maintenance contracts which are
deferred and recognized over the related service period. Service revenues
increased 30% to $101.4 million in 1997 from $77.9 million in 1996 and 192% from
$26.7 million in 1995. The increase in services and support revenues resulted
from growth in all categories of service revenues, principally due to the growth
of the installed customer base and the resulting renewal of maintenance
contracts. The high growth from 1995 to 1996 was due primarily to the Company
initiating consulting and support services relating to the anti-virus and
network security software products.

    Although the Company has had significant growth in net revenue and net
income (before acquisition and other related changes), the Company's growth rate
has slowed in recent periods. The Company has experienced increased price
competition for its products and the Company expects competition to increase in
the near-term, which may result in reduced average selling prices for the
Company's products in the near-term. Due to these and factors such as a maturing
anti-virus market and an increasingly higher base from which to grow, the
revenue growth rate from the Company's products will be difficult to sustain or
increase. To the extent these trends continue, the Company's results of
operations could be materially adversely affected. Renewals have historically
accounted for a significant portion of the Company's net revenue; however, there
can be no assurance that the Company will be able to sustain historic renewal
rates for its products in the future. Risks related to the Company's change in
business strategies, including its newly introduced suite pricing model and its
development of a two-year subscription licensing model for the Company's Sniffer
products and a software only version of the Company's Sniffer products, could
also cause fluctuations in the Company's operating results and could make
comparisons with historic operating results and balances difficult. To more
effectively service its customer's evolving needs, the Company also intends to
significantly expand and develop its worldwide professional service
organization. The Company expects that it will have lower profit margins on its
service revenues. See "Risk Factors--Variability of Quarterly Operating
Results," "--Risks Related to Certain Business Strategies" and "--Need to Expand
and


                                                                              32
<PAGE>   33

Develop An Effective Professional Services Organization; Risks Related to
Third-Party Professional Services".

    Although the Company believes that its products and systems are Year 2000
compliant, the Company's revenues and results of operations and financial
condition may be adversely impacted by, among other things, failure of third
party equipment and software utilized by the Company to be Year 2000 compliant
and the potential adverse impact of Year 2000 compliance on its customers
purchasing patterns and availability of resources to acquire Company products.
See "Risk Factors -- Year 2000 Compliance."

    International revenue accounted for approximately 29%, 25% and 25% of net
revenue for 1997, 1996 and 1995, respectively. The increase in international net
revenue as a percentage of net revenue from 1996 to 1997 was due primarily to
increased acceptance of the Company's products in international markets and the
continued investment in international operations. Historically, the Company has
relied primarily upon independent agents and distributors to market its products
internationally. The Company expects that international revenues will increase
in absolute terms as it, among other things, proceeds with its strategy of
acquiring existing independent agents and distributors in strategic markets or
converting independent agents into resellers. The Company also expects that a
significant portion of such international revenue will be denominated in local
currencies. To minimize the impact of foreign currency fluctuations, the Company
uses non-leveraged forward currency contracts. However, there can be no
assurance that the Company's future results of operations will not be adversely
affected by such 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 activity during the third
quarter, tariffs and other trade barriers, uncertainties relative to regional
economic circumstance (such as the recent economic turbulence in Asia),
political instability in emerging markets and difficulties staffing and managing
foreign operations. There can be no assurance that these factors will not have a
material adverse effect on the Company's future international license revenue.
Further, in countries with a high incidence of software piracy, the Company may
experience a higher rate of piracy of its products.

    Cost of Net Revenue. Cost of Net Revenue increased 40% to $112.2 million in
1997 from $80.2 million in 1996, and 59% from $50.4 million in 1995. The
increases in net revenue are due to the increases in cost of product revenue and
cost of services and support revenue described below.

    The Company's cost of product revenue consists primarily of the cost of
media, manuals and packaging for products distributed through traditional
channels, royalties and with respect to certain Sniffer products, computer
platforms and other hardware components. Cost of product revenues increased 34%
to $81.6 million in 1997 from $60.8 million in 1996. From 1995 to 1996 cost of
product revenues increased 54% from $39.5 million. The increase in cost of
product revenues from 1996 to 1997 was primarily due to a corresponding increase
in product revenues. The increase in cost of product revenues from 1995 to 1996
was due to an increase in product revenues as well as the increase in sales of
third party computer platforms and other hardware components as art of certain
Sniffer products, which have a lower gross margin than the Company's own
products. As a percentage of net product revenue, cost of product revenue was
16% in 1997 and 17% in 1996 and 15% in 1995.

    Cost of services and support revenue consists principally of salaries and
benefits related to employees providing customer support and consulting
services. In 1997, cost of services and support revenue increased 58% to $30.5
million from $19.4 million in 1996. From 1995 to 1996, cost of services and
support revenue increased 78% from $10.8 million. These increases are due to
increases in net revenue as well as the initial investment in the anti-virus
professional services organization. Costs increased at a higher rate than
revenue due to the shift in the mix of support and professional services revenue
versus revenue from warranty and maintenance contracts previously deferred. Cost
of services and support revenue as a percentage of net services and support
revenue was 30% in 1997, 25% in 1996 and 41% in 1995.

                                                                              33


<PAGE>   34

    The Company intends to expand its professional services organization which
is expected to cause the cost of services and support revenue to increase in
absolute dollars and may cause such expenses as a percentage of net revenue to
increase. To the extent that the percentage of the Company's net revenue which
is generated through traditional distribution channels increases, the Company's
cost of net revenue will increase and, accordingly, gross margins will decrease.
In addition, to the extent that the Company increases its reliance on retail
distribution, it may encounter problems related to product returns and limited
shelf space availability.

    Research and Development. Research and development expenses consist
primarily of salary and benefits for the Company's development and technical
support staff. Research and development expenses increased 58% to $85.8 million
in 1997 from $54.2 million in 1996. From 1995 to 1996, research and development
expenses increased 43% from $37.8 million. These increases were primarily a
result of the expansion of the Company's product development and technical
support staff and, to a lesser extent, the increased use of independent
contractors. As a percentage of net revenue, research and development expenses
increased to 14% in 1997 from 12% in 1996. Research and development spending
decreased as a percentage of net revenue in 1996 from 13% in 1995. Although in
absolute dollars, research and development spending increased, as a percentage
of net revenue research and development expenses decreased from 1995 to 1996 due
to a higher rate of increase in net revenue. The Company anticipates that
research and development expenses will continue to increase in absolute dollars,
but may fluctuate as a percentage of net revenue.

    The Company believes that its ability to maintain its competitiveness will
depend in large part upon its 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. Marketing and
sales expenses increased 49% to $188.3 million in 1997 from $126.4 million in
1996. From 1995 to 1996, marketing and sales expenses increased 34% from $94.1
million in 1995. These increases were primarily the result of an increase in
marketing and sales personnel and, to a lesser extent, increased advertising and
promotional activities required to support increased sales volumes and expanding
product lines. As a percentage of net revenue, marketing and sales expense was
32% in 1997 and 29% in 1996 and 33% in 1995. Although in absolute dollars,
marketing and sales spending increased from 1995 to 1996, as a percentage of net
revenue these expenses decreased due to a higher rate of growth in net revenue.
The Company is seeking to expand the breadth and depth of its product suites.
Such expansion, together with the Company's efforts to build brand identity
under its new corporate name are expected to contribute to a further increase in
marketing and sales expenses in absolute dollars, which expenses may 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. General and administrative costs increased 33% to $44.2 million
in 1997 from $33.2 million in 1996. From 1995 to 1996, general and
administrative expenses increased 50% from $22.2 million. The increase in 1997
is largely a result of a increased staffing to support operations both
domestically and internationally and to accommodate the growth in revenue. As a
percentage of net revenue, general and administrative expenses was 7% in 1997,
8% in 1996 and 1995. The Company intends to continue to make investments in its
finance and administrative infrastructure, and, as a result, expects general and
administrative expenses will increase in absolute dollars, but may fluctuate as
a percentage of net revenue.


                                                                              34

<PAGE>   35

    Contingent Compensation Related to Cinco Acquisition. The $18 million of
compensation expense that occurred in the quarter ended December 31, 1997
resulted from an amendment of the purchase agreement between Network General and
Cinco. The purchase agreement originally provided for $18 million in contingent
payments based primarily on the timely satisfaction of certain technical and
product development and revenue goals.

    As a result of the McAfee/Network General merger, significant changes in
product directions were undertaken and it was believed that these changes and
the related uncertainties would adversely impact the ability of the Cinco
founders/selling stockholders to achieve the specified goals. Therefore, in
order to retain the founders in the Company's employ, the purchase agreement was
amended to remove the specified goals. Four of the five founders have continued
with the Company. However, the consideration is payable whether the founders
remain with the Company or not.

    Acquisition and Other Related Costs. The Acquisition and other related costs
for 1997 comprise (i) the write-off of acquired in-process research and
development projects of companies acquired in purchase accounting transactions;
(ii) direct transaction costs of companies acquired in pooling of interests
transactions; (iii) accrual for severance and benefits for terminations; and
(iv) lease costs and asset write-downs in connection with the Network General
merger. The following is a summary of these charges (in thousands):
<TABLE>
<CAPTION>

                         Direct                       Lease Costs       
                      Transaction     Severance &      and Asset       In-Process         
                         Costs         Benefits       Writedowns          R&D            Other           Total 
                        -------         -------       -----------      ----------       -------         -------
<S>                     <C>             <C>             <C>             <C>             <C>             <C>    
Network General         $15,347         $11,083         $18,916         $    --         $   603         $45,949
Helix                        --              --              --              --           1,874           1,874
Paradigm                     --              --              --              --           2,330           2,330
PGP                          --              --              --           3,937              --           3,937
Sybari                       --              --              --              --           1,100           1,100
Cinco                        --              --              --           5,234              --           5,234
3DV                          --              --              --          19,504              --          19,504
                        -------         -------         -------         -------         -------         -------
Total Charges           $15,347         $11,083         $18,916         $28,675         $ 5,907         $79,928
                        =======         =======         =======         =======         =======         =======
</TABLE>


    Direct transaction costs included $10.5 million in investment banking fees,
$3.7 million in legal and accounting fees, $709,000 in filing fees and $438,000
in other related charges. Lease costs and asset writedowns include $3.8 million
related to the costs of closing approximately 35 facilities throughout the world
and the disposal of excess and obsolete assets (generally computer equipment
which did not comply with the Company's standards) of $15.1 million.

    The following table summarizes the activity in the reserves for Acquisition
and other related costs ($000's):
<TABLE>
<CAPTION>

                                   Direct         Severance        Lease          Asset          
                             Transaction Costs   & Benefits        Costs       Write Downs        Other           Total
                             -----------------   ----------       --------     -----------       --------        --------

<S>                          <C>                  <C>             <C>            <C>             <C>             <C>     
Balance, December 31, 1996        $     --        $     --        $     --       $     --        $  2,708        $  2,708
Charged in the three months
ended December 31, 1997             15,347          11,083           3,842         15,074           5,907          51,253
Paid Out or Charged against
the related assets                  (7,297)           (386)             --        (13,209)         (5,722)        (26,614)
                                  --------        --------        --------       --------        --------        --------
Balance, December 31, 1997        $  8,050        $ 10,697        $  3,842       $  1,865        $  2,893        $ 27,347
                                  ========        ========        ========       ========        ========        ========
</TABLE>

    The severance and benefits charges relate to company-wide reductions in
force following the Company's acquisitions of Network General, PGP and Helix in
the fourth quarter of approximately 186 employees across all employee groups.
The termination plan, which took place in January 1998, was finalized and
approved by management prior to December 31, 1997. The employees to be
terminated and the benefit arrangements were communicated to employees on
December 31, 1997. A limited number of 

                                                                              35
<PAGE>   36

employees were retained for a short period to help with the transition. Costs
associated with these transition employees were charged to operations during the
transition period.

    The lease costs were $3.8 million and represent an estimate of lease expense
during the period prior to re-leasing the property together with losses on
subleases, if any. The costs, excluding amortization of leasehold improvements
related to any facilities which were used by the Company during a short
transition period, were charged to operations. However, such charges were not
material. Due to the immediate consolidation of facilities, depreciation
allocable to these facilities during the transition period was also not
material. Asset write downs were $15.1 million and comprised the write-off of
leasehold improvements ($9.6 million) and the sale or abandonment of old and
obsolete equipment ($5.5 million) which was discarded or sold for nominal value.
To the extent that such equipment was used during the transition period,
depreciation (which was not material) was charged to operations. Facilities
identified for closure were available for sale or sublease as of December 31,
1997.

    The Company believes that the reserve balances remaining at December 31,
1997 are adequate to cover any additional benefits or losses yet to be paid or
realized. Any reserves not used will be recorded as a credit to Acquisition and
related charges in future periods.

    The Helix charge related to direct transaction costs ($838,000), severance
costs ($495,000) and other related charges ($541,000) incurred in connection
with the Helix acquisition which was accounted for under the pooling method of
accounting.

    The Paradigm charge related to the write-off of the purchase price paid in
the Company's acquisition of an Australian distributor, Paradigm Agency Ltd, who
had the right to use the McAfee brand name in Australia. This acquisition was
part of the Company's initiative to establish a direct presence in major foreign
markets and to recapture its brand names in these countries.

    The Sybari Technology charge related to a buy-out in December 1997 of a
license agreement the Company entered into earlier in 1997. The buy-out was
motivated in an effort to resolve potential disputes with Sybari, and the
technology was considered obsolete at the time of the buy-out and had no
alternative use in the Company's products.

    The in-process research and development costs in 1997 comprise approximately
$5.2 million, $3.9 million and $19.5 million in connection with the acquisitions
of Cinco Networks, Inc., PGP, and 3DV, respectively. The following is a summary
of the projects acquired in the PGP and Cinco acquisitions and the assumptions
used in determining the value of the in-process research and development costs.
As noted above, the 3DV projects in process at the date of the Network General
merger, together with all other 3DV technologies, were discontinued at that
date.

PGP:

The ongoing projects at PGP at the time of the purchase included upgrade
versions of PGP Product Suite components, including PGP for Personal Privacy,
PGP for Business Security and PGP Certificate Server. These upgrades will
include features such as improved key recovery certificate management and key
splitting and enhanced user interfaces. At the date the Company acquired PGP, it
estimated that, on average, 20% of the development effort had been completed and
that the remaining 80% of the development effort would take approximately six
months to complete and would cost $3.6 million. The efforts required to complete
the development of these projects principally relate to additional design
efforts to integrate the technologies into the Company's suite 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 the Company's products or that may have
been achieved due to 

                                                                              36


<PAGE>   37

efficiencies resulting from the combined sales force or the use of the Company's
more effective distribution channel. In conformity with the SEC's revised
guidelines for accounting for in-process research and development, these cash
flows were discounted back to their net present value using a discount rate of
27% (which represents a premium of approximately 5% over PGP's average weighted
cost of capital) and excluding the value attributable to the use of the
in-process technologies in future products. If the Company does not deploy
commercially accepted products based on the acquired in-process technologies,
operating results could be adversely affected in future periods. Additionally,
the failure of any particular project would impair the value of other
intangibles, particularly goodwill, acquired from Pretty Good Privacy.

Cinco:

   The ongoing projects at Cinco at the time of the purchase comprised upgrade
versions of NetXRay, WebXRay and Distributed NetXRay, Cinco's current products.
At the date the Company acquired Cinco, it estimated that, on average, 80% of
the development effort had been completed and that the remaining 20% of the
development effort would take approximately 4 months to complete and would cost
$240,000. The efforts required to complete the development of these projects
principally relate to the 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 the Company's products or that may have
been achieved due to efficiencies resulting from the combined sales force or the
use of the Company's more effective distribution channel. In conformity with the
SEC's revised guidelines for accounting for in-process research and development,
these cash flows were discounted back to their net present value using a
discount rate of 37.5% and excluding the value attributable to the use of the
in-process technologies in future products. If the Company does not deploy
commercially accepted products based on the acquired in-process technologies,
operating results could be adversely affected in future periods. Additionally,
the failure of any particular project would impair the value of other
intangibles, particularly goodwill, acquired from Cinco Networks.

Other Acquisitions:

    Acquisition and other related costs in 1996 principally comprise the
write-off of acquired in-process research and development in connection with the
acquisition of 3DV. This charge ($19.5 million) is also included in the 1997
Acquisition and other related costs due to the first quarter of 1997 being
included in the Company's results in 1997 and 1996 (see Note 4 in Notes to
Consolidated Financial Statements). Subsequent to the Network General merger in
December 1997, all 3DV projects were terminated. The remaining $3.4 million of
Acquisition and other related costs are comprised of $2.1 million recorded in
connection with the acquisition of Interactive Distributed Systems Software GmbH
and $1.3 million of transaction costs in connection with the acquisition of FSA.

        Acquisition and other related costs in 1995 are comprised of transaction
costs in connection with the acquisitions of Saber ($6.8 million), Assurdata
($1.6 million) and IPE ($1.9 million) and transaction costs of $1.9 million in
connection with the acquisition of distribution rights from three German
distribution entities.

    Interest and Miscellaneous Income. Interest and miscellaneous income
increased to $14.8 million in 1997 from $9.9 million in 1996 and $8.9 million in
1995. Interest and miscellaneous income increased from 1996 to 1997 and from
1995 to 1996 due to the investment of cash generated from operating activities.


                                                                              37

<PAGE>   38

    Provision for Income Taxes. The Company's effective tax rate for 1997, 1996
and 1995 was 78%, 43% and 35% respectively. The Company's effective tax rate for
1997, 1996 and 1995 was 39%, 36% and 30%, respectively, excluding the effect of
one-time non-deductible in-process research and development, merger and other
acquisition costs.

  LIQUIDITY AND CAPITAL RESOURCES

    At December 31, 1997, the Company had $123.5 million in cash and cash
equivalents and $233.0 million in marketable securities, for a combined total of
$356.5 million.

    Net cash provided by operating activities was $91.4 million, $100.4 million
and $50.9 million in 1997, 1996 and 1995, respectively. Net cash provided by
operating activities in 1997 consisted primarily of net income before
acquisition costs, plus increases in accounts payable and accrued liabilities
and deferred revenue which were offset primarily by an increase in accounts
receivable and deferred taxes. In 1996, net cash provided by operating
activities consisted primarily of net income plus accounts payable and accrued
liabilities which was offset primarily by increases in accounts receivable and
deferred taxes. In 1995, net cash provided by operating activities consisted
primarily of net income, accounts payable and accrued liabilities and deferred
revenue offset primarily by increases in accounts receivable and a decrease in
refundable income taxes.

    The Company expects its accounts receivable balance as a percentage of sales
to increase due to the Company's increased emphasis on international sales
(typically having longer payment terms); a higher percentage of indirect sales
through indirect channels; and a shift in the Company's product mix to more
server/enterprise based products. With an increase in business through indirect
channels, the Company's receivable collection experience has become more
dependent on the longer payment cycle for VARs and system integrators. To
address this increase in accounts receivable and to improve cash flow, the
Company may, among other things, take actions to encourage earlier payment of
receivables or sell receivables. To the extend that the Company's receivable
balance increases, the Company will be subject to greater general credit risks
with respect thereto.

    Net cash used in investing activities was $137.0 million, $59.8 million and
$24.4 million in 1997, 1996 and 1995, respectively, primarily reflecting
investments in acquisitions and mergers, purchases of marketable securities and
additions to fixed assets and intangible assets.

     Net cash provided by financing activities was $42.6 million and $21.7
million in 1997 and 1996 consisting primarily of the proceeds and tax benefits
associated with the exercise of non-qualified stock options. Net cash used in
financing activities in 1995 was $0.7 million consisting primarily of the
repurchase of common stock offset by the tax benefits associated with the
exercise of non-qualified stock options.

    The Company believes that its available cash and anticipated cash flow from
operations will be sufficient to fund the Company's working capital and capital
expenditure requirements for at least the next twelve months.


    FINANCIAL RISK MANAGEMENT

    The following discussion about the Company's 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, the Company faces 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 the Company's
financial results. Historically, the Company's primary exposures related 

                                                                              38


<PAGE>   39

to nondollar-denominated sales and operating expenses in Japan, Canada,
Australia, Europe, Latin America, and Asia. The Company has recently expanded
its business activities in Europe. As a result, the Company expects to see an
increase in exposures related to nondollar-denominated sales in several European
currencies. At the present time, the Company hedges only those currency
exposures associated with certain assets and liabilities denominated in
nonfunctional currencies and does not generally hedge anticipated foreign
currency cash flows. The hedging activity undertaken by the Company is intended
to offset the impact of currency fluctuations on certain nonfunctional currency
assets and liabilities. The success of this activity depends upon estimates of
transaction activity denominated in various currencies, primarily the Japanese
yen, Canadian dollar, Australian dollar, and certain European currencies. To the
extent that these estimates are over- or understated during periods of currency
volatility, the Company could experience unanticipated currency gains or losses.

    The Company maintains investment portfolio holdings of various issuers,
types and maturities. These securities are generally classified as
available-for-sale, and consequently are recorded on the balance sheet at fair
market value with unrealized gains and losses reported as a separate component
of shareholders' equity. These securities are not leveraged and are held for
purposes other than trading.

    The following tables present the hypothetical changes in fair values in the
securities held by the Company at December 31, 1997 that are sensitive to the
changes in interest rates. The modeling technique used measures the change in
fair market 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 market values represent the market
principal plus accrued interest and dividends at December 31, 1997. Ending fair
market 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):
<TABLE>
<CAPTION>

                             Valuation of securities      No charge     Valuation of securities
                              given an interest rate     in interest     given an interest rate
Issuer                      decrease of X basis points      rate       increase of X basis points
                           ----------------------------- -----------  ----------------------------
                             150BPS    100 BPS  50 BPS                50 BPS   100 BPS   150 BPS
                           ---------   -------  --------              ------   -------   -------
<S>                        <C>         <C>      <C>      <C>         <C>       <C>       <C> 
U.S. Government notes
and bonds                        $4.1     $4.1     $4.1       $4.1     $4.1      $4.1      $4.1
Municipal notes and bonds       204.4    203.8    203.1      202.6    201.9     201.2     200.7
Corporate notes, bonds
and preferreds                   89.2     89.1     89.1       89.0     89.0      88.9      88.9
                               ------   ------   ------     ------   ------    ------    ------
          Total                $297.7   $297.0   $296.3     $295.7   $295.0    $294.2    $293.7
                               ======   ======   ======     ======   ======    ======    ======
</TABLE>

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

                             Valuation of securities      No charge      Valuation of securities
                              given an interest rate     in interest     given an interest rate
Issuer                      decrease of X basis points      rate       increase of X basis points
                           ----------------------------- -----------  ----------------------------
                             150BPS    100 BPS  50 BPS                50 BPS   100 BPS   150 BPS
                           ---------   -------  --------              ------   -------   -------
<S>                        <C>         <C>      <C>      <C>         <C>       <C>       <C> 
U.S. Government notes
and bonds                     $4.2       $4.1    $4.1        $4.1     $4.1     $4.1        $4.0
Municipal notes and bonds    205.0      204.6   204.2       203.8    203.2    202.7       202.4
Corporate notes, bonds
and preferreds                89.4       89.4    89.3        89.3     89.2     89.2        89.2
                            ------     ------  ------      ------   ------   ------      ------
          Total             $298.6     $298.1  $297.6      $297.2   $296.5   $296.0      $295.6
                            ======     ======  ======      ======   ======   ======      ======

</TABLE>


                                                                              39

<PAGE>   40


CONVERTIBLE DEBT 

     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 (after
deducting the fee paid to the initial purchaser of the Debentures but no other
expenses of the placement). 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 5.692
shares per $1,000 of face amount at maturity, which equates to an initial
conversion price of $68.70 per share. The Debentures are subordinated in right
of payment to all existing and future Senior Indebtedness (as defined) 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 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, at the election of the Company and
subject to certain conditions) equal to the initial issue price plus accrued
original issue discount to such dates. The Debentures may also be redeemed at
the option of the holder if there is a Fundamental Change (as defined) at a
price equal to the issue price plus accrued original issue discount to the date
of redemption, subject to adjustment.

<TABLE>
<CAPTION>


QUARTERLY OPERATING RESULTS (UNAUDITED)
                                                                         THREE MONTHS ENDED
                                     ----------------------------------------------------------------------------------------------
                                      DEC. 31,     SEPT. 30,   JUNE 30,     MAR. 31,   DEC. 31,    SEPT. 30,   JUNE 30,    MAR. 31,
                                        1997          1997       1997         1997       1996        1996        1996        1996
                                        ----          ----       ----         ----       ----        ----        ----        ----
                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                  <C>          <C>         <C>         <C>         <C>         <C>         <C>         <C>      
STATEMENTS OF OPERATIONS
 AND OTHER DATA:

Net revenues                         $ 156,305    $ 154,802   $ 146,464   $ 143,232   $ 128,228   $ 106,386   $  95,998   $  91,182
Gross Margin                           122,119      127,720     121,637     117,131     105,153      87,802      78,505      75,058
Income (loss) from operations          (37,530)      26,979      45,775      29,885      43,820      34,969      33,528      21,137
Income (loss) before provision for
  Income taxes                         (28,811)      28,027      40,129      31,540      43,820      34,969      33,528      21,137
Net income (loss)                    $ (35,561)   $   8,869   $  30,896   $  13,519   $  29,055   $  23,136   $  12,647   $  11,845
Diluted earnings (loss) per share    $   (1.16)   $    0.12   $    0.43   $    0.19   $    0.39   $    0.31   $    0.17   $    0.16
Shares used in per share
  Calculation - diluted                 69,714       72,820      72,683      73,012      74,430      73,545      72,647      72,197

</TABLE>

    In view of the Company's acquisitions in various quarters of 1997 and 1996,
the growth in revenues and operating income experienced by the Company in 1997
and 1996 are not necessarily indicative of future results. In addition, the
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance.

   The Company's revenues and results of operations have been subject to
significant fluctuations, particularly on a quarterly basis, and the Company's
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 introduction of new products, distributor
inventory levels and return rates, inventory levels of the Company, product
upgrades or updates by the Company or its 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
turbulence in Asia), extraordinary events such as acquisitions or litigation and
the occurrence of unexpected events

   Significant quarterly fluctuations in revenues will cause significant
fluctuations in the Company's cash flows and the cash and cash equivalents,
accounts receivable and deferred revenue accounts on the Company's balance
sheet. In addition, the operating results of many software companies reflect
seasonal trends, and the Company's business, financial condition and results of
operations may be affected by such trends in the future. Such trends may include
higher net revenue in the fourth quarter as many customers 

                                                                              40


<PAGE>   41

complete annual budgetary cycles, and lower net revenue in the summer months
when many businesses experience lower sales, particularly in the European
market. See "Risk Factors--Variability of Quarterly Operating Results."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

    Quantitative and qualitative disclosure about market risk is set forth at
Selected Financial Data under Item 6.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL

    Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

    The information required hereunder is incorporated by reference from the
Company's Proxy Statement that was filed in connection with Company's annual
meeting of Stockholders to be held on May 13, 1998.

ITEM 11. EXECUTIVE COMPENSATION

    The information required hereunder is incorporated by reference from the
Company's Proxy Statement that was filed in connection with Company's annual
meeting of Stockholders to be held on May 13, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required hereunder is incorporated by reference from the
Company's Proxy Statement that was filed in connection with Company's annual
meeting of Stockholders to be held on May 13, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required hereunder is incorporated by reference from the
Company's Proxy Statement that was filed in connection with Company's annual
meeting of Stockholders to be held on May 13, 1998.

                                                                              41
<PAGE>   42




                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements:

<TABLE>
<CAPTION>
                                                    PAGE NUMBER
                                                    -----------
<S>                                                 <C>
   Report of Independent Accountants                     43
   Consolidated Balance Sheets:
     December 31, 1997 and 1996                          44
   Consolidated Statements of Operations:
     Years ended December 31, 1997, 1996 and 1995        45
   Consolidated Statements of Stockholder's Equity:
     Years ended December 31, 1997, 1996 and 1995        46 
   Consolidated Statements of Cash Flows:
     Years ended December 31, 1997, 1996, and 1995       47
   Notes to Consolidated Financial Statements            48
</TABLE>

(a)(2) Financial Statement Schedules

       Report of Independent Accountants
       Schedule II - Schedule of Valuation and Qualifying Accounts

            Other Schedules are omitted because the conditions required for
            filing do not exist or the required information is included in the
            financial statements or notes thereto.

(a)(3) Exhibits: See Index to Exhibits on Page 71. 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:

        (i) On November 24, 1997, the Company filed a Form 8-K reporting a
            modification to a proposal presented at its Special Stockholders
            Meeting on December 1, 1997.

       (ii) On December 11, 1997, the Company filed a Form 8-K reporting the
            closing of the merger of a wholly owned subsidiary of the Company
            with Network General Corporation.

      (iii) On December 11, 1997, the Company filed a Form 8-K reporting the
            closing of the Company's acquisition of Pretty Good Privacy, Inc.

                                                                              42
<PAGE>   43




                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders
Networks Associates, Inc.
Santa Clara, California

    We have audited the accompanying consolidated balance sheets of Networks
Associates, Inc., (formerly McAfee Associates, Inc.) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Networks
Associates, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.

    As discussed in Note 3, the Company has revised the amount allocated to
acquired in-process research and development in connection with its acquisitions
in 1995, 1996 and 1997, and has restated its consolidated financial statements
for each of those periods. The Company has also restated the financial
statements to include the financial statements for several small acquisitions
accounted for under the poolings of interests method of accounting and for
certain other adjustments to acquisition and other related costs in the fourth
quarter of 1997.


PricewaterhouseCoopers LLP

San Jose, California
January 20, 1998, except for
the matters discussed in Note 17 as to which the date is February 10, 1998 and
Note 3 as to which the date is March 31, 1999

                                                                              43
<PAGE>   44



                   NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>

                                                                       AS RESTATED (NOTE 3)
                                                                           DECEMBER 31,
                                                                    --------------------------
                                                                       1997             1996 
                                                                    ---------        ---------
<S>                                                                 <C>              <C>      
ASSETS
Current assets:
  Cash and cash equivalents ....................................... $ 123,494        $ 127,516
  Short term marketable securities ................................   123,882          134,304
  Accounts receivable, net of allowance for doubtful accounts
        of $3,662 in 1997 $4,077 in 1996 ..........................   114,984           80,765
  Inventories
  Prepaid expenses, income taxes and deferred taxes ...............    58,937           31,634
                                                                    ---------        ---------
          Total current assets ....................................   421,297          374,219
Long term marketable securities ...................................   109,184           46,483
Fixed assets, net .................................................    28,570           28,861
Deferred taxes ....................................................    16,173           12,221
Intangible and other assets .......................................    66,446           13,108
                                                                    ---------        ---------
          Total assets ............................................ $ 641,670        $ 474,892
                                                                    =========        =========

LIABILITIES
Current liabilities:
  Accounts payable ................................................ $  18,439        $  34,641
  Accrued liabilities .............................................   125,683           39,852
  Deferred revenue ................................................    69,464           51,759
                                                                    ---------        ---------
          Total current liabilities ...............................   213,586          126,252
Deferred revenue and taxes, less current portion ..................    13,186            7,741
                                                                    ---------        ---------
          Total liabilities .......................................   226,772          133,993
                                                                    ---------        ---------

Commitments and contingencies (Notes 8) 

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
  Authorized: 5,000,000 shares;
  Issued and outstanding: one share
Common stock, $.01 par value:
  Authorized: 300,000,000 shares;
  Issued and outstanding: 69,920,883 shares in 1997 and
67,633,968 shares in 1996 .........................................       699              676
Additional paid-in capital ........................................   191,047          140,651
Other .............................................................       (54)             514
Retained earnings .................................................   223,206          199,058
                                                                    ---------        ---------
          Total stockholders' equity ..............................   414,898          340,899
                                                                    ---------        ---------
          Total liabilities and stockholders' equity .............. $ 641,670        $ 474,892
                                                                    =========        =========

</TABLE>

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


                                                                              44
<PAGE>   45




                   NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                 AS RESTATED (NOTE 3)
                                                              YEARS ENDED DECEMBER 31,
                                                         --------------------------------------
                                                           1997           1996           1995
                                                         --------       --------       --------

<S>                                                      <C>            <C>            <C>     
Net revenue:
   Product ............................................  $499,380       $358,144       $260,264
   Services and support ...............................   101,423         77,854         26,679
                                                         --------       --------       --------
Total revenue .........................................   600,803        435,998        286,943
                                                         --------       --------       --------

 Cost of revenue:
   Product ............................................    81,649         60,842         39,535
   Services and support ...............................    30,547         19,363         10,849
                                                         --------       --------       --------
Total cost of revenue .................................   112,196         80,205         50,384
                                                         --------       --------       --------

Operating costs and expenses:
  Research and development ............................    85,750         54,160         37,815
  Marketing and sales .................................   188,335        126,396         94,125
  General and administrative ..........................    44,243         33,227         22,222
  Amortization of intangibles .........................     7,589          7,519          1,956
  Contingent Compensation related to Cinco ............    17,653             --             --
  Acquisition and other related costs .................    79,928         22,869         12,736
                                                         --------       --------       --------
       Total operating costs and expenses .............   423,498        244,171        168,854
                                                         --------       --------       --------
          Income from operations ......................    65,109        111,622         67,705
Interest and other income, net ........................    14,776          9,859          8,880
                                                         --------       --------       --------
          Income before provision for income taxes ....    79,885        121,481         76,585
Provision for income taxes ............................    62,162         52,274         26,819
                                                         --------       --------       --------
          Net income (loss) ...........................  $ 17,723       $ 69,207       $ 49,766
                                                         ========       ========       ========

Net income (loss) per share - basic ...................  $   0.26       $   1.03       $   0.76
                                                         ========       ========       ========
Shares used in per share calculation - basic ..........    69,161         66,919         65,135
                                                         ========       ========       ========

Net income (loss)  per share - diluted ................  $   0.24       $   0.94       $   0.71
                                                         ========       ========       ========
Shares used in per share calculation - diluted ........    73,005         73,305         70,177
                                                         ========       ========       ========

</TABLE>

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

                                                                              45

<PAGE>   46



                   NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>



                                                                             AS RESTATED (NOTE 3)
                                           --------------------------------------------------------------------------------------
                                                                    ADDITIONAL
                                               COMMON STOCK           PAID-IN                  RETAINED   TREASURY
                                             SHARES      AMOUNT       CAPITAL       OTHER      EARNINGS     STOCK        TOTAL
                                           ---------    ---------    ---------    ---------    ---------   ---------    ---------
<S>                                        <C>          <C>          <C>          <C>          <C>         <C>          <C>      
Balances, December 31, 1994 ..............    63,516    $     635    $ 128,673    $      90    $  80,085   $  (8,755)   $ 200,728
  Issuance of common stock upon
    exercise of stock options ............     2,587           26       13,035           --           --          --       13,061
  Issuance of common stock from
    Employee Stock Purchase Plan .........       174            2        2,386           --           --          --        2,388
  Tax benefit from exercise of
    Nonqualified stock options ...........        --           --       14,731           --           --          --       14,731
  Secondary offering costs ...............        --           --         (445)          --           --          --         (445)
  Repurchase of common stock .............        --           --           --           --           --     (30,870)     (30,870)
  Foreign currency translation ...........        --           --           --          (45)          --          --          (45)
  Net income .............................        --           --           --           --       49,766          --       49,766
                                           ---------    ---------    ---------    ---------    ---------   ---------    ---------
Balances, December 31, 1995 ..............    66,277          663      158,380           45      129,851     (39,625)     249,314
  Issuance of common stock upon
    Exercise of stock options ............     3,329           33       30,145           --           --          --       30,178
  Issuance of common stock from
    Employee Stock Purchase Plan .........       157            2        3,697           --           --          --        3,699
  Fractional shares returned upon
    stock split ..........................      (175)          (2)           2           --           --          --           --
  Tax benefit from exercise of
    Nonqualified stock options ...........        --           --       40,981           --           --          --       40,981
  Foreign currency translation ...........        --           --           --         (113)          --          --         (113)
  Unrealized gain on  investments ........        --           --           --          582           --          --          582
  Repurchase of common stock .............        --           --           --           --           --     (52,949)     (52,949)
  Retirement of treasury stock ...........    (1,954)         (20)     (92,554)          --           --      92,574           --
  Net income .............................        --           --           --           --       69,207          --       69,207
                                           ---------    ---------    ---------    ---------    ---------   ---------    ---------
Balances, December 31, 1996 ..............    67,634          676      140,651          514      199,058          --      340,899
  Elimination of Network General
     for the quarter ended March 31,1997 .     1,705           17       83,711          396        6,425     (79,196)      11,353
  Issuance of common stock upon
    exercise of stock options ............     2,753           28       35,727           --           --          --       35,755
  Issuance of common stock from
    Employee Stock Purchase Plan .........       366            4        6,925           --           --          --        6,929
 Tax benefit from exercise of
    nonqualified stock options ...........        --           --       39,941           --           --          --       39,941
  Foreign currency translation ...........        --           --           --       (1,020)          --          --       (1,020)
  Unrealized gain on investments .........        --           --           --           56           --          --           56
  Repurchase of common stock .............    (2,537)         (26)    (115,908)          --           --      79,196      (36,738)
  Net loss ...............................        --           --           --           --       17,723          --       17,723
                                           ---------    ---------    ---------    ---------    ---------   ---------    ---------
Balances, December 31, 1997 ..............    69,921    $     699    $ 191,047    $     (54)   $ 223,206   $      --    $ 414,898
                                           =========    =========    =========    =========    =========   =========    =========
</TABLE>




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

                                                                              46
<PAGE>   47

                   NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                        AS RESTATED (NOTE 3)
                                                                       YEARS ENDED DECEMBER 31
                                                                 -----------------------------------
                                                                    1997         1996         1995
                                                                 ---------    ---------    ---------
<S>                                                              <C>          <C>          <C>      
Cash flows from operating activities:
  Net income .................................................   $  17,723    $  69,207    $  49,766
  Adjustments to reconcile net income to net cash
    provided by operating activities:
     Acquired in-process research and development ............      30,796       19,504           --
     Depreciation and amortization ...........................      32,167       21,834       12,799
     Deferred taxes ..........................................     (23,460)      (4,939)      (1,455)
     Unrealized gain on investments ..........................          56          582           --
     Changes in assets and liabilities:
       Accounts receivable ...................................     (32,681)     (25,201)     (20,206)
       Refundable income taxes ...............................       1,593        4,195       (5,228)
       Prepaids and other assets .............................      (9,727)     (11,388)      (4,851)
       Accounts payable and accrued liabilities ..............      51,920       22,727       12,962
       Deferred revenue ......................................      22,986        3,929        7,161
                                                                 ---------    ---------    ---------
          Net cash provided by operating activities ..........      91,373      100,450       50,948
                                                                 ---------    ---------    ---------
Cash flows from investing activities:
  Elimination of Network General cash flow for  the quarter
  ended March 31, 1997 .......................................      14,354           --           --
  Purchases of available-for-sale investments ................    (785,060)    (200,420)     (30,800)
  Sales of available-for-sale investments ....................     769,142      162,332       20,784
  Purchases of held-to-maturity investments ..................     (81,668)    (112,062)    (204,626)
  Sales of held-to-maturity investments ......................      45,307      112,977      213,262
  Additions to fixed assets ..................................     (23,465)     (22,579)     (16,525)
  Acquisition of AIM Technology ..............................          --           --       (6,501)
  Acquisition of Cinco Networks, Inc. ........................     (25,079)          --           --
  Acquisition of Compusul ....................................      (3,350)          --           --
  Acquisition of 3DV Technology, Inc. ........................     (20,000)          --           --
  Acquisition of PGP .........................................     (24,974)          --           --
  Acquisition of Paradigm ....................................      (1,833)          --           --
  Purchased intangibles ......................................        (374)          --           --
                                                                 ---------    ---------    ---------
          Net cash used in investing activities ..............    (137,000)     (59,752)     (24,406)
                                                                 ---------    ---------    ---------
Cash flows from financing activities:
  Proceeds from borrowing/notes payable ......................          --           --          460
  Repayments of notes payable ................................        (261)        (199)          --
  Proceeds from exercise of stock options ....................      39,683       33,877       15,449
  Tax benefit from exercise of nonqualified stock options ....      39,941       40,981       14,731
  Cost of secondary security offering ........................          --           --         (445)
  Repurchase of common stock .................................     (36,738)     (52,949)     (30,870)
                                                                 ---------    ---------    ---------
          Net cash provided by (used in) financing activities.      42,625       21,710         (675)
                                                                 ---------    ---------    ---------
  Effect of exchange rate fluctuations on cash and cash
    Equivalents ..............................................      (1,020)        (113)         (45)
                                                                 ---------    ---------    ---------
Net increase in cash and cash equivalents ....................      (4,022)      62,295       25,822
Cash and cash equivalents at beginning of year ...............     127,516       65,221       39,399
                                                                 ---------    ---------    ---------
Cash and cash equivalents at end of year .....................   $ 123,494    $ 127,516    $  65,221
                                                                 =========    =========    =========
Supplemental disclosure of cash flow information:
  Cash paid during the year for income taxes .................   $  14,316    $  12,610    $  18,075
                                                                 =========    =========    =========


</TABLE>


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

                                                                              47
<PAGE>   48



                   NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND BUSINESS

    Networks Associates, Inc. (the "Company"), formally McAfee Associates, Inc.,
develops, markets, distributes and supports network security and 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. Software products and updates are delivered primarily
through electronic distribution under two-year subscription licenses and as
boxed product sold through the retail channel. 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 merger with Network General,
in December 1997.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation:

    The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

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. Actual
results could differ from those estimates.

Certain Risks and Concentrations:

    The Company's product revenues are concentrated in the personal computer
software industry which 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. In addition, a significant portion of the Company's
revenue and net income is derived from international sales and independent
agents and distributors. Fluctuations of the U.S. dollar against foreign
currencies, changes in local regulatory or economic conditions, piracy or
nonperformance by independent agents 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
amounts receivable from customers across a broad demographic base. Management 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.

                                                                              48

<PAGE>   49

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
equity. 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.

Revenue Recognition:

    Revenue from product licenses is generally recognized when a customer
purchase order has been received, a license agreement has been delivered, the
software or system has been shipped (or software has been electronically
delivered), remaining obligations are insignificant, and collection of the
resulting account receivable is probable. Maintenance revenue for providing
product updates and customer support is deferred and recognized ratably over the
service period. For subscription sales that have the maintenance fee included
with the licensing fee, maintenance revenue is derived based upon the amount
charged for such services when they are sold separately. Revenue from hardware
products is recognized upon shipment subject to a reserve for returns. Revenues
on rental units under operating leases and service agreements are recognized
ratably over the term of the rental or service period.

    Revenue generated from products sold through traditional channels where the
right of return exists is reduced by reserves for estimated sales returns. Such
reserves are based on estimates developed by management. As 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, it is reasonably possible that these estimates will
change in the near term.

    Prior to July 1, 1995 revenue from subscription licenses for anti-virus
software was recognized ratably over a two year period as the Company did not
separately sell the product license and maintenance. Effective July 1, 1995, the
Company began to sell these components separately and currently recognizes, upon
the initial sale, 80% of the total fee as product license revenue and defers 20%
of the fee as maintenance. The maintenance fee is recognized over the service
period, generally two years. The effect of this change was to increase 1995 net
income by $7.7 million ($0.11 per share).

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.

Advertising Costs

    Advertising costs are expensed when incurred. Advertising costs were $19.4
million, $10.6 million, and $5.2 million for the years ended December 31, 1997,
1996 and 1995, respectively.

Cash and Cash Equivalents:

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

Marketable Securities:

    All marketable securities are classified as either available-for-sale or
held-to-maturity. Available-for-sale securities are carried at fair value, and
held-to-maturity securities are stated at cost, adjusted for amortization or
premiums and accretion of discounts to maturity, 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 classified as
available-for-sale, when material, are reported net of related taxes as a
separate component of stockholders' equity. Realized gains and 

                                                                              49


<PAGE>   50

losses on sales of all such investments are reported in earnings and computed
using the specific identification cost method. No debt or equity securities were
classified as held-to-maturity at December 31, 1997.

Inventories:

     Inventories 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 stated at cost. Depreciation and amortization of fixed
assets is provided using the straight-line method over the estimated useful
lives of the assets (2 to 5 years).

Intangible Assets:

     Intangible assets include the estimated fair market values of purchased
technology when the related products or products under development are
considered technologically feasible and goodwill arising from acquisitions and
other intangibles. Intangibles are amortized over their estimated useful lives
(typically three years to five years).

     In accordance with FASB Statement 121, Accounting for the Impairment of
Long Lived Assets and for Long Lived Assets to be Disposed Of, the Company
records impairment losses on long lived assets, principally goodwill and
purchased technology when events or changes in circumstances indicate that the
carrying amount may not be recoverable. Impairment is considered to have
occurred when the undiscounted future net cash flows the assets are expected to
generate are less than the carrying value of the related asset. If such assets
are considered to be impaired, the impairment to be recognized is measured as
the amount by which the carrying amount of the asset exceeds the present value
of the future net cash flows.

Fair Value of Financial Instruments:

    Carrying amounts of the Company's financial instruments including cash and
cash equivalents, investments, accounts receivable, accounts payable and accrued
liabilities approximate fair value due to their short maturities.

Net Income 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 per share is computed
using the weighted average common shares and common equivalent shares
outstanding during the period.

Stock Dividend:

     During both April and October, 1996, the Company declared and paid stock
dividends of one share of common stock for every two shares of common stock
outstanding. All per share data contained herein has been restated to reflect
the increased number of shares outstanding.

3.  RESTATEMENT

    After discussions with the Staff of the Securities and Exchange Commission
(the "SEC"), the Company has restated the accompanying consolidated financial
statements as of December 31, 1997 and 1996 and for each of the three years
ended December 31, 1997. The financial statements have been restated to reflect
a change in the purchase price allocation and related amortization of
intangibles for acquisitions accounted for by the purchase method of accounting
in 1997 (Cinco Networks, Inc., and Pretty Good Privacy, Inc.) as well as two
smaller acquisitions in 1995 and 1996 (AIM Technology and Vycor Corporation,
respectively). The Company has also revised the original accounting for several
previously reported small acquisitions accounted for under the poolings of
interests method of accounting and for certain other adjustments to the


                                                                              50

<PAGE>   51

Acquisition and related costs charge taken in the fourth quarter of 1997. The
following schedules summarize these restatements.

                                                                              51
<PAGE>   52




                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                      DECEMBER 31, 1997
                                                           -----------------------------------------
                                                         AS PREVIOUSLY
ASSETS                                                      REPORTED          OTHER       AS RESTATED
                                                           ---------       ---------       ---------
<S>                                                      <C>               <C>            <C>
Current assets:
  Cash and cash equivalents ............................   $ 123,494       $      --       $ 123,494
  Short term marketable securities .....................     123,882              --         123,882
  Accounts receivable, net of allowance for doubtful
   accounts and returns of $3,662 in 1997 ..............     125,284         (10,300)        114,984
  Inventories
  Prepaid expenses, income taxes and deferred taxes ....      57,612           1,325          58,937
                                                           ---------       ---------       ---------
          Total current assets .........................     430,272          (8,975)        421,297
Long term marketable securities ........................     109,184              --         109,184
Fixed assets, net ......................................      28,570              --          28,570
Deferred taxes .........................................      16,173              --          16,173
Intangible and other assets ............................      17,732          48,714          66,446
                                                           ---------       ---------       ---------
          Total assets .................................   $ 601,931       $  39,739       $ 641,670
                                                           =========       =========       =========

LIABILITIES
Current liabilities:
  Accounts payable .....................................   $  18,439       $      --       $  18,439
  Accrued liabilities ..................................     141,083         (15,400)        125,683
  Deferred revenue .....................................      69,464              --          69,464
                                                           ---------       ---------       ---------
          Total current liabilities ....................     228,986         (15,400)        213,586
Deferred revenue and taxes, less current portion .......      13,186              --          13,186
                                                           ---------       ---------       ---------
          Total liabilities ............................     242,172         (15,400)        226,772
                                                           =========       =========       =========

Commitments and contingencies (Note 8):

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
  Authorized: 5,000,000 shares;
  Issued and outstanding: one share
Common stock, $.01 par value:
  Authorized: 300,000,000 shares;
  Issued and outstanding: 69,920,883 shares in 1997 ....         699              --             699
Additional paid-in capital .............................     191,047              --         191,047
Other ..................................................         (54)             --             (54)
Retained earnings ......................................     168,067          55,139         223,206
                                                           ---------       ---------       ---------
          Total stockholders' equity ...................     359,759          55,139         414,898
                                                           ---------       ---------       ---------
          Total liabilities and stockholders' equity ...   $ 601,931       $  39,739       $ 641,670
                                                           =========       =========       =========

</TABLE>

                                                                              52
<PAGE>   53




                   NETWORKS ASSOCIATES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                            YEAR ENDED DECEMBER 31, 1997
                                                          ---------------------------------------------------------
                                                              AS          RESTATEMENT
                                                          PREVIOUSLY      FOR POOLING
                                                           REPORTED       TRANSACTIONS     OTHER        AS RESTATED
                                                          ---------       ------------   ---------      -----------
<S>                                                       <C>             <C>            <C>             <C>      
Net revenue:
   Product ............................................   $ 510,770       $   5,610      $ (17,000)      $ 499,380
   Services and support ...............................     101,423              --             --         101,423
                                                          ---------       ---------      ---------       ---------
Total revenue .........................................     612,193           5,610        (17,000)        600,803
                                                          ---------       ---------      ---------       ---------

 Cost of revenue:
   Product ............................................      77,669             480          3,500          81,649
   Services and support ...............................      30,547              --             --          30,547
                                                          ---------       ---------      ---------       ---------
Total cost of revenue .................................     108,216             480          3,500         112,196
                                                          ---------       ---------      ---------       ---------

Operating costs and expenses:
  Research and development ............................      85,021             729             --          85,750
  Marketing and sales .................................     181,017           1,419          5,899         188,335
  General and administrative ..........................      43,060           1,183             --          44,243
  Amortization of intangibles .........................         858              --          6,731           7,589
Contingent Compensation related to Cinco Acquisition ..          --              --         17,653          17,653
Acquisition and other related costs ...................     175,800              --        (95,872)         79,928
                                                          ---------       ---------      ---------       ---------
       Total operating costs and expenses .............     485,756           3,331        (65,589)        423,498
                                                          ---------       ---------      ---------       ---------
          Income from operations ......................      18,221           1,799         45,089          65,109
Interest and other income, net ........................      14,743              33             --          14,776
                                                          ---------       ---------      ---------       ---------
          Income before provision for income taxes ....      32,964           1,832         45,089          79,885
Provision for income taxes ............................      61,320             842             --          62,162
                                                          ---------       ---------      ---------       ---------
          Net income (loss) ...........................   $ (28,356)      $     990      $  45,089       $  17,723
                                                          =========       =========      =========       =========

Net income (loss) per share - basic ...................   $   (0.41)                                     $    0.26
                                                          =========                                      =========
Shares used in per share calculation - basic ..........      68,748             413                         69,161
                                                          =========       =========                      =========

Net income (loss)  per share - diluted ................   $   (0.41)                                     $    0.24
                                                          =========                                      =========
Shares used in per share calculation - diluted ........      68,748             413                         73,005
                                                          =========       =========                      =========
</TABLE>

                                                                              53
<PAGE>   54




                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>

                                                                           DECEMBER 31, 1996
                                                           --------------------------------------------------
                                                                         RESTATEMENT
                                                         AS PREVIOUSLY   FOR POOLING
      ASSETS                                               REPORTED      TRANSACTIONS   OTHER      AS RESTATED
                                                           --------      ------------  --------      --------
<S>                                                        <C>           <C>           <C>           <C>     
Current assets:
  Cash and cash equivalents .............................  $125,141      $  2,375      $     --      $127,516
  Short term marketable securities ......................   134,029           275            --       134,304
  Accounts receivable, net of allowance for doubtful
         accounts and returns of $4,077 .................    77,391         3,374            --        80,765
  Inventories
  Prepaid expenses, income taxes and deferred taxes .....    31,420           214            --        31,634
                                                           --------      --------      --------      --------
          Total current assets ..........................   367,981         6,238            --       374,219
Long term marketable securities .........................    46,483            --            --        46,483
Fixed assets, net .......................................    28,363           498            --        28,861
Deferred taxes ..........................................    12,088           133            --        12,221
Intangible and other assets .............................     2,841           217        10,050        13,108
                                                           --------      --------      --------      --------
          Total assets ..................................  $457,756      $  7,086      $ 10,050      $474,892
                                                           ========      ========      ========      ========

LIABILITIES
Current liabilities:
  Accounts payable ......................................  $ 33,552      $  1,089      $     --      $ 34,641
  Accrued liabilities ...................................    36,360         3,492            --        39,852
  Deferred revenue ......................................    51,398           361            --        51,759
                                                           --------      --------      --------      --------
          Total current liabilities .....................   121,310         4,942            --       126,252
Deferred revenue and taxes, less current portion ........     7,523           218            --         7,741
                                                           --------      --------      --------      --------
          Total liabilities .............................   128,833         5,160            --       133,993
                                                           --------      --------      --------      --------

Commitments and contingencies (Notes 8) 

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
  Authorized: 5,000,000 shares;
  Issued and outstanding: one share
Common stock, $.01 par value:
  Authorized: 300,000,000 shares;
  Issued and outstanding 66,684,176 shares
 ........................................................       666            10            --           676
Additional paid-in capital ..............................   139,263         1,388            --       140,651
Other ...................................................       514            --            --           514
Retained earnings .......................................   188,480           528        10,050       199,058
                                                           --------      --------      --------      --------
          Total stockholders' equity ....................   328,923         1,926        10,050       340,899
                                                           --------      --------      --------      --------
          Total liabilities and stockholders' equity ....  $457,756      $  7,086      $ 10,050      $474,892
                                                           ========      ========      ========      ========

</TABLE>

                                                                              54


<PAGE>   55





                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                       YEAR ENDED DECEMBER 31, 1996
                                                        -----------------------------------------------------------
                                                                        RESTATEMENT
                                                        AS PREVIOUSLY   FOR POOLING
                                                        REPORTED        TRANSACTIONS        OTHER      AS RESTATED
                                                        -------------   ------------      --------     ------------
<S>                                                     <C>               <C>             <C>          <C>     
Net revenue:
   Product                                                $343,940        $ 14,204        $     --         $358,144
   Services and support                                     77,854              --              --           77,854
                                                          --------        --------        --------         --------
Total revenue                                              421,794          14,204              --          435,998
                                                          --------        --------        --------         --------

 Cost of revenue:
   Product                                                  57,550           3,292              --           60,842
   Services and support                                     19,363              --              --           19,363
                                                          --------        --------        --------         --------
Total cost of revenue                                       76,913           3,292              --           80,205
                                                          --------        --------        --------         --------

Operating costs and expenses:
  Research and development                                  52,244           1,916              --           54,160
  Marketing and sales                                      122,638           3,758              --          126,396
  General and administrative                                30,315           2,912              --           33,227
  Amortization of intangibles                                3,169              --           4,350            7,519
  Acquisition and other related costs                       30,669              --          (7,800)          22,869
                                                          --------        --------        --------         --------
       Total operating costs and expenses                  239,035           8,586          (3,450)         244,171
                                                          --------        --------        --------         --------
          Income from operations                           105,846           2,326           3,450          111,622
Interest and other income, net                               9,548             311              --            9,859
                                                          --------        --------        --------         --------
          Income before provision for income taxes         115,394           2,637           3,450          121,481
Provision for income taxes                                  51,284             990              --           52,274
                                                          --------        --------        --------         --------
          Net income (loss)                               $ 64,110        $  1,647        $  3,450         $ 69,207
                                                          ========        ========        ========         ========

Net income (loss) per share - basic                       $   0.97                                         $   1.03
                                                          ========                                         ========
Shares used in per share calculation - basic                65,835           1,084                           66,919
                                                          ========        ========                         ========

Net income (loss)  per share - diluted                    $   0.89                                         $   0.94
                                                          ========                                         ========
Shares used in per share calculation - diluted              72,221           1,084                           73,305
                                                          ========        ========                         ========

</TABLE>

                                                                              55
<PAGE>   56





                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                       YEAR ENDED DECEMBER 31, 1995
                                                        -----------------------------------------------------------
                                                                         RESTATEMENT
                                                        AS PREVIOUSLY    FOR POOLING
                                                        REPORTED         TRANSACTIONS      OTHER        AS RESTATED
                                                        -------------    ------------     --------      -----------
<S>                                                     <C>               <C>             <C>              <C>     
Net revenue:
   Product .............................................. $252,231        $  8,033        $     --         $260,264
   Services and support .................................   26,679              --              --           26,679
                                                          --------        --------        --------         --------
Total revenue ...........................................  278,910           8,033              --          286,943
                                                          --------        --------        --------         --------

 Cost of revenue:
   Product ..............................................   37,873           1,662              --           39,535
   Services and support .................................   10,849              --              --           10,849
                                                          --------        --------        --------         --------
Total cost of revenue ...................................   48,722           1,662              --           50,384
                                                          --------        --------        --------         --------

Operating costs and expenses:
  Research and development ..............................   36,771           1,044              --           37,815
  Marketing and sales ...................................   92,295           1,830              --           94,125
  General and administrative ............................   20,134           2,088              --           22,222
  Amortization of intangibles ...........................    1,356              --             600            1,956
  Acquisition and other related costs ...................   19,936              --          (7,200)          12,736
                                                          --------        --------        --------         --------
       Total operating costs and expenses ...............  170,492           4,962          (6,600)         168,854
                                                          --------        --------        --------         --------
          Income from operations ........................   59,696           1,409           6,600           67,705
Interest and other income, net ..........................    8,799              81              --            8,880
                                                          --------        --------        --------         --------
          Income before provision for income taxes ......   68,495           1,490           6,600           76,585
Provision for income taxes ..............................   26,154             665              --           26,819
                                                          --------        --------        --------         --------
          Net income .................................... $ 42,341        $    825        $  6,600         $ 49,766
                                                          ========        ========        ========         ========

Net income per share - basic                              $   0.67                                         $   0.76
                                                          ========                                         ========
Shares used in per share calculation - basic ............   63,651           1,484                           65,135
                                                          ========        ========                         ========

Net income per share - diluted                            $   0.62                                         $   0.71
                                                          ========                                         ========
Shares used in per share calculation - diluted ..........   68,693           1,484                           70,177
                                                          ========        ========                         ========
</TABLE>

DESCRIPTION OF ADJUSTMENTS

RESTATEMENT FOR POOLING TRANSACTIONS - NOT PREVIOUSLY RECORDED

     The above adjustments reflect the acquisitions of Helix Software Company,
Jade K.K., and Schuijers Holdings B.V., each in 1997, and FSA Corporation in
1996, for all periods presented. The Company originally included the financial
statements of the acquired entities only in the quarter in which they were
acquired, with an adjustment to retained earnings for prior periods. At the
request of the SEC, the Company has restated all periods to reflect the
historical financial statements of all these acquisitions.

RECLASSIFICATION OF ACQUISITION AND OTHER RELATED COSTS

In-process research and development charges:

     During 1995, 1996 and 1997, the Company completed a number of acquisitions
in transactions accounted for by the purchase method. Purchase price allocations
performed at the time of these acquisitions resulted in substantial allocations


                                                                              56


<PAGE>   57
to in-process research and development for projects underway by the acquired
companies which had not reached technological feasibility and which had no
alternative future use. These allocations were performed following methods
generally in use by technology companies based on appraisals at the time. Recent
guidance published by the SEC has resulted in a general re-evaluation of the
methodology used in such appraisals. Following a review of the Company's Form
10-K for the year ended December 31, 1997 by the SEC and subsequent discussions
with the SEC, the Company has re-evaluated its allocations for these purchase
transactions. The restatements included above reflect the adjustments to the
in-process research and development write-offs resulting from such
re-evaluations as follows:

<TABLE>
<CAPTION>

                                                    As                      Additional
                                               Originally        As           Amount
                                                 Reported     Restated     Capitalized
                                                 --------     --------     -----------

<S>                                            <C>            <C>          <C>    
Pretty Good Privacy                             $30,878        $ 3,937        $26,941
(acquired by Network Associates in 1997)
Cinco Networks, Inc                              23,688          5,234         18,454
(acquired by Network General in 1997)
Vycor Corporation                                 7,800             --          7,800
(acquired by McAfee in 1996)
AIM Technology                                    7,200             --          7,200
(acquired by Network General in 1995)
</TABLE>

    As a result of these re-evaluations, amortization of goodwill and other
intangibles resulting from these acquisitions for the years ended December 31,
1995, 1996 and 1997 increased from amounts previously reported by $600,000, $4.4
million and $6.7 million, respectively, and future amortization will be
increased for the next six years as follows:
<TABLE>
<CAPTION>

  Year Ended
 December 31,            Amount (in thousands)
 ------------            ---------------------
<S>                      <C>    
     1998                    $12,864
     1999                      9,114
     2000                      8,464
     2001                      8,464
     2002                      8,015
     2003                      1,793
</TABLE>

Restatements relating to other acquisition charges:

    The Company has also made a number of other adjustments relating to its
Acquisition and other related costs recorded in the fourth quarter of 1997 and
to Amortization of intangibles recorded as a result of the in-process research
and development related restatements. The table below shows these adjustments
together with the adjustments to acquired in-process research and development:
<TABLE>
<CAPTION>
DESCRIPTION (AMOUNTS IN `000S)                                                     1995             1996              1997
                                                                                ---------        ---------        -----------

<S>                                                                             <C>              <C>              <C>
Reclassification to revenue of provision for sales returns and
other marketing programs in connection with name change 
Included in this adjustment is a reclassification from accrued
liabilities  to accounts receivable of $10.3 million. The
remaining $6.7 million was originally recorded as a reduction
in accounts receivable.                                                          $     --         $     --         $(17,000)

Adjustment to eliminate accrual for legal expenses in
connection with securing the Network Associates name (recorded
in 1998).  This adjustment reduced accrued liabilities by the
same amount.                                                                           --               --           (1,600)
</TABLE>


                                                                              57

<PAGE>   58
<TABLE>

<S>                                                                             <C>              <C>              <C>      
Reclassification to cost of revenue of obsolete inventory
charge in connection with the Network General merger.  This
adjustment reduced accrued liabilities and reduced prepaid
expenses by the same amount.                                                          --               --           (3,500)

Reclassification to marketing and sales expense and cost of
revenue of advertising expenses in connection with combined
new company following the Network General merger.                                     --               --           (5,899)

Adjustment to eliminate advertising expenses (recorded in
1998).  This adjustment increased prepaid expenses.                                   --               --           (4,825)

Reclassification to research and development expense of
contingent compensation related to Cinco Networks.                                    --               --          (17,653)

Restatement of acquired in-process research and development
This adjustment increased intangible and other assets by the same amount.         (7,200)          (7,800)         (45,395)
                                                                                --------         --------         --------
      Total adjustments to Acquisition and other related costs                  $ (7,200)        $ (7,800)        $(95,872)
                                                                                ========         ========         ========

Additional amortization resulting from the restatement of
acquired in process research and development.  This adjustment
reduced intangible and other assets by the same amount.                         $    600         $  4,350         $  6,731
                                                                                ========         ========         ========
</TABLE>


The net effect of these adjustments was to reduce accrued liabilities by $15.4
million in 1997.

Contingent Compensation Related to Cinco Acquisition.

    The $18 million of compensation expense that occurred in the quarter ended
December 31, 1997 resulted from an amendment of the purchase agreement between
Network General and Cinco. The purchase agreement originally provided for $18
million in contingent payments based primarily on the timely satisfaction of
certain technical and product development and revenue goals.

    As a result of the McAfee/Network General merger, significant changes in
product directions were undertaken and it was believed that these changes and
the related uncertainties would adversely impact the ability of the Cinco
founders/selling stockholders to achieve the specified goals. Therefore, in
order to retain the founders in the Company's employ, the purchase agreement was
amended to remove the specified goals. Four of the five founders have continued
with the Company. However, the consideration is payable whether the founders
remain with the Company or not.

4. BUSINESS COMBINATIONS AND ACQUISITIONS:

Merger with Network General Corporation

    On December 1, 1997, the Company acquired Network General, a provider of
network fault and performance management solutions for approximately 17.9
million shares of the common stock. The Company also assumed and exchanged all
options to purchase Network General stock for options to purchase approximately
3.3 million shares of the Company's common stock. The transaction was accounted
for as a pooling of interests and therefore, all prior period financial
statements have been restated to include the results of Network General for all
periods presented. On December 2, 1997, in connection with the merger, McAfee
changed its name to Networks Associates, Inc.

    Network General had a fiscal year ended March 31. Restated financial
statements combine Network General results for the fiscal years ended March 31,
1997 and 1996 with the results for the years ended December 31, 1996 and 1995,
respectively. In order to conform Network General's fiscal year end to the
Company's fiscal year end, the consolidated statement of operations for the year
ended December 31, 1997 includes the three months ended March 31, 1997 for
Network 

                                                                              58


<PAGE>   59

General which are also included in the consolidated statement of income for the
year ended December 31, 1996. Revenue and net loss of Network General for such
period were $68.0 million and $7 million respectively.

Separate and combined results of operations for the periods prior to the merger
are as follows:
<TABLE>
<CAPTION>

                                Nine Months Ended
                                  September 31,       Year Ended December 31,
                                     1997               1996             1995
                                   ---------         ---------        ---------
<S>                             <C>                  <C>              <C>      
Revenues:
           McAfee                  $ 253,570         $ 195,330        $  98,098
           Network General         $ 190,928         $ 240,668        $ 188,845
                                   ---------         ---------        ---------
           Combined                $ 444,498         $ 435,998        $ 286,943
                                   =========         =========        =========

Net income (loss):
           McAfee                  $  83,907         $  44,114        $  22,341
           Network General         $ (15,310)        $  25,093        $  27,425
                                   ---------         ---------        ---------
           Combined                $  68,597         $  69,207        $  49,766
                                   =========         =========        =========

Net income (loss) per share
           McAfee                  $    1.54         $    0.81        $    0.44
                                   =========         =========        =========
           Network General             (0.86)             1.32             1.44
                                   =========         =========        =========
           Combined                $    0.94         $    0.94        $    0.71
                                   =========         =========        =========
</TABLE>

   During 1997, 1996 and 1995, the Company acquired other companies or assets
for common stock as poolings of interest or for cash and other consideration in
purchase transactions. The financial statements have been restated for the
companies acquired in poolings of interest. The following is a summary of such
acquisitions:
<TABLE>
<CAPTION>

                                                      Common stock issued         Purchase price of purchase
                                                     in poolings of interest           transactions
                                                     -----------------------           ------------

<S>                                                  <C>                           <C>
1997
Jade K.K....................................           336,071 shares
Schuijers Holdings B.V......................            63,721 shares
3DV Technology, Inc.........................                                            $20.0 million
Compusul Consultoria de Informatica, Ltd.                                           $2.6 million plus $1.0
                                                                                     million contingently
                                                                                          payable
Cinco Networks, Inc.........................                                            $26.0 million
Paradigm Agency Pty Ltd.....................                                             $2.3 million
Helix Software Company......................              550,000 shares
Pretty Good Privacy, Inc....................                                       $35 million and warrants
                                                                                 to purchase 250,000 shares
                                                                                     of common stock at $60
                                                                                           per share.
1996
Vycor Corporation............................                                             $9.0 million
Assets acquired from Interactive Distributed
Systems Software Gmbh........................                                             $2.1 million
FSA Corporation..............................           534,000 shares

1995
AIM Technology...............................                                             $7.2 million
IPE..........................................                                             $2.5 million
Assurdata....................................                                        $1.6 million plus a
                                                                                   warrant to purchase 33,750
                                                                                            shares of
                                                                                    common stock at $11.26
                                                                                            per share
Distribution rights from three German
distribution entities........................                                             $1.9 million
</TABLE>


                                                                              59

<PAGE>   60

     3DV was acquired by Network General in March 1997. Due to the restatement
of the financial statements to reflect the merger, the statement of operations
of Network General for the three months ended March 31, 1997, and therefore the
acquired in-process research and development write off in connection with the
3DV acquisition, has been included in the restated statement of operations for
both the year ended December 31, 1997 and the year ended December 31, 1996.

     Of the total purchase price paid for the acquisitions treated as purchases
in 1997, 1996 and 1995, the Company expensed (primarily as in-process R&D), in
the year acquired, approximately $28.7 million, $21.6 million, and $4.1 million,
respectively, and capitalized (primarily as developed technology and goodwill)
approximately $54.9 million, $9.0 million and $8.9 million, respectively.
Amounts are being amortized over 3 to 7 years.

     In connection with the acquisitions accounted for as a pooling of
interests, the Company incurred direct transaction costs and other restructuring
and related charges in the amount of $15.3 million in the year ended December
31, 1997.

     The following is a summary of the charges relating to these acquisitions
together with charges for certain restructuring activities taken by the Company
($ 000's):

<TABLE>
<CAPTION>
                       Direct                        Lease
                        Direct                      Benefits       Costs and
                     Transaction    Severance &      Asset        In-Process
                        Costs        Benefits      Writedowns         R&D           Other          Total
                       -------        -------        -------        -------        -------        -------
<S>                  <C>            <C>            <C>            <C>             <C>            <C>    
Network General        $15,347        $11,083        $18,916        $    --        $   603        $45,949
Helix                       --             --             --             --          1,874          1,874
Paradigm                    --             --             --                         2,330          2,330
PGP                         --             --             --          3,937                         3,937
Sybari                      --             --             --             --          1,100          1,100
Cinco                       --             --             --          5,234             --          5,234
3DV                         --             --             --         19,504             --         19,504
                       -------        -------        -------        -------        -------        -------
Total Charges          $15,347        $11,083        $18,916        $28,675        $ 5,907        $79,928
                       =======        =======        =======        =======        =======        =======
</TABLE>

    Direct transaction costs included $10.5 million in investment banking fees,
$3.7 million in legal and accounting fees, $709,000 in filing fees and $438,000
in other related charges. Lease costs and asset writedowns include $3.8 million
related to the costs of closing approximately 35 facilities throughout the world
and the disposal of excess and obsolete assets (generally computer equipment
which did not comply with the Company's standards) of $15.1 million.

     The following table summarizes the activity in the reserves for Acquisition
and other related costs (in thousands):

<TABLE>
<CAPTION>
                                   Direct
                                 Transaction     Severance         Lease           Asset
                                   Costs         & Benefits        Costs         Write Downs       Other           Total
                                  --------        --------        --------        --------        --------        --------
<S>                              <C>             <C>             <C>             <C>             <C>             <C>     
Balance, December 31, 1996        $     --        $     --        $     --        $     --        $  2,708        $  2,708
Charged in the three months
ended December 31, 1997             15,347          11,083           3,842          15,074           5,907          51,253
Paid Out or Charged against
the related assets                  (7,297)           (386)             --         (13,209)         (5,722)        (26,614)
                                  --------        --------        --------        --------        --------        --------
Balance, December 31, 1997        $  8,050        $ 10,697        $  3,842        $  1,865        $  2,893        $ 27,347
                                  ========        ========        ========        ========        ========        ========
</TABLE>



                                                                              60
<PAGE>   61

    The severance and benefits charges related to company-wide reductions in
force following the Company's major acquisitions of Network General, PGP and
Helix in the fourth quarter of approximately 186 employees across all employee
groups. This termination plan, which took place in January 1998, was finalized
and approved by management prior to December 31, 1997, identified the employees
to be terminated and the benefit arrangements were communicated to employees on
December 31, 1997. A limited number of employees were retained for a short
period to help with the transition. Costs associated with these employees were
charged to operations 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
costs excluding amortization and leasehold improvements related to any
facilities which were used by the Company during a short transition period were
charged to operations. However, such charges were not material. Due to the
immediate consolidation of facilities, depreciation allocable to these
facilities during the transition period was also not material. Asset write downs
comprised the write-off of leasehold improvements and the sale or abandonment of
old and obsolete equipment which was discarded or sold for nominal value. To the
extent that such equipment was used during the transition period, depreciation
(which was not material) was charged to operations. Facilities identified for
closure were available for sale or sublease as of December 31, 1997.

    The Company believes that the reserve balances remaining at December 31,
1997 are adequate to cover any additional benefits or losses yet to be paid or
realized. Any reserves not used will be recorded as a credit to Acquisition and
other related costs in future periods.

    The following summary, prepared on a pro forma basis, combines the results
of operations as if the acquisitions of 3DV, Compusul, Cinco, Paradigm and PGP
had occurred as of the beginning of the periods presented, 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):

<TABLE>
<CAPTION>
                                         Year Ended
                                         December 31
                                  --------------------------
                                    1997             1996
                                  ---------        ---------
                                         (unaudited)
<S>                               <C>              <C>      
Revenue                           $ 611,605        $ 453,496
Net Income (loss)                 $  (1,808)       $  39,331
Net income (loss per share)       $   (0.02)       $    0.54
</TABLE>

    The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented. 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.

    Acquisition and other related costs in 1996 principally comprise the
write-off of acquired in-process research and development in connection with the
acquisition of 3DV. This charge ($19.5 million) is also included in the 1997
Acquisition and other related costs due to the first quarter of 1997 being
included in the Company's results in 1997 and 1996. Subsequent to the Network
General merger in December 1997, all 3DV projects were terminated. The remaining
$3.4 million of Acquisition and other related costs are comprised of $2.1
million recorded in connection with the acquisition of Interactive Distributed
Systems Software GmbH and $1.3 million of transaction costs in connection with
the acquisition of FSA.

    Acquisition and other related costs in 1995 comprise transaction costs in
connection with the acquisitions of Saber ($6.8 million), Assurdata ($1.6
million) and IPE ($1.9 million) and transaction costs of $1.9 million in
connection with the acquisition of distribution rights from three German
distribution entities.

5. MARKETABLE SECURITIES:



                                                                              61
<PAGE>   62
    At December 31, 1997 and 1996, marketable securities are summarized as
follows (in thousands):

<TABLE>
<CAPTION>
1997:                                   Amortized        Aggregate       Unrealized
----                                      Cost          Fair Value          Gains
                                        ---------       ----------       ----------
<S>                                     <C>             <C>              <C>
Available-For-Sale-Securities
U.S. Government debt securities         $  6,014         $  6,021         $      7
Municipal debt securities                245,671          246,049              378
Corporate debt securities                 35,655           36,273              618
                                        --------         --------         --------
                                        $287,340         $288,343         $  1,003
                                        ========         ========         ========
</TABLE>

    At December 31, 1997, all marketable debt securities have scheduled
maturities of less than three years.

<TABLE>
<CAPTION>
1996:                                  Amortized       Aggregate      Unrealized
                                         Cost          Fair Value        Gains
                                       ---------       ----------     ----------
                                                     (in thousands)
<S>                                    <C>             <C>            <C>
Held-to-Maturity Securities .
U.S. Government debt securities         $ 9,955         $ 9,955         $    --
Municipal debt securities                74,784          74,890             106
                                        -------         -------         -------
                                        $84,739         $84,845         $   106
                                        =======         =======         =======
</TABLE>


<TABLE>
<CAPTION>
                                        Amortized        Aggregate        Unrealized
                                          Cost          Fair Value      Gains (Losses)
                                        --------       -----------      --------------
                                                      (In thousands)
<S>                                    <C>              <C>              <C>
Available-for-Sale Securities
U.S. Government debt securities         $  1,002         $  1,000          $     (2)
Municipal debt securities                 85,084           85,014               (70)
Corporate debt securities                 10,171            9,759              (412)
                                        --------         --------          -------- 
                                        $ 96,257         $ 95,773          $   (484)
                                        ========         ========          ======== 
</TABLE>

6.  DERIVATIVES

    During fiscal year 1997, the Company began using forward foreign exchange
contracts to hedge certain assets denominated in foreign currencies. For these
instruments, risk reduction is assessed on a transaction basis and the
instruments are designated as, and effective as a hedge and are highly inversely
correlated to the hedged item as required by generally accepted accounting
principles. Gains and losses on these hedges are included in the carrying amount
of the assets and are ultimately recognized in income. If a hedging instrument
ceases to qualify for hedge accounting, it is accounted for on a mark to market
basis and any subsequent gains and losses are recognized currently in income.
The Company does not use any derivatives for trading or speculative purposes.

   FORWARD EXCHANGE CONTRACTS

    The Company conducts business globally. As a result, it is exposed to
movements in foreign currency exchange rates. The Company enters into forward
exchange contracts to hedge exposures associated with nonfunctional currency
assets and liabilities denominated in Canadian, Australian and several European
currencies.

    The Company does not generally hedge anticipated foreign currency cash flows
nor does the Company enter into forward contracts for trading purposes. Gains
and losses on the contracts are reported in other income and generally 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. The forward contracts outstanding and their unrealized gains and
(losses) are presented below (in thousands):

<TABLE>
<CAPTION>
                                  Notional         Notional
                                    Value           Value          Unrealized
                                  Purchased          Sold          Gain/(loss)
                                  ---------        --------        -----------
<S>                               <C>              <C>             <C>      
Australian Dollar                 $     --         $    866          $     (2)
</TABLE>


                                                                              62
<PAGE>   63

<TABLE>
<S>                               <C>              <C>             <C>      
Canadian Dollar                         --            2,486                 8
Dutch Guilder                        2,900               --               (23)
Other European Currencies               --            8,878               (59)
                                  --------         --------          -------- 
                                  $  2,900         $ 12,230          $    (76)
                                  ========         ========          ========
</TABLE>


7. BALANCE SHEET DETAIL (in thousands):

<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                               ----------------------------
                                                 1997               1996
                                               ---------          ---------
<S>                                            <C>                <C>      
Fixed assets:
  Furniture and fixtures .............         $  19,321          $  39,689
  Computers, demonstration and
     rental equipment ................            61,204             19,645
  Leasehold improvements .............             9,026              6,157
                                               ---------          ---------
                                                  89,551             65,491
  Less  accumulated  depreciation and
    amortization .....................           (60,981)           (36,630)
                                               ---------          ---------
                                               $  28,570          $  28,861
                                               =========          =========
Intangibles assets (see Note 2):
  Purchased technology ...............         $   6,678          $   3,516
  Other ..............................             1,261              1,261
  Goodwill ...........................            73,680             17,046
                                               ---------          ---------
                                                  81,619             21,823
  Less accumulated amortization ......           (19,019)           (10,772)
                                               ---------          ---------
                                                  62,600             11,051
Other assets .........................             3,846              2,057
                                               ---------          ---------
                                               $  66,446          $  13,108
                                               =========          =========
Accrued liabilities:
  Accrued compensation ...............         $  18,175          $  12,992
  Accrued acquisition and merger costs            27,347              2,708
  Cinco compensation payable .........            17,653                 --
  Accrued taxes ......................            29,298              2,403
  Other accrued expenses .............            33,210             21,749
                                               ---------          ---------
                                               $ 125,683          $  39,852
                                               =========          =========
</TABLE>


8.  COMMITMENTS:

   LEASES

    The Company leases its operating facilities under non-cancelable operating
leases through December 2001. In addition, the Company has leased certain
equipment under various leases which expire no later than 1998.

    At December 31, 1997, future minimum payments under non-cancelable operating
leases are as follows (in thousands):


<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S>                          <C>     
1998 ................        $ 15,460
1999 ................          15,440
2000 ................          14,696
2001 ................          12,271
2002 and thereafter..         115,306 
                             --------
                             $173,173
                             ========
</TABLE>

    Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted
to $10.0 million, $7.3 million and $5.9 million, respectively.

    The Company presently intends to move its headquarters to larger facilities
in Santa Clara, California. To that end, the Company has agreed, as the assignee
of certain rights of the existing tenant, to rent a facility of approximately
200,000 square feet commencing on or about April 1, 1998. The underlying lease
is set to expire in 2013.

9.  NETWORK GENERAL SHARE REPURCHASE PROGRAM



                                                                              63
<PAGE>   64

    In July 1993, the Board of Directors of Network General authorized Network
General to repurchase up to 1,666,800 shares of its common stock on the open
market to satisfy commitments under its stock option and stock purchase plans.
In fiscal year 1996, up to an additional 1,666,800 shares of the Network General
common stock were authorized for repurchase for the same purpose. As of December
1, 1997, the Network General had repurchased and retired 1,954,323 shares at an
aggregate cost of $92,574,000.

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.

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 506,250 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 market value of the
Company's common stock at either the first day of an offering period or the last
day of such offering period. No participant may purchase more than $25,000 worth
of common stock in any one calendar year.

11.  STOCKHOLDERS' EQUITY:

Preferred Stock:

    The Company has authorized 5,000,000 shares of preferred stock, par value
$.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.

    In connection with the acquisition of FSA, the Company issued one share of
Series A preferred stock. FSA has issued 325,062 shares of common stock which
will be converted to the same number of shares of common stock of the Company by
August 1998.

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 1997 Plan,
the Company has reserved 5,850,000 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 market value of the Company's common
stock on the date of grant for incentive stock options granted to employees and
officers (including directors who are also employees) or 85% of the fair market
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 421,875 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 market 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.



                                                                              64
<PAGE>   65

    Aggregate activity under stock option plans is as follows:

<TABLE>
<CAPTION>
                                                                                 OUTSTANDING OPTIONS
                                                           ---------------------------------------------------------------------
                                        SHARES
                                       AVAILABLE            NUMBER OF         PRICE PER            AGGREGATE         WEIGHTED
                                       FOR GRANT             SHARES             SHARE                PRICE        AVG. EX. PRICE
                                       ---------           ----------        ------------         -------------   --------------
<S>                                   <C>                  <C>              <C>                   <C>             <C>
Balances, December 31, 1994            5,157,492            8,329,889        $ .00-$24.60         $  64,076,423        $ 7.69
Additional shares authorized           6,750,000                   --                  --                    --            --
Shares granted .............          (7,525,651)           7,525,651        $5.48-$48.00           114,919,788        $15.27
Shares exercised ...........                  --           (2,586,378)       $ .00-$34.13           (13,061,481)       $ 5.05
Shares canceled ............           1,609,600           (1,723,056)       $1.70-$46.80           (16,620,144)       $ 9.65
                                      ----------           ----------                              ------------
Balances, December 31, 1995            5,991,441           11,546,106        $ .00-$48.00           149,314,586        $12.93
Shares granted .............          (4,197,370)           4,197,370        $1.13-$65.69           134,948,924        $32.15
Shares exercised ...........                  --           (3,328,493)       $0.01-$48.00           (28,567,332)       $ 8.58
Shares canceled ............           1,528,694           (1,528,694)       $1.70-$60.30           (27,610,011)       $18.06
                                      ----------           ----------                              ------------
Balances, December 31, 1996            3,322,765           10,886,289        $ .01-$65.69           228,086,167        $20.95
Eliminate duplicate period .              55,318              148,985        $0.80-$60.30             1,017,800        $6.830
Additional shares authorized           7,850,000
Shares granted .............          (5,973,398)           5,973,398        $0.98-$60.30           260,853,796        $43.67
Shares exercised ...........                  --           (2,752,673)       $0.80-$60.30           (36,259,606)       $13.17
Shares canceled ............           2,721,278           (2,721,278)       $0.98-$66.63           (76,792,667)       $28.22
                                       ---------           ----------        ------------          ------------        ------
Balances, December 31, 1997            7,975,963           11,534,721        $0.98-$66.63          $376,905,490        $32.68
                                       =========           ==========        ============          ============        ======
</TABLE>


    At December 31, 1997, a total of 2,963,535 options to purchase common stock
were exercisable at an aggregate exercise price of $25.66.

    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.

<TABLE>
<CAPTION>
                                                Options Outstanding                                     Options Exercisable
                               ---------------------------------------------------------      ------------------------------------
                                  Number          Weighted Average      Weighted Average        Number            Weighted Average
Range of                       Outstanding           Remaining             Exercisable        Exercisable             Exercise
Exercise Prices                at 12/31/97     Contractual Life (yrs)         Price           at 12/31/97               Price
---------------                -----------     ----------------------   ----------------      -----------         ----------------
<S>                            <C>             <C>                      <C>                   <C>                 <C>      
$  0.98  -  $    8.37             718,198                6.98               $    5.50             381,147             $    5.06
$  8.89  -  $   11.11           1,487,544                7.38               $   10.00             451,723             $   10.17
$ 12.67  -  $   20.55             820,316                6.91               $   16.88             449,514             $   17.15
$ 20.67  -  $   31.50           1,131,303                7.76               $   24.52             477,187             $   24.71
$ 32.38  -  $   36.30             708,524                9.07               $   35.29             353,484             $   35.83
$ 38.55  -  $   39.30             946,969                8.82               $   38.93             280,078             $   38.85
$ 40.00  -  $   40.00           1,761,000                9.22               $   40.00               4,000             $   40.00
$ 40.25  -  $   43.95           1,419,522                9.42               $   42.65              94,368             $   41.47
$ 44.13  -  $   48.15           1,182,611                8.52               $   46.17             422,399             $   46.97
$ 49.38  -  $   66.63           1,358,734                9.38               $   55.02              49,635             $   51.92
                               ----------                                                       ---------
$  0.98  -  $   66.63          11,534,721                8.47               $   32.17           2,963,535             $   25.67
                               ==========                                                       =========
</TABLE>


<TABLE>
<CAPTION>
                                         Options Outstanding                                   Options Exercisable
                       ---------------------------------------------------------      ------------------------------------
                          Number          Weighted Average      Weighted Average        Number           Weighted Average
Range of               Outstanding           Remaining             Exercisable        Exercisable             Exercise
Exercise Prices        at 12/31/96     Contractual Life (yrs)         Price           at 12/31/96               Price
---------------        -----------     ----------------------   ----------------      -----------         ----------------
<S>                    <C>             <C>                      <C>                   <C>                 <C>

$ 0.80 - $ 6.03         1,700,597              7.55                $  3.44                643,152            $    3.28
$ 8.37 - $ 8.37           734,937              8.28                $  8.37                 49,809            $    8.37
$ 8.89 - $ 9.70         1,437,072              8.53                $  9.67                110,094            $    9.69
$10.95 - $20.01         2,243,669              8.03                $ 14.24                492,451            $   13.85
$20.33 - $37.55         2,209,395              8.69                $ 25.26                311,980            $   24.71
$38.10 - $38.55           315,773              9.45                $ 38.55                 33,632            $   38.54
$39.15 - $46.80         1,415,462              9.26                $ 42.64                163,131            $   42.38
$47.10 - $48.15           470,613              9.09                $ 47.90                 30,647            $   47.98
$49.50 - $65.69           358,771              9.73                $ 53.59                  1,997            $   55.94
                        ---------                                                         -------
</TABLE>



                                                                              65
<PAGE>   66

<TABLE>
<S>                    <C>             <C>                      <C>                   <C>                 <C>
$ 0.80  - $65.69       10,886,289              8.47                $ 20.94              1,836,893            $   15.20
                       ==========                                                       =========
</TABLE>

    The fair market 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.

<TABLE>
<CAPTION>
                              1995        1996        1997
                              ----        ----        ----
<S>                           <C>         <C>         <C>  
Risk free interest rate       5.50%       5.85%       5.39%
Expected life (yrs)              4           4           4
Volatility                    0.66        0.66        0.66
Dividend yield                   0           0           0
</TABLE>


    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 twelve months ending December
1997 and 36 month period from January 1995 through December 1997 was 66%. Since
the volatility has been relatively stable one value was selected for all
segments. The Company has not paid a dividend, and has no plans to do so.

    The weighted average fair value of options granted in 1997,1996 and 1995 was
$27.85, $17.44 and $10.05 , 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 7. Purchase periods occur twice yearly and each effectively
contains a 6 and 12 month option.

<TABLE>
<CAPTION>
                              Feb. 1995   Aug. 1995   Feb. 1996   Aug. 1996   Feb. 1997   Aug. 1997
                              ---------   ---------   ---------   ---------   ---------   ---------
<S>                           <C>         <C>         <C>         <C>         <C>         <C>  
Risk Free Interest Rate       6.06%       5.47%       4.84%       5.73%       5.40%       5.44%
Expected Life                 6,12mos     6,12mos     6,12mos     6,12mos     6,12mos     6.12 mos
Volatility                    0.66        0.66        0.66        0.66        0.66        0.66
Dividend Yield                  --          --          --          --          --          --
</TABLE>


    The weighted average fair value of options granted pursuant to the Employee
Stock Purchase Program in 1997, 1996 and 1995 was $16.66 , $10.51 and $9.03,
respectively.

    The following pro forma income information has been prepared following the
    provisions of SFAS 123.

<TABLE>
<CAPTION>
                                                            1997               1996            1995
                                                            ----               ----            ----
<S>                                                      <C>               <C>              <C>       
Net income (loss) - pro forma (thousands)                $  (31,205)       $   44,090       $   41,146

Net income (loss) per share - diluted  - pro forma       $    (0.43)       $     0.60       $     0.59
</TABLE>

    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 PGP, the Company issued warrants to purchase
250,000 shares of common stock at a price of $60 per share, which expire,
subject to certain extensions, on June 5, 1999, all of which were outstanding at
December 31,



                                                                              66
<PAGE>   67
1997. In addition, warrants for the purchase of 4,227 shares of Common Stock
issued in connection with the Company's 1995 acquisition of Assurdata were
outstanding at December 31, 1997. 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); Term 1 year;
Volatility 66%; Annual dividend 0%; Discount rate 5.5%. The resulting valuation
of the 250,000 warrants (prior to the 3:2 stock split) was $2,722,500, the total
amount of which was included in the purchase price allocation.

12.  PROVISION FOR INCOME TAXES:

Taxable income from continuing operations from the years ended December 31, was
earned in the following jurisdictions (in thousands):

<TABLE>
<CAPTION>
                 1997             1996             1995
               ---------       ---------        ---------
<S>            <C>             <C>              <C>      
Domestic       $  63,427       $ 123,935        $  74,318
Foreign           16,458          (2,454)           2,267
               ---------       ---------        ---------
               $  79,885       $ 121,481        $  76,585
               =========       =========        =========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                   1997           1996            1995
                                         --------       --------        --------
<S>                                      <C>            <C>             <C>
Federal:
  Current payable ................       $ 24,784       $ 44,327        $ 23,779
  Deferred .......................         20,173         (3,856)         (2,992)
                                         --------       --------        --------
Total federal ....................         44,957         40,471          20,787
State:
  Current payable ................          6,477          9,878           5,530
  Deferred .......................          2,270             55             (38)
                                         --------       --------        --------
Total state ......................          8,747          9,933           5,492
                                         --------       --------        --------
Foreign ..........................          8,458          1,870             540
                                         --------       --------        --------
Provision for income taxes .......       $ 62,162       $ 52,274        $ 26,819
                                         ========       ========        ========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                      1997            1996            1995
                                            --------        --------        --------
<S>                                         <C>             <C>             <C>     
Deferred revenue ....................       $  1,387        $  1,865        $  4,753
In-process technology ...............          6,190           6,355           6,349
State taxes .........................          1,740           1,631             502
Accrued liabilities and reserves ....         26,939           8,690           5,292
Depreciation and amortization .......          5,727           3,868           2,927
Subsidiaries operating loss carryover         10,597             968           2,472
                                            --------        --------        --------
                                              52,580          23,377          22,295
Valuation allowance .................         (7,728)           (968)         (2,472)
                                            --------        --------        --------
                                            $ 44,852        $ 22,409        $ 19,823
                                            ========        ========        ========

Current portion .....................       $ 28,679        $ 10,188        $  5,794
Non-current portion .................         16,173          12,221          14,029
                                            --------        --------        --------
                                            $ 44,852        $ 22,409        $ 19,823
                                            ========        ========        ========
</TABLE>

   The valuation allowance relates to the tax benefit of operating losses of PGP
and 3DV. The operating losses are subject to certain annual limitations as a
result of the acquisition and may expire before the company can utilize them.
Accordingly, a valuation allowance has been established.

   Realization of the remaining net deferred tax assets of $44,852,000 as of
December 31, 1997 is dependent on generating sufficient taxable income to offset
future deduction of the related items. Although realization is not assured,
management believes it is more likely than not that all of the net deferred tax
assets will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.

                                                                              67
<PAGE>   68

    U.S. income taxes were not provided for on a cumulative total of
approximately $17,038,000 of undistributed earnings for certain non-U.S.
subsidiaries. The Company intends to reinvest these earnings indefinitely in
operations outside the United States. As of December 31, 1997, the unrecognized
deferred tax liability for these earnings is approximately $5,963,000.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                              1997          1996         1995
                                                     -----         -----         ----- 
<S>                                                  <C>           <C>           <C>  
U.S. Federal statutory income tax rate .......        35.0%         35.0%         35.0%
State taxes, net of federal income tax benefit         4.7           5.9           5.1
Non deductible acquisition and other costs ...       43.84           7.5          3.72
Tax credits and other ........................       (5.73)        (5.37)         (8.8)
                                                     -----         -----         ----- 
                                                     77.81%        43.03%        35.02%
                                                     =====         =====         =====
</TABLE>

13.  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):

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                 -----------------------------------
                                                  1997          1996           1995
                                                 -------       -------       -------
<S>                                              <C>           <C>           <C>
NUMERATOR - BASIC AND DILUTED
Net income (loss)                                $17,723       $69,207       $49,766
                                                 =======       =======       =======
Net income (loss) available to common
stockholders                                     $17,723       $69,207       $49,766
                                                 =======       =======       =======

DENOMINATOR - BASIC
Weighted average common shares outstanding        69,161        66,919        65,135
                                                 =======       =======       =======
Basic net income (loss) per share                $  0.26       $  1.03       $  0.76
                                                 =======       =======       =======

DENOMINATOR - DILUTED
Denominator - Basic                               69,161        66,919        65,135
Effect of dilutive securities:
Common stock options                               3,844         6,386         5,042
                                                 -------       -------       -------
                                                  73,005        73,305        70,177
                                                 =======       =======       =======
Diluted net income (loss) per share              $  0.24       $  0.94       $  0.71
                                                 =======       =======       =======
</TABLE>

14.  BUSINESS SEGMENT INFORMATION:

   The Company operates in one industry segment and markets and services its
products in the United States and in foreign countries through its own direct
sales organization and through independent agents and distributors. In 1997,
foreign operations accounted for approximately 29% of the Company's net revenue,
but less than 10% of the Company's net income, and identifiable assets. No one
customer accounted for more than 10% of net revenue during fiscal 1997, 1996 and
1995.



                                                                              68
<PAGE>   69

   Net revenue information by geographic area is as follows (in thousands):

<TABLE>
<CAPTION>
                           YEAR ENDED DECEMBER 31,
                    --------------------------------------
                      1997           1996           1995
                    --------       --------       --------
<S>                 <C>            <C>            <C>     
North America       $426,558       $328,889       $214,910
International        174,245        107,109         72,033
                    --------       --------       --------
                    $600,803       $435,998       $286,943
                    ========       ========       ========
</TABLE>

15.  LITIGATION

    On April 24, 1997, the Company was served by Symantec with a suit filed in
the United States District Court, Northern District of California, San Jose
Division, alleging copyright infringement and unfair competition by the Company.
Symantec alleges that the Company's computer software program called "PC Medic"
copied portions of Symantec's computer software program entitled "CrashGuard."
Symantec's complaint sought injunctive relief and unspecified money damages. On
July 20, 1997, Symantec sought leave to amend its complaint to include
additional allegations of copyright infringement and trade secret
misappropriation pertaining to the Company's "VirusScan" product. Symantec
sought injunctive relief and unspecified money damages. On October 6, 1997, the
Court issued an order granting Symantec's motion to amend its complaint and
enjoining the Company from shipping any product containing either an
approximately 30-line routine found in Crash Guard or an approximately 100-line
routine found in a Symantec DLL. The Court's order expressly stated that "the
court is not enjoining the sale or distribution of [McAfee's] current product."
On December 19, 1997, the Court denied Symantec's motion to enjoin sale or
distribution of the Company's current PC Medic product. Trial is set for
September 1998.

    On May 13, 1997, Trend Micro Inc. ("Trend") filed suit in United States
District Court for the Northern District of California against both the Company
and Symantec Corporation. Trend alleges that the Company's "WebShield" and
"GroupShield" products infringe a Trend patent which issued on April 22, 1997.
Trend's complaint seeks injunctive relief and unspecified money damages. On June
6, 1997, the Company filed its answer denying any infringement. The Company also
filed a counterclaim accusing Trend of unfair competition, false advertising,
trade libel, and interference with prospective economic advantage. On September
19, 1997, Symantec Corporation filed a motion to sever Trend's case against the
Company and Symantec Corporation. The Company did not oppose Symantec's motion
to sever, other than to recommend a joint hearing on patent claim
interpretation. On December 19, 1997, the Court granted Symantec's motion to
sever Trend's case against the Company and Symantec Corporation, but adopted the
Company's recommendation regarding a joint hearing on patent claim
interpretation. Thus, there will be separate lawsuits as between Trend and the
Company, and Trend and Symantec. The exact terms of the severance order have not
yet been approved by the Court, and the Court has yet to reset key dates for
discovery and trial going forward in the two cases. The Company anticipates that
the Court will shortly reset the date for the joint patent claim interpretation
hearing for late June or July, 1998. Thirty days after the joint patent claim
interpretation hearing, the Court has indicated it will set further dates for
discovery and trial.

    On May 6, 1997, RSA Data Security, Inc. ("RSA") filed a lawsuit against
Pretty Good Privacy, Inc., a wholly owned subsidiary of the Company since
December 18, 1997 ("PGP"), in San Mateo County Superior Court. RSA seeks a
declaration from the court that certain paragraphs of a license agreement
between PGP and Public Key Partners (the "License Agreement") have been
terminated and certain other paragraphs have survived RSA's purported
termination of the License Agreement. RSA, which purports to act on behalf of
Public Key Partners, also seeks an accounting of PGP's sales of products subject
to the License Agreement. PGP denies that RSA has the authority to act on behalf
of Public Key Partners, and denies that the License Agreement has been breached
or terminated in whole or in part. On May 22, 1997, PGP filed a motion to compel
arbitration of the action pursuant to an arbitration clause in the License
Agreement. PGP's motion was granted on October 9, 1997. The Court stayed the
state court proceedings and ordered the action to arbitration. The arbitration
proceedings are in the preliminary stages.

    On October 14, 1997, RSA filed a patent infringement lawsuit against PGP in
the United States District Court for the Northern District of California. RSA
alleges PGP has infringed one of the patents which was licensed to PGP under the
License Agreement. On November 4, 1997, PGP moved to stay the federal action,
or, in the alternative, compel it to arbitration. On December 23, 1997, RSA
filed a motion to amend its complaint to include the Company as a defendant.



                                                                              69
<PAGE>   70

PGP's motion to stay and RSA's motion to amend its complaint are scheduled to be
heard by the federal court in February 1998.

    On September 15, 1997, the Company 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 a
product of the Company infringes a Hilgraeve patent which was issued on June 7,
1994. Hilgraeve's action seeks injunctive relief and unspecified money damages.
The case is in discovery.

    Although the Company has not been served in any suit, three companies
(including Network Associates Corporation in California and Network Associates,
Inc. in Oregon) have made claims (including various trademark claims) or demands
with respect to the Company's use of the name Network Associates.

16.  RECENT ACCOUNTING PRONOUNCEMENTS

    In July 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income", which
requires a separate financial statement showing changes in comprehensive income,
is effective for financial statements issued for fiscal years beginning after
December 15, 1997. SFAS 130 requires reclassification of all prior-period
financial statements for comparative purposes.

    In July 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information", which requires companies to report certain
information about operating segments, including certain information about their
products, services, the geographic areas in which they operate and their major
customers. This statement supersedes FASB Statements Nos. 14, 18, 24 and 30.
SFAS 131 is effective for financial statements for fiscal years beginning after
December 15, 1997.



17.  SUBSEQUENT EVENTS:

    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 (after
deducting the fee paid to the initial purchaser of the Debentures but no other
expenses of the placement). 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 5.692
shares per $1,000 of face amount at maturity, which equates to an initial
conversion price of $68.70 per share. The Debentures are subordinated in right
of payment to all existing and future Senior Indebtedness (as defined) 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 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, at the election of the Company and
subject to certain conditions) equal to the initial issue price plus accrued
original issue discount to such dates. The Debentures may also be redeemed at
the option of the holder if there is a Fundamental Change (as defined) at a
price equal to the issue price plus accrued original issue discount to the date
of redemption, subject to adjustment.



                                                                              70
<PAGE>   71

SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Santa Clara, State of California, on the 15th day of April, 1999.

NETWORKS ASSOCIATES, INC.


/s/ William L. Larson
----------------------------------
William L. Larson
Chief Executive Officer and
Chairman of the Board

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on April 15, 1999 by the following persons on
behalf of the Registrant and in the capacities indicated.

<TABLE>
<CAPTION>
               SIGNATURE                                 TITLE
               ---------                                 -----
<S>                                          <C>
     /s/   William L. Larson                 Chief Executive Officer and
----------------------------------           Chairman of the Board (Principal
     (William L. Larson)                     Executive Officer)


     /s/   Leslie G. Denend                  Director
----------------------------------
     (Leslie G. Denend)

     /s/   Prabhat K. Goyal                  Vice President of Administration,
----------------------------------           Chief  Financial Officer, Treasurer
     (Prabhat K. Goyal)                      and Secretary (Principal Financial
                                             Officer and Principal Accounting
                                             Officer)

     /s/   Virginia Gemmell                  Director
----------------------------------
     (Virginia Gemmell)


     /s/   Edwin L. Harper                   Director
----------------------------------
     (Edwin L. Harper)
</TABLE>



                                                                              71
<PAGE>   72

SCHEDULE II

NETWORKS ASSOCIATES, INC.

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                        BALANCE    ADDITIONS    DEDUCTIONS   BALANCE AT
                                          AT       CHARGED TO                  END OF
                                       BEGINNING    EXPENSE                    PERIOD
                                       OF PERIOD
<S>                                    <C>          <C>         <C>            <C>
Year Ended December 31, 1997(1)
Allowance for Doubtful Accounts         4,206        2,129       (2,673)        3,662
Year Ended December 31, 1996(2)
Allowance for Doubtful Accounts         3,429        2,785       (2,137)        4,077
Year Ended December 31, 1995(3)
Allowance for Doubtful Accounts         2,333        1,837         (741)        3,429
</TABLE>


(1) Includes Network General balance sheet data as at December 31, 1997
(2) Includes Network General balance sheet data as at March 31, 1997
(3) Includes Network General balance sheet data as at March 31, 1996




                                                                              72
<PAGE>   73

REPORT OF INDEPENDENT ACCOUNTANTS



To the Stockholders
Networks Associates, Inc.:

Our report on the consolidated financial statements of Networks Associates, Inc.
and subsidiaries is included on page 43 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 42 of this Form
10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.





PRICEWATERHOUSECOOPERS LLP



San Jose, California
January 20, 1998 except for
the matters discussed in Note 17 as to which the date is February 10, 1998 and
Note 3 as to which the date is March 31, 1999



                                                                              73
<PAGE>   74

                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Exhibit No.                               Exhibit Title                                 Page No.
-----------                               -------------                                 --------
<S>             <C>                                                                     <C>
 2.1            Agreement and Plan of Reorganization, dated as of October 13,
                1997, among McAfee Associates, Inc., Mystery Acquisition Corp.
                and Network General Corporation, as amended by the First
                Amendment thereto, dated as of October 22, 1997.(5)

 2.2            Combination Agreement dated August 16, 1996 among the
                Registrant, FSA Combination Corp., FSA Corporation and Daniel
                Freedman.(1)

 2.3            Stock Exchange Agreement dated January 13, 1996 among the
                Registrant, FSA Combination Corp., Kabushiki Kaisha Jade and the
                shareholders of Jade.(2)

 2.4            Agreement and Plan of Reorganization dated December 1, 1997
                between the Registrant, Helix Software Company and DNA
                Acquisition Corp.(4)

 2.5            Agreement and Plan of Reorganization dated December 1, 1997
                between the Registrant, PGP and PG Acquisition Corp.,
                incorporated by reference to the Report on Form 8-K of the
                Registrant as filed with the Securities and Exchange Commission
                on December 11, 1997 (the "December 11, 1997 Form 8-K").(5)

 4.1            Registration Rights Agreement dated January 13, 1996 between the
                Registrant and all the shareholders of Jade.(2)

 4.2            Registration Rights Agreement dated August 30, 1996 between the
                Registrant and Daniel Freedman.(1)

 4.3            Registration Rights Agreement dated February 27, 1997 between
                the Registrant and the shareholders of Schuijers.(5)

 4.4            Registration Rights Agreement dated December 1, 1997 between the
                Registrant and the shareholders of Helix.(4)

 4.5            Registration Rights Agreement dated December 9, 1997 between the
                Registrant and certain of the shareholders of PGP.(4)

10.1            Standard Business Lease (Net) for Network General's principal
                facility dated June 18, 1991, between Network General and Menlo
                Oaks Partners, L.P., which is incorporated by reference to
                Exhibit 10.3 of Network General's Annual Report on Form 10-K for
                the year ended March 31, 1991.(3)

10.2            First Amendment to Lease dated June 10, 1992, between Network
                General and Menlo Parks Partners, L.P., which is incorporated by
                reference to Exhibit 10.3 of Network General's Annual Report on
                Form 10-K for the year ended March 31, 1992 ("Network General
                1992 Form 10-K").(3)

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., which is incorporated by reference to
                Exhibit 10.4 of the Network General 1992 Form 10-K.(3)

10.4            First Amendment to Lease dated June 18, 1992, between Network
                General and Menlo Oaks Partners, L.P., which is incorporated by
                reference to Exhibit 10.5 of the Network General 1992 Form
                10-K.(3)

10.5            Lease dated March 31, 1992, between Network General and
                Equitable Life Assurance Society of the United States, which is
                incorporated by reference to Exhibit 10.4 of the Network General
                1992 Form 10-K.(3)

10.6            Second Amendment to Lease dated February 1, 1995, between
                Network General and 
</TABLE>



                                                                              74
<PAGE>   75

<TABLE>
<S>             <C>                                                                     <C>

                Menlo Oaks Partners, L.P., which is incorporated by reference to
                Exhibit 10.2 of Network General's Quarterly Report on form 10-Q
                for the quarter ended December 31, 1994 ("Network General
                December 1994 form 10-Q").(3)

10.7            Third Amendment to Lease dated February 1, 1995 between Network
                General and Menlo Oaks Partners, L.P., which is incorporated by
                reference to Exhibit 10.23 of the Network General December 1994
                Form 10-Q.(3)

10.8            Fourth Amendment to Lease dated May 31, 1995, between Network
                General and Menlo Oaks Partners, L.P., which is incorporated by
                reference to Exhibit 10.27 of Network General's Quarterly Report
                on Form 10-Q for the quarter ended June 30, 1995 ("Network
                General June 1995 Form 10-Q").(3)

10.9            Fifth Amendment to Lease dated June 13, 1995, between Network
                General and Menlo Oaks Partners, L.P., which is incorporated by
                reference to Exhibit 10.28 of the Network General June 1995 Form
                10-Q.(3)

10.10           Lease dated July 3, 1996, between Network General and Campbell
                Avenue Associates, which is incorporated by reference to Exhibit
                10.21 of Network General's Quarterly Report on Form 10-Q for the
                quarter ended June 30, 1996.(3)

10.11           Sixth Amendment to Lease dated November 29, 1996, between
                Network General and Menlo Oaks Partners, L.P., which is
                incorporated by reference to Exhibit 10.22 of Network General's
                Quarterly Report on Form 10-Q for the quarter ended December 31,
                1996.(3)

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,
                incorporated by reference to Exhibit 10.51 of the Form 10-Q of
                McAfee Associates, Inc. for the Quarter ended June 30, 1997.(5)

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.

10.17           Quota Purchase Assignment Agreement, dated as of April 14, 1997,
                by and among McAfee Associates, Inc. and McAfee Do Brasil Ltda.,
                Compusul-Consultoria E Comericio De Informatica Ltda., and the
                stockholders of Compusul-Consultoria E Comericio De Informatica
                Ltda., incorporated by reference to Exhibit 10.52 of the Form
                10-Q of McAfee Associates, Inc. for the Quarter ended June 30,
                1997.

10.18           1997 Stock Incentive Plan, incorporated by reference to Exhibit
                4.1 to the Registration Statement on Form S-8 of McAfee
                Associates, Inc., filed with the Securities and Exchange
                Commission on August 8, 1997.

10.19           Change in control agreement between the Company and Dennis Cline
                dated April 14, 1995 incorporated by reference to Exhibit 10.2
                of the Company's Registration Statement No. 93296 on Form S-4
                (the "S-4").

10.20           Change in control agreement between the Company and Peter
                Watkins May 1, 1995 incorporated be reference to Exhibit 10.6 of
                the S-4. 
</TABLE>



                                                                              75
<PAGE>   76

<TABLE>
<S>             <C>                                                                     <C>
10.21           Change in control agreement between the Company and William L.
                Larson dated April 14, 1995 incorporated by reference to the
                Exhibit 10.7 of the S-4.

10.22           Change in control agreement between the Company and Prabhan K.
                Goyal incorporated by reference to Exhibit 10.43 of the
                Company's Form 10-Q for the quarter ended June 30, 1996.

21.1            Subsidiaries of Networks Associates, Inc.

23.2            Consent of PricewaterhouseCoopers LLP.

24.1            Power of Attorney (included in Part II of this Registration
                Statement under the caption "Signatures").

27.1            Financial Data Sheet
</TABLE>


(1)             Incorporated by reference from the Registrant's Current Report
                on Form 8-K filed with the Commission on September 24, 1996.

(2)             Incorporated by reference from the Registrant's Current Report
                on Form 8-K filed with the Commission on March 14, 1997.

(3)             Network General's filings with the Commission were made under
                File Number 0-17431.

(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 Form 10-K for
                the fiscal year ended December 31, 1997, filed with the
                Commission on February 17, 1998.

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



                                                                              76