##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the Transition Period
    from          to   Commission File Number:
    001-31216
  McAfee, Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware(State or other
    jurisdiction
    of incorporation or organization)

77-0316593(I.R.S. Employer
    Identification Number)3965 Freedom Circle
    Santa Clara, California(Address of principal
    executive offices)

95054(Zip Code)   Registrants telephone number, including area code:
 (408) 988-3832
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon stock, par value $0.01 per share
    and related Preferred Share Purchase Rights

New York Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act:
  None
  o þ
  o þ
  o þ
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 þ o o
  Rule 12b-2 o þ
    DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 





MCAFEE
    INC.
  FORM 10-K
 For the
    fiscal year ended December 31, 2006
  TABLE OF CONTENTS
   
 PageSpecial Note Regarding Forward-Looking
    Statements

3Explanatory Note Regarding Restatement

4PART IItem 1.

Business

10Item 1A.

Risk Factors

17Item 1B.

Unresolved Staff Comments

34Item 2.

Properties

34Item 3.

Legal Proceedings

34Item 4.

Submission of Matters to a Vote of Security
    Holders

37PART IIItem 5.

Market for the Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

37Item 6.

Selected Financial Data

41Item 7.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations

44Item 7A.

Quantitative and Qualitative Disclosures about
    Market Risk

82Item 8.

Financial Statements and Supplementary Data

82Item 9.

Changes In and Disagreements With Accountants on
    Accounting and Financial Disclosure

84Item 9A.

Controls and Procedures

84Item 9B.

Other Information

89PART IIIItem 10.

Directors and Executive Officers of the
    Registrant and Corporate Governance

89Item 11.

Executive Compensation

92Item 12.

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters

113Item 13.

Certain Relationships and Related Transactions,
    and Director Independence

115Item 14.

Principal Accountant Fees and Services

116PART IVItem 15.

Exhibits and Financial Statement Schedules

117Signatures

195Subsidiaries of the RegistrantConsent of Independent Registered Public Accounting FirmCertification of CEO and CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906   2




---



##### Table of Contents



SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  This Annual Report on
    Form 10-K
    contains forward-looking statements that involve risks and
    uncertainties. All forward-looking statements included in this
    Annual Report on
    Form 10-K
    are based on information available to us on the date hereof.
    These statements involve known and unknown risks, uncertainties
    and other factors, which may cause our actual results to differ
    materially from those implied by the forward-looking statements.
    Although we believe that the expectations reflected in the
    forward-looking statements are reasonable, we cannot guarantee
    future results, levels of activity, performance or achievements.
    Therefore, actual results may differ materially and adversely
    from those expressed in any forward-looking statements. Neither
    we nor any other person can assume responsibility for the
    accuracy and completeness of forward-looking statements.
    Important factors that may cause actual results to differ from
    expectations include, but are not limited to, those discussed in
    Item 1A, Risk Factors as well as in
    Item 1, Business and Item 7,
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations in this Annual Report
    on
    Form 10-K.
    We undertake no obligation to revise or update publicly any
    forward-looking statements for any reason.
  These statements include, without limitation, statements
    regarding our expectations, beliefs, intentions or strategies
    regarding the future. Forward-looking statements in the Report
    include, but are not limited to, statements about the following
    matters:
  
    future investments in complementary businesses, products and
    technologies;
    our expectation that our financial results will continue to
    fluctuate;
    our expectation that international revenue will remain a
    significant percentage of our net revenue;
    our expectation that both product and pricing competition
    will increase;
    our expectation that product-related expenses will
    increase;
    expectations about future sales to our top ten distributors
    and our sales efforts through the channel and other partners;
    the expected geographic composition of our future revenue;
    our expected future revenue mix;
    our expected revenue realization rates;
    the anticipated future trend of specific categories of
    expenses;
    the expected future impact related to change in senior
    management;
    our expected benefits from business acquisitions;
    stock-based compensation expense, which we began recognizing
    for our stock-based compensation plans under the fair value
    method in the first quarter of 2006;
    expected expenses associated with our strategy to mitigate
    employee income tax obligations;
    the expected future impact of FIN 48;
    our expected future level of DSOs;
    our expected settlement of pending federal and state
    stockholder derivative lawsuits;
    our expected use of cash to buy back our common stock in the
    open market and for acquisitions; and
    our expected ability to meet our obligations through
    available cash and internally generated funds, our expectation
    of generating positive working capital through operations, and
    our belief as to working capital being sufficient to meet our
    cash requirements in future periods.  In some cases, you can identify other forward-looking
    statements in the Report by terminology such as may,
    should, could, expects,
    plans, anticipates,
    believes, estimates,
    predicts, potential,
    targets,
 3




---



##### Table of Contents



goals, projects,
    continue, or variations of such words, similar
    expressions, or the negative of these terms or other comparable
    terminology.
  EXPLANATORY
    NOTE REGARDING RESTATEMENT
  Form 10-K
  Form 10-K Form 10-Q Form 8-K Form 10-K Form 10-Q Form 8-K
  Options Backdating  Which
    Companies are at Risk?
        Findings
    and conclusions
   4




---



##### Table of Contents




    in the case of our former general counsel, he and a former
    member of management participated in intentionally modifying one
    of the former general counsels stock option grants so as
    to create a lower exercise price, and the former general counsel
    failed to disclose this unauthorized change to the board of
    directors prior to late May 2006;
    in some instances, former members of management drafted
    corporate records, including employment documentation, board and
    compensation committee meeting minutes and actions by unanimous
    written consent, with the benefit of hindsight so as to choose
    measurement dates giving more favorable exercise prices,
    moreover, certain of these documents were used by us in making
    accounting determinations with respect to stock-based
    compensation;
    during the course of the investigation, certain former members
    of management did not provide completely accurate or consistent
    information and in one case, provided documentation to the
    special committee that the special committee determined was
    intentionally altered; and
    certain former members of senior management did not display the
    appropriate oversight and tone at the top expected
    by the board of directors.      Accounting for Stock Issued to Employees Share-Based Payment
 5




---



##### Table of Contents



TotalReason for revised accounting measurement date:Annual merit grant allocation and/or approval not complete on
    the original measurement date

$
70,358Original accounting measurement date prior to approval date


15,802Original accounting measurement date prior to employment
    commencement date


6,341Incorrect or inconsistent approval and employment commencement
    date documentation


4,812Clerical errors in director grants


270Total of intrinsic charges for revised measurement dates


97,583Repriced annual merit grant


6,694Post-employment option modifications previously not recorded


23,143Correction of accounting errors, primarily options historically
    accounted for as variable awards


9,938Total

$
137,358   Option
    grants previously accounted for using incorrect measurement
    dates
    
    annual merit grant allocation
    and/or
    approval not complete on the original measurement date,
    original accounting measurement date prior to approval date,
    original accounting measurement date prior to employment
    commencement date,
    incorrect or inconsistent approval and employment commencement
    date documentation, and
    clerical errors in director grants.  Form 10-K Critical Accounting Policies and
    Estimates Managements Discussion and
    Analysis of Financial Condition and Results of
    Operations Form 10-K
  Modifications in 2006 to Certain Stock
    Options Granted to Former Executive Officers and Current
    Directors Employee Stock
    Benefit Plans
   6




---



##### Table of Contents



Repriced
    Annual Merit Grant
  Accounting for Certain Transactions involving Stock
    Compensation, an interpretation of APB Opinion
    No. 25
  Post-employment
    option modifications previously not recorded
      Correction
    of errors, primarily options historically accounted for as
    variable awards
    Income
    tax implications exist as a result of the revision of stock
    option measurement dates
   7




---



##### Table of Contents



paid-in-capital
    Other
    prior-period errors
    Other
    issues
    Section 409A
    Blackout
    period
    EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock (EITF 00-19).
 8




---



##### Table of Contents



EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock.
 9




---



##### Table of Contents



PART I.
  Item 1.
    Business  OVERVIEW
  (408) 988-3832. www.mcafee.com
  and/or
  OUR
    APPROACH AND OFFERINGS
    Threat
    Protection Offerings
         10




---



##### Table of Contents



Compliance
    Management Offerings
    Unified
    Management Offerings
    Mobile
    Security Offerings
    SiteAdvisor
  e-mail
    Expert
    Services and Technical Support
     11




---



##### Table of Contents



on-site
    Research
    and Development, Investments and Acquisitions
              OUR
    CUSTOMERS AND MARKETS
   12




---



##### Table of Contents



Business
    to Business Solutions
    Consumer
    Solutions
    LICENSING
    MODELS
    Product
    Licensing Model
    Online
    Subscriptions and Managed Applications
  self-updating, www.mcafee.com
        MCAFEE
    MARKETING AND SALES
   13




---



##### Table of Contents



Resellers
    and Distributors
          Original
    Equipment Manufacturers
    Strategic
    Alliances
  and/or
  Sales
    in North America
   14




---



##### Table of Contents



Sales
    outside of North America
    and/or
  Other
    Marketing Activities
    www.mcafee.com
    COMPETITION
    
    performance,
    quality,
    accuracy,
    breadth of product group,
    integration of products,
    introduction of new products and features,
    brand name recognition,
    price,
    market presence,
    functionality,
    innovation, 15




---



##### Table of Contents




    customer support,
    frequency of upgrades and updates,
    reduction of production costs,
    usability and technical support,
    manageability of products and
    reputation.  and/or
  System Protection Market.
  Network Protection Market.
  Web Security Market.
  Other Competitors.
  OUR
    PROPRIETARY TECHNOLOGY
    OUR
    EMPLOYEES
   16




---



##### Table of Contents



ADDITIONAL
    INFORMATION
  1-800-SEC-0330. www.sec.gov Form 10-K, Form 10-K, Form 10-Q Form 8-K, Form 10-K.
  Item 1A.
    Risk
    Factors  Investing in our common stock involves a high degree of risk.
    The risks described below are not the only ones facing our
    company. Additional risks not presently known to us or that we
    deem immaterial may also impair our business operations. Any of
    the following risks could materially adversely affect our
    business, operating results and financial condition and could
    result in a complete loss of your investment.
  We Are
    Subject to Intense Competition and We Expect to Face Increased
    Competition in the Future.
    and/or
  
    in the system protection market, which includes our anti-virus
    and anti-spyware solutions, Symantec Corporation, CA, Inc. and
    Microsoft Corporation. Trend Micro Inc. remains the strongest
    competitor in the Asian anti-virus market and has entered the
    North American and EMEA markets. Kaspersky Lab, Inc., Panda
    Software, Sophos, F-Secure Corporation, and Dr. Ahns
    Anti-Virus Lab are also competitors in their respective
    geographic markets;
    in the network protection market, which includes our other
    intrusion detection and protection products, Cisco Systems Inc.,
    CA, Inc., IBM, (which acquired Internet Security Systems Inc. in
    October 2006), Juniper Networks, Inc., Symantec Corporation and
    3Com Corporation. IBM and Qualys are the strongest competitors
    for our Intrushield and Foundstone products and solutions,
    respectively; and
    in the web security market, which includes our SiteAdvisor
    products, Microsoft Corporation, Trend Micro Inc., and various
    search engine providers, namely, Google Inc. and Yahoo! Inc. In
    addition, we anticipate Symantec Corporation may enter this
    market in the near future.     17




---



##### Table of Contents



We Face
    Product Development Risks Associated with Rapid Technological
    Changes in Our Market.
    
    offer a broad range of network and system protection products;
    enhance existing products and expand product offerings,
    particularly those that operate in virtual environments;
    extend security technologies to additional digital devices such
    as mobile phones and personal digital assistants;
    respond promptly to new customer requirements and industry
    standards; 18




---



##### Table of Contents




    provide frequent, low cost or free upgrades and updates for our
    products;
    maintain quality;
    remain compatible with popular operating systems such as Linux,
    Suns Solaris, UNIX, Macintosh and OSX, Windows XP and
    Windows NT, and develop products that are compatible with
    new or otherwise emerging operating systems such as
    Microsofts Windows Vista Operating System and Macintosh
    Leopard; and
    interoperate with industry trends and new technologies and
    function within new operating environments, including virtual
    machine environments, that are or that become increasingly
    important to customer deployments.      The
    Discovery That We Had Retroactively Priced Stock Options and Had
    Not Accounted for Them Correctly May Result in Continued or
    Additional Litigation, Regulatory Proceedings and Government
    Enforcement Actions.
  10-K, 10-Qs 10-K.
     19




---



##### Table of Contents



Our
    International Operations Involve Risks Which Could Increase our
    Expenses Adversely, Impact Our Operating Results and Divert the
    Time and Attention of Management.
      
    increased costs and difficulties in managing and coordinating
    the activities of our geographically dispersed operations,
    particularly sales and support, located on multiple continents
    in greatly varying time zones and culturally diverse operations;
    the challenge of successfully establishing, managing and
    staffing shared service centers for worldwide sales finance and
    accounting operations centralized from locations in the
    U.S. and Europe;
    longer payment cycles and greater difficulty in collecting
    accounts receivable;
    our ability to adapt to sales and marketing practices and
    customer requirements in different cultures;
    our ability to successfully localize software products for a
    significant number of international markets;
    compliance with more stringent consumer protection and privacy
    laws;
    currency fluctuations, including weakness of the
    U.S. dollar relative to other currencies, or the
    strengthening of the U.S. dollar that may have an adverse
    impact on revenues, financial results and cash flows;
    risks related to hedging strategies;
    potentially adverse tax consequences, including the complexities
    of foreign value-added taxes and restrictions on the
    repatriation of earnings;
    enactment of additional regulations or restrictions on the use,
    import or export of encryption technologies, which would delay
    or prevent the acceptance and use of encryption products and
    public networks for secure communication;
    political instability in both established and emerging markets;
    tariffs, trade barriers and export restrictions;
    costs and delays associated with developing software in multiple
    languages;
    increased compliance and regulatory risks in established and
    emerging markets;
    a high incidence of software piracy in some countries; and
    international labor laws and our relationship with our employees
    and regional work councils.   20




---



##### Table of Contents



We Face a
    Number of Risks Related to Our Product Sales Through
    Intermediaries.
    Uncertain
    Timing and Delivery of Products
    Sale
    of Competing Products
    Loss
    of a Distributor
    Payment
    Difficulties
    Pricing
    Competition
   21




---



##### Table of Contents



We Face
    Risks Associated with Past and Future Acquisitions.
      Integration
    
    integrate and retain key management, sales, research and
    development and other personnel;
    integrate the acquired products into our product offerings both
    from an engineering and sales and marketing perspective;
    integrate and support preexisting supplier, distribution and
    customer relationships;
    coordinate research and development efforts; and
    consolidate duplicate facilities and functions and integrate
    back-office accounting, order processing and support functions.    Internal
    Controls, Policies and Procedures
    Open
    Source Software
   22




---



##### Table of Contents



Use of
    Cash and Securities
    Accounting
    Charges
    Critical
    Personnel May Be Difficult to Attract, Assimilate and
    Retain.
    Form S-8
  and/or
    Competition
    for Personnel; Need for Competitive Pay Packages
   23




---



##### Table of Contents



Reduced
    Productivity of New Hires; Senior Management
    Changes
        Our
    Financial Results Will Likely Fluctuate, Making It Difficult for
    Us to Accurately Estimate Operating Results.
      
    the introduction and adoption of new products, product upgrades
    or updates by us or our competitors;
    the volume, size, timing and contractual terms of new customer
    licenses and renewals of existing licenses, which may influence
    our revenue recognition;
    the mix of products we sell and services we offer, including
    whether (i) our products are sold directly by us or
    indirectly through distributors, resellers, ISPs such as
    Telefonica S.A., OEMs such as Dell, and others, (ii) the
    products are hardware or software based and (iii) in the
    case of software licenses, the licenses are perpetual licenses
    or time-based subscription licenses;
    changes in our supply chains and product delivery channels,
    which may result in product fulfillment delays; 24




---



##### Table of Contents




    changes in our business strategy;
    increased reliance upon third-party distributors, resellers and
    ISPs that are critical to the successful execution of our
    channel strategy;
    personnel limitations, which may adversely impact our ability to
    process the large number of orders that typically occur near the
    end of a fiscal quarter;
    costs or charges related to our acquisitions or dispositions;
    the components of our revenue that are deferred, including our
    online subscriptions and that portion of our software licenses
    attributable to support and maintenance;
    stock-based compensation expense, which we began recognizing for
    our stock-based compensation plans in the first quarter of 2006
    as a result of accounting rules changes;
    unanticipated costs associated with litigation or investigations;
    costs and charges related to certain extraordinary events,
    including relocation of personnel and previous financial
    restatements;
    costs related to Sarbanes-Oxley compliance efforts;
    changes in generally accepted accounting principles;
    our ability to effectively manage our operating expense levels;
    factors that lead to substantial declines in estimated values of
    long-lived assets below their carrying value; and
    our ability to successfully address and resolve issues arising
    from the discovery that we had retroactively priced stock
    options and had not accounted for them correctly.      We Face
    Risks in Connection With the Material Weaknesses Identified by
    Our Management and Any Related Remedial Measures That We
    Undertake.
   25




---



##### Table of Contents



We May
    Incur Additional Expenses in Order To Assist Our Employees With
    Potential Income Tax Liabilities Which May Arise Under
    Section 409A of the Internal Revenue Code.
     26




---



##### Table of Contents



We Rely
    Heavily on Our Intellectual Property Rights, Which Offer Only
    Limited Protection Against Potential Infringers; Intellectual
    Property Litigation in the Network and System Security Market is
    Common and Can Be Expensive.
        
    result in the loss of our proprietary rights;
    subject us to significant liabilities, including monetary
    liabilities;
    require us to seek licenses from third parties; or
    prevent us from manufacturing or selling our products.      We Face
    Risks Related to The Strategic Alliances We Use to Distribute
    Our Products.
   27




---



##### Table of Contents




    Strategic alliances require significant coordination between the
    parties involved. To be successful, our alliances may require
    the integration of other companies products with our
    products, which may involve significant time and expenditure by
    our technical staff and the technical staff of our strategic
    allies.
    Our agreements relating to our strategic alliances are
    terminable without cause with no or minimal notice or penalties.
    We may expend significant time, money and resources to further
    relationships with our strategic alliances that are thereafter
    terminated. In addition, if we were to lose a relationship with
    a strategic partner, we could expend significant money in
    developing new strategic alliances.
    The integration of products from different companies may be more
    difficult than we anticipate, and the risk of integration
    difficulties, incompatible products and undetected programming
    errors or defects may be higher than that normally associated
    with new products.
    Our sales force, marketing and professional services personnel
    may require additional training to market products that result
    from our strategic alliances. The marketing of these products
    may require additional sales force efforts and may be more
    complex than the marketing of our own products.
    We may be required to share ownership in technology developed as
    part of our strategic alliances.  Increased
    Customer Demands on Our Technical Support Services May Adversely
    Affect Our Relationships with Our Customers and Negatively
    Impact Our Financial Results.
      Failure
    of Our Products to Work Properly Or Misuse of Our Products Could
    Impact Sales, Increase Costs, and Create Risks of Potential
    Negative Publicity and Legal Liability.
     28




---



##### Table of Contents



We Face
    Manufacturing, Supply, Inventory, Licensing and Obsolescence
    Risks Relating to Our Products.
  Third-Party
    Manufacturing
    Sourcing
    Third-Party
    Licenses
    Obsolescence
    Product
    Fulfillment
    We Face
    Risks Related to Customer Outsourcing to System
    Integrators.
   29




---



##### Table of Contents



Product
    Liability and Related Claims May Be Asserted Against
    Us.
    Cryptography
    Contained in Our Technology is Subject to Export
    Restrictions.
    If We
    Fail to Effectively Upgrade Our Information Technology System,
    We May Not Be Able to Accurately Report Our Financial Results or
    Prevent Fraud.
    Pending
    or Future Litigation Could Have a Material Adverse Impact on Our
    Results of Operation and Financial Condition.
   30




---



##### Table of Contents



We Face
    Risks Related to Our 2006 Settlement Agreement with the
    Securities and Exchange Commission.
    False
    Detection of Viruses and Actual or Perceived Security Breaches
    Could Adversely Affect Our Business.
    Computer
    Hackers May Damage Our Products, Services and
    Systems.
    We Face
    Risks Related to Our Anti-Spam, Anti-Spyware and Safe Search
    Software Products.
   31




---



##### Table of Contents



Open
    Source Software and Failure to Comply with Open Source
    Licenses and Obligations Could Negatively Affect our
    Business.
    Compliance
    Or the Failure to Comply with Current and Future Environmental
    Regulations Could Cause Us Significant Expense.
    Our Tax
    Strategy May Expose Us to Risk.
    Business
    Interruptions May Impede Our Operations and the Operations of
    Our Customers.
     32




---



##### Table of Contents



Our Stock
    Price Has Been Volatile and Is Likely to Remain
    Volatile.
    We Face
    the Risk of a Decrease in Our Cash Balances and Losses in Our
    Investment Portfolio.
    Our
    Charter Documents and Delaware Law and Our Rights Plan May
    Impede or Discourage a Takeover, Which Could Lower Our Stock
    Price.
  Our
    Charter Documents and Delaware Law
      Our
    Rights Plan
   33




---



##### Table of Contents



Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties      Item 3.
    Legal
    Proceedings  Special
    Committee Investigation of Historical Stock Option Granting
    Practices
  Options Backdating  Which
    Companies are at Risk?
      Findings
    and Conclusions
   34




---



##### Table of Contents




    in the case of our former general counsel, he and a former
    member of management participated in intentionally modifying one
    of the former general counsels stock option grants so as
    to create a lower exercise price, and the former general counsel
    failed to disclose this unauthorized change to the board of
    directors prior to late May 2006;
    in some instances, former members of management drafted
    corporate records, including employment documentation, board and
    compensation committee meeting minutes and actions by unanimous
    written consent, with the benefit of hindsight so as to choose
    measurement dates giving more favorable exercise prices;
    moreover, certain of these documents were used by us in making
    accounting determinations with respect to stock-based
    compensation;
    during the course of the investigation, certain former members
    of management did not provide completely accurate or consistent
    information and in one case, provided documentation to the
    special committee that the special committee determined was
    intentionally altered; and
    certain former members of senior management did not display the
    appropriate oversight and tone at the top expected
    by the board of directors.    Government
    Inquiries Relating to Historical Stock Option
    Practices
         35




---



##### Table of Contents



and/or
  Late SEC
    Filings
  Form 10-K Form 10-Q Form 10-K Form 10-K. Form 10-K.
  Form 10-K Form 10-Q
  Stockholder
    Derivative Litigation Relating to Historical Stock Option
    Practices
       36




---



##### Table of Contents



SEC
    Settlement Related to Prior Restatement
    Indemnification
    Obligations
    Other
    Legal Matters
    Item 4.
    Submission
    of Matters to a Vote of Security Holders    PART II
  Item 5.
    Market
    for the Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities  Price
    Range of Common Stock
   37




---



##### Table of Contents



mark-up,
  High


LowYear Ended December 31, 2006First Quarter

$
29.24


$
21.75Second Quarter


27.52



22.00Third Quarter


25.15



19.52Fourth Quarter


30.50



24.01Year Ended December 31, 2005First Quarter

$
29.15


$
21.94Second Quarter


28.71



20.35Third Quarter


33.24



26.00Fourth Quarter


32.59



25.35     Dividend
    Policy
   38




---



##### Table of Contents



Stock
    Performance
  The following Performance Graph and related information shall
    not be deemed soliciting material or to be
    filed with the Securities and Exchange Commission,
    nor shall such information be incorporated by reference into any
    future filing under the Securities Act of 1933 or Securities
    Exchange Act of 1934, each as amended, except to the extent that
    we specifically incorporate it by reference into such filing.
    Comparison
    of Five-Year Cumulative Total Returns
  
  Dec-01


Dec-02


Dec-03


Dec-04


Dec-05


Dec-06McAfee, Inc.



100.0




62.2




58.2




111.9




105.0




109.8NASDAQ Stock Market (US & Foreign)



100.0




68.8




103.8




112.9




115.5




127.4NASDAQ Computer and Data Processing Stocks (US &
    Foreign)



100.0




68.9




90.8




100.2




103.5




116.3     Holders
    of Common Stock
    Common
    Stock Repurchases
   39




---



##### Table of Contents



Retirements
    of Common Stock
     40




---



##### Table of Contents



Item 6.
    Selected
    Financial Data  Restatement of Consolidated Financial
    Statements Managements Discussion
    and Analysis of Financial Conditions and Results of
    Operations.
  Years Ended December 31,2006


2005(1)


2004(2)


2003


2002(3)(As


(As


(As


(Asrestated)


restated)


restated)


restated)(In thousands, except for per share amounts)Statement of Operations DataTotal net revenue

$
1,145,158


$
981,628


$
907,573


$
937,509


$
1,044,416Income from operations


139,028



141,407



310,252



54,149



108,774Income before provision for income taxes, minority interest and
    cumulative effect of change in accounting principle


183,781



166,678



302,814



62,475



114,790Income before cumulative effect of change in accounting principle


137,471



118,217



220,017



57,073



113,064Cumulative effect of change in accounting principle, net of taxes














10,337



Net income


137,471



118,217



220,017



67,410



113,064Income per share, before cumulative effect of change in
    accounting principle, basic

$
0.85


$
0.72


$
1.37


$
0.36


$
0.76Income per share, before cumulative effect of change in
    accounting principle, diluted

$
0.84


$
0.70


$
1.28


$
0.35


$
0.71Cumulative effect of change in accounting principle, basic

$



$



$



$
0.06


$
Cumulative effect of change in accounting principle, diluted

$



$



$



$
0.06


$
Net income per share, basic

$
0.85


$
0.72


$
1.37


$
0.42


$
0.76Net income per share, diluted

$
0.84


$
0.70


$
1.28


$
0.41


$
0.71Shares used in per share calculation  basic


160,945



165,042



160,510



160,276



149,750Shares used in per share calculation  diluted


163,052



169,249



177,385



164,652



175,925   As of December 31,2006


2005(1)


2004(2)


2003


2002(3)(As


(As


(As


(Asrestated)


restated)


restated)


restated)(In thousands)Balance Sheet DataCash and cash equivalents

$
389,627


$
728,592


$
291,155


$
333,651


$
674,226Working capital


146,253



688,015



260,183



419,101



479,109Total assets


2,800,270



2,636,234



2,256,135



2,121,701



2,042,511Deferred revenue


897,525



751,806



601,485



454,770



326,823Long-term debt and other long-term liabilities


149,924



147,128



205,107



556,940



507,520Total equity


1,427,249



1,434,641



1,206,242



903,962



779,924  41




---



##### Table of Contents



Year Ended December 31, 2003(As previously





(Asreported)


(Adjustments)


restated)(In thousands, except for per share amounts)Statement of Operations DataTotal net revenue

$
936,336


$
1,173


$
937,509Income from operations


64,402



(10,253
)


54,149Income before provision for income taxes, minority interest and
    cumulative effect of change in accounting principle


73,125



(10,650
)


62,475Income before cumulative effect of change in accounting principle


59,905



(2,832
)


57,073Cumulative effect of change in accounting principle, net of taxes


10,337







10,337Net income


70,242



(2,832
)


67,410Income per share, before cumulative effect of change in
    accounting principle, basic

$
0.37


$
(0.01
)

$
0.36Income per share, before cumulative effect of change in
    accounting principle, diluted

$
0.36


$
(0.01
)

$
0.35Cumulative effect of change in accounting principle, basic

$
0.07


$
(0.01
)

$
0.06Cumulative effect of change in accounting principle, diluted

$
0.07


$
(0.01
)

$
0.06Net income per share, basic

$
0.44


$
(0.02
)

$
0.42Net income per share, diluted

$
0.43


$
(0.02
)

$
0.41Shares used in per share calculation  basic


160,338



(62
)


160,276Shares used in per share calculation  diluted


164,489



163



164,652   As of December 31, 2003(As previously





(Asreported)


(Adjustments)


restated)(In thousands)Balance Sheet DataCash and cash equivalents

$
333,651


$



$
333,651Working capital


415,768



3,333



419,101Total assets


2,120,498



1,203



2,121,701Deferred revenue


459,557



(4,787
)


454,770Long-term debt and other long-term liabilities


570,162



(13,222
)


556,940Total equity


888,089



15,873



903,962   42




---



##### Table of Contents



Year Ended December 31, 2002(3)(As previously





(Asreported)


(Adjustments)


restated)(In thousands, except for per share amounts)Statement of Operations DataTotal net revenue

$
1,043,044


$
1,372


$
1,044,416Income from operations


124,028



(15,254
)


108,774Income before provision for income taxes, minority interest and
    cumulative effect of change in accounting principle


129,933



(15,143
)


114,790Income before cumulative effect of change in accounting principle


128,312



(15,248
)


113,064Cumulative effect of change in accounting principle, net of taxes










Net income


128,312



(15,248
)


113,064Income per share, before cumulative effect of change in
    accounting principle, basic

$
0.86


$
(0.10
)

$
0.76Income per share, before cumulative effect of change in
    accounting principle, diluted

$
0.80


$
(0.09
)

$
0.71Cumulative effect of change in accounting principle, basic

$



$



$
Cumulative effect of change in accounting principle, diluted

$



$



$
Net income per share, basic

$
0.86


$
(0.10
)

$
0.76Net income per share, diluted

$
0.80


$
(0.09
)

$
0.71Shares used in per share calculation  basic


149,441



309



149,750Shares used in per share calculation  diluted


176,249



(324
)


175,925   As of December 31, 2002(3)(As previously





(Asreported)


(Adjustments)


restated)(In thousands)Balance Sheet DataCash and cash equivalents

$
674,226


$



$
674,226Working capital


475,418



3,691



479,109Total assets


2,045,487



(2,976
)


2,042,511Deferred revenue


329,195



(2,372
)


326,823Long-term debt and other long-term liabilities


519,150



(11,630
)


507,520Total equity


770,168



9,756



779,924     (1)
    
    In 2005, we reserved $50.0 million in connection with the
    settlement with the SEC and we deposited $50.0 million in
    an escrow account with the SEC as the designated beneficiary.(2)
    
    In 2004, we sold our Sniffer and Magic product lines for
    aggregate net cash proceeds of $260.9 million and
    recognized pre-tax gains on the sale of assets and technology
    aggregating $243.5 million. We also received
    $25.0 million from our insurance carriers for insurance
    reimbursements related to the class action lawsuit settled in
    2003.(3)
    
    We agreed to settle a pending class action lawsuit in September
    2003 for $70.0 million, which was recorded as expense in
    2002 as the settlement agreement was entered into prior to the
    filing of the 2002 financial statements. 43




---



##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Forward-Looking
    Statements and Factors That May Affect Future Results
    Overview
    and Executive Summary
           44




---



##### Table of Contents



Net
    revenue by Geography
    Net
    revenue by Product Groups and Customer Category
  
    McAfee.  Our McAfee products include our
    corporate products and our consumer products.      
    Sniffer Technologies.  Net revenue from the
    sale of Sniffer products was $91.4 million in 2004. In July
    2004, we sold our Sniffer product line for net cash proceeds of
    $213.8 million. We agreed to provide certain post-closing
    transition services to Network General Corporation, the acquirer
    of the Sniffer product line. We were reimbursed for our cost
    plus a profit margin and present these reimbursements as a
    reduction of operating expenses on a separate line in our income
    statement. The reimbursements we have recognized under this
    agreement totaled $0.4 million in 2005 and
    $6.0 million in 2004. We completed our obligations under
    the transition services agreement in July 2005. 45




---



##### Table of Contents




    Magic.  In 2004, net revenue from the sale of
    Magic Solutions products totaled approximately
    $2.8 million. We sold the assets of our Magic Solutions
    service desk business to BMC Software, Inc. The sale closed on
    January 30, 2004 and we received cash proceeds of
    approximately $47.1 million, net of direct expenses.
    McAfee Labs.  We sold our McAfee Labs assets to
    SPARTA, Inc. for $1.5 million in April 2005. Net revenue
    related to McAfee Labs was $1.9 million in 2005 and
    $6.4 million in 2004.  Deferred
    Revenue
    Cash,
    Cash Equivalents and Marketable Securities
    Explanatory Note Regarding Restatement Legal Proceedings Restatement of Consolidated Financial
    Statements Form 10-K.
  Special
    Committee Investigation of Historical Stock Option
    Practices
  Options Backdating  Which
    Companies are at Risk?
     46




---



##### Table of Contents




    in the case of our former general counsel, he and a former
    member of management participated in intentionally modifying one
    of the former general counsels stock option grants so as
    to create a lower exercise price, and the former general counsel
    failed to disclose this unauthorized change to the board of
    directors prior to late May 2006;
    in some instances, former members of management drafted
    corporate records, including employment documentation, board and
    compensation committee meeting minutes and actions by unanimous
    written consent, with the benefit of hindsight so as to choose
    measurement dates giving more favorable exercise prices,
    moreover, certain of these documents were used by us in making
    accounting determinations with respect to stock-based
    compensation;
    during the course of the investigation, certain former members
    of management did not provide completely accurate or consistent
    information and in one case, provided documentation to the
    special committee that the special committee determined was
    intentionally altered; and
    certain former members of senior management did not display the
    appropriate oversight and tone at the top expected
    by the board of directors.       47




---



##### Table of Contents



Share-Based Payment
  and/or and/or
  Critical
    Accounting Policies and Estimates
        
    restatement of stock-based compensation expense;
    stock-based compensation expense;
    revenue recognition;
    sales incentives and sales returns;
    deferred costs of revenue;
    allowance for doubtful accounts; 48




---



##### Table of Contents




    estimation of restructuring accrual and litigation;
    accounting for income taxes; and
    valuation of goodwill, intangibles and long-lived assets.  Restatement
    of Stock-Based Compensation
  Accounting for Stock Issued
    to Employees Accounting for Certain
    Transactions involving Stock Compensation, an interpretation of
    APB Option No. 25 Accounting for
    Stock-Based Compensation
      
    annual merit grant allocation
    and/or
    approval not complete on the original measurement dates,
    the key terms for a substantial portion of the grants in an
    annual merit grant had been determined with finality prior to
    the original measurement date, with a reduction in the exercise
    price on the original measurement date, which represented a
    repricing,
    original accounting measurement dates prior to approval dates,
    original accounting measurement dates prior to employment
    commencement dates,
    incorrect or inconsistent approval and employment commencement
    date documentation,
    clerical errors in director grants,
    correction of accounting errors, primarily options historically
    accounted for as variable awards, or
    post-employment option modifications previously not recorded.   49




---



##### Table of Contents




    Minutes of Board of Directors, Compensation Committee
    and/or
    delegated committee:  Approved minutes represent
    the best available evidence of grant approval. The investigative
    team was able to validate the occurrence of board of director
    and compensation committee meetings on the stated dates in most
    cases through director payment records, billing records of
    outside legal counsel who attended the meetings or a signature
    on the minutes by external legal counsel.
    Unanimous Written Consents
    (UWCs):  UWCs have an effective date
    that represents the date grants were approved by the
    compensation committee or delegated committee. For compensation
    committee UWCs in 2004 and 2005, we were not able to rely on
    certain UWC effective dates due to other evidence indicating
    that certain grants were approved subsequent to the UWC
    effective date. We were able to locate other evidence to
    determine the approval date of these grants, such as approval
    documentation in emails and evidence of the date UWCs were
    signed. There were no options granted in compensation committee
    UWCs from 2001 through 2003. For UWCs prior to 2001,
    compensation committee members had historically resolved to
    grant options, and such action was then documented in a UWC,
    with the effective date being the date the granting action was
    taken. With the exception of one UWC, no evidence was located
    that contradicted a UWC effective date as the approval date for
    any compensation committee grants prior to 2001. We have
    therefore placed reliance on the compensation committee UWCs
    prior to 2001.
    Option allocations for annual merit
    grants:  Allocations may be evidenced by signed
    and dated hard-copy schedules or electronic spreadsheets that
    list the employees and number of options granted to each
    employee. Email communications to which the electronic
    spreadsheets were attached also provided evidence of the date
    allocations were completed. We were able to validate whether
    allocation schedules were substantially complete by confirming
    individual grants in the allocation files to the actual grants
    reflected in our stock administration database. There were
    minimal changes to allocations after the date we determined that
    they were substantially complete.
    Database Dates:  The database date (DB
    date) indicates the date an option grant was entered into
    the stock administration database. Entry into the stock
    administration database represents the best evidence of a date
    no later than when the grants were determined with finality.      
    System Reports:  These are hard-copy reports
    generated from the stock administration database that have a
    date stamp indicating the date the report was generated. The
    reports list the name, number of options and exercise price of
    the grants. These reports indicate the latest date a grant could
    have been entered into the stock administration database, which
    was useful for grants prior to the June 17, 1998 system
    conversion date.
    Correspondence or other written
    documentation:  Written communication was in the
    form of grant notification letters from the human resource or
    stock administration departments stating the key terms of a
    grant, stock option agreements, employment offer or promotion
    letters stating the number of options to be granted and
    automated email notifications from human resources or our
    third-party broker. Written communication was primarily used to
    corroborate other available evidence used to determine
    measurement dates for annual merit grants, with the assumption
    that communication would not occur until the terms of the grants
    were determined with finality.   50




---



##### Table of Contents



Form 10-K Critical Accounting Policies and
    Estimates Managements Discussion and
    Analysis of Financial Condition and Results of Operations Form 10-K
  Date
    of Execution of UWC
        Annual
    Merit Grants
       51




---



##### Table of Contents



Incorrect
    or Inconsistent Approval and Employment Commencement Date
    Documentation
  and/or
  Lack
    of Approval Documentation
      Communication
    Dates
  i.e.
    Stock-based
    Compensation Expense
   52




---



##### Table of Contents



Years Ended December 31,2006


2005


2004Stock option grants:Risk free interest rate


4.8
%


3.9
%


3.1
%Weighted average expected lives (years)


5.6



4.0



4.0Volatility


37.4
%


54.4
%


62.8
%Dividend yield










ESPP:Risk free interest rate


4.6
%


3.1
%


2.0
%Weighted average expected lives (years)


0.5



1.0



1.3Volatility


38.0
%


40.0
%


47.5
%Dividend yield










        53




---



##### Table of Contents



Revenue
    Recognition
      97-2, Software Revenue Recognition (SOP 97-2), Revenue
    Recognition
    
    persuasive evidence of an arrangement exists,
    the product or service has been delivered,
    the fee is fixed or determinable, and
    collection of the resulting receivable is reasonably assured.      and/or
 54




---



##### Table of Contents



Sales
    Incentives and Sales Returns
      Deferred
    Costs of Revenue
    Allowance
    for Doubtful Accounts
      Estimation
    of Restructuring Accrual and Litigation
  Restructuring Accrual. Accounting for Exit Costs
    Associated With Exit or Disposal Activities
 55




---



##### Table of Contents



Litigation.
  Accounting
    for Income Taxes
        Valuation
    of Goodwill, Intangibles, and Long-lived Assets
  Goodwill and Other Intangible Assets
 56




---



##### Table of Contents



Accounting for
    the Impairment or Disposal of Long-Lived Assets.
      
    significant under performance relative to expected historical or
    projected future operating results;
    significant changes in the manner of our use of the acquired
    assets or the strategy for our overall business;
    significant negative industry or economic trends;
    significant declines in our stock price for a sustained
    period; and
    our market capitalization relative to net book value.   57




---



##### Table of Contents



Results
    of Operations
  Years
    Ended December 31, 2006, 2005 and 2004
  Net
    Revenue
    2006 vs. 2005





2005 vs. 20042006


2005


$


%


2004


$


%(As restated)








(As restated)(Dollars in thousands)Net revenue:Services and support

$
633,658


$
544,477


$
89,181



16
%

$
463,726


$
80,751



17
%Subscription


428,296



318,206



110,090



35



215,817



102,389



47Product


83,204



118,945



(35,741
)


(30
)


228,030



(109,085
)


(48
)Total net revenue

$
1,145,158


$
981,628


$
163,530



17
%

$
907,573


$
74,055



8
%Percentage of total net revenue:Services and support


55
%


56
%










51
%Subscription


38



32











24Product


7



12











25Total net revenue


100
%


100
%










100
%       mid-2003.
   58




---



##### Table of Contents



Net
    Revenue by Geography
    2006 vs. 2005





2005 vs. 20042006


2005


$


%


2004


$


%(As restated)








(As restated)(Dollars in thousands)Net revenue:North America

$
633,222


$
563,651


$
69,571



12
%

$
551,264


$
12,387



2
%EMEA


354,592



282,034



72,558



26



243,392



38,642



16Japan


87,121



75,973



11,148



15



54,160



21,813



40Asia-Pacific, excluding Japan


43,018



38,480



4,538



12



38,866



(386
)


(1
)Latin America


27,205



21,490



5,715



27



19,891



1,599



8Total net revenue

$
1,145,158


$
981,628


$
163,530



17
%

$
907,573


$
74,055



8
%Percentage of total net revenue:North America


55
%


57
%










61
%EMEA


31



29











27Japan


8



8











6Asia-Pacific, excluding Japan


4



4











4Latin America


2



2











2Total net revenue


100
%


100
%










100
%            59




---



##### Table of Contents



Service
    and Support Revenue
    2006 vs. 2005





2005 vs. 20042006


2005


$


%


2004


$


%(As restated)








(As restated)(Dollars in thousands)Net service and support revenue:Support and maintenance

$
610,061


$
520,351


$
89,710



17
%

$
436,873


$
83,478



19
%Consulting and training


23,597



24,126



(529
)


(2
)


26,853



(2,727
)


(10
)Total service and support revenue

$
633,658


$
544,477


$
89,181



16


$
463,726


$
80,751



17
%Percentage of service and support revenue:Support and maintenance


96
%


96
%










94
%Consulting and training


4



4











6Total service and support revenue


100
%


100
%










100
%      60




---



##### Table of Contents



Subscription
    Revenue
    2006 vs. 2005



2005 vs. 20042006

2005

$

%

2004

$

%(As restated)





(As restated)(Dollars in thousands)Total subscription revenue

$
428,296


$
318,206


$
110,090



35
%

$
215,817


$
102,389



47
%       Product
    Revenue
    2006 vs. 2005





2005 vs. 20042006


2005


$


%


2004


$


%(As restated)








(As restated)(Dollars in thousands)Net product revenue:Licenses

$
52,077


$
67,462


$
(15,385
)


(23
)%

$
127,568


$
(60,106
)


(47
)%Hardware


31,367



27,129



4,238



16



72,067



(44,938
)


(62
)Retail and other


(240
)


24,354



(24,594
)


(101
)


28,395



(4,041
)


(14
)Total product revenue

$
83,204


$
118,945


$
(35,741
)


(30
)%

$
228,030


$
(109,085
)


(48
)%Percentage of product revenue:Licenses


63
%


57
%










56
%Hardware


38



23











32Retail and other


(1
)


20











12Total product revenue


100
%


100
%










100
%    61




---



##### Table of Contents



Cost
    of Net Revenue
    2006 vs. 2005





2005 vs. 20042006


2005


$


%


2004


$


%(As restated)








(As restated)(Dollars in thousands)Cost of net revenue:Service and support

$
51,904


$
24,179


$
27,725



115
%

$
26,025


$
(1,846
)


(7
)%Subscription


110,267



63,478



46,789



74



38,484



24,994



65Product


60,957



64,614



(3,657
)


(6
)


74,518



(9,904
)


(13
)Amortization of purchased technology


23,712



17,767



5,945



33



14,887



2,880



19Total cost of net revenue

$
246,840


$
170,038


$
76,802



45


$
153,914


$
16,124



10Components of gross margin:Service and support

$
581,754


$
520,298










$
437,701Subscription


318,029



254,728











177,333Product


22,247



54,331











153,512Amortization of purchased technology


(23,712
)


(17,767
)










(14,887
)Total gross margin

$
898,318


$
811,590










$
753,659Total gross margin percentage


78
%


83
%










83
%   Cost of
    Service and Support Revenue
   62




---



##### Table of Contents



Cost of
    Subscription Revenue
      Cost of
    Product Revenue
      Amortization
    of Purchased Technology
   63




---



##### Table of Contents



Stock-based
    Compensation Expense
    Year EndedDecember 31, 2006Amortization of fair value of options issued to employees

$
30,660Former employees  extension of post-termination
    exercise period


4,326Former executive acceleration


1,419Cash settlement of options


3,066Restricted stock awards and units


16,426Employee Stock Purchase Plan


1,864Total stock-based compensation expense


57,761Deferred tax benefit


(15,672
)Total stock-based compensation expense, after-tax

$
42,089   Amortization of fair value of options issued to
    employees.
  Former employees  extension of post-termination
    exercise period.
  EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own Stock (EITF 00-19).
 64




---



##### Table of Contents



EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock.
  Former executive acceleration.
  Cash settlement of options.
  Restricted stock awards and units.
  Employee Stock Purchase Plan.
 65




---



##### Table of Contents



Year EndedDecember 31, 2006Cost of net revenue  service and support

$
1,968Cost of net revenue  subscription


699Cost of net revenue  product


750Stock-based compensation expense included in cost of net revenue


3,417Research and development


15,042Marketing and sales


24,289General and administrative


15,013Stock-based compensation expense included in operating expense


54,344Total stock-based compensation expense related to stock-based
    equity awards

$
57,761     Years Ended December 31,2005


2004(As restated)


(As restated)Grant date intrinsic value

$
3,873


$
7,031Restricted stock awards


1,078



426Exchange of McAfee.com options


290



6,516Repriced options


(770
)


7,283Former employees






2,759Extended life of vested options of terminated employees






1,148Total stock-based compensation expense


4,471



25,163Deferred tax expense


(1,301
)


(8,800
)Total stock-based compensation expense, after-tax

$
3,170


$
16,363   Grant date intrinsic value.
    Restricted stock awards.
 66




---



##### Table of Contents



Exchange of McAfee.com options.
  Repriced options.
  Former employees.
  Extended life of vested options held by terminated
    employees.
    Years Ended December 31,2004


2005(As restated)


(As restated)Cost of net revenue  service and support

$
14


$
215Cost of net revenue  subscription


36



109Cost of net revenue  product


(5
)


713Stock-based compensation expense included in cost of net revenue


45



1,037Research and development


524



9,538Marketing and sales


1,482



6,703General and administrative


2,420



6,810Loss on sale of assets and technology






84Severance/bonus costs related to Sniffer and Magic dispositions






991Stock-based compensation expense included in operating expense


4,426



24,126Total stock-based compensation expense related to stock-based
    equity awards

$
4,471


$
25,163        67




---



##### Table of Contents



Internal
    Revenue Code Section 409A
    Section 16(a)
    Officers and Directors
    Operating
    Costs
  Research
    and development
    2006 vs. 2005



2005 vs. 20042006

2005

$

%

2004

$

%(As restated)





(As restated)(Dollars in thousands)Research and development(1)

$
193,447


$
176,409


$
17,038



10
%

$
174,872


$
1,537



1
%Percentage of net revenue


17
%


18
%










19
%     (1)
    
    Includes stock-based compensation expense of $15,042, $524 and
    $9,538 in 2006, 2005 and 2004, respectively.         68




---



##### Table of Contents



Marketing
    and sales
    2006 vs. 2005



2005 vs. 20042006

2005

$

%

2004

$

%(As restated)





(As restated)(Dollars in thousands)Marketing and sales(1)


366,454



300,089



66,365



22
%


353,074



(52,985
)


(15
)%Percentage of net revenue


32
%


31
%










39
%     (1)
    
    Includes stock-based compensation expense of $24,289, $1,482 and
    $6,703 in 2006, 2005 and 2004, respectively.      General
    and administrative
    2006 vs. 2005



2005 vs. 20042006

2005

$

%

2004

$

%(As restated)





(As restated)(Dollars in thousands)General and administrative(1)


169,694



123,487



46,207



37
%


145,038



(21,551
)


(15
)%Percentage of net revenue


15
%


13
%










16
%     (1)
    
    Includes stock-based compensation expense of $15,013, $2,420 and
    $6,810 in 2006, 2005 and 2004, respectively.   69




---



##### Table of Contents



Amortization
    of intangibles
    2006 vs. 2005



2005 vs. 20042006

2005

$

%

2004

$

%(As restated)





(As restated)(Dollars in thousands)Amortization of intangibles


10,682



12,834



(2,152
)


(17
)%


14,235



(1,401
)


(10
)%     SEC and
    compliance costs
    Restructuring
    charges
    2006 vs. 2005



2005 vs. 20042006

2005

$

%

2004

$

%(As restated)





(As restated)(Dollars in thousands)Restructuring charges


470



3,782



(3,312
)


(88
)%


17,442



(13,660
)


(78
)%      70




---



##### Table of Contents



In-process
    research and development expense
      Loss
    (gain) on sale of assets and technology
    SEC
    settlement charge
    Reimbursement
    from transition services agreement
    Reimbursement
    Related to Litigation Settlement
    Severance/bonus
    costs related to Sniffer and Magic dispositions
   71




---



##### Table of Contents



Interest
    and Other Income
    2006 vs. 2005



2005 vs. 20042006

2005

$

%

2004

$

%(As restated)





(As restated)(Dollars in thousands)Interest and other income

$
44,397


$
26,703


$
17,694



66
%

$
14,651


$
12,052



82
%         Interest
    and other expenses
    Loss on
    repurchase of convertible debt
    Gain
    (loss) on investments, net
    Provision
    for income taxes
    2006 vs. 2005



2005 vs. 20042006

2005

$

%

2004

$

%(As restated)





(As restated)(Dollars in thousands)Provision for income taxes

$
46,310


$
48,461


$
(2,151
)


(4
)%

$
82,797


$
(34,336
)


(41
)%Effective tax rate


25
%


29
%










27
%    72




---



##### Table of Contents



and/or
    Acquisitions
  Citadel
    Security Software
    Onigma
    Preventsys
    SiteAdvisor
   73




---



##### Table of Contents



Wireless
    Security Corporation
    Foundstone,
    Inc.
    Liquidity
    and Capital Resources
  Years Ended December 31,2006


2005


2004(As restated)


(As restated)(In thousands)Net cash provided by operating activities

$
290,489


$
419,457


$
358,913Net cash (used in) provided by investing activities

$
(452,339
)

$
4,595


$
(39,373
)Net cash (used in) provided by financing activities

$
(197,711
)

$
39,841


$
(369,867
)   Overview
        Operating
    Activities
   74




---



##### Table of Contents



75




---



##### Table of Contents



and/or and/or
    Investing
    Activities
    Years Ended December 31,2006


2005


2004(As restated)


(As restated)Purchase of marketable securities

$
(1,315,407
)

$
(793,581
)

$
(1,243,990
)Proceeds from sale of marketable securities


631,849



669,260



967,866Proceeds from maturites of marketable securities


371,070



226,879



65,536Decrease (increase) in restricted cash


49,989



(50,322
)


19,930Purchase of property and equipment and leasehold improvements


(43,751
)


(28,941
)


(25,374
)Acquisitions, net of cash acquired


(146,089
)


(20,200
)


(84,650
)Proceeds from sale of assets and technology






1,500



261,309Net cash (used in) provided by investing activities

$
(452,339
)

$
4,595


$
(39,373
)   Investments
    Restricted
    Cash
   76




---



##### Table of Contents



Property
    and Equipment
        Acquisitions
        Proceeds
    from Sale of Assets and Technology
     77




---



##### Table of Contents



Financing
    Activities
    Years Ended December 31,2006


2005


2004(As restated)


(As restated)Proceeds from issuance of common stock under stock option plan
    and stock purchase plans

$
32,008


$
108,236


$
113,793Excess tax benefits from stock-based compensation


4,960







Repurchase of common stock


(234,679
)


(68,395
)


(221,816
)Repurchase of convertible debt










(265,623
)Contribution of proceeds from sale of common stock held in trust










3,779Net cash provided by (used in) financing activities

$
(197,711
)

$
39,841


$
(369,867
)   Stock
    Option and Stock Purchase Plans
      Excess
    Tax Benefits from Stock-Based Compensation
    Repurchase
    of Common Stock
   78




---



##### Table of Contents



Redemption
    of Convertible Debt
    Contribution
    of Proceeds from Sale of Common Stock Held in Trust
    Credit
    Facility
    Contractual
    Obligations
    Payments Due by PeriodLess Than


1-3


3-5


More ThanContractual Obligations

Total


1 Year


Years


Years


5 YearsOperating leases(1)

$
85,218


$
17,131


$
27,007


$
21,035


$
20,045Other commitments(2)


12,253



9,196



3,057







Purchase obligations(3)


5,065



5,065











Total

$
102,536


$
31,392


$
30,064


$
21,035


$
20,045     (1)
    
    Operating leases are for office space and office equipment. The
    operating lease commitments above reflect contractual and
    reasonably assured rent escalations under the lease
    arrangements. The majority of our lease contractual obligations
    relate to the following five leases: $40.1 million for the
    Santa Clara, California facility lease, $17.7 million
    for the Slough, United Kingdom facility lease, $4.3 million
    for the Cork, Ireland facility lease, $4.0 million for the
    Bangalore, India facility lease and $3.3 million for the
    Sunnyvale California lease.(2)
    
    Other commitments are minimum commitments on telecom contracts,
    contractual commitments for naming rights and advertising
    services and software licensing agreements and royalty
    commitments associated with the shipment and licensing of
    certain products. 79




---



##### Table of Contents



(3)
    
    We generally issue purchase orders to our contract manufacturers
    with delivery dates from four to six weeks from the purchase
    order date. In addition, we regularly provide such contract
    manufacturers with rolling six-month forecasts of product
    requirements for planning and long-lead time parts procurement
    purposes only. We are committed to accept delivery of materials
    pursuant to our purchase orders subject to various contract
    provisions which allow us to delay receipt of such order or
    allow us to cancel orders beyond certain agreed lead times. Such
    cancellations may or may not include cancellation costs payable
    by us. If we are unable to adequately manage our contract
    manufacturers and adjust such commitments for changes in demand,
    we may incur additional inventory expenses related to excess and
    obsolete inventory.    Off-Balance
    Sheet Arrangements
    Financial
    Risk Management
    Foreign
    Currency Risk
     80




---



##### Table of Contents



December 31,2006Euro

$
201British Pound Sterling


304Brazilian Real


(2
)$
503   Interest
    Rate Risk
  Investments
        Valuation of Securities Given





Valuation of Securities Givenan Interest Rate Decrease of


No


an Interest Rate Increase ofX Basis Points


Change in


X Basis PointsIssuer

150 BPS


100 BPS


50 BPS


Interest Rate


50 BPS


100 BPS


150 BPSU.S. Government notes and bonds

$
236.6


$
236.0


$
235.4


$
234.7


$
234.1


$
233.4


$
232.8Corporate notes and bonds


218.5



217.9



217.2



216.5



215.8



215.1



214.4Asset-backed securities


456.5



454.7



453.0



451.4



449.6



447.9



446.2Mortgaged-backed securities


16.0



16.0



15.9



15.9



15.9



15.9



15.8Non-corporate credit


3.3



3.3



3.3



3.3



3.3



3.3



3.4Total

$
930.9


$
927.9


$
924.8


$
921.8


$
918.7


$
915.6


$
912.6     Valuation of Securities Given





Valuation of Securities Givenan Interest Rate Decrease of


No


an Interest Rate Increase ofX Basis Points


Change in


X Basis PointsIssuer

150 BPS


100 BPS


50 BPS


Interest Rate


50 BPS


100 BPS


150 BPSU.S. Government notes and bonds

$
241.1


$
240.6


$
240.0


$
239.5


$
239.0


$
238.5


$
238.0Corporate notes and bonds


224.1



223.5



223.0



222.4



221.9



221.3



220.7Asset-backed securities


467.0



465.7



464.4



463.1



461.8



460.5



459.2Mortgaged-backed securities


16.4



16.4



16.4



16.4



16.3



16.3



16.3Non-corporate credit


3.4



3.4



3.4



3.4



3.4



3.4



3.4Total

$
952.0


$
949.6


$
947.2


$
944.8


$
942.4


$
940.0


$
937.6  81




---



##### Table of Contents



Interest
    Rate Swap Transactions
  five-day five-day
  Newly
    Adopted and Recently Issued Accounting Pronouncements
    Item 7A.  Quantitative
    and Qualitative Disclosure About Market Risk
    Item 8.
    Financial
    Statements and Supplementary Data  Quarterly
    Operating Results (Unaudited)
  Three Months EndedMarch 31,


December 31,


September 30,


June 30,


March 31,Previously Reported Amounts (See Note 3 to the Consolidated
    Financial Statements)

2006


2005


2005


2005


2005As reported


As reported


As reported


As reportedAs reported(In thousands, except per share data)Statement of Operations and Other Data:Net revenue

$
271,967


$
253,279


$
252,911


$
245,382


$
235,727Gross margin


227,049
(1)


201,270



215,818



208,526



197,070Income from operations


50,205



48,531



15,488



45,989



48,121Income before provision for income taxes


62,139



55,887



22,641



50,573



52,433Net income

$
40,890


$
38,613


$
22,547


$
41,698


$
35,970Basic net income per share

$
0.25


$
0.23


$
0.14


$
0.25


$
0.22Diluted income per share

$
0.25


$
0.23


$
0.13


$
0.25


$
0.21     (1)
    
    The as reported gross margin gives effect to our change in the
    allocation of technical support costs. In 2006, our technical
    support teams devoted proportionately more time to routine
    customer support and less time to product development. In the
    three months ended March 31, 2006, we allocated a greater
    percentage of technical support costs to cost of net revenue and
    a lesser percentage to research and development costs relative
    to prior periods (see note 3 to the consolidated financial
    statements).  82




---



##### Table of Contents



Three Months EndedMarch 31,


December 31,


September 30,


June 30,


March 31,Adjustments to Previously Reported Amounts

2006


2005


2005


2005


2005Adjustments


Adjustments


Adjustments


AdjustmentsAdjustments(In thousands, except per share data)Statement of Operations and Other Data:Net revenue

$
3,281


$
3,282


$
(2,622
)

$
(2,168
)

$
(4,163
)Gross margin


(5,947
)


7,203



(5,311
)


(5,958
)


(7,028
)Income from operations


2,748



4,882



(7,396
)


(8,010
)


(6,198
)Income before provision for income taxes


2,177



5,238



(8,052
)


(6,271
)


(5,771
)Net income

$
3,417


$
632


$
(10,234
)

$
(6,023
)

$
(4,986
)Basic net income per share

$
0.02


$



$
(0.07
)

$
(0.03
)

$
(0.03
)Diluted income per share

$
0.02


$



$
(0.06
)

$
(0.04
)

$
(0.02
)   Three Months EndedDecember 31,


September 30,


June 30,


March 31,


December 31,


September 30,


June 30,


March 31,2006


2006


2006


2006


2005


2005


2005


2005As restated


As restated


As restated


As restated


As restated(In thousands, except per share data)Statement of Operations and Other Data:Net revenue

$
305,241


$
287,063


$
277,606


$
275,248


$
256,561


$
250,289


$
243,214


$
231,564Gross margin


236,204



222,910



218,102



221,102



208,473



210,507



202,568



190,042Income from operations


33,595



36,790



15,690



52,953



53,413



8,092



37,979



41,923Income before provision for income taxes


45,695



50,866



22,904



64,316



61,125



14,589



44,302



46,662Net income

$
32,876


$
34,090


$
26,198


$
44,307


$
39,245


$
12,313


$
35,675


$
30,984Basic net income per share

$
0.21


$
0.21


$
0.16


$
0.27


$
0.23


$
0.07


$
0.22


$
0.19Diluted income per share

$
0.20


$
0.21


$
0.16


$
0.27


$
0.23


$
0.07


$
0.21


$
0.19        83




---



##### Table of Contents



Item 9.
    Changes
    In and Disagreements With Accountants on Accounting and
    Financial Disclosure    Item 9A.  Controls
    and Procedures
  Evaluation
    of Disclosure Controls and Procedures
    Managements
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f) Internal Control 
    Integrated Framework
    Accounting
    for Income Taxes
    Stock
    Administration Process
  Explanatory Note Regarding
    Restatement Form 10-K Restatement of Consolidated
    Financial Statements
   84




---



##### Table of Contents



Changes
    in Internal Control over Financial Reporting
    Remediation
    of Material Weakness in Financial Close
    Process
    Stock Administration Process
    
    Standardization of grant evidence and
    approval:  All grants of stock awards to employees
    are made solely by the compensation committee of our board of
    directors, in its sole discretion, and no authority to grant
    stock awards may be delegated to management.
    Standardization of grant timing:  All grants of
    stock awards to employees are made only at regularly scheduled
    meetings of the compensation committee.
    Changes in our executive management team:  Our
    executive management team has changed significantly over the
    past two years: we terminated the employment of our prior
    general counsel and our prior president for cause, our prior
    chief executive officer retired, and our senior vice president
    of human resources resigned.    
    Accumulation and tracking of stock-based compensation
    expense:  Monitoring and tracking procedures for
    stock-based compensation expense resulting from the stock option
    investigation within a secure controlled directory.
    Processing and reconciliation of stock-based compensation
    expense:  Processes to ensure that all stock-based
    expenses are properly calculated, independently approved and
    reconciled from the database to our stock administration
    accounting system. 85




---



##### Table of Contents




    Independent approval and recording of stock-based
    compensation expense:  Procedures to ensure that
    stock-based compensation expenses are recorded via journal
    entries that are independently approved by corporate accounting
    management and evidenced by complete supporting documentation.  Accounting
    for Income Taxes
    
    We are enhancing the training and education of our tax
    accounting personnel.
    We are automating key elements of the calculation of the
    provision for income taxes and the account reconciliation
    processes by implementing a new tax accounting system.
    We are improving our interim and annual review processes for
    various calculations including the tax provision computation
    process.    Inherent
    Limitation on the Effectiveness of Internal Controls
   86




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
  Internal Control 
    Integrated Framework
          
    The Companys controls over accounting for income taxes did
    not operate effectively as of December 31, 2006. In
    particular, errors were detected in the tax calculations for the
    quarterly and annual financial statements resulting from:
    (1) historical analyses not being prepared in sufficient
    detail; (2) current period tax calculations not being
    accurately prepared, and (3) reviews of tax calculations
    not being performed with sufficient precision. Due to the number
    and amount of the errors identified resulting from these
    internal control deficiencies and the absence of mitigating
    controls, there is a reasonable possibility that a material
    misstatement of the interim and annual financial statements
    would not have been prevented or detected on a timely basis. 87




---



##### Table of Contents




    The Companys controls over recording and disclosure of
    stock-based compensation expense were not properly designed and
    did not operate effectively as of December 31, 2006. These
    internal control deficiencies resulted in errors in
    (i) stock-based compensation expense, additional paid-in
    capital, related income tax accounts and weighted averaged
    diluted shares outstanding and (ii) related financial
    statement disclosures. Due to the errors identified related to
    the stock-based compensation amounts and the absence of
    mitigating controls, there is a reasonable possibility that a
    material misstatement of the interim and annual financial
    statements would not have been prevented or detected on a timely
    basis.    Internal Control  Integrated Framework Internal Control  Integrated Framework
    
  
 88




---



##### Table of Contents



Item 9B.
    Other
    Information  Rule 14a-8 company-sponsored
    PART III
  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Executive
    Officers:
  Name

Age

PositionDavid G. DeWalt


43


Chief Executive Officer and PresidentEric F. Brown


42


Chief Operating Officer and Chief Financial OfficerChristopher S. Bolin


40


Executive Vice President of Product Development and Chief
    Technology OfficerMark D. Cochran


48


Executive Vice President and General CounselMichael P. DeCesare


42


Executive Vice President of Worldwide Sales Operations   Directors:
 Year ofExpiration of

DirectorName

Age

Position

Term

SinceRobert B. Bucknam


56


Vice President, Cogent, Inc.


2008



2003Leslie G. Denend


66


Director, Verifone, Inc. and USAA


2009



1995David G. DeWalt


43


Chief Executive Officer and President


2008



2007Denis J. OLeary


51


Private Investor and Consultant


2007



2003Robert W. Pangia


56


Partner, Ivy Capital Partners, LLC; Director, Biogen Idec Inc.


2007



2001Charles J. Robel


58


Private Investor; Director, Informatica Corporation and Adaptec,
    Inc.


2009



2006Liane Wilson


64


Consultant


2008



2002   Executive
    Biographies
  David G. DeWalt
 89




---



##### Table of Contents



Eric F. Brown e-business
  Christopher S. Bolin
  Mark D. Cochran
  Michael P. DeCesare e-business
  Director
    Biographies
    Robert B. Bucknam
  Leslie G. Denend
 90




---



##### Table of Contents



Denis J. OLeary
  Robert W. Pangia
  Charles J. Robel
  Liane Wilson
  Board of
    Directors and Board Committees
    investor.mcafee.com
  The Audit Committee
  The Compensation Committee
  The Governance and Nominations Committee
 91




---



##### Table of Contents



Section 16(a)
    Beneficial Ownership Reporting Compliance
    Communications
    with the Board of Directors
    Code of
    Ethics
  investor.mcafee.com Form 8-K.
  Item 11.
    Executive
    Compensation  COMPENSATION
    DISCUSSION AND ANALYSIS
  A.
    Executive
    Summary    Eric Brown

Chief Operating Officer and Chief Financial OfficerChristopher Bolin

Executive Vice President of Product Development
    Chief Technology OfficerRoger King

Executive Vice President of Worldwide SalesRichard Decker

Senior Vice President and Chief Information OfficerWilliam Kerrigan

Executive Vice President of McAfee ConsumerFormer ExecutivesDale Fuller

Former Interim Chief Executive Officer and PresidentGeorge Samenuk

Former Chairman and Chief Executive OfficerKevin Weiss

Former President  92




---



##### Table of Contents



and/or
    B.
    Executive
    Compensation Design  1.
    Compensation
    Objectives and Philosophy    
    Attract, reward and retain the most talented and dedicated
    executives available.    
    Link cash and equity incentives to individual and corporate
    performance.
    Align executive incentives with stockholder value creation.    
    Use simple and reasonable measures of performance.
    Minimize executive perquisites.
    For executives in more senior positions, provide cash
    compensation that is primarily weighted toward variable (bonus)
    compensation, which is linked largely to performance.
    For executives in more senior positions, provide total
    compensation that is primarily weighted toward equity (RSU and
    option) compensation  because senior executives have
    a greater influence on overall corporate results and stockholder
    return.
    Use multi-year equity vesting to ensure that senior executives
    hold sufficient unvested equity value to provide a meaningful
    retention incentive.
    Use competitive benchmarking to our group of peer companies
    (described in Section C2).  2.
    Elements
    of Compensation    
    Base salary   93




---



##### Table of Contents




    Annual or quarterly cash bonuses
    Equity compensation in the form of stock options, restricted
    stock units
    and/or
    restricted stock awards.    3.
    Key
    Performance Metrics (KPMs) and Other Performance
    Criteria    
    Financial measures  including revenue-related and
    profit-related metrics
    Strategic positioning  including market share growth
    in key areas
    Executive team quality and depth  including talent
    growth and succession planning
    Product quality  including quality control audits and
    customer satisfaction    
    Leadership style and effectiveness, including teamwork
    Integrity
    Innovation
    Work ethic  4.
    Base
    Salaries    5.
    Cash
    Bonuses  and/or
 94




---



##### Table of Contents



6.
    Equity
    Compensation in General    
    Strengthen the link between the creation of stockholder value
    and long-term executive compensation
    Provide an opportunity for increased equity ownership by
    executives
    Provide long-term retention incentives to executives
    Maintain competitive levels of total direct compensation.    7.
    Options,
    Restricted Stock Units and Restricted Stock Awards       95




---



##### Table of Contents



8.
    Mix of
    Salary, Cash Bonuses and Equity; Total Direct
    Compensation      9.
    Severance
    and Change of Control Arrangements      10.
    Perquisites
    and Other Benefits     96




---



##### Table of Contents



C.
    Executive
    Compensation Implementation  1.
    Independent
    Compensation Committee Determines All Executive
    Compensation    2.
    The
    Role of Compensation Consultants      3.
    The
    Role of Peer Groups, Survey Data and Benchmarking    97




---



##### Table of Contents



Fiscal Year End 2006


Market Cap as of


1-Yr Stockholder


3-Yr StockholderCompany

Annual Revenue


12/31/2006 ($MM)


Return


ReturnMcAfee

$
1,142.3


$
4,534.6



4.6
%


23.6
%Adobe Systems

$
2,575.3


$
24,146.9



2.9
%


1.7
%Autodesk

$
1,537.2


$
9,289.6



(5.8
)%


18.1
%BEA Systems

$
1,199.8


$
4,855.1



33.8
%


0.8
%BMC Software

$
1,498.4


$
6,739.5



57.1
%


20.0
%CIBER

$
995.8


$
418.7



2.7
%


(7.8
)%Citrix Systems

$
1,134.3


$
4,885.0



(5.8
)%


8.5
%Hyperion Solutions(1)

$
765.2



N/A



N/A



N/AIntuit

$
2,342.3


$
10,500.6



14.5
%


4.9
%Mentor Graphics

$
791.6


$
1,506.2



74.4
%


7.4
%Mercury Interactive(2)

$
843.2



N/A



N/A



N/ANovell

$
967.3


$
2,128.8



(29.8
)%


(16.2
)%Parametric Technology

$
854.9


$
2,016.1



18.2
%


22.3
%RSA Security(3)

$
310.1



N/A



N/A



N/ASiebel Systems(4)

$
1,429.1



N/A



N/A



N/ASybase

$
876.2


$
2,254.6



13.0
%


6.3
%Symantec

$
4,143.4


$
21,702.6



19.1
%


6.5
%Synopsys

$
1,095.6


$
3,757.4



33.3
%


(7.6
)%VeriSign

$
1,566.6


$
5,864.4



9.8
%


13.8
%Notes     (1)
    
    Hyperion Solutions was acquired in 2006. Represents fiscal year
    end 2006 revenues (6/30/06 year end).(2)
    
    Mercury Interactive was acquired in 2006. Represents fiscal year
    end 2005 revenues.(3)
    
    RSA Security was acquired in 2006. Represents fiscal year end
    2005 revenues.(4)
    
    Siebel Systems was acquired in 2006. Represents fiscal year end
    2005 revenues.      4.
    Equity
    Grant Practices    not not
  
    Time the release of material non-public information in a manner
    that is intended to affect the value of equity award grants 98




---



##### Table of Contents




    Coordinate equity award grant dates with the public announcement
    of material non-public information, whether positive or negative
    Delay the release of material non-public information until after
    an equity award grant date
    Determine the size of equity awards based on when material
    nonpublic information is announced
    Determine the exercise price of a stock option based on anything
    other than the fair market value of our common stock on the
    grant date (unless otherwise legally required under its
    international equity plans)  D.
    Fiscal
    2006 Executive Compensation Decisions    1.
    Fiscal
    2006 Total Direct Compensation    2.
    Key
    Performance Metrics for Fiscal 2006    Name and Title


Company-Wide KPMs


Executive-Specific KPMsEric BrownChief Operating Officer and
    Chief Financial Officer


  Meet business plan revenue-relatedand profit-related targets
  Ensure progress in development ofour long-term strategy


  Maintain balance sheet strength andliquidity
  Achieve milestones for enhancingfinancial controls environment
  Resolve ongoing SEC investigationChristopher BolinExecutive Vice President of
    Product Development;
    Chief Technology Officer


  Meet business plan revenue-related
    and profit-related targets Ensure
    progress in development of our
    long-term strategy


  Deliver plans to build newtechnology to ensure competitivedifferentiation
  Deliver best of breed quality results
  Provide specific strategic optionsto address evolving marketplacecompetition 99




---



##### Table of Contents



Name and Title


Company-Wide KPMs


Executive-Specific KPMsRoger KingExecutive Vice President of
    Worldwide Sales


N/A  see below


N/A  see belowRichard DeckerSenior Vice President and
    Chief Information Officer


  Meet business plan revenue-related
    and profit-related targets Ensure
    progress in development of our
    long-term strategy


  Optimize network and processinginfrastructure
  Achieve SAP and other applicationmilestones for enhancing financialcontrols environment and improvingoperating effectiveness.
  Provide CIO support for SECinvestigation teamWilliam KerriganExecutive Vice President of
    McAfee Consumer


  Meet business plan revenue-relatedand profit-related targets
  Ensure progress in development ofour long-term strategy


  Achieve consumer segment financialobjectives
  Grow consumer market shareFormer ExecutivesDale FullerFormer Interim Chief Executive
    Officer and President


N/A  see discussion below


N/A  see discussion belowGeorge SamenukFormer Chairman and Chief Executive Officer


  Meet business plan revenue-relatedand profit-related targets
  Ensure progress in development ofour long-term strategy
  Communicate effectively withcustomers, investors, employees andregulators


  Achieve milestones for enhancingfinancial and operating controlsenvironment
  Resolve ongoing SEC investigation
  Work closely with board on all important aspects of McAfee development and status
  Continue to develop executive team     3.
    Equity
    Grants in Fiscal 2006  and/or
  4.
    Compensation
    for Eric Brown   100




---



##### Table of Contents



5.
    Compensation
    for Christopher Bolin  Sections B3-B8
  6.
    Compensation
    for Roger King  Sections B3-B8
  7.
    Compensation
    for Richard Decker  Sections B3-B8
  8.
    Compensation
    for William Kerrigan  Sections B3-B8
  9.
    Compensation
    for Dale Fuller   101




---



##### Table of Contents



10.
    Compensation
    for George Samenuk      11.
    Compensation
    for Kevin Weiss  Sections B3-B8
 102




---



##### Table of Contents



E.
    Subsequent
    Executive Compensation Program Changes    
    Revised the terms of executive employment agreements to conform
    to best practices as identified by Watson Wyatt, an executive
    compensation consulting firm that the compensation committee
    retained to provide advice regarding best practices for
    executive compensation arrangements.
    Refined our stock option-granting practices to, among other
    things:  1.
    Aggregate all new-hire, promotional and retention grants for
    approval on predetermined dates (typically once per quarter
    following our earnings announcements);      4.
    Retained Compensia to perform a comprehensive analysis of
    director compensation, and implemented changes to director
    compensation based on Compensias recommendations.  
    Introduced performance-based vesting for restricted stock units
    granted to our new CEO, Dave DeWalt, who joined our company in
    April 2007.
    Eliminated all of our fractional ownership interests in
    corporate aircraft, such that all our executives are required to
    travel on commercial carriers.  F.
    Tax,
    Accounting and Other Considerations  General. Explanatory Note Regarding
    Restatement
  Tax Deductibility of Compensation
    Expense.
  does
    Tax Implications for Executives.
 103




---



##### Table of Contents



Explanatory Note Regarding
    Restatement
    Accounting Considerations.
  Forfeiture of Executive Compensation.
  Compensation
    Committee Report on Compensation Discussion and
    Analysis
    Form 10-K
  
  
  Compensation
    Committee Interlocks and Insider Participation
   104




---



##### Table of Contents



SUMMARY
    COMPENSATION TABLE
    Stock


Option


All OtherName and Principal Position

Year


Salary(1)


Bonus(4)


Awards(5)


Awards(5)


Compensation(6)


TotalEric Brown


2006



540,930



941,250



1,515,722



1,153,091



129,245



4,280,238Chief operating officer and chief financial officerChristopher Bolin


2006



440,363



249,750



836,885



482,660



5,368



2,015,026Executive vice president of product development and chief
    technology officerRoger King


2006



100,000



100,000



77,182



57,919



656



335,757Executive vice president of worldwide salesRichard Decker


2006



397,732



218,400



322,189



408,378



7,048



1,353,747Senior vice president and chief information officerWilliam Kerrigan


2006



427,996



211,200



322,189



418,489



8,708



1,388,582Executive vice president of McAfee consumerFormer Executive OfficersDale Fuller


2006



329,807



217,500







166,056



245,155



958,518Former interim chief executive officer and presidentGeorge Samenuk


2006



787,629
(2)


1,046,712







2,784,661



4,691,443



9,310,445Former chairman and chief executive officerKevin Weiss


2006



495,007
(3)


450,000







300,109



24,706



1,269,822Former president     (1)
    
    Salary includes amounts deferred under our 401(k) Plan.(2)
    
    Includes $99,585 paid for unused vacation.(3)
    
    Includes $77,135 paid for unused vacation.(4)
    
    Amounts in this column reflect bonus payments earned in 2006,
    although some amounts were paid in 2007.(5)
    
    The compensation amounts reported in the Stock
    Awards and Option Awards columns reflect the
    expense that we reported in our consolidated 2006 financial
    statements under SFAS 123(R), except that the amounts of
    expense reported in our financial statements are net of
    estimated forfeitures, while the amounts shown in the table are
    gross of estimated forfeitures. These amounts consist of the
    fair value expense for all existing share-based awards that
    vested during the year 2006. For this purpose, the fair value of
    an award is apportioned over the period during which the award
    is expected to vest. The fair value of a stock award is equal to
    the closing price of our stock on the grant date. The fair value
    of an option award is determined using the Black-Scholes option
    pricing model. Our assumptions for financial statement purposes
    are described in Note 16 to our consolidated financial
    statements included for the year ended December 31, 2006. 105




---



##### Table of Contents



(6)
    
    All other compensation consisted of the following:  Gifts,


Group TermNon-Business


Family Travel


Life


Supplemental


CompanyCommuting


Living


Aircraft


and Matching


Insurance


Company-Paid


Contributions


COBRAName

Year


Expense


Allowance


Usage


Gifts(1)


Coverage


Life Insurance


To 401(k)


InsuranceEric Brown


2006


$
54,609


$



$
36,030


$
1,981


$
1,140


$



$
2,292


$
Christopher Bolin


2006















568



1,026







3,600



Roger King


2006



















656











Richard Decker


2006















3,255



2,622











William Kerrigan


2006















2,039



2,622







3,600



Dale Fuller


2006



3,181



30,214



108,090







428











George Samenuk


2006











7,109



3,657



2,076



17,760



3,600



1,805Kevin Weiss


2006



15,457











2,628



2,076







3,600



   PaymentUnderSeparation


Director


TaxName

Year


Agreement


Fees


Gross-ups(2)


TotalEric Brown


2006


$



$



$
33,193


$
129,245Christopher Bolin


2006











174


$
5,368Roger King


2006














$
656Richard Decker


2006











1,171


$
7,048William Kerrigan


2006











447


$
8,708Dale Fuller


2006







83,500



19,742


$
245,155George Samenuk


2006



4,622,412
(3)






33,024


$
4,691,443Kevin Weiss


2006











945


$
24,706     (1)
    
    Represents the cost of spousal travel to McAfee events, the cost
    of token gifts received at McAfee events and company-matching
    charitable contributions.(2)
    
    The tax
    gross-up
    payments disclosed in this column relate to taxes imposed on our
    reimbursements of living and commuting expenses (in the case of
    Mr. Fuller and Mr. Brown), taxes imposed on token
    gifts received at McAfee events and the cost of spousal travel
    to McAfee events (in the case of Mr. Bolin,
    Mr. Decker, Mr. Kerrigan, and Mr. Weiss), and
    taxes imposed on life insurance, token gifts received at McAfee
    events and the cost of spousal travel to McAfee events (in the
    case of Mr. Samenuk).(3)
    
    Represents cash payment of $1,046,712, a pro-rated target bonus
    that Mr. Samenuk was due under his employment agreement
    upon termination of his employment for any reason, and an
    additional cash payment of $3,575,700, which was equal to 80% of
    the amount, computed as two times his annual base salary plus
    target bonus, that Mr. Samenuk was entitled to under the
    terms of his pre-existing employment agreement. Mr. Samenuk
    received nothing more than he would have been entitled to under
    the terms of his pre-existing employment agreement with us. 106




---



##### Table of Contents



GRANTS OF
    PLAN-BASED AWARDS
    All OtherAll Other


StockStock


Awards:Awards:


Number of





Grant Date FairNumber of


Securities


Exercise or Base


Value ofShares of Stock


Underlying


Price of Option


Stock and OptionName and Principal Position

Grant Date


or Units(1)


Options(2)


Awards


Awards(5)Eric Brown


03/07/2006



125,000











2,952,500Chief operating officer
    and chief financial
    officerChristopher Bolin


03/07/2006



50,000











1,181,000Executive vice president
    of product development
    and chief technology
    officerRoger King


10/10/2006







100,000
(3)

$
25.79



1,031,950Executive vice president


10/10/2006of worldwide salesRichard Decker


03/07/2006



50,000











1,181,000Senior vice president
    and chief information
    officerWilliam Kerrigan


03/07/2006



50,000











1,181,000Executive vice president
    of McAfee consumerFormer Executive OfficersDale Fuller


01/20/2006







50,000
(4)

$
26.92



567,235Former interim chief
    executive officer and
    presidentGeorge Samenuk


03/22/2006



250,000











6,317,500Former chairman and
    chief executive officerKevin Weiss


03/07/2006



150,000











3,543,000Former president     (1)
    
    Restricted stock units vest 50% two years from the grant date
    and 50% three years from the grant date. The restricted stock
    unit grants made to executives in 2006 were intended to serve as
    equity compensation for both 2006 and 2007; no restricted stock
    unit grants were made to these named executives in 2007.(2)
    
    All options in this column were granted at an exercise price per
    share equal to the fair market value of the common stock on the
    date of grant.(3)
    
    Option grant vests at the rate of one-fourth (or 25%) one year
    from the date of grant and the remaining shares vest at a rate
    of 1/36th per month for the remaining 36 months of the
    vesting period. Under the 1997 Stock Incentive Plan, the board
    of directors is allowed to modify the terms of outstanding
    options. The exercisability of options may be accelerated upon a
    change of control. Options are cancelled on an optionees
    termination of employment under certain specified circumstances.(4)
    
    Initial option grant upon becoming an outside director on our
    board. Option vests one-third each year over three years from
    the date of grant. 107




---



##### Table of Contents



(5)
    
    The grant date fair value of stock and option awards column
    reflects the expense that we would expense in our financial
    statement over the awards vesting schedule. The fair value
    of a stock award is equal to the closing price of our stock on
    the grant date. The fair value of an option award is determined
    using the Black-Scholes option pricing model. Our assumptions
    for financial statement purposes are described in Note 16
    to our consolidated financial statements included for the year
    ended December 31, 2006.  OUTSTANDING
    EQUITY AWARDS AT FISCAL YEAR-END
    Option Awards


Stock AwardsNumber of








Number of


Market ValueSecurities Underlying


Option


Option


Shares or Units


of Shares orUnexercised Options(1)


Exercise


Expiration


of Stock That


Units of Stock ThatName

Exercisable


Unexercisable


Price


Date


have not Vested


have not VestedEric Brown


143,750



156,250



28.42



01/03/2015







Chief operating officer and chief financial officer


















50,000
(3)


1,419,000















125,000
(4)


3,547,500Christopher Bolin


5,000







11.06



04/20/2009







Executive vice president of product development and chief
    technology officer


10,000







11.06



10/01/2008







2,896







11.06



04/17/2007







869







11.06



07/30/2007







10,000







16.94



01/24/2010







4,500







24.56



05/09/2010







20,000







21.13



07/03/2010







72,500







4.19



02/12/2011







40,000







25.43



04/09/2012







34,271



729



16.90



04/08/2013







21,875



8,125



14.96



04/13/2014







48,438



26,562



16.57



07/21/2014







33,333



46,667



21.61



04/19/2015























33,333
(3)


945,991















50,000
(4)


1,419,000Roger King






100,000



25.79



10/10/2016







Executive vice president of worldwide sales


















40,000
(4)


1,135,200Richard Decker


28,333



51,667



28.81



07/26/2015







Senior vice president and chief information officer


















50,000
(4)


1,419,000William Kerrigan


4,167







14.41



10/08/2012







Executive vice president of McAfee consumer


3,126



521



16.90



03/24/2013







2,085



2,917



12.83



10/14/2013







9,376



26,562



16.57



07/21/2014







27,083



37,917



21.61



04/19/2015























50,000
(4)


1,419,000Former Executive OfficersDale Fuller






50,000
(2)


26.92



01/20/2016







Former interim chief executive officer and presidentGeorge Samenuk


420,000







27.19



02/06/2007
(5)






Former chairman and chief executive officer


400,000







18.20



02/06/2007
(5)






165,000







16.75



02/06/2007
(5)






250,000







21.61



02/06/2007
(5)






Kevin Weiss


94,792







15.89



01/08/2007







Former president


79,167







14.60



01/08/2007







70,833







17.00



01/08/2007







60,417







16.75



01/08/2007







35,417







21.61



01/08/2007







     (1)
    
    All options in these columns (except Dale Fullers options
    outstanding) vest at the rate of one-fourth (or 25%) one year
    from the date of grant and the remaining shares vest at a rate
    of 1/36th per month for the remaining 108




---



##### Table of Contents



36 months of the vesting period. Under the 1997 Stock
    Incentive Plan, the board of directors is allowed to modify the
    terms of outstanding options. The exercisability of options may
    be accelerated upon a change of control. Options are cancelled
    on an optionees termination of employment under certain
    specified circumstances. See footnote (2) below for the
    vesting schedule for Dale Fullers option grant.(2)
    
    Initial option grant upon becoming an outside director on our
    board. Option vests one-third each year over three years from
    the date of grant.(3)
    
    Vests one-third each year over three years from the date of
    grant.(4)
    
    Vests 50% two years from the grant date and 50% three years from
    the grant date.(5)
    
    These stock options held by Mr. Samenuk were extended for a
    brief period to February 6, 2007 (they would otherwise have
    expired on January 8, 2007). In connection with our
    entering into a separation agreement and release of claims with
    Mr. Samenuk on February 6, 2007, all of these stock
    options expired unexercised as of such date.(6)
    
    On November 13, 2007, we took action to pursue a bilateral
    agreement to amend certain stock option agreements held by
    Mr. Kerrigan and which have been determined to have been
    issued with exercise prices below the fair market value of the
    underlying shares of common stock on the date of the grant to
    increase the exercise price of those options to the fair market
    value of the underlying shares of common stock on each
    options revised measurement date for financial accounting
    purposes. On that same date, we amended the terms of vested
    stock options granted to certain current and former employees
    (including Mr. Kerrigan) that would expire pursuant to
    their terms on or before December 31, 2007 to extend the
    post-termination exercise period for such stock options until
    the ninetieth (90th) calendar day after such time as the we
    become current in our reporting obligations.  OPTIONS
    EXERCISED AND STOCK VESTED
    Option Awards


Stock AwardsNumber of


Value


Number of


ValueShares Acquired


Realized


Shares Acquired


RealizedName and Principal Position

on Exercise


on Exercise(1)


on Vesting


on VestingEric Brown










25,000



677,250Chief operating officer and chief financial officerChristopher Bolin










16,667



353,174Executive vice president of product development and chief
    technology officerRoger King














Executive vice president of worldwide salesRichard Decker














Senior vice president and chief information officerWilliam Kerrigan


28,955



285,269







Executive vice president of McAfee consumerFormer Executive OfficersDale Fuller














Former interim chief executive officer and presidentGeorge Samenuk


260,000



3,750,363
(2)






Former chairman and chief executive officerKevin Weiss














Former president     (1)
    
    Equal to the difference between the market price of the
    underlying shares at the time of exercise and the exercise price.(2)
    
    Realized from the sale of shares of company stock during
    February and April of 2006. 109




---



##### Table of Contents



Severance
    and Change of Control Benefits
             110




---



##### Table of Contents



InvoluntaryTermination for


Termination for








Termination UponCause


Good Reason


Death


Disability


Change in ControlEric F. BrownBase salary and cash bonus

$
1,150,000


$
1,150,000


$
1,150,000


$
1,150,000


$
1,150,000Equity

$
1,419,000


$
1,419,000


$
1,419,000


$
1,419,000


$
1,419,000Healthcare and other
    insurance benefits

$
11,727


$
11,727


$
11,727


$
11,727


$
11,727Tax gross ups

$



$



$



$



$
Christopher BolinBase salary and cash bonus

$
720,000


$
720,000


$
720,000


$
720,000


$
720,000Equity

$



$



$



$



$
1,692,696Healthcare and other
    insurance benefits

$
5,863


$
5,863


$
5,863


$
5,863


$
5,863Tax gross ups

$



$



$



$



$
William Kerrigan(1)Base salary and cash bonus

$
352,000


$
352,000


$
352,000


$
352,000


$
352,000Equity

$



$



$



$



$
621,736Healthcare and other
    insurance benefits

$
5,863


$
5,863


$
5,863


$
5,863


$
5,863Tax gross ups

$



$



$



$



$
     (1)
    
    Mr. Kerrigan retired from McAfee in July 2007. He did not
    receive any severance or change in control benefits in
    connection with his departure. 111




---



##### Table of Contents



Compensation
    of Directors
    
    $40,000 annual retainer, payable in quarterly installments (an
    additional $10,000 annual retainer, payable in quarterly
    installments, is paid to our lead independent director and the
    chairpersons of our standing board committees);
    $1,500 for each board and board committee meeting attended in
    person;
    $1,000 (reduced from $1,500 in March 2006) for each board
    and board committee meeting attended by telephone;
    expenses of attending board and committee meetings; and
    medical insurance benefits for directors and their families.        DIRECTOR
    COMPENSATION
    Fees Earned








All OtherName

or Paid in Cash


Stock Awards


Option Awards(1)


Compensation


TotalRobert Bucknam

$
126,000


$



$
233,234






$
359,234Leslie Denend


69,000







231,203







300,203Robert Dutkowsky


96,000







230,842







326,842Denis OLeary


91,000







227,385







318,385Robert Pangia


96,000







230,842







326,842Charles Robel


92,000







77,505







169,505Liane Wilson


88,500







221,362







309,862     (1)
    
    The compensation amounts reported in the Option
    Awards column reflect the expense that we reported in our
    consolidated 2006 financial statements under SFAS 123(R),
    except that the amounts of expense reported in our financial
    statements are net of estimated forfeitures, while the amounts
    shown in the table are gross of estimated forfeitures. These
    amounts consist of the fair value expense for all existing
    share-based awards that vested 112




---



##### Table of Contents



during the year 2006. For this purpose, the fair value of an
    award is apportioned over the period during which the award is
    expected to vest. The fair value of a stock award is equal to
    the closing price of our stock on the grant date. The fair value
    of an option award is determined using the Black-Scholes option
    pricing model. Our assumptions for financial statement purposes
    are described in Note 16 to our consolidated financial
    statements included for the year ended December 31, 2006.  Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Number of





Percent ofShares


Right to


OutstandingName and Address of Beneficial Owners

Owned(1)


Acquire(2)


Shares(3)David DeWalt










*Robert Bucknam






70,000



*Leslie Denend


6,297



85,000



*Dale Fuller






16,668



*Robert Pangia






102,500



*Denis OLeary






70,000



*Charles Robel






13,334



*Liane Wilson






90,000



*Eric Brown


61,347
(4)


225,000



*Christopher Bolin


38,184
(5)


350,750



*Richard Decker






50,000



*Roger King






31,250



*William Kerrigan






71,255



*J&W Seligman & Co. LLC(6)


12,732,080







8.0
%100 Park Avenue, New York City, New York 10017Lord, Abbett & Co. LLC(7)


12,754,212







8.0
%90 Hudson Street, Jersey City, NJ 07302Wellington Management Company, LLP(8)


18,885,761



75 State Street, Boston, MA 02109All executive officers and directors as a group (13 persons)


105,828



1,087,834



*     *
    
    Less than 1%.(1)
    
    Ownership includes direct and indirect (beneficial) ownership,
    as defined by SEC rules. To our knowledge, each person has sole
    voting and investment power over the shares unless otherwise
    noted. The SEC rules for the determination of beneficial
    ownership are very complex. Generally, however, shares owned
    directly, plus those controlled (e.g., owned by members of their
    immediate families), are considered beneficially owned. Excludes
    shares that may be acquired through stock option exercises.
    Unless otherwise indicated, the address of each beneficial owner
    is c/o. McAfee, Inc., 3965 Freedom Circle, Santa Clara, CA
    95054.(2)
    
    Consists of options that are currently exercisable or will
    become exercisable within 60 days of December 1, 2007.(3)
    
    Based upon 159,908,615 shares outstanding as of
    December 1, 2007.(4)
    
    Includes 25,000 shares of restricted stock issued to
    Mr. Brown that will vest in January 2008.(5)
    
    Includes 16,666 shares of restricted stock issued to
    Mr. Bolin that will vest in August 2008. 113




---



##### Table of Contents



(6)
    
    According to the Schedule 13G filed on February 13,
    2007 by J&W Seligman & Co. LLC (J&W
    Seligman). J&W Seligman is the beneficial holder of
    12,732,080 shares of our common stock. J&W Seligman
    does not have sole dispositive power or sole voting power over
    any shares.(7)
    
    According to the amended Schedule 13G filed on
    February 14, 2007 by Lord, Abbett & Co. LLC
    (Lord Abbett). Lord Abbett is the beneficial holder
    of 12,754,212 shares of our common stock. Lord Abbett has
    sole dispositive power over 12,754,212 shares and has sole
    voting power with respect to 12,320,912 shares.(8)
    
    According to the Schedule 13G filed on August 10, 2007
    by Wellington Management Company, LLP (Wellington
    Management). Wellington Management is the beneficial
    holder of 18,885,761 shares of our common stock. UBS AG has
    sole dispositive power and sole voting power over none of the
    shares.  Equity
    Compensation Plans
    Number ofSecuritiesNumber of





Remaining AvailableSecurities to be





for Future IssuanceIssued Upon


Weighted-Average


(ExcludingExercise of


Exercise Price of


Securities ReflectedPlan Category

Outstanding Options


Outstanding Options


in First Column)Plans approved by stockholders(1)


12,411,309


$
21.13



5,483,399Plans not approved by stockholders


1,488,702


$
17.74



379,699     (1)
    
    All option grants pursuant to the 1993 Stock Option Plan for
    Outside Directors, or the Directors Plan, have ten-year terms
    and are required to be granted at 100% of fair market value on
    the date of grant. The companys other option plans do not
    have this restriction. As of December 31, 2006,
    756,875 shares were outstanding under the Directors Plan at
    a weighted average exercise price of $18.78, and
    807,185 shares remained available for future issuance.    2000
    Nonstatutory Stock Option Plan
    1999
    Nonstatutory Stock Plan
   114




---



##### Table of Contents



1997
    Non-Officer Stock Plan
    Foundstone,
    Inc. 2000 Stock Plan
    Item 13.
    Certain
    Relationships and Related Transactions     115




---



##### Table of Contents



Form 10-K.
  Item 14.
    Principal
    Accountant Fees and Services    Years Ended December 31,2006


2005(In thousands)Audit fees(1)

$
9,046


$
5,610Audit-related fees(2)


4



8Tax fees(3)


505



2,391Other fees(4)


2



2Total

$
9,557


$
8,011     (1)
    
    Audit fees related to the audit of our consolidated annual
    financial statements, the audit of managements assessment
    of our internal control over financial reporting and
    D&Ts own audit of our internal control over financial
    reporting, work related to our restatement, review of the
    consolidated financial statements included in our quarterly
    reports on
    Form 10-Q,
    statutory audits for foreign entities and securities filings.(2)
    
    Audit-related fees for assurance services and services related
    to our audits and reviews of our consolidated financial
    statements which are not considered audit fees.(3)
    
    Fees for tax related services, including compliance, planning
    and tax advice.(4)
    
    Fees for subscription to online accounting research tool.   116




---



##### Table of Contents



PART IV
  Item 15.
    Exhibits
    and Financial Statement Schedules  Consolidated Financial Statements
  PageNumberReport of Independent Registered Public
    Accounting Firm


118Consolidated Balance Sheets:
    December 31, 2006 and 2005 (Restated)


119Consolidated Statements of Income and
    Comprehensive Income:
    Years ended December 31, 2006, 2005 (Restated) and 2004
    (Restated)


120Consolidated Statements of Stockholders
    Equity:
    Years ended December 31, 2006, 2005 (Restated) and 2004
    (Restated)


121Consolidated Statements of Cash Flows:
    Years ended December 31, 2006, 2005 (Restated) and 2004
    (Restated)


122Notes to Consolidated Financial Statements


124   Consolidated Financial Statement Schedule
  Form 10-K
      Exhibits
 117




---



##### Table of Contents



REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
                118




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2006


2005(As restatedsee note 3)(In thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents

$
389,627


$
728,592Restricted cash






50,489Short-term marketable securities


215,722



316,298Accounts receivable, net of allowance for doubtful accounts of
    $2,015 and $2,389, respectively


170,855



159,130Prepaid expenses and prepaid taxes


132,203



79,132Deferred income taxes


236,310



204,208Other current assets


31,915



28,490Total current assets


1,176,632



1,566,339Long-term marketable securities


634,820



212,131Restricted cash


950



939Property and equipment, net


91,999



85,692Deferred income taxes


228,103



237,970Intangible assets, net


113,574



80,086Goodwill


530,477



437,488Other assets


23,715



15,589Total assets

$
2,800,270


$
2,636,234LIABILITIESCurrent liabilities:Accounts payable

$
35,652


$
34,678Accrued SEC settlement






50,000Accrued income taxes


118,589



76,740Accrued compensation


62,913



55,781Other accrued liabilities


108,418



85,460Deferred revenue


704,807



575,665Total current liabilities


1,030,379



878,324Deferred revenue, less current portion


192,718



176,141Accrued taxes and other long-term liabilities


149,924



147,128Total liabilities


1,373,021



1,201,593Commitments and contingencies (Notes 11, 12 and 20)STOCKHOLDERS EQUITYPreferred stock, $0.01 par value:Authorized: 5,000,000 shares; Issued and outstanding: none
    in 2006 and 2005






Common stock, $0.01 par value:Authorized: 300,000,000 shares; Issued:
    172,512,046 shares at December 31, 2006 and
    170,453,210 shares at December 31, 2005Outstanding: 159,915,439 shares at December 31, 2006
    and 167,688,210 shares at December 31, 2005


1,726



1,705Treasury stock, at cost: 12,596,607 shares at
    December 31, 2006 and 2,765,000 shares at
    December 31, 2005


(303,074
)


(68,395
)Additional paid-in capital


1,527,843



1,443,743Deferred stock-based compensation






(8,146
)Accumulated other comprehensive income


31,472



33,923Retained earnings


169,282



31,811Total stockholders equity


1,427,249



1,434,641Total liabilities and stockholders equity

$
2,800,270


$
2,636,234    119




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF INCOME
    AND COMPREHENSIVE INCOME
  Years Ended December 31,2006


2005


2004(As restated


(As restatedsee note 3)


see note 3)(In thousands, except per share data)Net revenue:Service and support

$
633,658


$
544,477


$
463,726Subscription


428,296



318,206



215,817Product


83,204



118,945



228,030Total net revenue


1,145,158



981,628



907,573Cost of net revenue:Service and support


51,904



24,179



26,025Subscription


110,267



63,478



38,484Product


60,957



64,614



74,518Amortization of purchased technology


23,712



17,767



14,887Total cost of net revenue


246,840



170,038



153,914Operating costs:Research and development


193,447



176,409



174,872Marketing and sales


366,454



300,089



353,074General and administrative


169,694



123,487



145,038Amortization of intangibles


10,682



12,834



14,235SEC and compliance costs


17,824







Restructuring charges


470



3,782



17,442In-process research and development


460



4,000



Loss (gain) on sale of assets and technology


259



(56
)


(240,336
)SEC settlement charge






50,000



Reimbursement from transition services agreement






(362
)


(5,997
)Reimbursement related to litigation settlement










(24,991
)Severance/bonus costs related to Sniffer and Magic disposition










10,070Total operating costs


759,290



670,183



443,407Income from operations


139,028



141,407



310,252Interest and other income


44,397



26,703



14,651Interest and other expenses










(5,315
)Loss on repurchase of convertible debt










(15,070
)Gain (loss) on investments, net


356



(1,432
)


(1,704
)Income before provision for income taxes


183,781



166,678



302,814Provision for income taxes


46,310



48,461



82,797Net income

$
137,471


$
118,217


$
220,017Other comprehensive income:Unrealized gains (losses) on marketable securities, net of
    reclassification adjustment for gains (losses) recognized on
    marketable securities during the period and income tax

$
1,344


$
(638
)

$
(2,129
)Foreign currency translation (loss) gain


(3,795
)


3,811



(1,802
)Comprehensive income

$
135,020


$
121,390


$
216,086Net income per share  basic

$
0.85


$
0.72


$
1.37Net income per share  diluted

$
0.84


$
0.70


$
1.28Shares used in per share calculation  basic


160,945



165,042



160,510Shares used in per share calculation  diluted


163,052



169,249



177,385    120




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
  Accumulated


RetainedAdditional


Deferred


Other


Earnings


TotalCommon Stock


Treasury Stock


Paid-In


Stock-Based


Comprehensive


(Accumulated


StockholdersShares


Amount


Shares


Amount


Capital


Compensation


Income


Deficit)


Equity(In thousands)Balances, December 31, 2003, as reported


161,722


$
1,621



350


$
(4,707
)

$
1,087,625


$
(598
)

$
34,027


$
(229,879
)

$
888,089Cumulative effect of restatements(See Note 3)


















106,196



(14,433
)


654



(76,544
)


15,873Balances, December 31, 2003 (As restated)


161,722



1,621



350



(4,707
)


1,193,821



(15,031
)


34,681



(306,423
)


903,962Issuance of common stock upon exercise of stock options


9,152



92











105,638















105,730Issuance of common stock from Employee Stock Purchase Plan


775



8











8,055















8,063Issuance of common stock upon exercise of warrants


184



2











(2
)














Issuance of common stock upon conversion of debt


4,616



46











83,364















83,410Repurchase of common stock


(12,623
)






12,623



(221,816
)


















(221,816
)Retirement of treasury stock






(130
)


(12,973
)


226,523



(226,393
)














Deferred stock-based compensation


















10,814



(10,814
)










Shares returned from trust


(1,560
)


(16
)










16















Amortization of deferred stock-based compensation and other
    stock-based compensation expense


















5,497



19,666











25,163Cash payable in excess of exercise price related to exchange of
    McAfee.com options


















(3,154
)














(3,154
)Contribution of proceeds from sale of common stock held in trust


















3,779















3,779Tax benefits from exercise of non-qualified stock options


















53,213















53,213Stock options issued in connection with acquisition


















7,039



(2,252
)










4,787Release of tax contingency related to acquisition accounted for
    as a pooling of interests


















27,019















27,019Foreign currency translation


























(1,802
)






(1,802
)Net decrease in unrealized gains on investment


























(2,129
)






(2,129
)Net income






























220,017



220,017Balances, December 31, 2004 (As restated) (See Note 3)


162,266



1,623











1,268,706



(8,431
)


30,750



(86,406
)


1,206,242Issuance of common stock upon exercise of stock options


7,212



72











96,647















96,719Issuance of common stock from Employee Stock Purchase Plan


790



8











11,465















11,473Issuance of restricted stock


185



2



























2Repurchase of common stock


(2,765
)






2,765



(68,395
)


















(68,395
)Deferred stock-based compensation


















5,035



(5,035
)










Amortization of deferred stock-based compensation and other
    stock-based compensation expense


















(849
)


5,320











4,471Cash payable in excess of exercise price related to exchange of
    McAfee.com options


















(1,704
)














(1,704
)Contribution of proceeds from sale of common stock held in trust


















42















42Tax benefits from exercise of non-qualified stock options


















25,563















25,563Release of tax contingency related to acquisition accounted for
    as a pooling of interests


















38,838















38,838Foreign currency translation


























3,811







3,811Net increase in unrealized losses on investment


























(638
)






(638
)Net income






























118,217



118,217Balances, December 31, 2005, (As restated)(See Note 3)


167,688



1,705



2,765



(68,395
)


1,443,743



(8,146
)


33,923



31,811



1,434,641Issuance of common stock upon exercise of stock options


1,634



16











25,354















25,370Issuance of common stock from Employee Stock Purchase Plan


395



4











6,795















6,799Interest on Employee Stock Purchase Plans due to restrictions on
    share issuance


















(164
)














(164
)Issuance of restricted stock


30



1



























1Repurchase of common stock


(9,812
)






9,812



(234,679
)


















(234,679
)Forfeiture of restricted stock awards


(20
)






20























Reclassification of deferred compensation into additional
    paid-in capital due to adoption of FAS 123(R)


















(8,146
)


8,146











Stock-based compensation


















50,369















50,369Stock options related to option extension


















4,326















4,326Cash payable in excess of exercise price related to exchange of
    McAfee.com options


















(392
)














(392
)Tax benefits from exercise of non-qualified stock options


















5,958















5,958Foreign currency translation


























(3,795
)






(3,795
)Net increase in unrealized gains on investment


























1,344







1,344Net income






























137,471



137,471Balances, December 31, 2006


159,915


$
1,726



12,597


$
(303,074
)

$
1,527,843


$



$
31,472


$
169,282


$
1,427,249    121




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended December 31,2006


2005


2004(As restated


(As restatedsee Note 3)


see Note 3)(In thousands)Cash flows from operating activities:Net income

$
137,471


$
118,217


$
220,017Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation and amortization


70,271



66,996



68,336Tax benefit from exercise of nonqualified stock options






27,019



53,213Deferred income taxes


(34,975
)


(6,543
)


(24,835
)Non-cash restructuring charge


559



686



9,624Acquired in-process research and development


460



4,000



Interest released (earned) on restricted cash


489



(489
)


(Recovery of) provision for doubtful accounts, net


(5
)


1,574



1,716Non-cash stock-based compensation expense


54,695



4,471



25,163Excess tax benefit from stock-based compensation


(4,960
)






(Discount) premium amortization of marketable securities


(7,176
)


42



4,614(Gain) loss on sale of investments


(356
)


1,432



1,704Loss (gain) on sale of assets and technology


259



(56
)


(238,923
)Loss on repurchase of zero coupon convertible debenture










15,070Change in fair value of interest rate swap, net of change in the
    fair value of the debt










382Non-cash interest and other expense on convertible debt










1,224Changes in assets and liabilities, net of acquisitions and
    divestitures:Accounts receivable


(2,097
)


(23,204
)


33,930Prepaid expenses, prepaid taxes and other assets


(55,414
)


(9,471
)


(8,297
)Accounts payable


(531
)


3,536



(1,323
)Accrued taxes and other liabilities


21,655



43,230



30,566Deferred revenue


110,144



188,017



166,732Net cash provided by operating activities


290,489



419,457



358,913Cash flows from investing activities:Purchase of marketable securities


(1,315,407
)


(793,581
)


(1,243,990
)Proceeds from sales of marketable securities


631,849



669,260



967,866Proceeds from maturities of marketable securities


371,070



226,879



65,536Decrease (increase) in restricted cash(1)


49,989



(50,322
)


19,930Purchase of property and equipment and leasehold improvements


(43,751
)


(28,941
)


(25,374
)Acquisitions, net of cash acquired


(146,089
)


(20,200
)


(84,650
)Proceeds from sale of assets and technology






1,500



261,309Net cash (used in) provided by investing activities


(452,339
)


4,595



(39,373
) 122




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS  (Continued)
  Years Ended December 31,2006


2005


2004(As restated


(As restatedsee Note 3)


see Note 3)(In thousands)Cash flows from financing activities:Proceeds from issuance of common stock under stock option and
    stock purchase plans


32,008



108,236



113,793Excess tax benefit from stock-based compensation


4,960







Repurchase of common stock


(234,679
)


(68,395
)


(221,816
)Repurchase of convertible debt










(265,623
)Contribution of proceeds from sale of common stock held in trust










3,779Net cash (used in) provided by financing activities


(197,711
)


39,841



(369,867
)Effect of exchange rate fluctuations on cash


20,596



(26,456
)


7,831Net (decrease) increase in cash and cash equivalents


(338,965
)


437,437



(42,496
)Cash and cash equivalents at beginning of period


728,592



291,155



333,651Cash and cash equivalents at end of period

$
389,627


$
728,592


$
291,155Non cash investing and financing activities:Unrealized gain (loss) on marketable investments, net

$
1,344


$
(638
)

$
(2,129
)Fair value of assets acquired in business combinations,
    excluding cash acquired

$
166,099


$
20,949


$
109,474Liabilities assumed in business combinations

$
20,012


$
749


$
20,037Accrual for purchase of property, equipment and leasehold
    improvements

$
2,694


$
1,283


$
Realization of deferred tax assets of acquired company

$



$
38,838


$
27,019Issuance of common stock upon conversion of debt

$



$



$
83,410Stock options issued in connection with acquisition

$



$



$
7,039Supplemental disclosure of cash flow information:Cash paid for interest

$



$



$
6,349Cash paid for income taxes

$
54,919


$
38,023


$
21,912Cash received from income tax refunds

$
7,032


$
14,416


$
1,443     (1)
    
    The $50.0 million placed in escrow for the settlement with
    the SEC (see Note 20) is reflected as cash used in
    investing activities in 2005. The SEC approved the settlement in
    January 2006. In 2006, the release of the escrow is reflected as
    cash provided by investing activities of $50.0 million and
    the transfer to the SEC is reflected as cash used in operating
    activities of $50.0 million included within accrued taxes
    and other liabilities.   123




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS
  1.
    Organization
    and Business    2.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
    Use of
    Estimates
    Certain
    Risks and Concentrations
       124




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Foreign
    Currency Translation
      Derivatives
  Accounting
    for Derivative Instruments and Hedging Activities,
  Cash
    and Cash Equivalents
    Restricted
    Cash
   125




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Marketable
    Securities
      Inventory
    Deferred
    Costs of Revenue
    Property
    and Equipment
    
    building  interior  seven years;
    exterior  twenty years;
    office furniture and equipment  three to five
    years; and
    computer hardware, networking hardware and software 
    three to five years; 126




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    leasehold improvements  the shorter of the lease
    term, including assumed lease renewal periods that are
    reasonably assured, or the estimated useful life of the asset.        Internal
    Use Software
  98-1, Accounting for the Costs of Computer Software Developed
    or Obtained for Internal Use.
    Goodwill
    and Other Intangible Assets
  Goodwill and
    Other Intangible Assets
  Finite-Lived
    Intangibles, Long-Lived Assets and Assets Held for
    Sale
   127




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for
    the Impairment or Disposal of Long-Lived Assets.
    Fair
    Value of Financial Instruments
    Revenue
    Recognition
      97-2, Software Revenue Recognition (SOP 97-2), Revenue
    Recognition
    
    persuasive evidence of an arrangement exists,
    the product or service has been delivered,
    the fee is fixed or determinable, and
    collection of the resulting receivable is reasonably assured.   128




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    and/or
    Research
    and Development
    Advertising
    Costs
    Restatement
    of Stock-Based Compensation
  Accounting for Stock Issued
    to Employees Accounting for Certain
    Transactions involving Stock Compensation  an
    interpretation of APB Option No. 25 Accounting for Stock-Based
    Compensation
 129




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Share-Based Payment
    
    annual merit grant allocation
    and/or
    approval not complete on the original measurement date,
    the key terms for a substantial portion of the grants in an
    annual merit grant had been determined with finality prior to
    the original measurement date, with a reduction in the exercise
    price on the original measurement date, which represented a
    repricing,
    original accounting measurement date prior to approval date,
    original accounting measurement date prior to employment
    commencement date,
    incorrect or inconsistent approval and employment commencement
    date documentation,
    clerical errors in director grants,
    correction of accounting errors, primarily options historically
    accounted for as variable awards, or
    post-employment option modifications previously not recorded.    
    Minutes of Board of Directors, Compensation Committee
    and/or
    delegated committee:  Approved minutes represent
    the best available evidence of grant approval. The investigative
    team was able to validate the occurrence of board of director
    and compensation committee meetings on the stated dates in most
    cases through director payment records, billing records of
    outside legal counsel who attended the meetings or a signature
    on the minutes by external legal counsel.
    Unanimous Written Consents
    (UWCs):  UWCs have an effective date
    that represents the date grants were approved by the
    compensation committee or delegated committee. For compensation
    committee UWCs in 2004 and 2005, we were not able to rely on
    certain UWC effective dates due to other evidence indicating
    that certain grants were approved subsequent to the UWC
    effective date. We were able to locate other evidence to
    determine the approval date of these grants, such as approval
    documentation in emails and evidence of the date UWCs were
    signed. There were no options granted in compensation committee
    UWCs from 2001 through 2003. For UWCs prior to 2001,
    compensation committee members had historically resolved to
    grant options, and such action was then documented in a UWC,
    with the effective date being the date the granting action was
    taken. With the exception of one UWC, no evidence was located
    that contradicted a UWC effective date as the approval date for
    any compensation committee grants prior to 2001. We have
    therefore placed reliance on the compensation committee UWCs
    prior to 2001. 130




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    Option allocations for annual merit
    grants:  Allocations may be evidenced by signed
    and dated hard-copy schedules or electronic spreadsheets that
    list the employees and number of options granted to each
    employee. Email communications to which the electronic
    spreadsheets were attached also provided evidence of the date
    allocations were completed. We were able to validate whether
    allocation schedules were substantially complete by confirming
    individual grants in the allocation files to the actual grants
    reflected in our stock administration database. There were
    minimal changes to allocations after the date we determined that
    they were substantially complete.
    Database Dates:  The database date (DB
    date) indicates the date an option grant was entered into
    the stock administration database. Entry into the stock
    administration database represents the best evidence of a date
    no later than when the grants were determined with finality.      
    System Reports:  These are hard-copy reports
    generated from the stock administration database that have a
    date stamp indicating the date the report was generated. The
    reports list the name, number of options and exercise price of
    the grants. These reports indicate the latest date a grant could
    have been entered into the stock administration database, which
    was useful for grants prior to the June 17, 1998 system
    conversion date.
    Correspondence or other written
    documentation:  Written communication was in the
    form of grant notification letters from the human resource or
    stock administration departments stating the key terms of a
    grant, stock option agreements, employment offer or promotion
    letters stating the number of options to be granted and
    automated email notifications from human resources or our
    third-party broker. Written communication was primarily used to
    corroborate other available evidence used to determine
    measurement dates for annual merit grants, with the assumption
    that communication would not occur until the terms of the grants
    were determined with finality.    Date
    of Execution of UWC
   131




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Annual
    Merit Grants
          Incorrect
    or Inconsistent Approval and Employment Commencement
    Documentation
  and/or
  Lack
    of Approval Documentation
   132




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Communication
    Dates
  e.
    Stock-Based
    Compensation
         133




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Transition Election
    Related to Accounting for the Tax Effects of Share-Based Payment
    Awards
  SEC
    and Compliance Costs
    Accounting
    for Income Taxes
      Computation
    of Net Income Per Share
    Earnings per Share
 134




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Warranty
    Comprehensive
    Income (Loss)
      Before





Net ofIncome Tax


Income Tax


Income Tax2006Unrealized gain on marketable securities, net

$
2,596


$
(1,038
)

$
1,558Reclassification adjustment for net gain on marketable
    securities recognized during the period


(356
)


142



(214
)Foreign currency translation loss


(3,795
)






(3,795
)Total other comprehensive loss

$
(1,555
)

$
(896
)

$
(2,451
)2005Unrealized loss on marketable securities, net

$
(2,496
)

$
998


$
(1,498
)Reclassification adjustment for net loss on marketable
    securities recognized during the period


1,432



(572
)


860Foreign currency translation gain


3,811







3,811Total other comprehensive income

$
2,747


$
426


$
3,1732004Unrealized loss on marketable securities, net

$
(5,253
)

$
2,102


$
(3,151
)Reclassification adjustment for net loss on marketable
    securities recognized during the period


1,704



(682
)


1,022Foreign currency translation loss


(1,802
)






(1,802
)Total other comprehensive loss

$
(5,351
)

$
1,420


$
(3,931
)  135




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005Unrealized loss on available-for-sale securities

$
(678
)

$
(2,022
)Cumulative translation adjustment


32,150



35,945Total

$
31,472


$
33,923   Recent
    Accounting Pronouncements
  Noncontrolling
    Interests
  Noncontrolling Interests in Consolidated Financial
    Statements an amendment of Accounting
    Research Bulletin No. 51 .
  Business
    Combinations
  Business Combinations
  Fair
    Value Option
  The Fair Value Option for Financial Assets and
    Financial Liabilities  including an amendment of FASB
    Statement No. 1
  Fair
    Value Measurements
  Fair Value Measurements
 136




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting
    for Uncertainty in Income Taxes
  Accounting for Uncertainty in Income Taxes 
    an interpretation of FASB Statement No. 109
      Considering
    the Effects of Prior Year Misstatements when Quantifying
    Misstatements in Current Year Financial Statements
  Considering the Effects of
    Prior Year Misstatements when Quantifying Misstatements in
    Current Year Financial Statements,
  How Sales
    Taxes Collected from Customers and Remitted to Governmental
    Authorities Should Be Presented in the Income
    Statement
  06-3, How Sales Taxes Collected from Customers and Remitted
    to Governmental Authorities Should Be Presented in the Income
    Statement (EITF 06-3). EITF 06-3 EITF 06-3.
 137




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting
    Changes and Error Corrections
  Accounting Changes and Error Corrections Accounting Changes, Reporting Accounting Changes in
    Interim Financial Statements.
  The
    Meaning of Other-Than-Temporary Impairment
  No. 115-1 The Meaning of Other-Than-Temporary Impairment and Its
    Application to Certain Investments (FSP 115-1), FSP 115-1 FSP 115-1 Accounting for Certain
    Investments in Debt and Equity Securities The Equity Method of Accounting
    for Investments in Common Stock. FSP 115-1 No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
    Application to Certain Investments, No. D-44, Recognition of Other-Than-Temporary Impairment upon the
    Planned Sale of a Security Whose Cost Exceeds Fair Value. FSP 115-1 FSP 115-1
  3.
    Restatement
    of Consolidated Financial Statements    
    in the case of our former general counsel, he and a former
    member of management participated in intentionally modifying one
    of the former general counsels stock option grants so as
    to create a lower exercise price, and the former general counsel
    failed to disclose this unauthorized change to the board of
    directors prior to late May 2006;
    in some instances, former members of management drafted
    corporate records, including employment documentation, board and
    compensation committee meeting minutes and actions by unanimous
    written consent, with the benefit of hindsight so as to choose
    measurement dates giving more favorable exercise prices;
    moreover, certain of these documents were used by us in making
    accounting determinations with respect to stock-based
    compensation; 138




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    during the course of the investigation, certain former members
    of management did not provide completely accurate or consistent
    information and in one case, provided documentation to the
    special committee that the special committee determined was
    intentionally altered; and
    certain former members of senior management did not display the
    appropriate oversight and tone at the top expected
    by the board of directors.    Option
    grants previously accounted for using incorrect measurement
    dates
  Annual
    merit grant allocation and/or approval not complete on the
    original measurement date
    Original
    accounting measurement date prior to approval date
    Original
    accounting measurement date prior to employment commencement
    date
    Incorrect
    or inconsistent approval and employment commencement date
    documentation
   139




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Repriced
    annual merit grant
    Post-employment
    option modifications previously not recorded
    Correction
    of accounting errors, primarily options historically accounted
    for as variable awards
       140




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Effect
    of errors on stock-based compensation, before
    tax
    1995


1996


1997


1998


1999


2000Reason for revised accounting measurement date:Annual merit grant allocation and/or approval not complete on
    the original measurement date

$



$
82


$
1,485


$
12,931


$
11,409


$
13,242Original accounting measurement date prior to approval date






262



291



809



1,701



1,302Original accounting measurement date prior to employment
    commencement date


487



1,659



1,713



1,181



908



271Incorrect or inconsistent approval and employment commencement
    date documentation






















14Clerical errors in director grants






10



43



57



47



16Total of intrinsic charges for revised measurement dates


487



2,013



3,532



14,978



14,065



14,845Repriced annual merit grant






















1,003Post-employment option modifications previously not recorded














11,420



3,502



3,419Correction of accounting errors, primarily options historically
    accounted for as variable awards


















275



1,223Total

$
487


$
2,013


$
3,532


$
26,398


$
17,842


$
20,490   141




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2001


2002


2003


2004


2005


TotalReason for revised accounting measurement date:Annual merit grant allocation and/or approval not complete on
    the original measurement date

$
12,630


$
8,551


$
6,038


$
3,245


$
745


$
70,358Original accounting measurement date prior to approval date


1,516



2,292



2,498



2,852



2,279



15,802Original accounting measurement date prior to employment
    commencement date


57



28



20



12



5



6,341Incorrect or inconsistent approval and employment commencement
    date documentation


(1,875
)


4,211



1,502



686



274



4,812Clerical errors in director grants


11



2



24



28



32



270Total of intrinsic charges for revised measurement dates


12,339



15,084



10,082



6,823



3,335



97,583Repriced annual merit grant


6,629



(2,078
)


(249
)


1,569



(180
)


6,694Post-employment option modifications previously not recorded


1,345



3,430



(207
)


234







23,143Correction of accounting errors, primarily options historically
    accounted for as variable awards


9,124



(1,942
)


(1,219
)


2,217



260



9,938Total

$
29,437


$
14,494


$
8,407


$
10,843


$
3,415


$
137,358   Diluted
    earnings per share
    Related
    tax adjustments
   142




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Other
    prior-period errors
  Accounting Changes and Error
    Corrections Accounting Changes Materiality
  Revenue
    corrections
  and/or
  Cost of
    net revenues
    Operating
    costs
   143




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Interest
    and other income
    Tax
    provision
    Restatement
    Impact on Financial Statements
    Years Ended December 31,2005


2004Net income, as previously reported

$
138,828


$
225,065Additional stock-based compensation expense


(3,415
)


(10,843
)Income tax impact of additional stock-based compensation expense


930



3,662Other adjustments, net of tax


(18,126
)


2,133Net income, as restated

$
118,217


$
220,017     144




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Income TaxBenefit onStock-Based








Additional


AdditionalCompensation


Additional


Stock-Based


Stock-Based


Stock-BasedExpense, as


Stock-Based


Compensation


Compensation


CompensationPreviously


Compensation


Expense,


Expense, as


Expense, Net ofFor The Year Ended December 31,

Reported


Expense(1)


as Restated


Restated(2)


Tax, as Restated2003

$
12,507


$
8,407


$
20,914


$
(2,626
)

$
5,7812002


22,404



14,494



36,898



(3,544
)


10,9502001


24,871



29,437



54,308



(10,843
)


18,5942000


10,116



20,490



30,606



(7,081
)


13,4091999


15,570



17,842



33,412



(6,450
)


11,3921998


668



26,398



27,066



(9,854
)


16,5441997






3,532



3,532



(1,236
)


2,2961996






2,013



2,013



(744
)


1,2691995






487



487



(178
)


309Total

$
86,136


$
123,100


$
209,236


$
(42,556
)

$
80,544Income tax impact of additional stock-based compensation expense






(42,556
)Cumulative effect of stock-based compensation adjustments
    through December 31, 2003






80,544Other adjustments, net of tax, through December 31, 2003






(4,000
)Cumulative effect at January 1, 2004 in the beginning
    balance of retained earnings





$
76,544     (1)
    
    Additional compensation expense is the result of improper
    measurement dates for stock option grants, improper accounting
    for modifications of the key terms of certain stock option
    awards and the correction of accounting errors primarily related
    to variable awards.(2)
    
    Includes income tax benefit on additional stock-based
    compensation expense, adjustments for tax deductions prohibited
    under Section 162(m) of the Internal Revenue Code as a
    result of the additional stock-based compensation expense and
    various other adjustments resulting from the impact of
    additional stock-based compensation recorded in the applicable
    year. 145




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Income TaxBenefit onAdditional


AdditionalStock-Based


Additional


Stock-Based


Stock-Based


Stock-BasedCompensation


Stock-Based


Compensation


Compensation


CompensationExpense, as


Compensation


Expense,


Expense, as


Expense, Net ofYear Ended December 31,

Previously Reported


Expense(1)


as Restated


Restated(2)


Tax, as Restated2005

$
1,056


$
3,415


$
4,471


$
(930
)

$
2,4852004


14,320



10,843



25,163



(3,662
)


7,181     (1)
    
    Additional compensation expense is the result of improper
    measurement dates for stock option grants, improper accounting
    for modifications of the key terms of certain stock option
    awards and the correction of accounting errors primarily related
    to variable awards.(2)
    
    Includes income tax benefit on additional stock-based
    compensation expense, adjustments for tax deductions prohibited
    under Section 162(m) of the Internal Revenue Code as a
    result of the additional stock-based compensation expense and
    various other adjustments resulting from the impact of
    additional stock-based compensation recorded in the applicable
    year. 146




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Consolidated
    Balance Sheet
  December 31, 2005(As previously


(Adjustments)


(As restated)reported)(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
728,592


$



$
728,592Restricted cash


50,489







50,489Short-term marketable securities


316,298







316,298Accounts receivable, net of allowance for doubtful accounts of
    $2,389


158,680



450



159,130Prepaid expenses and prepaid taxes


78,945



187



79,132Deferred income taxes


206,811



(2,603
)


204,208Other current assets


27,846



644



28,490Total current assets


1,567,661



(1,322
)


1,566,339Long-term marketable securities


212,131







212,131Restricted cash


939







939Property and equipment, net


85,641



51



85,692Deferred income taxes


241,315



(3,345
)


237,970Intangible assets, net


80,782



(696
)


80,086Goodwill


438,396



(908
)


437,488Other assets


15,759



(170
)


15,589Total assets

$
2,642,624


$
(6,390
)

$
2,636,234LIABILITIESCurrent liabilities:Accounts payable

$
34,678


$



$
34,678Accrued SEC settlement


50,000







50,000Accrued income taxes


81,227



(4,487
)


76,740Accrued compensation


50,617



5,164



55,781Other accrued liabilities


82,011



3,449



85,460Deferred revenue


570,458



5,207



575,665Total current liabilities


868,991



9,333



878,324Deferred revenue, less current portion


175,962



179



176,141Accrued taxes and other long-term liabilities


142,638



4,490



147,128Total liabilities


1,187,591



14,002



1,201,593STOCKHOLDERS EQUITYPreferred stock










Common stock


1,705







1,705Treasury stock


(68,395
)






(68,395
)Additional paid-in capital


1,356,881



86,862



1,443,743Deferred stock-based compensation


(474
)


(7,672
)


(8,146
)Accumulated other comprehensive income


31,302



2,621



33,923Retained earnings


134,014



(102,203
)


31,811Total stockholders equity


1,455,033



(20,392
)


1,434,641Total liabilities and stockholders equity

$
2,642,624


$
(6,390
)

$
2,636,234   147




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31, 2004(As previously


(Adjustments)


(As restated)reported)(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
291,155


$



$
291,155Short-term marketable securities


232,929







232,929Accounts receivable, net of allowance for doubtful accounts of
    $2,536


146,376



476



146,852Prepaid expenses, prepaid taxes, and other current assets


99,513



5,987



105,500Deferred income taxes


200,459



2,629



203,088Total current assets


970,432



9,092



979,524Long-term marketable securities


400,597







400,597Restricted cash


617







617Property and equipment, net


91,715



782



92,497Deferred income taxes


220,604



(248
)


220,356Intangible assets, net


107,133



1,762



108,895Goodwill


439,180



(2,419
)


436,761Other assets


16,254



634



16,888Total assets

$
2,246,532


$
9,603


$
2,256,135LIABILITIESCurrent liabilities:Accounts payable

$
32,891


$
(1,449
)

$
31,442Accrued income taxes


70,778



(2,200
)


68,578Accrued compensation


53,146



5,936



59,082Other accrued liabilities


82,300



1,899



84,199Deferred revenue


475,621



419



476,040Total current liabilities


714,736



4,605



719,341Deferred revenue, less current portion


125,752



(307
)


125,445Accrued taxes and other long-term liabilities


204,796



311



205,107Total liabilities


1,045,284



4,609



1,049,893STOCKHOLDERS EQUITYPreferred stock










Common stock


1,623







1,623Treasury stock










Additional paid-in capital


1,178,855



89,851



1,268,706Deferred stock-based compensation


(1,777
)


(6,654
)


(8,431
)Accumulated other comprehensive income


27,361



3,389



30,750Retained earnings


(4,814
)


(81,592
)


(86,406
)Total stockholders equity


1,201,248



4,994



1,206,242Total liabilities and stockholders equity

$
2,246,532


$
9,603


$
2,256,135  148




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidated
    Statements of Income and Comprehensive Income
  Year Ended December 31, 2005


Year Ended December 31, 2004(As previously


(Adjustments)


(As restated)


(As previously


(Adjustments)


(As restated)reported)








reported)(In thousands, except per share data)Net revenue:Service and support

$
541,238
(1)

$
3,239


$
544,477


$
464,238


$
(512
)

$
463,726Subscription


318,206
(1)






318,206



215,817







215,817Product


127,855
(1)


(8,910
)


118,945



230,487



(2,457
)


228,030Total net revenue


987,299



(5,671
)


981,628



910,542



(2,969
)


907,573Cost of net revenue:Service and support(2)


30,881
(1)


(6,702
)


24,179



23,768



2,257



26,025Subscription(2)


54,275
(1)


9,203



63,478



38,476



8



38,484Product(2)


63,944
(1)


670



64,614



73,334



1,184



74,518Amortization of purchased technology


15,515



2,252



17,767



13,331



1,556



14,887Total cost of net revenue


164,615



5,423



170,038



148,909



5,005



153,914Operating costs:Research and development(2)


176,350



59



176,409



172,717



2,155



174,872Marketing and sales(2)


294,234



5,855



300,089



354,380



(1,306
)


353,074General and administrative(2)


123,756



(269
)


123,487



141,561



3,477



145,038Amortization of intangibles


12,902



(68
)


12,834



14,065



170



14,235Restructuring charges


3,731



51



3,782



17,493



(51
)


17,442In-process research and development


4,000







4,000











Gain on sale of assets and technology(2)


(56
)






(56
)


(240,336
)






(240,336
)SEC settlement charge


50,000







50,000











Reimbursement from transition services agreement


(362
)






(362
)


(5,997
)






(5,997
)Reimbursement related to litigation settlement














(24,991
)






(24,991
)Severance/bonus costs related to Sniffer and Magic disposition(2)














10,070







10,070Total operating costs


664,555



5,628



670,183



438,962



4,445



443,407Income from operations


158,129



(16,722
)


141,407



322,671



(12,419
)


310,252Interest and other income


24,837



1,866



26,703



15,889



(1,238
)


14,651Interest and other expenses














(5,315
)






(5,315
)Loss on repurchase of convertible debt














(15,070
)






(15,070
)Loss on investments, net


(1,432
)






(1,432
)


(1,704
)






(1,704
)Income before provision for income taxes


181,534



(14,856
)


166,678



316,471



(13,657
)


302,814Provision for income taxes


42,706



5,755



48,461



91,406



(8,609
)


82,797Net income

$
138,828


$
(20,611
)

$
118,217


$
225,065


$
(5,048
)

$
220,017Other comprehensive income:Unrealized losses on marketable securities, net of
    reclassification adjustment for losses recognized on marketable
    securities during the period and income tax

$
(638
)

$



$
(638
)

$
(2,129
)

$



$
(2,129
)Foreign currency translation (loss) gain


4,579



(768
)


3,811



(4,537
)


2,735



(1,802
)Comprehensive income

$
142,769


$
(21,379
)

$
121,390


$
218,399


$
(2,313
)

$
216,086Net income per share  basic

$
0.84


$
(0.12
)

$
0.72


$
1.40


$
(0.03
)

$
1.37Net income per share  diluted

$
0.82


$
(0.12
)

$
0.70


$
1.31


$
(0.03
)

$
1.28Shares used in per share calculation  basic


165,087



(45
)


165,042



160,714



(204
)


160,510Shares used in per share calculation  diluted


169,234



15



169,249



177,099



286



177,385  149




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (1)
    
    During 2005, we made certain reclassifications from product
    revenue to service and support revenue, primarily related to
    online subscriptions. Total net revenue was not impacted by
    these reclassifications. As of January 1, 2006, we changed
    the presentation of our net revenue and cost of net revenue to
    include three categories: (i) product, which includes
    hardware and perpetual licenses (ii) subscription, which
    includes subscription-based offerings and (iii) service and
    support, which includes maintenance, consulting and training.
    Previously, we chose to allocate our subscription business
    between product revenue and services and support revenue instead
    of presenting it as a separate category. We believe this new
    presentation is consistent with the way we currently manage our
    business as we grow the subscription component of both our
    corporate and consumer businesses. In the table below, we have
    applied the change in presentation retrospectively to the
    balances previously reported for the years ended
    December 31, 2005 and 2004. Total net revenues and cost of
    net revenues were not affected by the change.  Form 10-K
  Years Ended December 31,2005


2004(As previously


(As previouslyreported)


reported)Net revenue:Product

$
167,538


$
294,163Service and support


819,761



616,379Total net revenue

$
987,299


$
910,542Cost of net revenue:Product

$
63,272


$
73,058Service and support


85,828



62,520Amortization of purchased technology


15,515



13,331Total cost of net revenue

$
164,615


$
148,909     Year Ended December 31,2005


2004Net revenue:Service and support

$
541,238


$
230,487Subscription


318,206



215,817Product


127,855



464,238Total net revenue

$
987,299


$
910,542Cost of net revenue:Service and support

$
30,881


$
23,768Subscription


54,275



38,476Product


63,944



73,334Amortization of purchased technology


15,515



13,331Total cost of net revenue

$
164,615


$
148,909  150




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31, 2005


Year Ended December 31, 2004(As previously


(Adjustments)


(As restated)


(As previously


(Adjustments)


(As restated)reported)








reported)Stock-based compensation included in cost of net revenue:Service and support

$



$
14


$
14


$



$
215


$
215Subscription






36



36







109



109Product






(5
)


(5
)






713



713Total stock-based compensation included in cost of net revenue






45



45







1,037



1,037Stock-based compensation included in operating costs:Research and development


(234
)


758



524



6,518



3,020



9,538Marketing and sales


(25
)


1,507



1,482



2,642



4,061



6,703General and administrative


1,315



1,105



2,420



4,085



2,725



6,810Gain on sale of assets and technology














84







84Severance/bonus costs related to Sniffer and Magic disposition














991







991Total stock-based compensation included in operating costs


1,056



3,370



4,426



14,320



9,806



24,126Total stock-based compensation

$
1,056


$
3,415


$
4,471


$
14,320


$
10,843


$
25,163  151




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31, 2005


Year Ended December 31, 2004(As previously


(Adjustments)


(As restated)


(As previously


(Adjustments)


(As restated)reported)








reported)(In thousands)Cash flows from operating activities:Net income

$
138,828


$
(20,611
)

$
118,217


$
225,065


$
(5,048
)

$
220,017Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation and amortization


64,884



2,112



66,996



66,699



1,637



68,336Tax benefit from exercise of nonqualified stock options


34,442



(7,423
)


27,019



72,622



(19,409
)


53,213Deferred income taxes


(13,762
)


7,219



(6,543
)


(21,503
)


(3,332
)


(24,835
)Non-cash stock-based compensation expense


1,056



3,415



4,471



14,320



10,843



25,163Changes in assets and liabilities, net of acquisitions and
    divestitures:Accounts receivable


(23,309
)


105



(23,204
)


35,668



(1,738
)


33,930Prepaid expenses, prepaid taxes and other assets


(13,249
)


3,778



(9,471
)


(6,267
)


(2,030
)


(8,297
)Accounts payable


2,060



1,476



3,536



(423
)


(900
)


(1,323
)Accrued taxes and other liabilities


39,128



4,102



43,230



15,388



15,178



30,566Deferred revenue


182,190



5,827



188,017



161,933



4,799



166,732Net effect on cash flows from operating activities





$











$
Non cash investing and financing activities:Fair value of assets acquired in business combinations

$
17,080


$
3,869


$
20,949


$
110,394


$
(920
)

$
109,474Cash paid for income taxes

$
38,024


$
(1
)

$
38,023


$
31,393


$
(9,481
)

$
21,912Cash received from income tax refunds

$



$
14,416


$
14,416


$



$
1,443


$
1,443     Year Ended December 31, 2005

Year Ended December 31, 2004

Year Ended December 31, 2003(As

(Adjustments)

(As

(As

(Adjustments)

(As

(As

(Adjustments)

(Aspreviously



restated)

previously



restated)

previously



restated)reported)





reported)





reported)(In thousands)Allowance for doubtful accounts

$
2,389


$



$
2,389


$
2,536


$
(261
)

$
2,275


$
3,070


$
(8
)

$
3,062Sales returns and other incentives

$
32,573


$
(634
)

$
31,939


$
29,224


$
97


$
29,321


$
39,599


$
1,746


$
41,345  152




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  4.
    Business
    Combinations  Citadel
    Security Software
        Onigma
        Preventsys
       153




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    SiteAdvisor
          SiteAdvisor


Preventsys


Onigma


Citadel


TotalTechnology

$
15,450


$
3,540


$
23,139


$
15,900


$
58,029Other intangibles


420



890



1,889



6,500



9,699Goodwill


50,607



260







41,660



92,527Cash


29



23



125







177Other assets


485



661



281



1,072



2,499Deferred tax assets


377



1,978



530







2,885Total assets acquired


67,368



7,352



25,964



65,132



165,816Accrued liabilities


37



1,015



372







1,424Deferred revenue






203







3,937



4,140Deferred tax liabilities


6,269



1,750



6,429







14,448Total liabilities assumed


6,306



2,968



6,801



3,937



20,012Net assets acquired


61,062



4,384



19,163



61,195



145,804In-process research and development expensed






460











460Total acquisition cost

$
61,062


$
4,844


$
19,163


$
61,195


$
146,264    154




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2006


2005Pro forma net revenue

$
1,157,986


$
993,485Pro forma net income

$
119,371


$
88,300Pro forma basic net income per share,

$
0.74


$
0.54Pro forma diluted net income per share

$
0.73


$
0.52Shares used in per share calculation  basic


160,945



165,042Shares used in per share calculation  diluted


163,052



169,249       Wireless
    Security Corporation
     155




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Technology

$
1,500Other intangibles


300Goodwill


13,247Cash


131Other assets


34Deferred tax assets


1,870Total assets acquired


17,082Accrued liabilities


40Deferred tax liabilities


711Total liabilities assumed


751Net assets acquired


16,331In-process research and development expensed


4,000Total acquisition cost

$
20,331     Foundstone,
    Inc.
     156




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Technology

$
27,000Other intangible assets


1,600Goodwill


57,693Cash


920Other assets


12,682Deferred tax assets


10,464Total assets acquired


110,359Accrued liabilities


8,684Deferred tax liabilities


11,297Total liabilities assumed


19,981Net assets acquired

$
90,378  157




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2004(Unaudited)Pro forma net revenue

$
924,626Pro forma net income

$
207,179Pro forma basic net income per share

$
1.29Shares used in per share calculation  basic


160,510Pro forma diluted net income per share

$
1.21Shares used in per share calculation  diluted


177,385     5.
    Sale of
    Businesses  McAfee
    Labs
      Sniffer
    Technologies
       158




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Magic
    Solutions
      6.
    Marketable
    Securities and Cash and Cash Equivalents    December 31, 2006Purchase/


Gross


GrossAmortized


Unrealized


Unrealized


AggregateCost


Gains


Losses


Fair ValueU.S. Government debt securities

$
179,466


$
28


$
(675
)

$
178,819Corporate debt securities


642,975



391



(874
)


642,492Time deposits


29,231











29,231$
851,672


$
419


$
(1,549
)

$
850,542   December 31, 2005Purchase/


Gross


GrossAmortized


Unrealized


Unrealized


AggregateCost


Gains


Losses


Fair ValueU.S. Government debt securities

$
199,233


$



$
(1,770
)

$
197,463Corporate debt securities


293,917



17



(1,618
)


292,316Time deposits


38,650











38,650$
531,800


$
17


$
(3,388
)

$
528,429       December 31,2006


2005Cash and money market funds, at cost which approximates fair
    value

$
369,617


$
718,109Corporate debt securities, primarily commercial paper


20,010



10,483Total cash and cash equivalents

$
389,627


$
728,592  159




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2006


2005


2004Realized gains

$
596


$
697


$
922Realized losses


(240
)


(2,129
)


(2,626
)Net realized gain (loss)

$
356


$
(1,432
)

$
(1,704
)     Less Than 12 Months


12 Months or Greater


TotalGross





Gross





GrossUnrealized





Unrealized





UnrealizedFair Value


Losses


Fair Value


Losses


Fair Value


LossesU.S. Government debt securities

$
82,293


$
(107
)

$
51,764


$
(568
)

$
134,057


$
(675
)Corporate debt securities


102,610



(211
)


26,857



(123
)


129,467



(334
)Asset-backed securities


202,114



(269
)


34,431



(271
)


236,545



(540
)$
387,017


$
(587
)

$
113,052


$
(962
)

$
500,069


$
(1,549
)     7.
    Derivatives  Forward
    Exchange Contracts
      December 31,2006Euro

$
201British Pound Sterling


304Brazilian Real


(2
)$
503  160




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Interest
    Rate Swaps
      five-day
    five-day
   161




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8. Consolidated
    Balance Sheet Detail (in thousands):
  December 31,2006


2005(In thousands)Property and equipment:Building

$
19,839


$
19,828Furniture and fixtures


19,689



16,564Computers, equipment and software


181,175



159,349Leasehold improvements


29,380



23,649Construction in progress


13,797



8,533263,880



227,923Accumulated depreciation


(178,798
)


(147,293
)85,082



80,630Land


6,917



5,062Total property and equipment, net

$
91,999


$
85,692     December 31,2006


2005(In thousands)Other accrued liabilities:Accrued legal and accounting fees

$
18,134


$
13,666Accrued marketing


23,317



15,172Other accrued expenses


66,967



56,622$
108,418


$
85,460   December 31,2006


2005(In thousands)Accrued taxes and other long-term liabilities:Accrued income taxes, long-term

$
120,836


$
127,191Other


29,088



19,937$
149,924


$
147,128     9.
    Restructuring  2006
    Restructuring
     162




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Severance andOther BenefitsBalance, January 1, 2006

$
Restructuring accrual


2,404Cash payments


(14
)Balance, December 31, 2006

$
2,390     2005
    Restructuring
      Lease


SeveranceTermination


and Other


OtherCosts


Benefits


Costs


TotalBalance, January 1, 2005

$



$



$



$
Restructuring accrual


1,800



216



4



2,020Cash payments


(1,205
)


(216
)


(4
)


(1,425
)Effects of foreign currency exchange


(14
)










(14
)Accretion


23











23Balance, December 31, 2005


604











604Cash payments


(577
)










(577
)Adjustment to liability


4











4Effects of foreign currency exchange


(19
)










(19
)Accretion


12











12Balance, December 31, 2006

$
24


$



$



$
24     2004
    Restructuring
   163




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           164




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    LeaseTermination


Severance and


OtherCosts


Other Benefits


Costs


TotalBalance, January 1, 2004

$



$



$



$
Restructuring accrual


9,973



7,932



480



18,385Cash payments


(579
)


(4,175
)


(63
)


(4,817
)Adjustment to liability


(231
)


(275
)






(506
)Accretion


74











74Balance, December 31, 2004


9,237



3,482



417



13,136Restructuring accrual


1,454



1,382



20



2,856Cash payments


(2,747
)


(4,864
)


(297
)


(7,908
)Adjustment to liability


(810
)






(140
)


(950
)Effects of foreign currency exchange


(46
)










(46
)Accretion


341











341Balance, December 31, 2005


7,429











7,429Cash payments


(2,111
)










(2,111
)Adjustment to liability


(598
)










(598
)Effects of foreign currency exchange


97











97Accretion


256











256Balance, December 31, 2006

$
5,073


$



$



$
5,073     2003
    Restructuring
     165




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            LeaseTermination


Severance and


OtherCosts


Other Benefits


Costs


TotalBalance, January 1, 2003

$



$



$



$
Restructuring accrual


15,734



6,692



739



23,165Cash payments


(1,707
)


(6,259
)


(167
)


(8,133
)Adjustment to liability


(273
)


(116
)


(572
)


(961
)Accretion


463











463Balance, December 31, 2003

$
14,217


$
317


$



$
14,534Cash payments


(1,841
)


(194
)






(2,035
)Adjustment to liability


(483
)


(123
)






(606
)Accretion


548











548Balance, December 31, 2004


12,441











12,441Cash payments


(1,279
)










(1,279
)Adjustment to liability


(1,006
)










(1,006
)Accretion


498











498Balance, December 31, 2005


10,654











10,654Cash payments


(1,960
)










(1,960
)Adjustment to liability


(1,908
)










(1,908
)Accretion


389











389Balance, December 31, 2006

$
7,175


$



$



$
7,175    166




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    10.
    Goodwill
    and Other Intangible Assets      Effects of











Effects ofForeign











ForeignJanuary 1,


Goodwill





Currency


December 31,


Goodwill





Currency


December 31,2005


Acquired


Adjustments


Exchange


2005


Acquired


Adjustments


Exchange


2006North America

$
353,484


$
9,422


$
(10,140
)

$
266


$
353,032


$
59,229


$
216


$
(24
)

$
412,453EMEA


48,458



3,406



(1,613
)


(322
)


49,929



25,098



33



385



75,445Japan


17,584



163



(247
)






17,500



1,266



5







18,771Asia-Pacific (excluding Japan)


6,332



(32
)


(357
)






5,943



6,014



3







11,960Latin America


10,903



128



(275
)


328



11,084



920



3



(159
)


11,848Total

$
436,761


$
13,087


$
(12,632
)

$
272


$
437,488


$
92,527


$
260


$
202


$
530,477       December 31, 2006


December 31, 2005Accumulated








AccumulatedAmortization








AmortizationWeighted





(Including Effects








(Including EffectsAverage


Gross


of Foreign


Net


Gross


of Foreign


NetUseful


Carrying


Currency


Carrying


Carrying


Currency


CarryingLife


Amount


Exchange)


Amount


Amount


Exchange)


AmountOther Intangible assets:Purchased technologies


4.4 years


$
203,790


$
(119,202
)

$
84,588


$
141,999


$
(91,884
)

$
50,115Trademarks and patents


5.0 years



29,444



(28,830
)


614



28,944



(27,051
)


1,893Customer base and other intangibles


5.8 years



72,161



(43,789
)


28,372



62,970



(34,892
)


28,078$
305,395


$
(191,821
)

$
113,574


$
233,913


$
(153,827
)

$
80,086  167




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005(In thousands)Gross intangible assets, beginning of year

$
233,913


$
235,054Add: Purchased technologies (amortized over one to seven years)


58,206



1,500Add: Trademarks and patents (amortized over one to seven years)


500



Add: Customer base and other intangibles (amortized over one to
    seven years)


9,198



300Add: Change in value due to foreign exchange


3,578



(2,941
)305,395



233,913Dispositions






Gross intangible assets, end of year

$
305,395


$
233,913       Fiscal Years:2007

$
41,5992008


33,6442009


22,6712010


13,9872011


1,673Thereafter


$
113,574   11.
    Commitments  Leases
    Lease Expiration

Renewal OptionCorporate Headquarters, Santa Clara, California

March 2013

10 year renewalEuropean Headquarters, Cork, Ireland

December 2014

Two 5 year renewalsSunnyvale, California

May 2010

3 year renewalSlough, England

September 2017

NoneBangalore, India

December 2009

5 year renewalTokyo, Japan

February 2009

2 year renewal  168




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      SubleasePayments


Income2007

$
17,131


$
(2,642
)2008


14,420



(2,554
)2009


12,587



(1,058
)2010


10,896



(978
)2011


10,139



(510
)Thereafter


20,045



(660
)Total

$
85,218


$
(8,402
)       Purchase


OtherObligations


Commitments2007

$
5,065


$
9,1962008






3,057Total

$
5,065


$
12,253   12.
    Warranty
    Accrual and Guarantees    December 31,2006


2005


2004Warranty balance, beginning of year

$
1,083


$
1,818


$
1,103Additional accruals


1,937



3,514



8,037Disposition of Sniffer










(807
)Costs incurred during the period


(2,358
)


(4,249
)


(6,515
)Warranty balance, end of year

$
662


$
1,083


$
1,818     
    Under the terms of our software license agreements with our
    customers, we agree that in the event the software sold
    infringes upon any patent, copyright, trademark, or any other
    proprietary right of a third-party, we will indemnify our
    customer licensees against any loss, expense, or liability from
    any damages that may 169




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  be awarded against our customer. We include this infringement
    indemnification in our software license agreements and selected
    managed service arrangements. In the event the customer cannot
    use the software or service due to infringement and we can not
    obtain the right to use, replace or modify the license or
    service in a commercially feasible manner so that it no longer
    infringes then we may terminate the license and provide the
    customer a pro-rata refund of the fees paid by the customer for
    the infringing license or service. We have recorded no liability
    associated with this indemnification, as we are not aware of any
    pending or threatened infringement actions that are probable
    losses. We believe the estimated fair value of these
    intellectual property indemnification clauses is minimal.  
    Under the terms of certain vendor agreements, in particular,
    vendors used as part of our managed services, we have agreed
    that in the event the service provided to the customer by the
    vendor on behalf of us infringes upon any patent, copyright,
    trademark, or any other proprietary right of a third-party, we
    will indemnify our vendor, against any loss, expense, or
    liability from any damages that may be awarded against our
    vendor. No maximum liability is stipulated in these vendor
    agreements. We have recorded no liability associated with this
    indemnification, as we are not aware of any pending or
    threatened infringement actions or claims that are probable
    losses. We believe the estimated fair value of these
    indemnification clauses is minimal.
    As permitted under Delaware law, we have agreements whereby we
    indemnify our officers and directors for certain events or
    occurrences while the officer or director is, or was, serving at
    our request in such capacity. The maximum potential amount of
    future payments we could be required to make under these
    indemnification agreements is not limited; however, we have
    director and officer insurance coverage that reduces our
    exposure and may enable us to recover a portion or all of any
    future amounts paid. We believe the estimated fair value of
    these indemnification agreements in excess of applicable
    insurance coverage is minimal.
    Under the terms of our agreement to sell Magic in January 2004,
    we agreed to indemnify the purchaser for any breach of
    representations or warranties in the agreement as well as for
    any liabilities related to the assets prior to sale that were
    not included in the purchaser assumed liabilities (undiscovered
    liabilities). Subject to limited exceptions, the maximum
    potential loss related to the indemnification is
    $10.0 million. To date, we have paid no amounts under the
    representations and warranties indemnification. We have not
    recorded any accruals related to these agreements.
    Under the terms of our agreement to sell Sniffer in July 2004,
    we agreed to indemnify the purchaser for any breach of
    representations or warranties in the agreement as well as for
    any liabilities related to the assets prior to sale that were
    not included in the purchaser assumed liabilities (undiscovered
    liabilities). Subject to limited exceptions, the maximum
    potential loss related to the indemnification is
    $200.0 million. To date, we have paid no amounts under the
    representations and warranties indemnification. We have not
    recorded any accruals related to these agreements.
    Under the terms of our agreement to sell McAfee Labs assets in
    December 2004, we agreed to indemnify the purchaser for any
    breach of representations or warranties in the agreement as well
    as for any liabilities related to the assets prior to sale that
    were not included in the purchaser assumed liabilities
    (undiscovered liabilities). Subject to limited exceptions, the
    maximum potential loss related to the indemnification is
    $1.5 million. We have not recorded any accruals related to
    these agreements.   170




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  13.
    Line of
    Credit and Convertible Debt  Line
    of Credit
    5.25% Convertible
    Subordinated Note Due 2006
      14.
    Employee
    Benefit Plan    15.
    Stockholders
    Equity  Common
    Stock
       171




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Preferred
    Stock
    Preferred
    Shares Rights Agreement
    16.
    Employee
    Stock Benefit Plans  Employee
    Stock Purchase Plan
       172




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Company
    Stock Incentive Plans
         173




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Plan
    Activity
    December 31, 2005


December 31, 2004Number of


Weighted-Average


Number of


Weighted-AverageOptions


Exercise Price


Options


Exercise PriceOutstanding at beginning of period


19,320


$
15.85



29,856


$
15.29Options granted


5,822



24.66



5,797



17.34Options assumed in conjunction with acquisition










429



2.69Options exercised


(7,165
)


13.52



(9,152
)


11.61Options canceled


(1,912
)


18.45



(7,610
)


19.15Outstanding at end of period


16,065


$
19.77



19,320


$
15.85Options exercisable


6,278


$
17.77



9,447


$
14.54     Year Ended December 31, 2006Weighted-AverageNumber of


Weighted-Average


Remaining


AggregateOptions


Exercise Price


Contractual Life


Intrinsic Value(1)Outstanding at beginning of period


16,065


$
19.77Options granted


2,082



24.38Options exercised


(1,634
)


15.53Options canceled


(2,613
)


20.78Outstanding at end of period


13,900


$
20.77Options outstanding and expected to vest


12,436


$
20.43



6.1


$
103,495Options exercisable


8,168


$
19.15



4.8


$
79,055     (1)
    
    Intrinsic value is calculated as the difference between the
    market value of our common stock on December 31, 2006 and
    the exercise price of the option. The aggregate intrinsic value
    of options outstanding and exercisable includes options with an
    exercise price below $28.38, the closing price of our common
    stock on December 31, 2006, as reported by the New York
    Stock Exchange.     174




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31, 2006


December 31, 2005


December 31, 2004Weighted





Weighted





Weighted





WeightedRestricted


Average


Restricted


Average


Restricted


Average


Restricted


AverageStock


Grant Date


Stock


Grant Date


Stock


Grant Date


Stock


Grant DateUnits


Fair Value


Awards


Fair Value


Awards


Fair Value


Awards


Fair ValueUnvested at beginning of period





$




185


$
29.79



47


$
27.18



47


$
27.18Grants


3,664



23.79



30



23.76



185



29.79







Vested










(62
)


29.79



(47
)


27.18







Cancelled


(844
)


24.13



(20
)


30.59















Unvested at end of period


2,820


$
23.69



133


$
28.32



185


$
29.79



47


$
27.18       Valuation
    and Expense Information under SFAS 123(R)
    Using


Adjustments forAPB 25


SFAS 123(R)


As ReportedStock-based compensation expense included in cost of net
    revenues and operating expenses

$
28,327


$
29,434


$
57,761Income from operations


168,462



(29,434
)


139,028Income before provision for income taxes


213,215



(29,434
)


183,781Net income


156,456



(18,985
)


137,471Net income per share  basic

$
0.97


$
(0.12
)

$
0.85Net income per share  diluted

$
0.96


$
(0.12
)

$
0.84Cash flows from operating activities


295,449



(4,960
)


290,489Cash flows used in financing activities


(202,671
)


4,960



(197,711
)  175




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year EndedDecember 31,2006Amortization of fair value of options issued to employees

$
30,660Former employees  extension of post-termination
    exercise period


4,326Former executive acceleration


1,419Cash settlement of options


3,066Restricted stock awards and units


16,426Employee Stock Purchase Plan


1,864Total stock-based compensation expense

$
57,761   Amortization of fair value of options issued to
    employees.
  Former employees  extension of post-termination
    exercise period.
  EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own Stock (EITF 00-19).
   176




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  EITF 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock.
  Former executive acceleration.
  Cash settlement of options.
  Restricted stock awards and units.
  Employee Stock Purchase Plan.
 177




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year EndedDecember 31,2006Cost of net revenue  service and support

$
1,968Cost of net revenue  subscription


699Cost of net revenue  product


750Stock-based compensation expense included in cost of net revenue


3,417Research and development


15,042Marketing and sales


24,289General and administrative


15,013Stock-based compensation expense included in operating expense


54,344Total stock-based compensation expense related to stock-based
    equity awards


57,761Deferred tax benefit


(15,672
)Total stock-based compensation expense related to stock-based
    equity awards, net of tax

$
42,089       Modifications
    in 2006 to Certain Stock Options Granted to Former Executive
    Officers and Current Directors
     178




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Assumptions
    used under SFAS 123(R) and SFAS 123
    Years Ended December 31,2006


2005


2004Stock option grants:Risk free interest rate


4.8
%


3.9
%


3.1
%Weighted average expected lives (years)


5.6



4.0



4.0Volatility


37.4
%


54.4
%


62.8
%Dividend yield










ESPP:Risk free interest rate


4.6
%


3.1
%


2.0
%Weighted average expected lives (years)


0.5



1.0



1.3Volatility


38.0
%


40.0
%


47.5
%Dividend yield










     Years Ended December 31,2006

2005

2004Weighted-average grant date fair value of options granted

$
10.47


$
11.24


$
9.26Weighted-average fair value of employee stock purchase rights

$
6.11


$
8.41


$
6.58    179




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Pro
    Forma Information under SFAS 123 for Periods Prior to
    January 1, 2006
    Years Ended December 31,2005


2004Net income

$
118,217


$
220,017Add:Stock-based compensation expense included in reported net
    income, net of tax


3,170



16,363Deduct:Total stock-based compensation expense determined under fair
    value based method for all awards, net of tax


(36,803
)


(27,710
)Pro forma net income

$
84,584


$
208,670Net income per share:As reportedBasic

$
0.72


$
1.37Diluted

$
0.70


$
1.28Pro formaBasic

$
0.51


$
1.30Diluted

$
0.50


$
1.22   Stock-Based
    Compensation Recognized Prior to January 1,
    2006
    Years Ended December 31,2005


2004Grant date intrinsic value

$
3,873


$
7,031Restricted stock awards


1,078



426Exchange of McAfee.com options


290



6,516Repriced options


(770
)


7,283Former employees






2,759Extended life of vested options of terminated employees






1,148Total stock-based compensation expense


4,471



25,163Deferred tax expense


(1,301
)


(8,800
)Total stock-based compensation expense, after-tax

$
3,170


$
16,363   Grant date intrinsic value.
 180




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Restricted stock awards.
    Exchange of McAfee.com options.
    Repriced options.
     181




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Former Employees.
      Extended Life of Vested Options Held by Terminated
    Employees. 90-day
 182




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2005


2004Cost of net revenue  services and support

$
14


$
215Cost of net revenue  subscription


36



109Cost of net revenue  product


(5
)


713Stock-based compensation expense included in cost of net revenue


45



1,037Research and development


524



9,538Marketing and sales


1,482



6,703General and administrative


2,420



6,810Loss on sale of assets and technology






84Severance/bonus costs related to Sniffer and Magic dispositions






991Stock-based compensation expense included in operating expense


4,426



24,126Total stock-based compensation expense related to stock-based
    equity awards

$
4,471


$
25,163   Internal
    Revenue Code Section 409A
      17.
    Provision
    for Income Taxes    December 31,2006


2005


2004Domestic

$
47,493


$
105,008


$
169,871Foreign


136,288



61,670



132,943$
183,781


$
166,678


$
302,814  183




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2006


2005


2004Federal:Current

$
28,948


$
55,342


$
(3,287
)Deferred


(17,489
)


(8,446
)


56,337Total Federal


11,459



46,896



53,050State:Current


4,877



14,291



1,866Deferred


(169
)


(253
)


8,898Total State


4,708



14,038



10,764Foreign:Current


42,255



4,098



25,459Deferred


(12,112
)


(16,571
)


(6,476
)Total Foreign


30,143



(12,473
)


18,983Provision for income taxes

$
46,310


$
48,461


$
82,797     Years Ended December 31,2006


2005ASSETSDeferred revenue

$
221,571


$
192,417Accrued liabilities and allowances


71,785



63,566Depreciation and amortization


115,114



139,827Tax credits


107,846



99,730Deferred stock-based compensation


19,372



7,275Net operating loss carryover


39,735



36,869575,423



539,684Valuation allowance


(70,088
)


(57,061
)Total deferred tax assets


505,335



482,623LIABILITIESIntangibles not amortizable for tax purposes


28,510



31,211Prepaid and other assets


12,412



9,234Total deferred tax liability


40,922



40,445Net deferred tax asset

$
464,413


$
442,178Current portion

$
236,310


$
204,208Noncurrent portion


228,103



237,970$
464,413


$
442,178  184




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      FSP 109-2. and/or non-U.S. subsidiaries. non-U.S. subsidiaries
   185




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2006


2005


2004Federal income tax provision at statutory rate

$
64,201


$
58,335


$
105,985State tax expense (net of Federal benefit)


3,808



5,303



12,094Non deductible acquisition and other costs


161



1,407



22,840Foreign earnings taxed at rates different than the Federal rate


(23,294
)


(22,257
)


(8,024
)Federal and state tax expense related to SEC settlement






19,638



Goodwill and other permanent differences


1,593



(2,017
)


(4,261
)Tax credits and other benefits


(5,767
)


(1,148
)


(18,157
)Repatriation of foreign earnings under the American Jobs
    Creation Act of 2004






1,531



Actual/deemed repatriations of earnings from foreign subsidiaries


3,399



4,528



1,417Stock compensation


4,339



(6,598
)


(156
)Benefit from accruals for tax exposures and valuation allowances


(2,130
)


(10,261
)


(28,941
)$
46,310


$
48,461


$
82,797   18.
    Net
    Income Per Share    Years Ended December 31,2006


2005


2004Numerator  Basic net income

$
137,471


$
118,217


$
220,017Numerator  Diluted net income

$
137,471


$
118,217


$
220,017Interest on convertible debentures(1)










7,556Net income, adjusted

$
137,471


$
118,217


$
227,573Denominator  BasicBasic weighted-average common shares outstanding


160,945



165,042



160,510Denominator  DilutedBasic weighted-average common shares outstanding


160,945



165,042



160,510Effect of dilutive securities:Convertible debentures(1)










12,154Common stock options, restricted stock units and shares subject
    to repurchase(2)


2,107



4,207



4,697Warrants










24Diluted weighted-average shares


163,052



169,249



177,385Net income per share  Basic

$
0.85


$
0.72


$
1.37Net income per share  Diluted

$
0.84


$
0.70


$
1.28  186




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (1)
    
    The convertible debt was repaid in 2004 so there were no amounts
    outstanding in 2005 and 2006.(2)
    
    At December 31, 2006, 2005 and 2004, 7.2 million,
    2.2 million and 4.7 million options to purchase common
    stock, respectively, were excluded from the calculation since
    the effect was anti-dilutive.  19.
    Business
    Segment and Major Customer Information     187




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2006


2005


2004Net revenue by region:North America

$
633,222


$
563,651


$
551,264EMEA


354,592



282,034



243,392Japan


87,121



75,973



54,160Asia-Pacific, excluding Japan


43,018



38,480



38,866Latin America


27,205



21,490



19,891Net revenue

$
1,145,158


$
981,628


$
907,573Income from operations by region:North America

$
231,611


$
206,350


$
190,216EMEA


183,599



122,047



91,284Japan


51,081



41,306



21,421Asia-Pacific, excluding Japan


2,067



6,729



12,273Latin America


16,550



10,539



2,304Corporate


(345,880
)


(245,564
)


(7,246
)Income from operations

$
139,028


$
141,407


$
310,252Depreciation expense by region:North America

$
12,269


$
12,209


$
12,457EMEA


1,842



1,419



2,180Japan


381



370



688Asia-Pacific, excluding Japan


2,352



1,478



1,763Latin America


175



109



112Corporate


18,858



20,810



22,013Depreciation expense

$
35,877


$
36,395


$
39,213    188




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2006


2005


2004General and administrative and other operating costs

$
164,738


$
105,976


$
128,127Corporate marketing


61,817



41,720



65,036Stock-based compensation


57,761



4,471



24,088Amortization of purchased technology and other intangibles


34,394



30,601



29,122SEC settlement charge






50,000



SEC and compliance costs


17,824







Acquisition and retention bonuses


8,157



4,436



3,654Restructuring charges


470



3,782



17,442In-process research and development


460



4,000



Loss (gain) on sale of assets and technology


259



(56
)


(240,336
)Divestiture costs






996



1,031Reimbursement from transition services agreement






(362
)


(5,997
)Severance/bonus costs related to Sniffer and Magic disposition










10,070Reimbursement related to litigation settlement










(24,991
)Corporate expenses

$
345,880


$
245,564


$
7,246     December 31,2006


2005North America

$
2,016,617


$
2,151,880EMEA


578,193



306,404Japan


100,649



70,709Asia-Pacific, excluding Japan


33,109



36,080Latin America


15,754



15,120Corporate


55,948



56,041Total assets

$
2,800,270


$
2,636,234  189




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005India

$
9,790


$
6,149Japan


3,334



4,060United Kingdom


4,575



2,582Ireland


1,720



2,117The Netherlands


144



363Other foreign countries


5,126



3,917Total foreign countries


24,689



19,188United States


67,310



66,504Total

$
91,999


$
85,692     Years Ended December 31,2006


2005


2004United Kingdom

$
101,824


$
75,281


$
67,635Germany


53,145



48,397



42,029Japan


87,121



75,973



54,160Canada


26,401



34,099



35,333Other foreign countries


269,846



218,326



192,486Total foreign countries


538,337



452,076



391,643United States


606,821



529,552



515,930Total

$
1,145,158


$
981,628


$
907,573     20.
    Litigation  Settled
    Cases
    Formal Order of Private
    Investigation
 190




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    In re Network Associates, Inc. II
    Securities Litigation
  Open
    Cases
    Government
    Inquiries Relating to Historical Stock Option
    Practices
        Securities
    Cases
   191




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  In re
    McAfee, Inc. Derivative Litigation,
        In re McAfee.com Corp. Initial Public
    Offering Securities Litigation, In re Initial Public Offering
    Securities Litigation,
 192




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Other
  No. 107CV-093592
      21.
    Related
    Party Transactions    22.
    Subsequent
    Events   193




---



##### Table of Contents



MCAFEE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    e-commerce e-commerce
 194




---



##### Table of Contents



SIGNATURES
      By: /s/  David
    G. DeWalt   Chief Executive Officer and President
    Signature

Title

Date/s/  David
    G. DeWalt(David
    G. DeWalt)

Chief Executive Officer and President

December 21, 2007/s/  Eric
    F. Brown(Eric
    F. Brown)

Chief Financial Officer and Chief Operating Officer

December 21, 2007/s/  Charles
    J. Robel(Charles
    J. Robel)

Chairman of the Board

December 21 , 2007/s/  Robert
    B. Bucknam(Robert
    B. Bucknam)

Director

December 21, 2007/s/  Leslie
    G. Denend(Leslie
    G. Denend)

Director

December 21, 2007/s/  Denis
    J. OLeary(Denis
    J. OLeary)

Director

December 21, 2007/s/  Robert
    W. Pangia(Robert
    W. Pangia)

Director

December 21, 2007/s/  Liane
    Wilson(Liane
    Wilson)

Director

December 21, 2007  195




---



##### Table of Contents



EXHIBIT INDEX
  Incorporated by ReferenceExhibit





File

Exhibit



Filed withNumber

Description

Form

Number

Number

Filing Date

this 10-K3
.1

Second Restated Certificate of Incorporation of the Registrant,
    as amended on December 1, 1997

S-4

333-48593


3
.1

March 25, 19983
.2

Certificate of Ownership and Merger between Registrant and
    McAfee, Inc.

10-Q

001-31216


3
.2

November 8, 20043
.3

Second Amended and Restated Bylaws of the Registrant.

10-Q

001-31216


3
.3

November 8, 20043
.4

Certificate of Designation of Series A Preferred Stock of
    the Registrant

10-Q

000-20558


3
.3

November 14, 19963
.5

Certificate of Designation of Rights, Preferences and Privileges
    of Series B Participating Preferred Stock of the Registrant

8-A

000-20558


5
.0

October 22, 19984
.3

Indenture dated as of August 17, 2001 between the
    Registrant and State Street Bank and Trust Company of
    California, N.A.

S-3

333-73112


4
.3

November 9, 200110
.1

Lease Assignment dated November 17, 1997 for facility at
    3965 Freedom Circle, Santa Clara, California by and between
    Informix Corporation and the Registrant

S-3

333-46049


10
.13

February 11, 199810
.2

Consent to Assignment Agreement dated December 19, 1997 by
    and among Birk S. McCandless, LLC, Guaranty Federal Bank,
    F.S.B., Informix Corporation and the Registrant

S-3

333-46049


10
.14

February 11, 199810
.3

Subordination, Nondisturbance and Attornment Agreement dated
    December 18, 1997, between Guaranty Federal Bank, F.S.B.,
    the Registrant and Birk S. McCandless, LLC

S-3

333-46049


10
.15

February 11, 199810
.4

Form of lease executed November 22, 1996 by and between
    Birk S. McCandless, LLC and Informix Corporation for facility at
    3965 Freedom Circle, Santa Clara, California

S-3

333-46049


10
.16

February 11, 199810
.5*

2002 Employee Stock Purchase Plan, as amended

S-8

333-126929


4
.1

July 27, 200510
.6*

1997 Stock Incentive Plan, as amended

S-8

333-126928


4
.1

July 27, 2005 196




---



##### Table of Contents



Incorporated by ReferenceExhibit





File

Exhibit



Filed withNumber

Description

Form

Number

Number

Filing Date

this 10-K10
.7*

Amended and Restated 1993 Stock Option Plan for Outside Directors

10-K

001-31216


10
.7

October 31, 200310
.8*

2000 Nonstatutory Stock Option Plan

10-K

000-20558


10
.20

April 2, 200110
.9*

Employment agreement dated February 23, 2007 by and between
    David DeWalt and the Registrant

8-K

001-31216


10
.1

March 8, 200710
.11

First Amendment to Lease dated March 20, 1998 between Birk
    S. McCandless, LLC and the Registrant

10-Q

000-20558


10
.28

November 13, 200110
.12

Confirmation, Amendment and Notice of Security Agreement dated
    March 20, 1998 among Informix Corporation, Birk S.
    McCandless, LLC and the Registrant

10-Q

000-20558


10
.29

November 13, 200110
.13

Second Amendment to Lease dated September 1, 1998 among
    Informix Corporation, Birk S. McCandless, LLC and the Registrant

10-Q

000-20558


10
.30

November 13, 200110
.14

Subordination, Non-disturbance and Attornment Agreement dated
    June 21, 2000, among Column Financial, Inc., Informix
    Corporation, Birk S. McCandless, LLC, and the Registrant

10-Q

000-20558


10
.31

November 13, 200110
.15*

Release of Claims dated February 6, 2007 by and between
    George Samenuk and the Registrant

8-K

001-31216


10
.1

February 7, 200710
.16

Form of Indemnification Agreement between the Registrant and its
    Executive Officers

10-K

001-31216


10
.34

March 9, 200410
.17*

Summary of Pay for Performance Plan

10-K

001-31216


10
.33

October 31, 200310
.18*

Network Associates, Inc. Tax Deferred Savings Plan

S-8

333-110257


4
.1

November 5, 200310
.19

Umbrella Credit Facility of Registrant dated April 15, 2004

10-Q

001-31216


10
.36

May 10, 200410
.20

Fifth Amendment to Network Associates, Inc. Tax Deferred Savings
    Plan

10-Q

001-31216


10
.37

May 10, 200410
.21

Sixth Amendment to Network Associates, Inc. Tax Deferred Savings
    Plan

10-Q

001-31216


10
.43

August 9, 2004 197




---



##### Table of Contents



Incorporated by ReferenceExhibit





File

Exhibit



Filed withNumber

Description

Form

Number

Number

Filing Date

this 10-K10
.22*

Employment Agreement between Registrant and Eric F. Brown dated
    December 10, 2004

8-K

001-31216


10
.1

December 14, 200410
.23*

2005 Independent Director Cash Compensation Plan

10-K/A

001-31216


10
.46

May 24, 200510
.24*

Executive Officer Annual Compensation for Fiscal Year Ending
    December 31, 2006

8-K

001-31216


10
.1

March 13, 200610
.25*

Chief Executive Officer Annual Compensation for Fiscal Year
    Ending December 31, 2006

8-K

001-31216


10
.1

March 28, 200610
.26*

Letter agreement, dated February 23, 2007, between
    Registrant and David DeWalt

8-K

001-31216


10
.1

March 8, 200610
.27*

First Amendment to Employment Agreement between Registrant and
    Eric F. Brown dated May 26, 2005

8-K

001-31216


10
.3

May 26, 200510
.28*

Letter Agreement Amendment to Employment Agreement between the
    Registrant and Eric F. Brown dated January 31, 2006

10-K

001-31216


10
.36

March 1, 200610
.28*

Employment Agreement between William Kerrigan and the
    Registrant, dated October 1, 2004, as amended by First
    Amendment to Employment Agreement dated May 24, 2005

10-K

001-31216


10
.37

March 1, 200621
.1

Subsidiaries of the Registrant











X23
.1

Consent of Independent Registered Public Accounting Firm











X31
.1

Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002











X32
.1

Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002











X     *
    
    Management contracts or compensatory plans or arrangements
    covering executive officers or directors of McAfee, Inc. 198




---



##### Table of Contents



SCHEDULE II
  MCAFEE,
    INC.
  VALUATION
    AND QUALIFYING ACCOUNTS
  Provision forDoubtfulAccounts,


Write-OffsAdditions Charged


ofBalance at


to Expense,


Previously


Balance atBeginning of


Deferred Revenue or


Provided


End ofPeriod


Net Revenue(1)


Accounts


Period(In thousands)Year Ended December 31, 2006Allowance for Doubtful Accounts

$
2,389


$
884


$
(1,258
)

$
2,015Year Ended December 31, 2005Allowance for Doubtful Accounts

$
2,275


$
923


$
(809
)

$
2,389Year Ended December 31, 2004Allowance for Doubtful Accounts

$
3,062


$
144


$
(931
)

$
2,275     (1)
    
    Allowance for Doubtful Accounts, Net.  The
    provision for doubtful accounts, net consists of our estimates
    with respect to the uncollectibility of our receivables, net of
    recoveries of amounts previously written off. Our management
    must make estimates of the uncollectibility of our accounts
    receivables. Management specifically analyzes accounts
    receivable and analyzes historical bad debts, customer
    concentrations, customer credit-worthiness, current economic
    trends and changes in our customer payment terms when evaluating
    the adequacy of the allowance for doubtful accounts.  Provision forSales Returnsand OtherBalance at


Incentives


Actual


Balance atBeginning of


Charged to Net


Returns and


End ofPeriod


Revenue(2)


Incentives


Period(In thousands)Year Ended December 31, 2006Sales Returns and Other Incentives

$
31,939


$
139,054


$
(131,219
)

$
39,774Year Ended December 31, 2005Sales Returns and Other Incentives

$
29,321


$
145,525


$
(142,907
)

$
31,939Year Ended December 31, 2004Sales Returns and Other Incentives

$
41,345


$
63,701


$
(75,725
)

$
29,321     (2)
    
    Allowance for Sales Returns and Other
    Incentives.  The allowance for sales returns and
    incentives consists of our estimates of potential future product
    returns related to current period product revenue, and specific
    provisions for distributor, reseller, and retailer sales
    incentives that are reductions in the revenue to be realized. We
    analyze and monitor current and historical return rates, current
    economic trends and changes in customer demand and acceptance of
    our products when evaluating the adequacy of the sales returns
    and other allowances. We also budget for our sales incentives,
    such as end-user rebates, volume incentive rebate programs and
    marketing funds each quarter and determine amounts to be spent
    and we monitor amounts spent against our budgets. These
    estimates affect our net revenue line item on our statement of
    income and affect our net accounts receivable line item on our
    consolidated balance sheet. These estimates affect all of our
    operating geographies. 199