##### 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 1934    
|   |  | For the Fiscal Year Ended December 31, 2004                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|   |  | For the Transition Period
    from           to                                             

Commission File Number: 001-31216


McAfee, Inc.


(Exact name of registrant as specified in its charter)


|                                                                                        |  |                                            
|--------------------------------------------------------------------------------------- |  | -------------------------------------------
|Delaware                                                                                |  | 77-0316593                                 
|(State or other jurisdiction
    of incorporation or organization)                      |  | (I.R.S. Employer
    Identification Number)
|                                                                                       
|3965 Freedom Circle
    Santa Clara, California(Address of principal executive offices) |  | 95054(Zip Code)                            

Registrants telephone number, including area code:


(408) 988-3832


Securities registered pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, $0.01 Par Value,


together with associated Rights


þ o


o


þ o




DOCUMENTS INCORPORATED BY REFERENCE














---



MCAFEE INC.


FORM 10-K


For the fiscal year ended December 31, 2004







TABLE OF CONTENTS


|                                                     |  |                                                                                                    |     |      |    | 
|---------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                                     |  |                                                                                                    |     | Page |   
|                                                     |  |                                                                                                    |     |      |   
|PART I                                               |  |                                                                                                    |     |     
|Item 1.                                              |  | Business                                                                                           |     |      | 2  | 
|Item 2.                                              |  | Properties                                                                                         |     |      | 25 | 
|Item 3.                                              |  | Legal Proceedings                                                                                  |     |      | 25 | 
|Item 4.                                              |  | Submission of Matters to a Vote of Security
    Holders                                            |     |      | 25 | 
|                                                    
|PART II                                              |  |                                                                                                    |     |     
|Item 5.                                              |  | Market for the Registrants Common
    Equity and Related Stockholder Matters                      |     |      | 26 | 
|Item 6.                                              |  | Selected Financial Data                                                                            |     |      | 28 | 
|Item 7.                                              |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations          |     |      | 29 | 
|Item 7A.                                             |  | Quantitative and Qualitative Disclosure
    about Market Risk                                      |     |      | 57 | 
|Item 8.                                              |  | Financial Statements and Supplementary
    Data                                                    |     |      | 58 | 
|Item 9.                                              |  | Changes In and Disagreements with
    Accountants on Accounting and Financial Disclosure           |     |      | 59 | 
|Item 9A.                                             |  | Controls and Procedures                                                                            |     |      | 59 | 
|Item 9B                                              |  | Other Information                                                                                  |     |      | 63 | 
|                                                    
|PART III                                             |  |                                                                                                    |     |     
|Item 10.                                             |  | Directors and Executive Officers of the
    Registrant                                             |     |      | 64 | 
|Item 11.                                             |  | Executive Compensation                                                                             |     |      | 64 | 
|Item 12.                                             |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters |     |      | 64 | 
|Item 13.                                             |  | Certain Relationships and Related
    Transactions                                                 |     |      | 64 | 
|Item 14                                              |  | Principal Accountant Fees and Services                                                             |     |      | 64 | 
|                                                    
|PART IV                                              |  |                                                                                                    |     |     
|Item 15.                                             |  | Exhibits and Financial Statement
    Schedules                                                     |     |      | 65 | 
|Signatures                                           |  |                                                                                                    | 122 |     
|2005 Independent Director Cash Compensation Plan    
|Subsidiaries                                        
|Consent of Deloitte & Touche LLP                    
|Consent of PricewaterhouseCoopers LLP               
|Certification of CEO and CFO Pursuant to Section 302
|Certification of CEO and CFO Pursuant to Section 906



1



---



##### Table of Contents






PART I







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

General










OVERVIEW






2



---



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | McAfee System Protection Solutions, which delivers anti-virus
    and security products and services designed to protect systems
    such as desktops and servers and                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | McAfee Network Protection Solutions, which offers products
    designed to maximize the performance and security of networks
    and network intrusion prevention with McAfee IntruShield and
    McAfee Foundstone. We sold our Sniffer Technologies product line
    to Network General Corporation on July 16, 2004.
    Previously, this product line included products designed to
    capture data, monitor network traffic and collect and report on
    key network statistics, and comprised a significant portion of
    our revenue.





McAfee System Protection Solutions








McAfee Network Protection Solutions




3



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Expert Services and Technical Support












| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PrimeSupport ServicePortal  Consists of a
    searchable, knowledge base of technical solutions and links to a
    variety of technical documents such as product FAQs and
    technical notes.                                                                                                                                                 
|
| |  | PrimeSupport Connect  Provides toll-free
    telephone access to technical support during regular business
    hours and access to the on-line ServicePortal.                                                                                                                                                                                   
|
| |  | PrimeSupport Priority  Provides priority,
    unlimited, toll-free (where available) telephone access to
    technical support 24 hours a day, 7 days a week and
    access to the on-line ServicePortal.                                                                                                                                       
|
| |  | PrimeSupport Enterprise  Offers proactive,
    personalized service and includes an assigned technical support
    engineer from our Enterprise support team, proactive support
    contact (telephone or email) with customer-defined frequency,
    election of five designated customer contacts and access to the
    on-line ServicePortal.



Research and Development






4



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Strategic Alliances




Product Licensing Model






On-Line Subscriptions and Managed Applications








5



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Sales and Marketing






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





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





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









6



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| |                                 
| | --------------------------------
| | Original Equipment Manufacturers





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







Customers






Product Development, Investments, and Acquisitions






7



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Manufacturing and Suppliers




Competition






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



Anti-Virus.


Network Security and Intrusion Detection and Protection.


8



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Other Competitors.


Proprietary Technology




Employees




9



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##### Table of Contents



RISK FACTORS


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


Our Financial Results Will Likely Fluctuate.






| |                    
| | -------------------
| | Operational Factors





| |   |                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | introduction of new products, product upgrades or updates by us
    or our competitors;                                                                                                                                                                                                                                                                                     
|
| |  | volume, size, timing and contractual terms of new licenses and
    renewals of existing licenses;                                                                                                                                                                                                                                                                           
|
| |  | our perpetual plus licensing program, in the near
    term;                                                                                                                                                                                                                                                                                                               
|
| |  | the mix of products we sell and services we offer and whether
    (i) our products are sold directly by us or indirectly
    through distributors, resellers, ISPs such as AOL, and
    others, (ii) the product is hardware or software based and
    (iii) in the case of software licenses, the licenses are
    perpetual licenses or time-based subscription licenses;
|
| |  | system, supply of manufactured products and personnel
    limitations 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,
    including our acquisitions of Foundstone in 2004 and of
    Entercept Security Technologies and IntruVert Networks in 2003,
    the dispositions of our Magic and Sniffer product lines and the
    announced disposition of our McAfee Labs assets;                                                      
|
| |  | the components of our revenue that are deferred, including our
    on-line subscriptions and that portion of our software licenses
    attributable to support and maintenance;                                                                                                                                                                                             
|
| |  | stock-based compensation charges;                                                                                                                                                                                                                                                                                                                                           
|
| |  | costs and charges related to certain events, including our
    ongoing cost reduction and profitability plan, Sarbanes-Oxley
    compliance efforts, litigation, reductions in force, relocation
    of personnel and previous financial restatements; and                                                                                                                  
|
| |  | factors that lead to substantial drops in estimated values of
    long-lived assets below their carrying value.                                                                                                                                                                                                                                                             



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



10



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




Our Business Transformation, Dispositions and Cost Reduction
Plan, Expose Us to Significant Risks.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our growth and/or profitability may not increase in the
    near-term or at all and we may fail to achieve desired savings
    or performance targets on a timely basis or at all;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | an increased dependence on our channel and other partners to
    sell our products, particularly to enterprise and small to
    medium sized business (SMB) customers, following the
    transfer of a significant portion of our direct sales force in
    the Sniffer transaction;                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | our strategic positioning may result in our competing more
    directly with larger, more established competitors, such as
    Cisco Systems and Microsoft;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | our business, including internal finance and IT operations, has
    been and may continue to be disrupted and strained due to, among
    other things, our cost saving measures, our Sniffer post-closing
    support obligations (including our obligation to produce
    stand-alone audited historical Sniffer financial statements) and
    personnel losses;                                                                                                                                                                                                                                                                                                                                                              
|
| |  | we have centralized our order processing operations from Latin
    America to Plano, Texas and we have also moved the EMEA shared
    services center and our localization operations from Amsterdam
    to Cork, Ireland. We have also transitioned a significant
    portion of our research and development personnel to our
    research facility in Bangalore, India. These events could result
    in the loss of personnel unwilling to relocate, reduced service
    levels due to time zone differences, difficulties in finding
    personnel with sufficient language capabilities and loss of
    direct, on-the-ground finance and accounting oversight in the
    sales regions being serviced on a remote basis;
|
| |  | we may experience an undesired loss of sales, research and
    development, finance and other personnel and it may be difficult
    for us to find suitable replacements;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | we have installed a new customer relationship management system,
    providing our finance and sales teams information in a different
    format than previously available and, in some cases, with less
    information. During the transition period to our new system, we
    may experience, among other things, related reduced operational
    efficiencies, losses of information and a decreased ability to
    monitor or forecast our business;                                                                                                                                                                                                                                                                      
|
| |  | we may be unable to successfully expand our McAfee brand
    significantly beyond our anti-virus products;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

11



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| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | many of our products and service capabilities were recently
    acquired and the income potential for these products and
    services is unproven and the market for these products is
    volatile;
|
| |  | there may be customer confusion around our strategy.                                                                                                                                                

We Are Subject to Intense Competition in the System and
Network Protection Markets, and We Expect to Face Increased
Competition in the Future.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in the anti-virus product market, Symantec and Computer
    Associates. Trend Micro remains the strongest competitor in the
    Asian anti-virus market. F-Secure, Dr. Ahns, Panda
    and Sophos are also showing growth in their respective markets.
    Microsoft has continued to make acquisitions and has announced
    its intention to enter all segments of the anti-virus market at
    the end of 2005; and
|
| |  | in the market for our other intrusion detection and protection
    products, Cisco Systems, Computer Associates, Internet Security
    Systems, Juniper Networks, Symantec and 3Com Corporation.                                                                                                                                                                                                                       





We Face Risks in Connection With The Material Weaknesses
Resulting From Our Sarbanes-Oxley Section 404 Management
Report and Any Related Remedial Measures That We Undertake.






12



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








Critical Personnel May Be Difficult to Attract, Assimilate
and Retain.






| |                                                                 
| | ----------------------------------------------------------------
| | Competition for Personnel; Need for Competitive Pay
    Packages



13



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| |                               
| | ------------------------------
| | Impact of Personnel Reductions





| |                                                                   
| | ------------------------------------------------------------------
| | Reduced Productivity of New Hires; Senior Management
    Additions









| |                                                
| | -----------------------------------------------
| | Senior Management and Critical Personnel Losses





We Face Risks Associated with Past and Future
Acquisitions.




14



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| |            
| | -----------
| | 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





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

15



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



We Face Risks Related to Our International Operations.








| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | longer payment cycles and greater difficulty in collecting
    accounts receivable;                                                                                                                                                                              
|
| |  | increased costs and management difficulties related to the
    building of our international sales and support organization;                                                                                                                                     
|
| |  | the acceptance of our business strategy and the reorganization
    of our international sales forces by regions;                                                                                                                                                 
|
| |  | the ability to successfully localize software products for a
    significant number of international markets;                                                                                                                                                    
|
| |  | our ability to effectively provide service and support for our
    hardware based products from the U.S.;                                                                                                                                                        
|
| |  | our ability to successfully establish, manage and staff shared
    service centers for worldwide sales and finance and accounting
    operations centralized from locations in the U.S. and Europe;                                                              
|
| |  | our ability to adapt to sales practices and customer
    requirements in different cultures;                                                                                                                                                                     
|
| |  | compliance with more stringent consumer protection and privacy
    laws;                                                                                                                                                                                         
|
| |  | currency fluctuations, including recent weakness of the
    U.S. dollar relative to other currencies, or the
    strengthening of the U.S. dollar in future periods that may
    have an adverse impact on revenues, and risks related to hedging
    strategies;
|
| |  | political instability in both established and emerging markets;                                                                                                                                                                                                  
|
| |  | tariffs, trade barriers and export restrictions;                                                                                                                                                                                                                 
|
| |  | a high incidence of software piracy in some countries; and                                                                                                                                                                                                       
|
| |  | international labor laws and our relationship with our employees
    and regional work councils.                                                                                                                                                                 



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




16



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




Customers May Cancel or Delay Purchases.




17



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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;                                                                                                                                                                             
|
| |  | extend security technologies to additional digital devices;                                                                                                                                                                         
|
| |  | respond promptly to new customer requirements and industry
    standards;                                                                                                                                                           
|
| |  | provide frequent, low cost upgrades and updates for our
    products; and                                                                                                                                                           
|
| |  | remain compatible with popular operating systems such as Linux,
    NetWare, Windows XP, Windows 2000, Windows 98 and
    Windows NT, and develop products that are compatible with
    new or otherwise emerging operating systems.



We Face a Number of Risks Related to Our Product Sales
Through Distributors.






| |                           
| | --------------------------
| | Sale of Competing Products



18



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| |                      
| | ---------------------
| | Loss of a Distributor





| |                      
| | ---------------------
| | Delayed Effectiveness





| |                                          
| | -----------------------------------------
| | Need for Accurate Distributor Information





| |                     
| | --------------------
| | Payment Difficulties



We Face the Risk of Future Charges in the Event of Impairment
and Will Experience Significant Amortization Charges Related to
Purchased Technology.




Accounting for Impairment or Disposal of Long-Lived
Assets.


We Face Risks Related to Our Strategic Alliances.






| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our strategic alliances are generally terminable by either party
    with no or minimal notice or penalties. We may expend
    significant time, money and resources to further strategic
    alliances that are thereafter terminated.

19



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| |   |                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Business interests may diverge over time, which might result in
    conflict, termination or a reduction in collaboration. For
    example, our alliance with Internet Security Systems was
    terminated following the announcement of our acquisition in 2003
    of Entercept and IntruVert.                                             
|
| |  | Strategic alliances require significant coordination between the
    parties involved. To be successful, our alliances may require
    the integration of other companies products with our
    products, which may involve significant time and expenditure by
    our technical staff and the technical staff of our strategic
    allies.
|
| |  | Our sales and marketing force may require additional training to
    market products that result from our strategic alliances. The
    marketing of these products may require additional sales force
    efforts and may be more complex than the marketing of our own
    products.                                                        
|
| |  | The integration of products from different companies may be more
    difficult than we anticipate, and the risk of integration
    difficulties, incompatible products and undetected programming
    errors or bugs may be higher than that normally associated with
    new products.                                                      
|
| |  | Our strategic alliances may involve providing professional
    services, which might require significant additional training of
    our professional services personnel and coordination between our
    professional services personnel and other third-party
    professional service personnel.                                           
|
| |  | We may be required to share ownership in technology developed as
    part of our strategic alliances.                                                                                                                                                                                                                                        
|
| |  | Due to the complex nature of our products and of those parties
    with whom we have strategic alliances, it may take longer than
    we anticipate to successfully integrate and market our
    respective products.                                                                                                                        

Our Products Face Manufacturing, Supply, Inventory, Licensing
and Obsolescence Risks.




| |                          
| | -------------------------
| | Third-Party Manufacturing





| |         
| | --------
| | Sourcing





| |                     
| | --------------------
| | Third-Party Licenses



20



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| |             
| | ------------
| | Obsolescence



We Face Risks Related to Customer Outsourcing to System
Integrators.




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.                    





21



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Pending or Future Litigation Could Have a Material Adverse
Impact on Our Results of Operation and Financial Condition.




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.




Product Liability and Related Claims May Be Asserted Against
Us.




Computer Hackers May Damage Our Products,
Services and Systems.




22



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




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




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




Potential Terrorist Attacks and Any Governmental Response
Could Have a Material Adverse Effect on the U.S. and Global
Economies and Could Adversely Impact the Internet and Our
Products and Business.




23



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We Face Risks Associated with Governmental Contracting.






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





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





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





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



Cryptography Contained in Our Technology is Subject to Export
Restrictions.




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





24



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








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










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








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



25



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##### Table of Contents






PART II







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

Price Range of Common Stock






|                             |  |      |       |  |     |   |       | 
|---------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|                             |  | High |       |  | Low |  
|                             |  |      |       |  |     |  
|Year Ended December 31, 2004 |  |      |       |  |     |   |       | 
|First Quarter                |  | $    | 18.50 |  |     | $ | 14.96 | 
|Second Quarter               |  |      | 19.75 |  |     |   | 15.68 | 
|Third Quarter                |  |      | 20.10 |  |     |   | 16.04 | 
|Fourth Quarter               |  |      | 33.39 |  |     |   | 20.46 | 
|Year Ended December 31, 2003 |  |      |       |  |     |   |       | 
|First Quarter                |  | $    | 20.28 |  |     | $ | 13.72 | 
|Second Quarter               |  |      | 14.40 |  |     |   | 10.80 | 
|Third Quarter                |  |      | 15.50 |  |     |   | 10.75 | 
|Fourth Quarter               |  |      | 15.59 |  |     |   | 12.95 | 

Dividend Policy




Holders of Common Stock




26



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Common Stock Repurchases




|                                       |       |           |       |        |            |                     |                  |                   |                    |                 |                      |        |  |   |         |  | 
|-------------------------------------- | ----- | --------- | ----- | ------ | ---------- | ------------------- | ---------------- | ----------------- | ------------------ | --------------- | -------------------- | ------ |  | - | ------- |  | 
|                                       |       |           |       |        |            | Total Number of     |                  |                   | Approximate Dollar |                
|                                       |       |           |       |        |            | Shares Purchased as |                  |                   | Value of Shares    |                
|                                       |       | Total     |       |        |            |                     | Part of Publicly |                   |                    | That May yet be |                     
|                                       |       | Number of |       |        | Average    |                     |                  | Announced Plan or |                    |                 | Purchased Under      |       
|                                       |       | Shares    |       |        | Price Paid |                     |                  | Repurchase        |                    |                 | Our Stock Repurchase |       
|Period                                 |       | Purchased |       |        | per Share  |                     |                  | Program(1)        |                    |                 | Program(1)           |       
|                                       |       |           |       |        |            |                     |                  |                   |                    |                 |                      |       
|November 1, 2003 - November 30, 2003   |       |           |      |        |            |                     |                 |                   |                    |                 |                     |        |  | $ | 150,000 | 
|December 1, 2003 - December 31, 2003   |       |           | 350   |        |            | $                   | 13.45            |                   |                    |                 | 350                  |        |  | $ | 145,293 | 
|April 1, 2004 - April 30, 2004         |       |           | 450   |        |            | $                   | 15.86            |                   |                    |                 | 450                  |        |  | $ | 138,154 | 
|May 1, 2004 - May 31, 2004             |       |           | 8,213 |        |            | $                   | 16.82            |                   |                    |                 | 8,213                |        |  | $ |        | 
|August 1, 2004 - August 31, 2004       |       |           |      |        |            |                     |                 |                   |                    |                 |                     |        |  | $ | 200,000 | 
|August 1, 2004 - August 31, 2004       |       |           | 1,913 |        |            | $                   | 19.35            |                   |                    |                 | 1,913                |        |  | $ | 163,029 | 
|September 1, 2004 - September 30, 2004 |       |           | 2,047 |        |            | $                   | 19.28            |                   |                    |                 | 2,047                |        |  | $ | 123,556 | 
|October 1, 2004 - October 31, 2004     |       |           |      |        |            |                     |                 |                   |                    |                 |                     |        |  | $ | 123,556 | 
|November 1, 2004 - November 30, 2004   |       |           |      |        |            |                     |                 |                   |                    |                 |                     |        |  | $ | 123,556 | 
|December 1, 2004 - December 31, 2004   |       |           |      |        |            |                     |                 |                   |                    |                 |                     |        |  | $ | 123,556 | 
|                                       |       |           |       |        |            |                     |                  |                   |                    |                 |                      |       
|                                       | Total |           |       | 12,973 |            |                     | $                | 17.46             |                    |                 |                      | 12,973 |  |   |         |  | 
|                                       |       |           |       |        |            |                     |                  |                   |                    |                 |                      |       



Retirements of Common Stock






Public Filings




27



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



|                                                                                                                                                  |                                                                                                  |                                              |         |      |      |   |         |         |  |   |           |      |  |      |           |      |  |   |          |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------------------------------------------- | ------- | ---- | ---- | - | ------- | ------- |  | - | --------- | ---- |  | ---- | --------- | ---- |  | - | -------- | ----- | -
|                                                                                                                                                  |                                                                                                  | Years Ended December 31,                     |        
|                                                                                                                                                  |                                                                                                  |                                              |        
|                                                                                                                                                  |                                                                                                  | 2004(1)                                      |         |      | 2003 |   |         | 2002(2) |  |   | 2001      |      |  | 2000 |          
|                                                                                                                                                  |                                                                                                  |                                              |         |      |      |   |         |         |  |   |           |      |  |      |          
|                                                                                                                                                  |                                                                                                  | (In thousands, except for per share amounts) |        
|Statement of Operations Data                                                                                                                      |                                                                                                  |                                              |         |      |      |   |         |         |  |   |           |      |  |      |           |      |  |   |          |      
|Total net revenue                                                                                                                                 |                                                                                                  | $                                            | 910,542 |      |      | $ | 936,336 |         |  | $ | 1,043,044 |      |  | $    | 1,071,660 |      |  | $ | 709,372  |      
|Income (loss) from operations                                                                                                                     |                                                                                                  |                                              | 322,671 |      |      |   | 64,402  |         |  |   | 124,028   |      |  |      | 153,483   |      |  |   | (127,541 | )    
|Income (loss) before provision for (benefit from) income taxes,
    minority interest and cumulative effect of change in accounting
    principle |                                                                                                  |                                              | 316,471 |      |      |   | 73,125  |         |  |   | 129,933   |      |  |      | 148,136   |      |  |   | (70,924  | )    
|Income (loss) before cumulative effect of change in accounting
    principle                                                                      |                                                                                                  |                                              | 225,065 |      |      |   | 59,905  |         |  |   | 128,312   |      |  |      | 83,253    |      |  |   | (108,014 | )    
|Cumulative effect of change in accounting principle, net of taxes                                                                                 |                                                                                                  |                                              |        |      |      |   | 10,337  |         |  |   |          |      |  |      |          |      |  |   |         |      
|Net income (loss)                                                                                                                                 |                                                                                                  |                                              | 225,065 |      |      |   | 70,242  |         |  |   | 128,312   |      |  |      | 83,253    |      |  |   | (108,014 | )    
|                                                                                                                                                  | Income (loss) per share, before cumulative effect of change in
    accounting principle, basic   |                                              | $       | 1.40 |      |   | $       | 0.37    |  |   | $         | 0.86 |  |      | $         | 0.60 |  |   | $        | (0.78 | )
|                                                                                                                                                  | Income (loss) per share, before cumulative effect of change in
    accounting principle, diluted |                                              | $       | 1.31 |      |   | $       | 0.36    |  |   | $         | 0.80 |  |      | $         | 0.53 |  |   | $        | (0.78 | )
|Cumulative effect of change in accounting principle, basic                                                                                        |                                                                                                  | $                                            |        |      |      | $ | 0.07    |         |  | $ |          |      |  | $    |          |      |  | $ |         |      
|Cumulative effect of change in accounting principle, diluted                                                                                      |                                                                                                  | $                                            |        |      |      | $ | 0.07    |         |  | $ |          |      |  | $    |          |      |  | $ |         |      
|Net income (loss) per share, basic                                                                                                                |                                                                                                  | $                                            | 1.40    |      |      | $ | 0.44    |         |  | $ | 0.86      |      |  | $    | 0.60      |      |  | $ | (0.78    | )    
|Net income (loss) per share, diluted                                                                                                              |                                                                                                  | $                                            | 1.31    |      |      | $ | 0.43    |         |  | $ | 0.80      |      |  | $    | 0.53      |      |  | $ | (0.78    | )    
|Shares used in per share calculation  basic                                                                                                      |                                                                                                  |                                              | 160,714 |      |      |   | 160,338 |         |  |   | 149,441   |      |  |      | 137,847   |      |  |   | 138,072  |      
|Shares used in per share calculation  diluted                                                                                                    |                                                                                                  |                                              | 177,099 |      |      |   | 164,489 |         |  |   | 176,249   |      |  |      | 164,363   |      |  |   | 138,072  |      

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|                                               |  |                          |           |  |      |   |           |         |  |   |           |  |  |      |           |  |  |   |           | 
|---------------------------------------------- |  | ------------------------ | --------- |  | ---- | - | --------- | ------- |  | - | --------- |  |  | ---- | --------- |  |  | - | --------- | 
|                                               |  | Years Ended December 31, |          
|                                               |  |                          |          
|                                               |  | 2004(1)                  |           |  | 2003 |   |           | 2002(2) |  |   | 2001      |  |  | 2000 |          
|                                               |  |                          |           |  |      |   |           |         |  |   |           |  |  |      |          
|                                               |  | (In thousands)           |          
|Balance Sheet Data                             |  |                          |           |  |      |   |           |         |  |   |           |  |  |      |           |  |  |   |           | 
|Cash and cash equivalents                      |  | $                        | 291,155   |  |      | $ | 333,651   |         |  | $ | 674,226   |  |  | $    | 612,832   |  |  | $ | 275,539   | 
|Working capital                                |  |                          | 259,870   |  |      |   | 415,768   |         |  |   | 475,418   |  |  |      | 443,035   |  |  |   | 79,591    | 
|Total assets                                   |  |                          | 2,237,676 |  |      |   | 2,120,498 |         |  |   | 2,045,487 |  |  |      | 1,658,093 |  |  |   | 1,465,622 | 
|Deferred revenue                               |  |                          | 601,373   |  |      |   | 459,557   |         |  |   | 329,195   |  |  |      | 404,826   |  |  |   | 531,555   | 
|Long term debt and other long-term liabilities |  |                          | 204,796   |  |      |   | 570,162   |         |  |   | 519,150   |  |  |      | 579,243   |  |  |   | 400,456   | 
|Total equity                                   |  |                          | 1,201,248 |  |      |   | 888,089   |         |  |   | 770,168   |  |  |      | 341,493   |  |  |   | 222,923   | 






|    |                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In January 2004, we sold our Sniffer and Magic product lines for
    net cash proceeds of $260.9 million and recognized pre-tax
    gains on the sale of assets and technology aggregating
    $243.5 million.                              
|   
|(2) | 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.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Sales by geography. We operate our business in five
    geographic regions: North America (U.S. and Canada); Europe,
    Middle East and Africa, or EMEA; Japan; Asia-Pacific (excluding
    Japan) and Latin America. In 2004, 39% of our net revenue was
    generated outside of North America, with North America and EMEA
    collectively accounting for 87% of our total net revenue. North
    America and

29



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| |  |                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | EMEA have benefited from increased corporate IT spending. Our
    2004 sales in EMEA totaling $241.7 million were favorably
    impacted by the strengthening of the Euro during the year.



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table illustrates the strengthening of foreign
    currencies in geographic regions outside of North America from
    which we derive a significant portion of our revenues:

|                                    |  |      |       |          |     |  |        | 
|----------------------------------- |  | ---- | ----- | -------- | --- |  | ------ | 
|                                    |  |      |       | Japanese |    
|                                    |  | Euro |       |          | Yen | 
|                                    |  |      |       |          |     | 
|2003 Average Exchange Rate to $1 US |  |      | .8854 |          |     |  | 115.98 | 
|2004 Average Exchange Rate to $1 US |  |      | .8051 |          |     |  | 108.17 | 
|                                    |  |      |       |          |     | 
|% Change                            |  |      | 9%    |          |     |  | 7%     | 
|                                    |  |      |       |          |     | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | McAfee. Our McAfee products include enterprise, small and
    medium sized businesses (SMB) and consumer products,
    with enterprise including our Entercept host-based intrusion
    protection products which were acquired in connection with the
    Entercept acquisition in April 2003. SMB sales remained
    relatively consistent from $232.6 million for 2003 to
    $228.9 million for 2004. Enterprise sales, excluding
    IntruShield, for 2004 were $238.9 million, a
    $13.0 million, or 6%, increase from $225.9 million for
    2003. The year over year increase reflects an increase in
    corporate IT spending in 2004, partially offset by the impact of
    our perpetual plus license model, which recognizes less revenue
    upfront and defers more revenue to future periods.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We continue to experience significant growth in the consumer
    market. Our consumer market is comprised of our McAfee consumer
    on-line subscription service and retail boxed product sales. In
    2004, we added 4.7 million net new subscribers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Revenue from our consumer security market increased
    $122.6 million, or 70% from $176.3 million in 2003 to
    $298.9 million in 2004. At December 31, 2004, we had a
    total subscriber base of approximately 8.5 million consumer
    customers, compared to 3.7 million at December 31,
    2003. Drivers of this subscriber growth include
    (i) numerous virus outbreaks during the second half of 2003
    and through 2004, including variations of Sasser, MyDoom, Bagle
    and NetSky, and (ii) continued strategic relationships with
    channel partners, such as AOL and Dell. In October 2004, we
    announced a renewed relationship with AOL under which, among
    other things, AOL will offer our on-line PC anti virus services
    to AOL members as part of their AOL subscription and membership
    experience for both broadband and dial up members.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IntruShield. Our IntruShield network protection products,
    acquired by us in the second quarter of 2003, are sold primarily
    to enterprises and small and medium sized businesses. During
    2004, we had revenues of approximately $43.7 million,
    compared to $15.5 million in 2003. The $28.2 million
    increase is due to the full year impact on revenues in 2004, as
    well as sequential quarter growth in 2004.
|
| |  | Foundstone. Our Foundstone network protection products,
    acquired by us in October 2004, are sold primarily to
    enterprises and small and medium sized businesses. We are in the
    process of integrating Foundstones operations with ours
    and its products with our intrusion prevention technologies and
    systems management capabilities. Revenues from Foundstone were
    not significant in 2004.              
|
| |  | Sniffer Technologies. We sold Sniffer in July 2004 for
    net cash proceeds of $213.8 million. As there were only
    approximately six months of Sniffer revenue in 2004, there was a
    significant decline in revenue from $210.2 million in 2003
    to $90.9 million in 2004. Additionally, there was a
    declining trend in Sniffer revenues in 2004 prior to the sale.                                                    



| |  |                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have agreed to provide certain post-closing transitional
    services to Network General. We are 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. For the year ended December 31, 2004, we have
    recorded approximately $6.0 million for these transition
    services.



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Magic. We sold the assets of our Magic Solutions service
    desk business to BMC Software, Inc. in January 2004 for cash
    proceeds of $47.1 million, net of direct expenses. During
    2004 and 2003, net

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | revenue from Magic Solutions products totaled approximately
    $2.9 million and $63.2 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | McAfee Labs. We entered into an agreement to sell the
    assets of McAfee Labs on December 21, 2004 for cash
    proceeds of $1.5 million. During 2004 and 2003, net revenue
    from McAfee Labs totaled approximately $6.4 million and
    $11.0 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Deferred revenue balances. Our deferred revenue balance
    at December 31, 2004 was $601.4 million, and at
    December 31, 2003 it was $459.6 million, excluding
    approximately $22.0 million relating to our Magic product
    line which was classified as liabilities related to assets held
    for sale. The increase from December 31, 2003 to
    December 31, 2004 was 31%. We believe that the deferred
    revenue balance improves predictability of future revenues. In
    the middle of 2003, we introduced our perpetual plus licensing
    program in EMEA and introduced this program in the United States
    in the first quarter of 2004. Under the perpetual plus licensing
    program more revenue is allocated to service and support due to
    a change in pricing structure, which was the primary reason for
    the increase in deferred revenue. The strengthening of foreign
    currencies against the U.S. dollar resulted in
    approximately $18 million of the increase. These increases
    were partially offset by the sale of our Sniffer business in
    2004, which had a deferred revenue balance at December 31,
    2003 of approximately $60.2 million.
|
| |  | Cash, cash equivalents and investment balances. Cash,
    cash equivalents and investment balances at December 31,
    2004 and 2003 totaled $924.7 million and
    $766.3 million. During 2004, we generated approximately
    $358.9 million in cash from operations. We used
    approximately $39.4 million of cash for investing
    activities and $369.9 million for financing activities. We
    received $260.9 million for the sale of Sniffer and Magic,
    and paid $84.7 million, net of cash assumed, for the
    acquisition of Foundstone, which is reflected in investing
    activities. Our primary utilizations of cash in 2004 were for
    the net purchases of marketable securities of approximately
    $210.6 million, the repurchase shares of common stock for
    $221.8 million and the redemption of convertible debt for
    $265.6 million.                                                                                                                                                                                                                                                                                                                              



Critical Accounting Policies and Estimates






31



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| |   |                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | revenue recognition;                                                                                                                                                                                                                                                             
|
| |  | estimating valuation allowances and accrued liabilities,
    specifically sales returns and other allowances, the allowance
    for doubtful accounts, our facility restructuring accrual; and
    the assessment of the probability of the outcome of litigation
    against us;
|
| |  | accounting for income taxes; and                                                                                                                                                                                                                                                 
|
| |  | valuation of goodwill, intangibles and long-lived assets.                                                                                                                                                                                                                        



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



Software Revenue Recognition, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain
Transactions Revenue Recognition Application of AICPA Statement of Position 97-2 to
Arrangements that Include the Right to Use Software Stored on
Another Entitys Hardware






32



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Estimation of Sales Returns and Other Allowances, Allowance
for Doubtful Accounts, Restructuring Accrual and Litigation


Sales Returns and Other Allowances.




Allowance for Doubtful Accounts.


33



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|                                          |  |               |      |  |              |   |      | 
|----------------------------------------- |  | ------------- | ---- |  | ------------ | - | ---- | 
|                                          |  | December 31,  |      |  | December 31, |  
|                                          |  | 2004          |      |  | 2003         |  
|                                          |  |               |      |  |              |  
|                                          |  | (In millions) |     
|Allowance for sales return and incentives |  | $             | 29.2 |  |              | $ | 39.6 | 
|Allowance for doubtful accounts           |  |               | 2.5  |  |              |   | 3.1  | 
|                                          |  |               |      |  |              |  
|Total allowance                           |  | $             | 31.7 |  |              | $ | 42.7 | 
|                                          |  |               |      |  |              |  



Restructuring Accrual. Accounting for Exit Costs Associated With Exit or
Disposal Activities




Litigation.




| |                            
| | ---------------------------
| | Accounting for Income Taxes



34



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| |                                                              
| | -------------------------------------------------------------
| | Valuation of Goodwill, Intangibles, and Long-lived
    Assets

Goodwill and
Other Intangible Assets






Accounting for
the Impairment or Disposal of Long-Lived Assets.


35



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##### Table of Contents











| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | 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.                                                            



Results of Operations




| |                                              
| | ---------------------------------------------
| | Years Ended December 31, 2004, 2003, and 2002



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



|                  |                      |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      |  |     |    |   |  |     |    |  
|----------------- | -------------------- | ------------------------------- | ------- | ------------- | ----------- | - | ------- | ------- |  | - | --------- | ------- |  | ---- | --- | -- | ---- |  | --- | -- | - |  | --- | -- | -
|                  |                      |                                 |         | Percentage of |            
|                  |                      | For the Year Ended December 31, |         |               | Net Revenue |  
|                  |                      |                                 |         |               |             |  
|                  |                      | 2004                            |         |               | 2003        |   |         | 2002    |  |   | 2004      |         |  | 2003 |     |    | 2002 | 
|                  |                      |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      | 
|                  |                      | (In thousands)                  |         |               |             |   |         |         | 
|Net revenue:      |                      |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      |  |     |    |   |  |     |   
|                  | Product              |                                 | $       | 294,163       |             |   | $       | 513,610 |  |   | $         | 631,550 |  |      |     | 32 | %    |  |     | 55 | % |  |     | 61 | %
|                  | Services and support |                                 |         | 616,379       |             |   |         | 422,726 |  |   |           | 411,494 |  |      |     | 68 |      |  |     | 45 |   |  |     | 39 |  
|                  |                      |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      | 
|Total net revenue |                      | $                               | 910,542 |               |             | $ | 936,336 |         |  | $ | 1,043,044 |         |  |      | 100 | %  |      |  | 100 | %  |   |  | 100 | % 
|                  |                      |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      | 



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| |                         
| | ------------------------
| | Net Revenue by Geography



|                  |                                |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      |  |     |    |   |  |     |    |  
|----------------- | ------------------------------ | ------------------------------- | ------- | ------------- | ----------- | - | ------- | ------- |  | - | --------- | ------- |  | ---- | --- | -- | ---- |  | --- | -- | - |  | --- | -- | -
|                  |                                |                                 |         | Percentage of |            
|                  |                                | For the Year Ended December 31, |         |               | Net Revenue |  
|                  |                                |                                 |         |               |             |  
|                  |                                | 2004                            |         |               | 2003        |   |         | 2002    |  |   | 2004      |         |  | 2003 |     |    | 2002 | 
|                  |                                |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      | 
|                  |                                | (In thousands)                  |         |               |             |   |         |         | 
|Net revenue:      |                                |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      |  |     |    |   |  |     |   
|                  | North America                  |                                 | $       | 554,641       |             |   | $       | 606,685 |  |   | $         | 653,532 |  |      |     | 61 | %    |  |     | 65 | % |  |     | 63 | %
|                  | EMEA                           |                                 |         | 241,724       |             |   |         | 240,616 |  |   |           | 298,659 |  |      |     | 27 |      |  |     | 26 |   |  |     | 28 |  
|                  | Japan                          |                                 |         | 54,609        |             |   |         | 40,519  |  |   |           | 39,369  |  |      |     | 6  |      |  |     | 4  |   |  |     | 4  |  
|                  | Asia-Pacific (excluding Japan) |                                 |         | 38,494        |             |   |         | 29,014  |  |   |           | 33,595  |  |      |     | 4  |      |  |     | 3  |   |  |     | 3  |  
|                  | Latin America                  |                                 |         | 21,074        |             |   |         | 19,502  |  |   |           | 17,889  |  |      |     | 2  |      |  |     | 2  |   |  |     | 2  |  
|                  |                                |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      | 
|Total net revenue |                                | $                               | 910,542 |               |             | $ | 936,336 |         |  | $ | 1,043,044 |         |  |      | 100 | %  |      |  | 100 | %  |   |  | 100 | % 
|                  |                                |                                 |         |               |             |   |         |         |  |   |           |         |  |      |     |    |      | 







37



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| |                
| | ---------------
| | Product Revenue



|                           |                       |                                 |         |               |                 |   |         |         |  |   |         |         |  |      |    |     |      |  |    |     |   |  |    |     |  
|-------------------------- | --------------------- | ------------------------------- | ------- | ------------- | --------------- | - | ------- | ------- |  | - | ------- | ------- |  | ---- | -- | --- | ---- |  | -- | --- | - |  | -- | --- | -
|                           |                       |                                 |         | Percentage of |                
|                           |                       | For the Year Ended December 31, |         |               | Product Revenue |  
|                           |                       |                                 |         |               |                 |  
|                           |                       | 2004                            |         |               | 2003            |   |         | 2002    |  |   | 2004    |         |  | 2003 |    |     | 2002 | 
|                           |                       |                                 |         |               |                 |   |         |         |  |   |         |         |  |      |    |     |      | 
|                           |                       | (In thousands)                  |         |               |                 |   |         |         | 
|Term subscription licenses |                       | $                               | 39,682  |               |                 | $ | 113,696 |         |  | $ | 181,825 |         |  |      | 14 | %   |      |  | 23 | %   |   |  | 29 |    
|Perpetual licenses         |                       |                                 | 118,301 |               |                 |   | 227,492 |         |  |   | 277,882 |         |  |      | 40 |     |      |  | 44 |     |   |  | 44 |    
|Hardware                   |                       |                                 | 79,828  |               |                 |   | 99,502  |         |  |   | 93,359  |         |  |      | 27 |     |      |  | 19 |     |   |  | 15 |    
|Retail                     |                       |                                 | 27,787  |               |                 |   | 45,993  |         |  |   | 63,236  |         |  |      | 9  |     |      |  | 9  |     |   |  | 10 |    
|Other                      |                       |                                 | 28,565  |               |                 |   | 26,927  |         |  |   | 15,248  |         |  |      | 10 |     |      |  | 5  |     |   |  | 2  |    
|                           |                       |                                 |         |               |                 |   |         |         |  |   |         |         |  |      |    |     |      | 
|                           | Total product revenue |                                 | $       | 294,163       |                 |   | $       | 513,610 |  |   | $       | 631,550 |  |      |    | 100 | %    |  |    | 100 | % |  |    | 100 | %
|                           |                       |                                 |         |               |                 |   |         |         |  |   |         |         |  |      |    |     |      | 







38



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| |                             
| | ----------------------------
| | Services and Support Revenue



|                                  |                                    |                                 |         |                        |                     |   |         |         |  |   |         |         |  |      |    |     |      |  |    |     |   |  |    |     |  
|--------------------------------- | ---------------------------------- | ------------------------------- | ------- | ---------------------- | ------------------- | - | ------- | ------- |  | - | ------- | ------- |  | ---- | -- | --- | ---- |  | -- | --- | - |  | -- | --- | -
|                                  |                                    |                                 |         | Percentage of Services |                    
|                                  |                                    | For the Year Ended December 31, |         |                        | and Support Revenue |  
|                                  |                                    |                                 |         |                        |                     |  
|                                  |                                    | 2004                            |         |                        | 2003                |   |         | 2002    |  |   | 2004    |         |  | 2003 |    |     | 2002 | 
|                                  |                                    |                                 |         |                        |                     |   |         |         |  |   |         |         |  |      |    |     |      | 
|                                  |                                    | (In thousands)                  |         |                        |                     |   |         |         | 
|Support and maintenance           |                                    | $                               | 436,299 |                        |                     | $ | 313,731 |         |  | $ | 310,473 |         |  |      | 71 | %   |      |  | 74 | %   |   |  | 75 | %  
|Consulting                        |                                    |                                 | 19,157  |                        |                     |   | 27,421  |         |  |   | 36,740  |         |  |      | 3  |     |      |  | 7  |     |   |  | 9  |    
|Training                          |                                    |                                 | 8,394   |                        |                     |   | 9,486   |         |  |   | 12,527  |         |  |      | 1  |     |      |  | 2  |     |   |  | 3  |    
|On-line subscription arrangements |                                    |                                 | 152,529 |                        |                     |   | 72,088  |         |  |   | 51,754  |         |  |      | 25 |     |      |  | 17 |     |   |  | 13 |    
|                                  |                                    |                                 |         |                        |                     |   |         |         |  |   |         |         |  |      |    |     |      | 
|                                  | Total services and support revenue |                                 | $       | 616,379                |                     |   | $       | 422,726 |  |   | $       | 411,494 |  |      |    | 100 | %    |  |    | 100 | % |  |    | 100 | %
|                                  |                                    |                                 |         |                        |                     |   |         |         |  |   |         |         |  |      |    |     |      | 







39



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| |                                  
| | ---------------------------------
| | Cost of Net Revenue; Gross Margin

|                          |                                      |                                 |         |                       |             |   |         |        |  |   |         |         |  |      |     |    |      |  |     |    |   |  |     |    |  
|------------------------- | ------------------------------------ | ------------------------------- | ------- | --------------------- | ----------- | - | ------- | ------ |  | - | ------- | ------- |  | ---- | --- | -- | ---- |  | --- | -- | - |  | --- | -- | -
|                          |                                      |                                 |         | Percentage of Cost of |            
|                          |                                      | For the Year Ended December 31, |         |                       | Net Revenue |  
|                          |                                      |                                 |         |                       |             |  
|                          |                                      | 2004                            |         |                       | 2003        |   |         | 2002   |  |   | 2004    |         |  | 2003 |     |    | 2002 | 
|                          |                                      |                                 |         |                       |             |   |         |        |  |   |         |         |  |      |     |    |      | 
|                          |                                      | (In thousands)                  |         |                       |             |   |         |        | 
|Cost of net revenue:      |                                      |                                 |         |                       |             |   |         |        |  |   |         |         |  |      |     |    |      |  |     |    |   |  |     |   
|                          | Product                              |                                 | $       | 73,058                |             |   | $       | 80,895 |  |   | $       | 101,019 |  |      |     | 49 | %    |  |     | 54 | % |  |     | 61 | %
|                          | Services and support                 |                                 |         | 62,520                |             |   |         | 57,362 |  |   |         | 60,539  |  |      |     | 42 |      |  |     | 38 |   |  |     | 37 |  
|                          | Amortization of purchased technology |                                 |         | 13,331                |             |   |         | 11,369 |  |   |         | 3,153   |  |      |     | 9  |      |  |     | 8  |   |  |     | 2  |  
|                          |                                      |                                 |         |                       |             |   |         |        |  |   |         |         |  |      |     |    |      | 
|Total cost of net revenue |                                      | $                               | 148,909 |                       |             | $ | 149,626 |        |  | $ | 164,711 |         |  |      | 100 | %  |      |  | 100 | %  |   |  | 100 | % 
|                          |                                      |                                 |         |                       |             |   |         |        |  |   |         |         |  |      |     |    |      | 
|Gross margin              |                                      | $                               | 761,633 |                       |             | $ | 786,710 |        |  | $ | 878,333 |         |  |      |     |    |      |  |     |    |   |  |     |   
|                          |                                      |                                 |         |                       |             |   |         |        |  |   |         |         |  |      |     |    |      | 
|Gross margin percentage   |                                      |                                 | 84      | %                     |             |   | 84      | %      |  |   | 84      | %       |  |      |     |    |      |  |     |    |   |  |     |   



Cost of Product Revenue.




Cost of Services and Support.


Amortization of Purchased Technology.


40



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Gross Margins.




| |                
| | ---------------
| | Operating Costs



|                                                                       |                                                                              |                                 |          |               |             |   |         |         |  |   |         |         |  |      |     |    |      |  |    |    |   |  |    |    |  
|---------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------- | -------- | ------------- | ----------- | - | ------- | ------- |  | - | ------- | ------- |  | ---- | --- | -- | ---- |  | -- | -- | - |  | -- | -- | -
|                                                                       |                                                                              |                                 |          | Percentage of |            
|                                                                       |                                                                              | For the Year Ended December 31, |          |               | Net Revenue |  
|                                                                       |                                                                              |                                 |          |               |             |  
|                                                                       |                                                                              | 2004                            |          |               | 2003        |   |         | 2002    |  |   | 2004    |         |  | 2003 |     |    | 2002 | 
|                                                                       |                                                                              |                                 |          |               |             |   |         |         |  |   |         |         |  |      |     |    |      | 
|                                                                       |                                                                              | (In thousands)                  |          |               |             |   |         |         | 
|Research and development(1)                                            |                                                                              | $                               | 172,717  |               |             | $ | 184,606 |         |  | $ | 148,801 |         |  |      | 19  | %  |      |  | 20 | %  |   |  | 14 | % 
|Marketing and sales(2)                                                 |                                                                              |                                 | 354,380  |               |             |   | 363,306 |         |  |   | 397,747 |         |  |      | 39  |    |      |  | 39 |    |   |  | 38 |   
|General and administrative(3)                                          |                                                                              |                                 | 139,845  |               |             |   | 129,920 |         |  |   | 119,393 |         |  |      | 15  |    |      |  | 14 |    |   |  | 11 |   
|(Gain)loss on sale of assets and technology(4)                         |                                                                              |                                 | (240,336 | )             |             |   | 788     |         |  |   | (9,301  | )       |  |      | (26 | )  |      |  |   |    |   |  | (1 | ) 
|Litigation (reimbursement) settlement                                  |                                                                              |                                 | (24,991  | )             |             |   |        |         |  |   | 70,000  |         |  |      | (3  | )  |      |  |   |    |   |  | 7  |   
|Restructuring charges                                                  |                                                                              |                                 | 17,493   |               |             |   | 22,667  |         |  |   | 1,116   |         |  |      | 2   |    |      |  | 2  |    |   |  |   |   
|Amortization of intangibles                                            |                                                                              |                                 | 14,065   |               |             |   | 15,637  |         |  |   | 10,742  |         |  |      | 2   |    |      |  | 2  |    |   |  | 1  |   
|Severance/bonus costs related to Sniffer and Magic
    dispositions(5) |                                                                              |                                 | 10,070   |               |             |   |        |         |  |   |        |         |  |      | 1   |    |      |  |   |    |   |  |   |   
|Reimbursement from transition services agreement                       |                                                                              |                                 | (5,997   | )             |             |   |        |         |  |   |        |         |  |      | (1  | )  |      |  |   |    |   |  |   |   
|Provision for (recovery from) doubtful accounts                        |                                                                              |                                 | 1,716    |               |             |   | (1,216  | )       |  |   | (219    | )       |  |      |    |    |      |  |   |    |   |  |   |   
|Acquisition related costs not subject to capitalization                |                                                                              |                                 |         |               |             |   |        |         |  |   | 16,026  |         |  |      |    |    |      |  |   |    |   |  | 2  |   
|In-process research and development                                    |                                                                              |                                 |         |               |             |   | 6,600   |         |  |   |        |         |  |      |    |    |      |  |   |    |   |  |   |   
|                                                                       |                                                                              |                                 |          |               |             |   |         |         |  |   |         |         |  |      |     |    |      | 
|                                                                       | Total operating costs, including the effects of stock-based
    compensation |                                 | $        | 438,962       |             |   | $       | 722,308 |  |   | $       | 754,305 |  |      |     | 48 | %    |  |    | 77 | % |  |    | 72 | %
|                                                                       |                                                                              |                                 |          |               |             |   |         |         |  |   |         |         |  |      |     |    |      | 






|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Includes stock-based compensation charge of $6,518, $5,157 and
    $3,963 in 2004, 2003 and 2002, respectively. 
|   
|(2) | Includes stock-based compensation charge of $2,642, $5,065 and
    $1,980 in 2004, 2003 and 2002, respectively. 
|   
|(3) | Includes stock-based compensation charge of $4,085, $2,285 and
    $16,461 in 2004, 2003 and 2002, respectively.
|   
|(4) | Net of stock-based compensation charge of $84 in 2004                                                           
|   
|(5) | Includes stock-based compensation charge of $991 in 2004                                                        

Research and Development.


41



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Marketing and Sales.








General and Administrative.


42



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(Gain) loss on Sale of Assets and Technology.






Litigation Reimbursement/ Settlement.




| |                      
| | ---------------------
| | Restructuring Charges



| |                   
| | ------------------
| | 2004 Restructuring



43



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|                           |  |             |       |   |           |   |        |             |  |   |       |   |  |   |        |  
|-------------------------- |  | ----------- | ----- | - | --------- | - | ------ | ----------- |  | - | ----- | - |  | - | ------ | -
|                           |  | Lease       |       |   | Severance |   |        |             |  |  
|                           |  | Termination |       |   | and Other |   |        |             |  |  
|                           |  | Costs       |       |   | Benefits  |   |        | Other Costs |  |   | Total |  
|                           |  |             |       |   |           |   |        |             |  |   |       |  
|Balance, January 1, 2004   |  | $           |      |   |           | $ |       |             |  | $ |      |   |  | $ |       |  
|Restructuring accrual      |  |             | 8,685 |   |           |   | 7,932  |             |  |   | 480   |   |  |   | 17,097 |  
|Cash payments              |  |             | (579  | ) |           |   | (4,175 | )           |  |   | (63   | ) |  |   | (4,817 | )
|Adjustment to liability    |  |             | (222  | ) |           |   | (275   | )           |  |   |      |   |  |   | (497   | )
|Accretion                  |  |             | 74    |   |           |   |       |             |  |   |      |   |  |   | 74     |  
|                           |  |             |       |   |           |   |        |             |  |   |       |  
|Balance, December 31, 2004 |  | $           | 7,958 |   |           | $ | 3,482  |             |  | $ | 417   |   |  | $ | 11,857 |  
|                           |  |             |       |   |           |   |        |             |  |   |       |  



| |                   
| | ------------------
| | 2003 Restructuring





44



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|                           |  |             |        |   |           |   |        |             |  |   |       |   |  |   |        |  
|-------------------------- |  | ----------- | ------ | - | --------- | - | ------ | ----------- |  | - | ----- | - |  | - | ------ | -
|                           |  | Lease       |        |   | Severance |   |        |             |  |  
|                           |  | Termination |        |   | and Other |   |        |             |  |  
|                           |  | Costs       |        |   | Benefits  |   |        | Other Costs |  |   | Total |  
|                           |  |             |        |   |           |   |        |             |  |   |       |  
|Balance, January 1, 2003   |  | $           |       |   |           | $ |       |             |  | $ |      |   |  | $ |       |  
|Restructuring accrual      |  |             | 15,734 |   |           |   | 6,692  |             |  |   | 739   |   |  |   | 23,165 |  
|Cash payments              |  |             | (1,707 | ) |           |   | (6,259 | )           |  |   | (167  | ) |  |   | (8,133 | )
|Adjustment to liability    |  |             | (273   | ) |           |   | (116   | )           |  |   | (572  | ) |  |   | (961   | )
|Accretion                  |  |             | 463    |   |           |   |       |             |  |   |      |   |  |   | 463    |  
|                           |  |             |        |   |           |   |        |             |  |   |       |  
|Balance, December 31, 2003 |  |             | 14,217 |   |           |   | 317    |             |  |   |      |   |  |   | 14,534 |  
|Cash payments              |  |             | (1,841 | ) |           |   | (194   | )           |  |   |      |   |  |   | (2,035 | )
|Adjustment to liability    |  |             | (623   | ) |           |   | (123   | )           |  |   |      |   |  |   | (746   | )
|Accretion                  |  |             | 548    |   |           |   |       |             |  |   |      |   |  |   | 548    |  
|                           |  |             |        |   |           |   |        |             |  |   |       |  
|Balance, December 31, 2004 |  | $           | 12,301 |   |           | $ |       |             |  | $ |      |   |  | $ | 12,301 |  
|                           |  |             |        |   |           |   |        |             |  |   |       |  



Restructuring Costs  2002.


45



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Amortization of Intangibles.


Severance/ Bonus Costs Related to Sniffer and Magic
Dispositions.




Reimbursement from Transition Services Agreement.


Provision for (Recovery from) Doubtful Accounts, Net.


Acquisition Related Costs not Subject to Capitalization.


In-Process Research and Development. 1 2




46



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Interest and Other Income.


Interest and Other Expenses.


(Loss) gain on repurchase of convertible debt.


(Loss) gain on Investments, Net.


Impairment of Strategic and Other Investments.


Provision for (benefit from) Income Taxes.


47



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Cumulative Effect of Change in Accounting Principle.


Stock-Based Compensation




|                                                                |                                |                          |       |        |      |   |       |        |  |   |        |        | 
|--------------------------------------------------------------- | ------------------------------ | ------------------------ | ----- | ------ | ---- | - | ----- | ------ |  | - | ------ | ------ | 
|                                                                |                                | Years Ended December 31, |      
|                                                                |                                |                          |      
|                                                                |                                | 2004                     |       |        | 2003 |   |       | 2002   | 
|                                                                |                                |                          |       |        |      |   |       |        | 
|Exchange of McAfee.com options                                  |                                | $                        | 6,669 |        |      | $ | 3,369 |        |  | $ | 16,101 |       
|Former employees                                                |                                |                          | 1,216 |        |      |   | 1,125 |        |  |   | 10,118 |       
|New and existing executives and employees                       |                                |                          | 1,928 |        |      |   | 424   |        |  |   | 1,478  |       
|Extended life of vested options of terminated employees         |                                |                          | 1,164 |        |      |   | 3,720 |        |  |   |       |       
|Extended vesting term of options                                |                                |                          |      |        |      |   |      |        |  |   | 193    |       
|Extended period of Employee Stock Purchase Plan                 |                                |                          |      |        |      |   | 3,869 |        |  |   |       |       
|Shares purchased outside Employee Stock Purchase Plan and other |                                |                          |      |        |      |   |      |        |  |   | 62     |       
|Repriced options                                                |                                |                          | 3,343 |        |      |   |      |        |  |   | (5,548 | )     
|                                                                |                                |                          |       |        |      |   |       |        | 
|                                                                | Total stock-based compensation |                          | $     | 14,320 |      |   | $     | 12,507 |  |   | $      | 22,404 | 
|                                                                |                                |                          |       |        |      |   |       |        | 



Exchange of McAfee.com options.


Former employees.






48



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##### Table of Contents



New and existing executives and employees.








Extended life of vested options held by terminated
employees.




Extended period of Employee Stock Purchase Plan.


Repriced Options.


49



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##### Table of Contents







Impact of Recent Accounting Pronouncement on Stock-Based
Compensation. Share Based Payment


Acquisition




| |                 
| | ----------------
| | Foundstone, Inc.





Liquidity and Capital Resources


|                                                   |  |                |          |   |      |   |          |      |  |   |           |  
|-------------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | ---- |  | - | --------- | -
|                                                   |  | 2004           |          |   | 2003 |   |          | 2002 | 
|                                                   |  |                |          |   |      |   |          |      | 
|                                                   |  | (In thousands) |         
|Cash, cash equivalents and investments             |  | $              | 924,681  |   |      | $ | 766,257  |      |  | $ | 1,013,709 |  
|Net cash provided by operating activities          |  | $              | 358,913  |   |      | $ | 156,304  |      |  | $ | 195,093   |  
|Net cash used in investing activities              |  | $              | (39,373  | ) |      | $ | (374,480 | )    |  | $ | (183,646  | )
|Net cash (used in)provided by financing activities |  | $              | (369,867 | ) |      | $ | (146,579 | )    |  | $ | 43,736    |  



| |         
| | --------
| | Overview



50



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| |                     
| | --------------------
| | Operating Activities











51



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| |                     
| | --------------------
| | Investing Activities



|                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|---------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|Activity                                                         |  | 2004 |          |   | 2003 |   |          | 2002 | 
|                                                                 |  |      |          |   |      |   |          |      | 
|Cash payments for acquisitions, net                              |  | $    | (84,650  | ) |      | $ | (217,256 | )    |  | $ | (118,308 | )
|Cash payments for property and equipment                         |  |      | (25,374  | ) |      |   | (60,027  | )    |  |   | (59,427  | )
|Net (purchases) proceeds of investments in marketable securities |  |      | (210,588 | ) |      |   | (97,861  | )    |  |   | 8,668    |  
|Decrease(increase) in restricted cash                            |  |      | 19,930   |   |      |   | 664      |      |  |   | (21,734  | )
|Proceeds from sale of assets and technology                      |  |      | 261,309  |   |      |   |         |      |  |   | 7,155    |  
|                                                                 |  |      |          |   |      |   |          |      | 
|Net cash used in investing activities                            |  | $    | (39,373  | ) |      | $ | (374,480 | )    |  | $ | (183,646 | )
|                                                                 |  |      |          |   |      |   |          |      | 



| |             
| | ------------
| | Acquisitions









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



52



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





| |                
| | ---------------
| | Restricted Cash





| |                     
| | --------------------
| | Financing Activities









53



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Contractual Obligations




|                        |  |                        |         |           |        |   |        |       |  |     |        |  |           |         |        |  |  |   |        | 
|----------------------- |  | ---------------------- | ------- | --------- | ------ | - | ------ | ----- |  | --- | ------ |  | --------- | ------- | ------ |  |  | - | ------ | 
|                        |  | Payments Due by Period |        
|                        |  |                        |        
|                        |  |                        |         | Less Than |        |   | 1-3    |       |  | 3-5 |        |  | More Than |        
|Contractual Obligations |  | Total                  |         |           | 1 Year |   |        | Years |  |     | Years  |  |           | 5 Years |       
|                        |  |                        |         |           |        |   |        |       |  |     |        |  |           |         |       
|Operating leases(1)     |  | $                      | 153,489 |           |        | $ | 24,197 |       |  | $   | 37,201 |  |           | $       | 30,281 |  |  | $ | 61,810 | 
|Other commitments(2)    |  |                        | 21,298  |           |        |   | 7,049  |       |  |     | 11,416 |  |           |         | 2,833  |  |  |   |       | 
|Purchase obligations(3) |  |                        | 2,781   |           |        |   | 2,781  |       |  |     |       |  |           |         |       |  |  |   |       | 
|                        |  |                        |         |           |        |   |        |       |  |     |        |  |           |         |       
|Total                   |  | $                      | 177,568 |           |        | $ | 34,027 |       |  | $   | 48,617 |  |           | $       | 33,114 |  |  | $ | 61,810 | 
|                        |  |                        |         |           |        |   |        |       |  |     |        |  |           |         |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 operating lease contractual obligations
    reflect $60.0 million and $56.8 million in minimum
    non-cancelable payments under leases for the Santa Clara,
    California and Cork, Ireland facilities, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(2) | Other commitments are minimum commitments on telecom contracts
    and contractual commitments for naming rights and advertising
    services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(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




Convertible Debt




54



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Stock Repurchases






Financial Risk Management






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





55



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##### Table of Contents





|                       |  |          |     |  |       |   |     |          |  |   |       |   |  |   |     |  
|---------------------- |  | -------- | --- |  | ----- | - | --- | -------- |  | - | ----- | - |  | - | --- | -
|                       |  | 2004     |     |  | 2003  |  
|                       |  |          |     |  |       |  
|                       |  | Carrying |     |  | Fair  |   |     | Carrying |  |   | Fair  |  
|                       |  | Value    |     |  | Value |   |     | Value    |  |   | Value |  
|                       |  |          |     |  |       |   |     |          |  |   |       |  
|Euro                   |  | $        | 116 |  |       | $ | 116 |          |  | $ | 490   |   |  | $ | 490 |  
|British Pound Sterling |  |          | 288 |  |       |   | 288 |          |  |   | 54    |   |  |   | 54  |  
|Brazilian Real         |  |          | 420 |  |       |   | 420 |          |  |   |      |   |  |   |    |  
|Singapore Dollar       |  |          |    |  |       |   |    |          |  |   | (16   | ) |  |   | (16 | )
|Japanese Yen           |  |          | 1   |  |       |   | 1   |          |  |   |      |   |  |   |    |  
|Australian Dollar      |  |          | 4   |  |       |   | 4   |          |  |   | 75    |   |  |   | 75  |  
|Canadian Dollar        |  |          | 39  |  |       |   | 39  |          |  |   | 255   |   |  |   | 255 |  
|                       |  |          |     |  |       |   |     |          |  |   |       |  
|                       |  | $        | 868 |  |       | $ | 868 |          |  | $ | 858   |   |  | $ | 858 |  
|                       |  |          |     |  |       |   |     |          |  |   |       |  



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







Accounting for Derivative
Instruments and Hedging Activities






56



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







|                                      |       |                  |       |       |           |   |                               |                |  |   |        |       |  |         |       |       |         |   |       |       |  |   |       |       | 
|------------------------------------- | ----- | ---------------- | ----- | ----- | --------- | - | ----------------------------- | -------------- |  | - | ------ | ----- |  | ------- | ----- | ----- | ------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                      |       | Valuation of     |       |       |           |   |                               |                |  |   |       
|                                      |       | Securities Given |       |       |           |   |                              
|                                      |       | an Interest Rate |       |       |           |   | Valuation of Securities Given |               
|                                      |       | Decrease of      |       |       |           |   | an Interest Rate Increase of  |               
|                                      |       | X Basis Points   |       |       | No        |   |                               | X Basis Points | 
|                                      |       |                  |       |       | Change in |   |                               |                | 
|Issuer                                |       | 100 BPS          |       |       | 50 BPS    |   |                               | Interest Rate  |  |   | 50 BPS |       |  | 100 BPS |       |       | 150 BPS |  
|                                      |       |                  |       |       |           |   |                               |                |  |   |        |       |  |         |       |       |         |  
|U.S. Government notes and bonds       |       | $                | 288.8 |       |           | $ | 287.3                         |                |  | $ | 285.8  |       |  | $       | 285.4 |       |         | $ | 283.9 |       |  | $ | 282.4 |      
|Municipal bonds                       |       |                  | 4.9   |       |           |   | 4.9                           |                |  |   | 4.9    |       |  |         | 4.9   |       |         |   | 4.9   |       |  |   | 4.9   |      
|Corporate notes, bonds and preferreds |       |                  | 422.1 |       |           |   | 421.1                         |                |  |   | 420.1  |       |  |         | 419.1 |       |         |   | 418.1 |       |  |   | 417.1 |      
|                                      |       |                  |       |       |           |   |                               |                |  |   |        |       |  |         |       |       |         |  
|                                      | Total |                  | $     | 715.8 |           |   | $                             | 713.3          |  |   | $      | 710.8 |  |         | $     | 709.4 |         |   | $     | 706.9 |  |   | $     | 704.4 | 
|                                      |       |                  |       |       |           |   |                               |                |  |   |        |       |  |         |       |       |         |  



|                                      |       |                  |       |       |           |   |                               |                |  |   |        |       |  |         |       |       |         |   |       |       |  |   |       |       | 
|------------------------------------- | ----- | ---------------- | ----- | ----- | --------- | - | ----------------------------- | -------------- |  | - | ------ | ----- |  | ------- | ----- | ----- | ------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                      |       | Valuation of     |       |       |           |   |                               |                |  |   |       
|                                      |       | Securities Given |       |       |           |   |                              
|                                      |       | an Interest Rate |       |       |           |   | Valuation of Securities Given |               
|                                      |       | Decrease of      |       |       |           |   | an Interest Rate Increase of  |               
|                                      |       | X Basis Points   |       |       | No        |   |                               | X Basis Points | 
|                                      |       |                  |       |       | Change in |   |                               |                | 
|Issuer                                |       | 100 BPS          |       |       | 50 BPS    |   |                               | Interest Rate  |  |   | 50 BPS |       |  | 100 BPS |       |       | 150 BPS |  
|                                      |       |                  |       |       |           |   |                               |                |  |   |        |       |  |         |       |       |         |  
|U.S. Government notes and bonds       |       | $                | 292.9 |       |           | $ | 291.6                         |                |  | $ | 290.3  |       |  | $       | 289.1 |       |         | $ | 287.8 |       |  | $ | 286.5 |      
|Municipal bonds                       |       |                  | 5.0   |       |           |   | 5.0                           |                |  |   | 5.0    |       |  |         | 5.0   |       |         |   | 5.0   |       |  |   | 5.0   |      
|Corporate notes, bonds and preferreds |       |                  | 428.3 |       |           |   | 427.5                         |                |  |   | 426.6  |       |  |         | 425.8 |       |         |   | 425.0 |       |  |   | 424.2 |      
|                                      |       |                  |       |       |           |   |                               |                |  |   |        |       |  |         |       |       |         |  
|                                      | Total |                  | $     | 726.2 |           |   | $                             | 724.1          |  |   | $      | 721.9 |  |         | $     | 719.9 |         |   | $     | 717.8 |  |   | $     | 715.7 | 
|                                      |       |                  |       |       |           |   |                               |                |  |   |        |       |  |         |       |       |         |  

Recent Accounting Pronouncements Update









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



57



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

Quarterly Operating Results (Unaudited)


|                                                                                                     |  |                                       |         |  |               |   |         |          |  |   |           |  |  |              |         |  |               |   |         |          |  |   |           |  |  |   |         |  |  |   |         | 
|---------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- |  | ------------- | - | ------- | -------- |  | - | --------- |  |  | ------------ | ------- |  | ------------- | - | ------- | -------- |  | - | --------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                                                     |  | Three Months Ended                    |        
|                                                                                                     |  |                                       |        
|                                                                                                     |  | December 31,                          |         |  | September 30, |   |         | June 30, |  |   | March 31, |  |  | December 31, |         |  | September 30, |   |         | June 30, |  |   | March 31, | 
|                                                                                                     |  | 2004                                  |         |  | 2004          |   |         | 2004     |  |   | 2004      |  |  | 2003         |         |  | 2003          |   |         | 2003     |  |   | 2003      | 
|                                                                                                     |  |                                       |         |  |               |   |         |          |  |   |           |  |  |              |         |  |               |   |         |          |  |   |           | 
|                                                                                                     |  | (In thousands, except per share data) |        
|Statement of Operations
    and Other Data:                                                          |  |                                       |         |  |               |   |         |          |  |   |           |  |  |              |         |  |               |   |         |          |  |   |           |  |  |   |         | 
|Net revenues                                                                                         |  | $                                     | 244,153 |  |               | $ | 221,633 |          |  | $ | 225,678   |  |  | $            | 219,078 |  |               | $ | 272,222 |          |  | $ | 227,775   |  |  | $ | 217,025 |  |  | $ | 219,314 | 
|Gross margin                                                                                         |  |                                       | 204,273 |  |               |   | 187,360 |          |  |   | 188,114   |  |  |              | 181,886 |  |               |   | 230,335 |          |  |   | 189,840   |  |  |   | 180,882 |  |  |   | 185,653 | 
|Income from operations                                                                               |  |                                       | 23,427  |  |               |   | 210,717 |          |  |   | 13,201    |  |  |              | 75,326  |  |               |   | 51,141  |          |  |   | 9,708     |  |  |   | 1,911   |  |  |   | 1,642   | 
|Income before provision for income taxes and cumulative effect
    of change in accounting principle |  |                                       | 23,621  |  |               |   | 199,457 |          |  |   | 13,969    |  |  |              | 79,424  |  |               |   | 55,478  |          |  |   | 13,268    |  |  |   | 2,903   |  |  |   | 1,476   | 
|Income before cumulative effect of change in accounting principle                                    |  |                                       | 38,747  |  |               |   | 118,148 |          |  |   | 10,200    |  |  |              | 57,970  |  |               |   | 45,308  |          |  |   | 10,774    |  |  |   | 2,491   |  |  |   | 1,332   | 
|Cumulative effect of, change in accounting principle, net of
    taxes                               |  |                                       |        |  |               |   |        |          |  |   |          |  |  |              |        |  |               |   | (805    | )        |  |   |          |  |  |   |        |  |  |   | 11,142  | 
|Net income                                                                                           |  |                                       | 38,747  |  |               |   | 118,148 |          |  |   | 10,200    |  |  |              | 57,970  |  |               |   | 44,503  |          |  |   | 10,774    |  |  |   | 2,491   |  |  |   | 12,474  | 
|Cumulative effect of change in accounting principle, per share                                       |  | $                                     |        |  |               | $ |        |          |  | $ |          |  |  | $            |        |  |               | $ |        |          |  | $ |          |  |  | $ |        |  |  | $ | 0.07    | 
|Basic income per share                                                                               |  | $                                     | .24     |  |               | $ | .75     |          |  | $ | .06       |  |  | $            | .35     |  |               | $ | 0.28    |          |  | $ | 0.07      |  |  | $ | 0.02    |  |  | $ | 0.08    | 
|Diluted income per share                                                                             |  | $                                     | .23     |  |               | $ | .70     |          |  | $ | .06       |  |  | $            | .33     |  |               | $ | 0.26    |          |  | $ | 0.07      |  |  | $ | 0.02    |  |  | $ | 0.08    | 







58



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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




Internal
Control  Integrated Framework




Accounting for Income Taxes




Revenue Accounting




59



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Financial Close and Reporting Process




Internal Control  Integrated
Framework






Changes in Internal Control over Financial Reporting








| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increasing the number of internal general ledger and tax
    accounting personnel trained in reporting under accounting
    principles generally accepted in the United States (GAAP)                                                 
|
| |  | Improving the documentation, communication and periodic review
    of our accounting policies throughout our domestic and
    international locations for consistency and application with
    GAAP at each of our operating locations
|
| |  | Improving the interim and annual review and reconciliation
    process for certain key account balances                                                                                                                               
|
| |  | Enhancing the training and education for our international
    finance and accounting personnel and new hire additions to the
    worldwide finance team                                                                              

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| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | Implementing more stringent policies and procedures regarding
    revenue accounting and change management of our product catalogue
|
| |  | Directing more internal audit time and attention to sales order
    processing and revenue accounting activities                   
|
| |  | Increasing diligence regarding user access and change management
    to our network, databases and applications                    
|
| |  | Automating certain controls that are currently performed manually                                                                  
|
| |  | Simplifying and integrating systems                                                                                                

Inherent Limitation on the Effectiveness of Internal
Controls




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of McAfee, Inc.
(formerly known as Network Associates, Inc.):


Internal Control 
Integrated Framework






61



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys controls over the calculation of the income
    tax provision, taxes payable and deferred income tax amounts did
    not operate effectively as of December 31, 2004. In
    particular, (1) the Company did not have a sufficient
    number of personnel with adequate expertise in income tax
    accounting matters, (2) historical analyses were not
    maintained in sufficient detail and (3) account
    reconciliations, which are necessary to detect whether income
    tax amounts are calculated properly and recorded in the proper
    period, were not completed and reviewed in time to permit timely
    reporting of financial results. Due to the potential that a
    material misstatement could occur related to the income tax
    amounts and the absence of mitigating controls, there is a more
    than remote likelihood that a material misstatement of the
    interim and annual financial statements would not have been
    prevented or detected.                                                                                                                                                                                                                                                                                                                                                
|
| |  | The Companys controls over the recognition of revenue for
    software contracts did not operate effectively as of
    December 31, 2004. In particular, controls to properly
    apply the provisions of AICPA Statement of Position 97-2,
    Software Revenue Recognition(as amended) to
    (1) analyze the terms of new contracts from a certain
    geographic region and (2) defer and amortize the
    appropriate amount applicable to post contract support, did not
    operate effectively and audit adjustments to defer revenue that
    had been improperly recognized were recorded by the Company for
    the quarter ended December 31, 2004. Such adjustments in
    the aggregate were material to the interim financial statements
    for that period and the potential misstatement could have been
    material to the annual financial statements. In addition, based
    on (1) the amount of the misstatements identified and the
    potential for additional misstatements related to the revenue
    recognized, (2) the elevated risk of misstatement
    associated with revenue recognition and (3) the absence of
    mitigating controls, there is a more than remote likelihood that
    a material misstatement of the interim and annual financial
    statements would not have been prevented or detected.
|
| |  | The Companys controls over the period-end financial
    closing and reporting process are inadequate and constitute a
    material weakness in the design of internal control over
    financial reporting. Specifically, the Company lacks sufficient
    resources with the appropriate level of technical accounting
    expertise within the accounting function and therefore was
    unable to accurately perform certain of the designed controls
    over the December 31, 2004 financial closing and reporting
    process on a timely basis, evidenced by a significant number of
    adjustments which were necessary to present the financial
    statements for the year ended December 31, 2004 in
    accordance with generally accepted accounting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

62



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| |  |                                                                                                                                                                                                                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | principles. Based on (1) the misstatements identified and
    (2) the significance of the financial closing and reporting
    process to the preparation of reliable financial statements,
    there is a more than remote likelihood that a material
    misstatement of the interim and annual financial statements
    would not have been prevented or detected.



Internal Control  Integrated Framework Internal Control  Integrated Framework













Item 9B.Other
Information




63



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PART III







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



Section 16(a) Beneficial Ownership Reporting
Compliance









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








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








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



64



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PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statements:


|                                                                |                                               |        |    |    | 
|--------------------------------------------------------------- | --------------------------------------------- | ------ | -- | -- | 
|                                                                |                                               | Page   |   
|                                                                |                                               | Number |   
|                                                                |                                               |        |   
|Reports of Independent Registered Public
    Accounting Firms   |                                               |        | 66 |   
|Consolidated Balance Sheets:                                    |                                               |        |    |   
|                                                                | December 31, 2004 and 2003                    |        |    | 68 | 
|Consolidated Statements of Income and
    Comprehensive Income: |                                               |        |    |   
|                                                                | Years ended December 31, 2004, 2003 and 2002  |        |    | 69 | 
|Consolidated Statements of
    Stockholders Equity:            |                                               |        |    |   
|                                                                | Years ended December 31, 2004, 2003 and 2002  |        |    | 71 | 
|Consolidated Statements of Cash Flows:                          |                                               |        |    |   
|                                                                | Years ended December 31, 2004, 2003, and 2002 |        |    | 72 | 
|Notes to Consolidated Financial
    Statements                  |                                               |        | 73 |   

Financial Statement Schedule








Exhibits:


65



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












Internal Control 
Integrated Framework








66



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM















67



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MCAFEE, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


|                                                                          |                                                                                                                           |                                            |           |         |           |  |           |         |           | 
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------- | --------- |  | --------- | ------- | --------- | 
|                                                                          |                                                                                                                           | December 31,                               |          
|                                                                          |                                                                                                                           |                                            |          
|                                                                          |                                                                                                                           | 2004                                       |           |         | 2003      | 
|                                                                          |                                                                                                                           |                                            |           |         |           | 
|                                                                          |                                                                                                                           | (In thousands, except                      |          
|                                                                          |                                                                                                                           | share data)                                |          
|ASSETS                                                                   
|Current assets:                                                           |                                                                                                                           |                                            |           |         |           |  |           |        
|                                                                          | Cash and cash equivalents                                                                                                 |                                            | $         | 291,155 |           |  | $         | 333,651 |          
|                                                                          | Short-term marketable securities                                                                                          |                                            |           | 232,929 |           |  |           | 174,499 |          
|                                                                          | Accounts receivable, net of allowance for doubtful accounts of
    $2,536 and $2,863, respectively                        |                                            |           | 137,520 |           |  |           | 170,218 |          
|                                                                          | Prepaid expenses, income taxes and other current assets                                                                   |                                            |           | 103,687 |           |  |           | 97,616  |          
|                                                                          | Deferred income taxes                                                                                                     |                                            |           | 200,459 |           |  |           | 160,550 |          
|                                                                          | Assets held for sale                                                                                                      |                                            |           |        |           |  |           | 24,719  |          
|                                                                          |                                                                                                                           |                                            |           |         |           | 
|                                                                          |                                                                                                                           | Total current assets                       |           |         | 965,750   |  |           |         | 961,253   | 
|Long-term marketable securities                                           |                                                                                                                           |                                            | 400,597   |         |           |  | 258,107   |        
|Restricted cash                                                           |                                                                                                                           |                                            | 617       |         |           |  | 20,547    |        
|Property and equipment, net                                               |                                                                                                                           |                                            | 91,715    |         |           |  | 111,672   |        
|Deferred income taxes                                                     |                                                                                                                           |                                            | 220,604   |         |           |  | 199,196   |        
|Intangible assets, net                                                    |                                                                                                                           |                                            | 107,133   |         |           |  | 105,952   |        
|Goodwill                                                                  |                                                                                                                           |                                            | 439,180   |         |           |  | 443,593   |        
|Other assets                                                              |                                                                                                                           |                                            | 12,080    |         |           |  | 20,178    |        
|                                                                          |                                                                                                                           |                                            |           |         |           | 
|                                                                          |                                                                                                                           | Total assets                               |           | $       | 2,237,676 |  |           | $       | 2,120,498 | 
|                                                                          |                                                                                                                           |                                            |           |         |           | 
|                                                                         
|LIABILITIES                                                              
|Current liabilities:                                                      |                                                                                                                           |                                            |           |         |           |  |           |        
|                                                                          | Accounts payable                                                                                                          |                                            | $         | 32,891  |           |  | $         | 32,099  |          
|                                                                          | Accrued liabilities                                                                                                       |                                            |           | 197,368 |           |  |           | 147,281 |          
|                                                                          | Deferred revenue                                                                                                          |                                            |           | 475,621 |           |  |           | 342,795 |          
|                                                                          | Liabilities related to assets held for sale                                                                               |                                            |           |        |           |  |           | 23,310  |          
|                                                                          |                                                                                                                           |                                            |           |         |           | 
|                                                                          |                                                                                                                           | Total current liabilities                  |           |         | 705,880   |  |           |         | 545,485   | 
|Deferred revenue, less current portion                                    |                                                                                                                           |                                            | 125,752   |         |           |  | 116,762   |        
|Convertible debt                                                          |                                                                                                                           |                                            |          |         |           |  | 347,397   |        
|Accrued taxes and other long term liabilities                             |                                                                                                                           |                                            | 204,796   |         |           |  | 222,765   |        
|                                                                          |                                                                                                                           |                                            |           |         |           | 
|                                                                          |                                                                                                                           | Total liabilities                          |           |         | 1,036,428 |  |           |         | 1,232,409 | 
|                                                                          |                                                                                                                           |                                            |           |         |           | 
|Commitments and contingencies (Notes 11, 12 and 20)                       |                                                                                                                           |                                            |           |         |           |  |           |        
|                                                                         
|STOCKHOLDERS EQUITY                                                     
|Preferred stock, $0.01 par value:                                         |                                                                                                                           |                                            |           |         |           |  |           |        
|                                                                          | Authorized: 5,000,000 shares; Issued and outstanding: none
    in 2004 and 2003                                           |                                            |           |        |           |  |           |        |          
|Common stock, $0.01 par value:                                            |                                                                                                                           |                                            |           |         |           |  |           |        
|                                                                          | Authorized: 300,000,000 shares;
    Issued:162,266,174 shares and 162,071,798 shares for
    2004 and 2003, respectively; |                                            |           |         |           |  |           |         |          
|                                                                          | Outstanding: 162,266,174 shares and 161,721,798 for 2004
    and 2003, respectively                                       |                                            |           | 1,623   |           |  |           | 1,621   |          
|Treasury stock, at cost: no shares in 2004 and
    350,000 shares in 2003 |                                                                                                                           |                                            |          |         |           |  | (4,707    | )      
|Additional paid-in capital                                                |                                                                                                                           |                                            | 1,178,855 |         |           |  | 1,087,625 |        
|Deferred stock-based compensation                                         |                                                                                                                           |                                            | (1,777    | )       |           |  | (598      | )      
|Accumulated other comprehensive income                                    |                                                                                                                           |                                            | 27,361    |         |           |  | 34,027    |        
|Accumulated deficit                                                       |                                                                                                                           |                                            | (4,814    | )       |           |  | (229,879  | )      
|                                                                          |                                                                                                                           |                                            |           |         |           | 
|                                                                          |                                                                                                                           | Total stockholders equity                 |           |         | 1,201,248 |  |           |         | 888,089   | 
|                                                                          |                                                                                                                           |                                            |           |         |           | 
|                                                                          |                                                                                                                           | Total liabilities and stockholders equity |           | $       | 2,237,676 |  |           | $       | 2,120,498 | 
|                                                                          |                                                                                                                           |                                            |           |         |           | 



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MCAFEE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF INCOME


AND COMPREHENSIVE INCOME


|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |         |   |         |         |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------- | ------- | -------- | ------- | - | ------ | ------- | ------- | - | ------- | ------- | --------- | 
|                                                                                                                                                                       |                                                                                                                                            | Years Ended December 31,              |        
|                                                                                                                                                                       |                                                                                                                                            |                                       |        
|                                                                                                                                                                       |                                                                                                                                            | 2004                                  |         |          | 2003    |   |        | 2002    |        
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|                                                                                                                                                                       |                                                                                                                                            | (In thousands, except per share data) |        
|Net revenue:                                                                                                                                                           |                                                                                                                                            |                                       |         |          |         |   |        |         |         |   |         |        
|                                                                                                                                                                       | Product                                                                                                                                    |                                       | $       | 294,163  |         |   | $      | 513,610 |         |   | $       | 631,550 |          
|                                                                                                                                                                       | Services and support                                                                                                                       |                                       |         | 616,379  |         |   |        | 422,726 |         |   |         | 411,494 |          
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|                                                                                                                                                                       |                                                                                                                                            | Total net revenue                     |         |          | 910,542 |   |        |         | 936,336 |   |         |         | 1,043,044 | 
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|Cost of net revenue:                                                                                                                                                   |                                                                                                                                            |                                       |         |          |         |   |        |         |         |   |         |        
|                                                                                                                                                                       | Product                                                                                                                                    |                                       |         | 73,058   |         |   |        | 80,895  |         |   |         | 101,019 |          
|                                                                                                                                                                       | Services and support                                                                                                                       |                                       |         | 62,520   |         |   |        | 57,362  |         |   |         | 60,539  |          
|                                                                                                                                                                       | Amortization of purchased technology                                                                                                       |                                       |         | 13,331   |         |   |        | 11,369  |         |   |         | 3,153   |          
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|                                                                                                                                                                       |                                                                                                                                            | Total cost of net revenue             |         |          | 148,909 |   |        |         | 149,626 |   |         |         | 164,711   | 
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|Operating costs:                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |         |   |         |        
|                                                                                                                                                                       | Research and development(1)                                                                                                                |                                       |         | 172,717  |         |   |        | 184,606 |         |   |         | 148,801 |          
|                                                                                                                                                                       | Marketing and sales(2)                                                                                                                     |                                       |         | 354,380  |         |   |        | 363,306 |         |   |         | 397,747 |          
|                                                                                                                                                                       | General and administrative(3)                                                                                                              |                                       |         | 139,845  |         |   |        | 129,920 |         |   |         | 119,393 |          
|                                                                                                                                                                       | (Gain) loss on sale of assets and technology(4)                                                                                            |                                       |         | (240,336 | )       |   |        | 788     |         |   |         | (9,301  | )        
|                                                                                                                                                                       | Litigation (reimbursement) settlement                                                                                                      |                                       |         | (24,991  | )       |   |        |        |         |   |         | 70,000  |          
|                                                                                                                                                                       | Restructuring charges                                                                                                                      |                                       |         | 17,493   |         |   |        | 22,667  |         |   |         | 1,116   |          
|                                                                                                                                                                       | Amortization of intangibles                                                                                                                |                                       |         | 14,065   |         |   |        | 15,637  |         |   |         | 10,742  |          
|                                                                                                                                                                       | Severance/bonus costs related to Sniffer and Magic disposition(5)                                                                          |                                       |         | 10,070   |         |   |        |        |         |   |         |        |          
|                                                                                                                                                                       | Reimbursement from transition services agreement                                                                                           |                                       |         | (5,997   | )       |   |        |        |         |   |         |        |          
|                                                                                                                                                                       | Provision for (recovery of) doubtful accounts, net                                                                                         |                                       |         | 1,716    |         |   |        | (1,216  | )       |   |         | (219    | )        
|                                                                                                                                                                       | Acquisition related costs not subject to capitalization                                                                                    |                                       |         |         |         |   |        |        |         |   |         | 16,026  |          
|                                                                                                                                                                       | In-process research and development                                                                                                        |                                       |         |         |         |   |        | 6,600   |         |   |         |        |          
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|                                                                                                                                                                       |                                                                                                                                            | Total operating costs                 |         |          | 438,962 |   |        |         | 722,308 |   |         |         | 754,305   | 
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|                                                                                                                                                                       | Income from operations                                                                                                                     |                                       |         | 322,671  |         |   |        | 64,402  |         |   |         | 124,028 |          
|Interest and other income                                                                                                                                              |                                                                                                                                            |                                       | 15,889  |          |         |   | 15,917 |         |         |   | 27,324  |        
|Interest and other expenses                                                                                                                                            |                                                                                                                                            |                                       | (5,315  | )        |         |   | (7,543 | )       |         |   | (25,085 | )      
|(Loss) gain on repurchase of convertible debt                                                                                                                          |                                                                                                                                            |                                       | (15,070 | )        |         |   | (2,727 | )       |         |   | 26      |        
|(Loss) gain on investments, net                                                                                                                                        |                                                                                                                                            |                                       | (1,704  | )        |         |   | 3,076  |         |         |   | 3,838   |        
|Impairment of strategic and other investments                                                                                                                          |                                                                                                                                            |                                       |        |          |         |   |       |         |         |   | (198    | )      
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|                                                                                                                                                                       | Income before provision for (benefit from) income taxes,
    minority interest and cumulative effect of change in accounting
    principle |                                       |         | 316,471  |         |   |        | 73,125  |         |   |         | 129,933 |          
|Provision for (benefit from) income taxes                                                                                                                              |                                                                                                                                            |                                       | 91,406  |          |         |   | 13,220 |         |         |   | (274    | )      
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|                                                                                                                                                                       | Income before minority interest and cumulative effect of change
    in accounting principle                                                |                                       |         | 225,065  |         |   |        | 59,905  |         |   |         | 130,207 |          
|Minority interest in income of consolidated subsidiaries                                                                                                               |                                                                                                                                            |                                       |        |          |         |   |       |         |         |   | (1,895  | )      
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|                                                                                                                                                                       | Income before cumulative effect of change in accounting principle                                                                          |                                       |         | 225,065  |         |   |        | 59,905  |         |   |         | 128,312 |          
|Cumulative effect of change in accounting principle, net of
    taxes of $3,590                                                                                        |                                                                                                                                            |                                       |        |          |         |   | 10,337 |         |         |   |        |        
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|Net income                                                                                                                                                             |                                                                                                                                            | $                                     | 225,065 |          |         | $ | 70,242 |         |         | $ | 128,312 |        
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|Other comprehensive income:                                                                                                                                            |                                                                                                                                            |                                       |         |          |         |   |        |         |         |   |         |        
|Unrealized losses on marketable securities, net of
    reclassification adjustment for losses recognized on marketable
    securities during the period and income tax |                                                                                                                                            | $                                     | (2,129  | )        |         | $ | (709   | )       |         | $ | (2,667  | )      
|                                                                                                                                                                       | Foreign currency translation (loss) gain                                                                                                   |                                       |         | (4,537   | )       |   |        | 10,578  |         |   |         | 10,744  |          
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        
|Comprehensive income                                                                                                                                                   |                                                                                                                                            | $                                     | 218,399 |          |         | $ | 80,111 |         |         | $ | 136,389 |        
|                                                                                                                                                                       |                                                                                                                                            |                                       |         |          |         |   |        |         |        

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MCAFEE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME AND


COMPREHENSIVE INCOME  (Continued)


|                              |                                                                   |                                       |   |         |      |  |   |         |  |  |   |         | 
|----------------------------- | ----------------------------------------------------------------- | ------------------------------------- | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                              |                                                                   | Years Ended December 31,              |  
|                              |                                                                   |                                       |  
|                              |                                                                   | 2004                                  |   |         | 2003 |  |   | 2002    | 
|                              |                                                                   |                                       |   |         |      |  |   |         | 
|                              |                                                                   | (In thousands, except per share data) |  
|Basic net income per share:   |                                                                   |                                       |   |         |      |  |   |         |  |  |   |        
|                              | Income before cumulative effect of change in accounting principle |                                       | $ | 1.40    |      |  | $ | 0.37    |  |  | $ | 0.86    | 
|                              | Cumulative effect of change in accounting principle, net of taxes |                                       |   |        |      |  |   | 0.07    |  |  |   |        | 
|                              |                                                                   |                                       |   |         |      |  |   |         | 
|                              | Net income per share  basic                                      |                                       | $ | 1.40    |      |  | $ | 0.44    |  |  | $ | 0.86    | 
|                              |                                                                   |                                       |   |         |      |  |   |         | 
|                              | Shares used in per share calculation  basic                      |                                       |   | 160,714 |      |  |   | 160,338 |  |  |   | 149,441 | 
|                              |                                                                   |                                       |   |         |      |  |   |         | 
|Diluted net income per share: |                                                                   |                                       |   |         |      |  |   |         |  |  |   |        
|                              | Income before cumulative effect of change in accounting principle |                                       | $ | 1.31    |      |  | $ | 0.36    |  |  | $ | 0.80    | 
|                              | Cumulative effect of change in accounting principle, net of taxes |                                       |   |        |      |  |   | 0.07    |  |  |   |        | 
|                              |                                                                   |                                       |   |         |      |  |   |         | 
|                              | Net income per share  diluted                                    |                                       | $ | 1.31    |      |  | $ | 0.43    |  |  | $ | 0.80    | 
|                              |                                                                   |                                       |   |         |      |  |   |         | 
|                              | Shares used in per share calculation  diluted                    |                                       |   | 177,099 |      |  |   | 164,489 |  |  |   | 176,249 | 
|                              |                                                                   |                                       |   |         |      |  |   |         | 






|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Includes stock-based compensation charge of $6,518, $5,157 and
    $3,963 in 2004, 2003 and 2002, respectively. 
|   
|(2) | Includes stock-based compensation charge of $2,642, $5,065 and
    $1,980 in 2004, 2003 and 2002, respectively. 
|   
|(3) | Includes stock-based compensation charge of $4,085, $2,285 and
    $16,461 in 2004, 2003 and 2002, respectively.
|   
|(4) | Net of stock-based compensation charge of $84 in 2004.                                                          
|   
|(5) | Includes stock-based compensation charge of $991 in 2004.                                                       

|                                                                                            |                          |                   |   |         | 
|------------------------------------------------------------------------------------------- | ------------------------ | ----------------- | - | ------- | 
|                                                                                            |                          | Year Ended        |  
|                                                                                            |                          | December 31, 2002 |  
|                                                                                            |                          |                   |  
|Pro forma amounts assuming the change in accounting principle is
    applied retroactively: |                          |                   |   |        
|                                                                                            | Net income               |                   | $ | 121,513 | 
|                                                                                            | Basic income per share   |                   | $ | 0.81    | 
|                                                                                            | Diluted income per share |                   | $ | 0.76    | 



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MCAFEE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                            |                                                                                                                |                |         |         |          |   |            |         |   |          |             |             |               |              |           |          |             |       |        |               |   |   |        |        |   |   |          |         |  |   |           |          |  
|--------------------------- | -------------------------------------------------------------------------------------------------------------- | -------------- | ------- | ------- | -------- | - | ---------- | ------- | - | -------- | ----------- | ----------- | ------------- | ------------ | --------- | -------- | ----------- | ----- | ------ | ------------- | - | - | ------ | ------ | - | - | -------- | ------- |  | - | --------- | -------- | -
|                            |                                                                                                                |                |         |         |          |   |            |         |   |          |             | Accumulated |               |              |           |          |            
|                            |                                                                                                                |                |         |         |          |   |            |         |   | Other    |             |             |               |              |          
|                            |                                                                                                                | Common Stock   |         |         |          |   | Additional |         |   | Deferred |             |             | Comprehensive |              |           |          |             | Total |       
|                            |                                                                                                                |                |         |         | Treasury |   |            | Paid-In |   |          | Stock-Based |             |               | Income       |           |          | Accumulated |       |        | Stockholders |  
|                            |                                                                                                                | Shares         |         |         | Amount   |   |            | Stock   |   |          | Capital     |             |               | Compensation |           |          | (Loss)      |       |        | Deficit       |   |   | Equity |       
|                            |                                                                                                                |                |         |         |          |   |            |         |   |          |             |             |               |              |           |          |             |       |        |               |   |   |        |       
|                            |                                                                                                                | (In thousands) |        
|Balances, December 31, 2001 |                                                                                                                |                | 140,681 |         |          | $ | 1,406      |         |   | $        |            |             |               | $            | 752,439   |          |             | $     |       |               |   | $ | 16,081 |        |   | $ | (428,433 | )       |  | $ | 341,493   |         
|                            | Issuance of common stock upon exercise of stock options                                                        |                |         | 8,197   |          |   |            | 82      |   |          |             |            |               |              |           | 99,664   |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 99,746   |  
|                            | Issuance of common stock upon exercise of stock options by
    McAfee.com                                      |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 3,633    |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 3,633    |  
|                            | Issuance of common stock from Employee Stock Purchase Plans                                                    |                |         | 743     |          |   |            | 8       |   |          |             |            |               |              |           | 6,524    |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 6,532    |  
|                            | Issuance of common stock for acquisition of minority interest in
    McAfee.com, net of cost of $1,956         |                |         | 8,307   |          |   |            | 83      |   |          |             |            |               |              |           | 119,397  |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 119,480  |  
|                            | Deferred stock-based compensation                                                                              |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 31,955   |             |       |        | (31,955       | ) |   |        |       |   |   |          |        |  |   |           |         |  
|                            | Amortization of deferred stock-based compensation and other
    compensation charge                            |                |         |        |          |   |            |        |   |          |             |            |               |              |           | (3,815   | )           |       |        | 26,219        |   |   |        |       |   |   |          |        |  |   |           | 22,404   |  
|                            | Reclassification of cash payable in excess of exercise price
    related to exchange of McAfee.com options     |                |         |        |          |   |            |        |   |          |             |            |               |              |           | (4,190   | )           |       |        |              |   |   |        |       |   |   |          |        |  |   |           | (4,190   | )
|                            | Tax benefits from exercise of non-qualified stock options                                                      |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 45,962   |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 45,962   |  
|                            | Stock options issued in connection with acquisition                                                            |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 357      |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 357      |  
|                            | Minority interest attributed to McAfee.com                                                                     |                |         |        |          |   |            |        |   |          |             |            |               |              |           | (1,638   | )           |       |        |              |   |   |        |       |   |   |          |        |  |   |           | (1,638   | )
|                            | Foreign currency translation                                                                                   |                |         |        |          |   |            |        |   |          |             |            |               |              |           |         |             |       |        |              |   |   |        | 10,744 |   |   |          |        |  |   |           | 10,744   |  
|                            | Net decrease in unrealized gains on investments                                                                |                |         |        |          |   |            |        |   |          |             |            |               |              |           |         |             |       |        |              |   |   |        | (2,667 | ) |   |          |        |  |   |           | (2,667   | )
|                            | Net income                                                                                                     |                |         |        |          |   |            |        |   |          |             |            |               |              |           |         |             |       |        |              |   |   |        |       |   |   |          | 128,312 |  |   |           | 128,312  |  
|                            |                                                                                                                |                |         |         |          |   |            |         |   |          |             |             |               |              |           |          |             |       |        |               |   |   |        |       
|Balances, December 31, 2002 |                                                                                                                |                | 157,928 |         |          |   | 1,579      |         |   |          |            |             |               |              | 1,050,288 |          |             |       | (5,736 | )             |   |   | 24,158 |        |   |   | (300,121 | )       |  |   | 770,168   |         
|                            | Issuance of common stock upon exercise of stock options                                                        |                |         | 2,548   |          |   |            | 26      |   |          |             |            |               |              |           | 19,610   |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 19,636   |  
|                            | Issuance of common stock from Employee Stock Purchase Plans                                                    |                |         | 1,596   |          |   |            | 16      |   |          |             |            |               |              |           | 15,765   |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 15,781   |  
|                            | Repurchase of common stock                                                                                     |                |         | (350    | )        |   |            |        |   |          |             | (4,707      | )             |              |           |         |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | (4,707   | )
|                            | Deferred stock-based compensation                                                                              |                |         |        |          |   |            |        |   |          |             |            |               |              |           | (643     | )           |       |        | 643           |   |   |        |       |   |   |          |        |  |   |           |         |  
|                            | Amortization of deferred stock-based compensation and other
    stock-based compensation charge                |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 8,012    |             |       |        | 4,495         |   |   |        |       |   |   |          |        |  |   |           | 12,507   |  
|                            | Reclassification of cash payable in excess of exercise price
    related to exchange of McAfee.com options     |                |         |        |          |   |            |        |   |          |             |            |               |              |           | (5,407   | )           |       |        |              |   |   |        |       |   |   |          |        |  |   |           | (5,407   | )
|                            | Foreign currency translation                                                                                   |                |         |        |          |   |            |        |   |          |             |            |               |              |           |         |             |       |        |              |   |   |        | 10,578 |   |   |          |        |  |   |           | 10,578   |  
|                            | Net decrease in unrealized gains on investments                                                                |                |         |        |          |   |            |        |   |          |             |            |               |              |           |         |             |       |        |              |   |   |        | (709   | ) |   |          |        |  |   |           | (709     | )
|                            | Net income                                                                                                     |                |         |        |          |   |            |        |   |          |             |            |               |              |           |         |             |       |        |              |   |   |        |       |   |   |          | 70,242  |  |   |           | 70,242   |  
|                            |                                                                                                                |                |         |         |          |   |            |         |   |          |             |             |               |              |           |          |             |       |        |               |   |   |        |       
|Balances, December 31, 2003 |                                                                                                                |                | 161,722 |         |          |   | 1,621      |         |   |          | (4,707      | )           |               |              | 1,087,625 |          |             |       | (598   | )             |   |   | 34,027 |        |   |   | (229,879 | )       |  |   | 888,089   |         
|                            | Issuance of common stock upon exercise of stock options                                                        |                |         | 9,152   |          |   |            | 92      |   |          |             |            |               |              |           | 105,638  |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 105,730  |  
|                            | Issuance of common stock from Employee Stock Purchase Plans                                                    |                |         | 775     |          |   |            | 8       |   |          |             |            |               |              |           | 8,055    |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 8,063    |  
|                            | Issuance of common stock upon exercise of warrants                                                             |                |         | 184     |          |   |            | 2       |   |          |             |            |               |              |           | (2       | )           |       |        |              |   |   |        |       |   |   |          |        |  |   |           |         |  
|                            | Issuance of common stock upon conversion of debt                                                               |                |         | 4,616   |          |   |            | 46      |   |          |             |            |               |              |           | 83,364   |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 83,410   |  
|                            | Repurchase of common stock                                                                                     |                |         | (12,623 | )        |   |            |        |   |          |             | (221,816    | )             |              |           |         |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | (221,816 | )
|                            | Retirement of treasury stock                                                                                   |                |         |        |          |   |            | (130    | ) |          |             | 226,523     |               |              |           | (226,393 | )           |       |        |              |   |   |        |       |   |   |          |        |  |   |           |         |  
|                            | Deferred stock-based compensation                                                                              |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 6,443    |             |       |        | (6,443        | ) |   |        |       |   |   |          |        |  |   |           |         |  
|                            | Shares returned from trust                                                                                     |                |         | (1,560  | )        |   |            | (16     | ) |          |             |            |               |              |           | 16       |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           |         |  
|                            | Amortization of deferred stock-based compensation and other
    stock-based compensation charge                |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 6,804    |             |       |        | 7,516         |   |   |        |       |   |   |          |        |  |   |           | 14,320   |  
|                            | Reclassification of cash 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    |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 3,779    |  
|                            | Tax benefits from exercise of non-qualified stock options                                                      |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 72,622   |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 72,622   |  
|                            | Stock options issued in connection with acquisition                                                            |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 7,039    |             |       |        | (2,252        | ) |   |        |       |   |   |          |        |  |   |           | 4,787    |  
|                            | Release of deferred tax valuation allowance related to
    acquisition accounted for as a pooling of interests |                |         |        |          |   |            |        |   |          |             |            |               |              |           | 27,019   |             |       |        |              |   |   |        |       |   |   |          |        |  |   |           | 27,019   |  
|                            | Foreign currency translation                                                                                   |                |         |        |          |   |            |        |   |          |             |            |               |              |           |         |             |       |        |              |   |   |        | (4,537 | ) |   |          |        |  |   |           | (4,537   | )
|                            | Net decrease in unrealized gains on investment                                                                 |                |         |        |          |   |            |        |   |          |             |            |               |              |           |         |             |       |        |              |   |   |        | (2,129 | ) |   |          |        |  |   |           | (2,129   | )
|                            | Net income                                                                                                     |                |         |        |          |   |            |        |   |          |             |            |               |              |           |         |             |       |        |              |   |   |        |       |   |   |          | 225,065 |  |   |           | 225,065  |  
|                            |                                                                                                                |                |         |         |          |   |            |         |   |          |             |             |               |              |           |          |             |       |        |               |   |   |        |       
|Balances, December 31, 2004 |                                                                                                                |                | 162,266 |         |          | $ | 1,623      |         |   | $        |            |             |               | $            | 1,178,855 |          |             | $     | (1,777 | )             |   | $ | 27,361 |        |   | $ | (4,814   | )       |  | $ | 1,201,248 |         
|                            |                                                                                                                |                |         |         |          |   |            |         |   |          |             |             |               |              |           |          |             |       |        |               |   |   |        |       



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CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |         |         |          |          |         |         |          |  
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------------------- | --------------------------------------------------- | -------- | ------- | -------- | ---------- | ------- | ------- | -------- | -------- | ------- | ------- | -------- | -
|                                             |                                                                                                         | Years Ended December 31,                                                                    |                                                      
|                                             |                                                                                                         |                                                                                             |                                                      
|                                             |                                                                                                         | 2004                                                                                        |                                                       |                                                     | 2003     |         |          | 2002       |        
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|                                             |                                                                                                         | (In thousands)                                                                              |                                                      
|Cash flows from operating activities:        |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |         |         |          |         
|                                             | Net income                                                                                              |                                                                                             | $                                                     | 225,065                                             |          |         | $        | 70,242     |         |         | $        | 128,312  |        
|                                             | Adjustments to reconcile net income to net cash provided by
    operating activities:                   |                                                                                             |                                                       |                                                     |          |         |          |            |         |         |          |          |        
|                                             |                                                                                                         | Cumulative effect of change in accounting principle, net                                    |                                                       |                                                     |         |         |          |            | (10,337 | )       |          |          |        |        
|                                             |                                                                                                         | Depreciation and amortization                                                               |                                                       |                                                     | 66,699   |         |          |            | 62,830  |         |          |          | 53,684  |        
|                                             |                                                                                                         | Non-cash restructuring charge                                                               |                                                       |                                                     | 9,624    |         |          |            | 14,534  |         |          |          |        |        
|                                             |                                                                                                         | Acquired in-process research and development                                                |                                                       |                                                     |         |         |          |            | 6,600   |         |          |          |        |        
|                                             |                                                                                                         | Premium amortization of marketable securities                                               |                                                       |                                                     | 4,614    |         |          |            | 7,114   |         |          |          |        |        
|                                             |                                                                                                         | Provision for (recovery of) doubtful accounts                                               |                                                       |                                                     | 1,716    |         |          |            | (1,216  | )       |          |          | (219    | )      
|                                             |                                                                                                         | Non-cash interest and other expense on convertible debt                                     |                                                       |                                                     | 1,224    |         |          |            | 3,162   |         |          |          | 12,025  |        
|                                             |                                                                                                         | Stock-based compensation charges                                                            |                                                       |                                                     | 14,320   |         |          |            | 12,507  |         |          |          | 22,404  |        
|                                             |                                                                                                         | Deferred income taxes                                                                       |                                                       |                                                     | (21,503  | )       |          |            | (25,368 | )       |          |          | (65,208 | )      
|                                             |                                                                                                         | Loss (gain) on sale of investments                                                          |                                                       |                                                     | 1,704    |         |          |            | (3,076  | )       |          |          | (3,838  | )      
|                                             |                                                                                                         | Impairment of strategic and other investments                                               |                                                       |                                                     |         |         |          |            |        |         |          |          | 198     |        
|                                             |                                                                                                         | Minority interest                                                                           |                                                       |                                                     |         |         |          |            |        |         |          |          | 1,895   |        
|                                             |                                                                                                         | Loss (gain) on repurchase of zero coupon convertible debenture                              |                                                       |                                                     | 15,070   |         |          |            | 2,727   |         |          |          | (26     | )      
|                                             |                                                                                                         | (Gain) loss on sale of assets and technology                                                |                                                       |                                                     | (238,923 | )       |          |            | 788     |         |          |          | (9,301  | )      
|                                             |                                                                                                         | Tax benefit from exercise of nonqualified stock options                                     |                                                       |                                                     | 72,622   |         |          |            |        |         |          |          | 45,962  |        
|                                             |                                                                                                         | Change in fair value of interest rate swap, net of change in the
    fair value of the debt |                                                       |                                                     | 382      |         |          |            | (5,646  | )       |          |          | (1,402  | )      
|                                             |                                                                                                         | Changes in assets and liabilities, net of acquisitions:                                     |                                                       |                                                     |          |         |          |            |         |         |          |          |         |        
|                                             |                                                                                                         |                                                                                             | Accounts receivable                                   |                                                     |          | 44,524  |          |            |         | (6,676  | )        |          |         | (15,805 | )       
|                                             |                                                                                                         |                                                                                             | Prepaid expenses, income taxes and other assets       |                                                     |          | (6,267  | )        |            |         | (17,624 | )        |          |         | 9,699   |         
|                                             |                                                                                                         |                                                                                             | Accounts payable, accrued taxes and other liabilities |                                                     |          | 6,109   |          |            |         | (78,452 | )        |          |         | 77,993  |         
|                                             |                                                                                                         |                                                                                             | Deferred revenue                                      |                                                     |          | 161,933 |          |            |         | 124,195 |          |          |         | (61,280 | )       
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|                                             |                                                                                                         |                                                                                             |                                                       | Net cash provided by operating activities           |          |         | 358,913  |            |         |         | 156,304  |          |         |         | 195,093  |  
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|Cash flows from investing activities:        |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |         |         |          |         
|                                             | Purchase of marketable securities                                                                       |                                                                                             |                                                       | (1,243,990                                          | )        |         |          | (1,120,561 | )       |         |          | (773,093 | )      
|                                             | Proceeds from sale and maturity of marketable securities                                                |                                                                                             |                                                       | 1,033,402                                           |          |         |          | 1,022,700  |         |         |          | 781,761  |        
|                                             | Decrease (increase) in restricted cash                                                                  |                                                                                             |                                                       | 19,930                                              |          |         |          | 664        |         |         |          | (21,734  | )      
|                                             | Purchase of minority interest in McAfee.com                                                             |                                                                                             |                                                       |                                                    |          |         |          |           |         |         |          | (98,447  | )      
|                                             | Purchases of acquired technology                                                                        |                                                                                             |                                                       |                                                    |          |         |          | (178       | )       |         |          | (807     | )      
|                                             | Acquisitions, net of cash acquired                                                                      |                                                                                             |                                                       | (84,650                                             | )        |         |          | (217,078   | )       |         |          | (19,054  | )      
|                                             | Purchase of property and equipment and leasehold improvements,
    net                                  |                                                                                             |                                                       | (25,374                                             | )        |         |          | (60,027    | )       |         |          | (59,427  | )      
|                                             | Sale of Secure Computing shares and collar                                                              |                                                                                             |                                                       |                                                    |          |         |          |           |         |         |          | 5,105    |        
|                                             | Proceeds from sale of assets and technology                                                             |                                                                                             |                                                       | 261,309                                             |          |         |          |           |         |         |          | 2,050    |        
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|                                             |                                                                                                         |                                                                                             |                                                       | Net cash used in investing activities               |          |         | (39,373  | )          |         |         | (374,480 | )        |         |         | (183,646 | )
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|Cash flows from financing activities:        |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |         |         |          |         
|                                             | Proceeds from issuance of common stock under stock option plan
    and stock purchase plans             |                                                                                             |                                                       | 113,793                                             |          |         |          | 35,417     |         |         |          | 109,911  |        
|                                             | Contribution of proceeds from sale of common stock held in trust                                        |                                                                                             |                                                       | 3,779                                               |          |         |          |           |         |         |          |         |        
|                                             | Repurchase of common stock                                                                              |                                                                                             |                                                       | (221,816                                            | )        |         |          | (4,707     | )       |         |          |         |        
|                                             | Repurchase of convertible debt                                                                          |                                                                                             |                                                       | (265,623                                            | )        |         |          | (177,289   | )       |         |          | (66,175  | )      
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|                                             |                                                                                                         |                                                                                             |                                                       | Net cash (used in) provided by financing activities |          |         | (369,867 | )          |         |         | (146,579 | )        |         |         | 43,736   |  
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|                                             | Effect of exchange rate fluctuations                                                                    |                                                                                             |                                                       | 7,831                                               |          |         |          | 24,180     |         |         |          | 6,211    |        
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|                                             | Net (decrease) increase in cash and cash equivalents                                                    |                                                                                             |                                                       | (42,496                                             | )        |         |          | (340,575   | )       |         |          | 61,394   |        
|                                             | Cash and cash equivalents at beginning of period                                                        |                                                                                             |                                                       | 333,651                                             |          |         |          | 674,226    |         |         |          | 612,832  |        
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|                                             | Cash and cash equivalents at end of period                                                              |                                                                                             | $                                                     | 291,155                                             |          |         | $        | 333,651    |         |         | $        | 674,226  |        
|                                             |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |        
|Non cash investing and financing activities: |                                                                                                         |                                                                                             |                                                       |                                                     |          |         |          |            |         |         |          |         
|                                             | Unrealized losses on marketable investments, net                                                        |                                                                                             | $                                                     | (2,129                                              | )        |         | $        | (709       | )       |         | $        | (2,667   | )      
|                                             | Issuance of common stock for acquisition of minority interest in
    McAfee.com, net of costs of $1,956 |                                                                                             | $                                                     |                                                    |          |         | $        |           |         |         | $        | 119,480  |        
|                                             | Fair value of assets acquired in business combinations                                                  |                                                                                             | $                                                     | 110,394                                             |          |         | $        | 247,958    |         |         | $        |         |        
|                                             | Liabilities assumed in business combinations                                                            |                                                                                             | $                                                     | 20,037                                              |          |         | $        | 25,465     |         |         | $        |         |        
|                                             | Realization of deferred tax assets of acquired company                                                  |                                                                                             | $                                                     | 27,019                                              |          |         | $        |           |         |         | $        |         |        
|                                             | Issuance of common stock upon conversion of debt                                                        |                                                                                             | $                                                     | 83,410                                              |          |         | $        |           |         |         | $        |         |        
|                                             | Stock options issued in connection with acquisition                                                     |                                                                                             | $                                                     | 7,039                                               |          |         | $        |           |         |         | $        | 357      |        
|                                             | Supplemental disclosure of cash flow information:                                                       |                                                                                             |                                                       |                                                     |          |         |          |            |         |         |          |          |        
|                                             | Cash paid during the year for interest                                                                  |                                                                                             | $                                                     | 6,349                                               |          |         | $        | 10,434     |         |         | $        | 20,666   |        
|                                             | Cash paid during the year for income taxes                                                              |                                                                                             | $                                                     | 31,393                                              |          |         | $        | 20,864     |         |         | $        | 18,547   |        



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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











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



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







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





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



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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













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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





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





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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |          
| | ---------
| | Inventory





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





| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | building  interior  seven years;
    exterior  twenty years;                                                                                                               
|
| |  | office furniture and equipment  three to seven
    years; and                                                                                                                
|
| |  | computer hardware and software  three to five years;                                                                                                                         
|
| |  | 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

Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use.




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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

Goodwill and Other Intangible Assets




| |                                                                         
| | ------------------------------------------------------------------------
| | Finite-Lived Intangibles, Long-Lived Assets and Assets
    Held for Sale



Accounting for the Impairment or Disposal of Long-Lived
Assets.








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





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





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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Software Revenue Recognition, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions Revenue Recognition. Application of AICPA Statement of
Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entitys Hardware










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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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







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





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





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

Accounting for
Stock-Based Compensation Accounting for Stock Issued
to Employees, Accounting for Certain
Transactions


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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Involving Stock-Based Compensation, an interpretation of APB
Opinion No. 25








|                        |                                                                                                                                     |                         |         |         |      |   |        |         |   |   |         |         |  
|----------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ------- | ------- | ---- | - | ------ | ------- | - | - | ------- | ------- | -
|                        |                                                                                                                                     | Year Ended December 31, |        
|                        |                                                                                                                                     |                         |        
|                        |                                                                                                                                     | 2004                    |         |         | 2003 |   |        | 2002    |  
|                        |                                                                                                                                     |                         |         |         |      |   |        |         |  
|Net income, as reported |                                                                                                                                     | $                       | 225,065 |         |      | $ | 70,242 |         |   | $ | 128,312 |        
|                        | Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    tax |                         |         | (25,632 | )    |   |        | (55,848 | ) |   |         | (76,721 | )
|                        | Add back: stock-based compensation expense, net of tax, included
    in reported net income                                         |                         |         | 9,182   |      |   |        | 7,504   |   |   |         | 13,442  |  
|                        |                                                                                                                                     |                         |         |         |      |   |        |         |  
|                        | Pro forma net income                                                                                                                |                         | $       | 208,615 |      |   | $      | 21,898  |   |   | $       | 65,033  |  
|                        |                                                                                                                                     |                         |         |         |      |   |        |         |  
|Net income per share:   |                                                                                                                                     |                         |         |         |      |   |        |         |   |   |         |        
|                        | Basic  as reported                                                                                                                 |                         | $       | 1.40    |      |   | $      | 0.44    |   |   | $       | 0.86    |  
|                        | Basic  pro forma                                                                                                                   |                         | $       | 1.30    |      |   | $      | 0.14    |   |   | $       | 0.44    |  
|                        | Diluted  as reported                                                                                                               |                         | $       | 1.31    |      |   | $      | 0.43    |   |   | $       | 0.80    |  
|                        | Diluted  pro forma                                                                                                                 |                         | $       | 1.25    |      |   | $      | 0.13    |   |   | $       | 0.41    |  





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



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                     
| | --------------------
| | Net Income Per Share





| |         
| | --------
| | Warranty





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





|                                                                                                   |                                  |            |        |        |            |   |        |            |  |   |        |        |  
|-------------------------------------------------------------------------------------------------- | -------------------------------- | ---------- | ------ | ------ | ---------- | - | ------ | ---------- |  | - | ------ | ------ | -
|                                                                                                   |                                  | Before     |        |        |            |   | Net of |           
|                                                                                                   |                                  | Income Tax |        |        | Income Tax |   |        | Income Tax | 
|                                                                                                   |                                  |            |        |        |            |   |        |            | 
|2004                                                                                               |                                  |            |        |        |            |   |        |            |  |   |        |       
|Unrealized loss on marketable securities and investments, net                                      |                                  | $          | (5,253 | )      |            | $ | 2,102  |            |  | $ | (3,151 | )     
|Reclassification adjustment for net loss on marketable
    securities recognized during the period |                                  |            | 1,704  |        |            |   | (682   | )          |  |   | 1,022  |       
|Foreign currency translation loss                                                                  |                                  |            | (4,537 | )      |            |   |       |            |  |   | (4,537 | )     
|                                                                                                   |                                  |            |        |        |            |   |        |            | 
|                                                                                                   | Total other comprehensive loss   |            | $      | (8,086 | )          |   | $      | 1,420      |  |   | $      | (6,666 | )
|                                                                                                   |                                  |            |        |        |            |   |        |            | 
|2003                                                                                               |                                  |            |        |        |            |   |        |            |  |   |        |       
|Unrealized gain on marketable securities and investments, net                                      |                                  | $          | 1,894  |        |            | $ | (757   | )          |  | $ | 1,137  |       
|Reclassification adjustment for net gain on marketable
    securities recognized during the period |                                  |            | (3,076 | )      |            |   | 1,230  |            |  |   | (1,846 | )     
|Foreign currency translation gain                                                                  |                                  |            | 10,578 |        |            |   |       |            |  |   | 10,578 |       
|                                                                                                   |                                  |            |        |        |            |   |        |            | 
|                                                                                                   | Total other comprehensive income |            | $      | 9,396  |            |   | $      | 473        |  |   | $      | 9,869  |  
|                                                                                                   |                                  |            |        |        |            |   |        |            | 

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                                                   |                                  |            |        |       |            |   |        |            |  |   |        |       | 
|-------------------------------------------------------------------------------------------------- | -------------------------------- | ---------- | ------ | ----- | ---------- | - | ------ | ---------- |  | - | ------ | ----- | 
|                                                                                                   |                                  | Before     |        |       |            |   | Net of |           
|                                                                                                   |                                  | Income Tax |        |       | Income Tax |   |        | Income Tax | 
|                                                                                                   |                                  |            |        |       |            |   |        |            | 
|2002                                                                                               |                                  |            |        |       |            |   |        |            |  |   |        |      
|Unrealized loss on marketable securities and investments, net                                      |                                  | $          | (805   | )     |            | $ | 322    |            |  | $ | (483   | )    
|Reclassification adjustment for net gain on marketable
    securities recognized during the period |                                  |            | (3,838 | )     |            |   | 1,535  |            |  |   | (2,303 | )    
|Impairment recognized                                                                              |                                  |            | 198    |       |            |   | (79    | )          |  |   | 119    |      
|Foreign currency translation gain                                                                  |                                  |            | 10,744 |       |            |   |       |            |  |   | 10,744 |      
|                                                                                                   |                                  |            |        |       |            |   |        |            | 
|                                                                                                   | Total other comprehensive income |            | $      | 6,299 |            |   | $      | 1,778      |  |   | $      | 8,077 | 
|                                                                                                   |                                  |            |        |       |            |   |        |            | 



|                                                        |       |      |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------------------------- | ----- | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                        |       | 2004 |        |        | 2003 |   |        | 2002   | 
|                                                        |       |      |        |        |      |   |        |        | 
|Unrealized (loss) gain on available-for-sale securities |       | $    | (1,384 | )      |      | $ | 745    |        |  | $ | 1,454  |       
|Cumulative translation adjustment                       |       |      | 28,745 |        |      |   | 33,282 |        |  |   | 22,704 |       
|                                                        |       |      |        |        |      |   |        |        | 
|                                                        | Total |      | $      | 27,361 |      |   | $      | 34,027 |  |   | $      | 24,158 | 
|                                                        |       |      |        |        |      |   |        |        | 



| |                                              
| | ---------------------------------------------
| | Recent Accounting Pronouncements and Guidance



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

Share
Based Payment




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

Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creations Act of 2004


82



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |          
| | ---------
| | Inventory

Inventory Costs, an Amendment of ARB No. 43,
Chapter 4.




| |                                               
| | ----------------------------------------------
| | The Meaning of Other-Than-Temporary Impairment

The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments,




|   |                                                    
|-- | ---------------------------------------------------
|3. | Cumulative Effect of Change in Accounting Principle



83



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                  |                            |        |         |               |        |   |         |      | 
|----------------------------------------------------------------- | -------------------------- | ------ | ------- | ------------- | ------ | - | ------- | ---- | 
|                                                                  |                            |        |         | Pro Forma for |       
|                                                                  |                            |        |         | Commission    |       
|                                                                  |                            | Actual |         |               | Change |  
|                                                                  |                            |        |         |               |        |  
|Operating expenses                                                |                            | $      | 763,606 |               |        | $ | 774,938 |     
|                                                                  |                            |        |         |               |        |  
|Income before cumulative effect of change in accounting principle |                            | $      | 128,312 |               |        | $ | 121,513 |     
|                                                                  |                            |        |         |               |        |  
|                                                                  | Per common share  basic   |        | $       | 0.86          |        |   | $       | 0.81 | 
|                                                                  |                            |        |         |               |        |  
|                                                                  | Per common share  diluted |        | $       | 0.80          |        |   | $       | 0.76 | 
|                                                                  |                            |        |         |               |        |  
|Net income                                                        |                            | $      | 128,312 |               |        | $ | 121,513 |     
|                                                                  |                            |        |         |               |        |  
|                                                                  | Per common share  basic   |        | $       | 0.86          |        |   | $       | 0.81 | 
|                                                                  |                            |        |         |               |        |  
|                                                                  | Per common share  diluted |        | $       | 0.80          |        |   | $       | 0.76 | 
|                                                                  |                            |        |         |               |        |  



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



| |                 
| | ----------------
| | Foundstone, Inc.









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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                         |                           |                |        |         | 
|------------------------ | ------------------------- | -------------- | ------ | ------- | 
|                         |                           | (In thousands) |       
|Technology               |                           | $              | 27,000 |        
|Other intangible assets  |                           |                | 1,600  |        
|Goodwill                 |                           |                | 59,235 |        
|Cash                     |                           |                | 920    |        
|Other assets             |                           |                | 12,918 |        
|Deferred tax assets      |                           |                | 8,721  |        
|                         |                           |                |       
|                         | Total assets acquired     |                |        | 110,394 | 
|                         |                           |                |       
|Liabilities              |                           |                | 8,740  |        
|Deferred tax liabilities |                           |                | 11,297 |        
|                         |                           |                |       
|                         | Total liabilities assumed |                |        | 20,037  | 
|                         |                           |                |       
|Net assets acquired      |                           | $              | 90,357 |        
|                         |                           |                |       



|                                                                  |  |                         |         |  |      |   |         | 
|----------------------------------------------------------------- |  | ----------------------- | ------- |  | ---- | - | ------- | 
|                                                                  |  | Year Ended December 31, |        
|                                                                  |  |                         |        
|                                                                  |  | 2004                    |         |  | 2003 |  
|                                                                  |  |                         |         |  |      |  
|                                                                  |  | (Unaudited)             |        
|Net revenue                                                       |  | $                       | 927,595 |  |      | $ | 954,136 | 
|                                                                  |  |                         |         |  |      |  
|Income before cumulative effect of change in accounting principle |  | $                       | 212,610 |  |      | $ | 46,838  | 
|                                                                  |  |                         |         |  |      |  
|Net income                                                        |  | $                       | 212,610 |  |      | $ | 57,175  | 
|                                                                  |  |                         |         |  |      |  
|Basic net income per share                                        |  | $                       | 1.32    |  |      | $ | 0.36    | 
|                                                                  |  |                         |         |  |      |  
|Shares used in per share calculation  basic                      |  |                         | 160,714 |  |      |   | 160,338 | 
|                                                                  |  |                         |         |  |      |  
|Diluted net income per share                                      |  | $                       | 1.24    |  |      | $ | 0.35    | 
|                                                                  |  |                         |         |  |      |  
|Shares used in per share calculation  diluted                    |  |                         | 177,099 |  |      |   | 164,489 | 
|                                                                  |  |                         |         |  |      |  





| |                         
| | ------------------------
| | IntruVert Networks, Inc.



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












| |                                      
| | -------------------------------------
| | Entercept Security Technologies, Inc.







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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                 |  |   |        |  
|-------------------------------- |  | - | ------ | -
|Original accrual, April 30, 2003 |  | $ | 2,837  |  
|Cash payments                    |  |   | (1,106 | )
|Adjustments                      |  |   | (1,137 | )
|                                 |  |   |       
|Balance, December 31, 2004       |  | $ | 594    |  
|                                 |  |   |       





|                                               |                           |                |         |         |                    |              |         |                     |  |   |         |         | 
|---------------------------------------------- | ------------------------- | -------------- | ------- | ------- | ------------------ | ------------ | ------- | ------------------- |  | - | ------- | ------- | 
|                                               |                           |                |         |         |                    | Total Assets |        
|                                               |                           | IntruVert      |         |         | Entercept Security |              |         | Acquired and        | 
|                                               |                           | Networks, Inc. |         |         | Technologies, Inc. |              |         | Liabilities Assumed | 
|                                               |                           |                |         |         |                    |              |         |                     | 
|                                               |                           | (In thousands) |        
|Deferred tax assets                            |                           | $              | 436     |         |                    | $            | 10,560  |                     |  | $ | 10,996  |        
|Technology                                     |                           |                | 18,200  |         |                    |              | 21,700  |                     |  |   | 39,900  |        
|Other intangible assets                        |                           |                | 1,900   |         |                    |              | 2,800   |                     |  |   | 4,700   |        
|Cash                                           |                           |                | 10,986  |         |                    |              | 1,028   |                     |  |   | 12,014  |        
|Goodwill                                       |                           |                | 71,598  |         |                    |              | 99,565  |                     |  |   | 171,163 |        
|Other assets                                   |                           |                | 4,984   |         |                    |              | 3,517   |                     |  |   | 8,501   |        
|                                               |                           |                |         |         |                    |              |         |                     | 
|                                               | Total assets acquired     |                |         | 108,104 |                    |              |         | 139,170             |  |   |         | 247,274 | 
|                                               |                           |                |         |         |                    |              |         |                     | 
|Current liabilities                            |                           |                | 2,649   |         |                    |              | 4,739   |                     |  |   | 7,388   |        
|Deferred tax liabilities                       |                           |                | 7,839   |         |                    |              | 9,555   |                     |  |   | 17,394  |        
|                                               |                           |                |         |         |                    |              |         |                     | 
|                                               | Total liabilities assumed |                |         | 10,488  |                    |              |         | 14,294              |  |   |         | 24,782  | 
|                                               |                           |                |         |         |                    |              |         |                     | 
|Net assets acquired                            |                           | $              | 97,616  |         |                    | $            | 124,876 |                     |  | $ | 222,492 |        
|                                               |                           |                |         |         |                    |              |         |                     | 
|In-process research and development (expensed) |                           | $              | 5,700   |         |                    | $            | 900     |                     |  | $ | 6,600   |        
|                                               |                           |                |         |         |                    |              |         |                     | 
|Total acquisition cost                         |                           | $              | 103,316 |         |                    | $            | 125,776 |                     |  | $ | 229,092 |        
|                                               |                           |                |         |         |                    |              |         |                     | 

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                  |  |                         |         |  |      |   |           | 
|----------------------------------------------------------------- |  | ----------------------- | ------- |  | ---- | - | --------- | 
|                                                                  |  | Year Ended December 31, |        
|                                                                  |  |                         |        
|                                                                  |  | 2003                    |         |  | 2002 |  
|                                                                  |  |                         |         |  |      |  
|                                                                  |  | (Unaudited)             |        
|Net revenue                                                       |  | $                       | 939,953 |  |      | $ | 1,052,474 | 
|                                                                  |  |                         |         |  |      |  
|Income before cumulative effect of change in accounting principle |  | $                       | 49,721  |  |      | $ | 93,367    | 
|                                                                  |  |                         |         |  |      |  
|Net income                                                        |  | $                       | 60,058  |  |      | $ | 93,367    | 
|                                                                  |  |                         |         |  |      |  
|Basic net income per share                                        |  | $                       | 0.38    |  |      | $ | 0.62      | 
|                                                                  |  |                         |         |  |      |  
|Shares used in per share calculation  basic                      |  |                         | 160,338 |  |      |   | 149,441   | 
|                                                                  |  |                         |         |  |      |  
|Diluted net income per share                                      |  | $                       | 0.37    |  |      | $ | 0.59      | 
|                                                                  |  |                         |         |  |      |  
|Shares used in per share calculation  diluted                    |  |                         | 164,489 |  |      |   | 157,156   | 
|                                                                  |  |                         |         |  |      |  





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





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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                               |  |             |           | 
|---------------------------------------------- |  | ----------- | --------- | 
|                                               |  | (Unaudited) |          
|Net revenue                                    |  | $           | 1,043,044 | 
|                                               |  |             |          
|Net income                                     |  | $           | 141,334   | 
|                                               |  |             |          
|Basic net income per share                     |  | $           | 0.91      | 
|                                               |  |             |          
|Shares used in per share calculation  basic   |  |             | 155,245   | 
|                                               |  |             |          
|Diluted net income per share                   |  | $           | 0.84      | 
|                                               |  |             |          
|Shares used in per share calculation  diluted |  |             | 183,150   | 
|                                               |  |             |          





|   |                   
|-- | ------------------
|5. | Sale of Businesses



| |            
| | -----------
| | McAfee Labs





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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                     
| | --------------------
| | Sniffer Technologies





|                  |                     |                |        |        | 
|----------------- | ------------------- | -------------- | ------ | ------ | 
|                  |                     | (In thousands) |       
|Assets:           |                     |                |        |       
|                  | Prepaid expenses    |                | $      | 2,227  | 
|                  | Inventory           |                |        | 6,759  | 
|                  | Equipment, net      |                |        | 2,396  | 
|                  | Goodwill            |                |        | 50,547 | 
|                  |                     |                |       
|Total assets      |                     | $              | 61,929 |       
|                  |                     |                |       
|Liabilities:      |                     |                |        |       
|                  | Accrued liabilities |                | $      | 2,069  | 
|                  | Deferred revenue    |                |        | 43,477 | 
|                  |                     |                |       
|Total liabilities |                     | $              | 45,546 |       
|                  |                     |                |       









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



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                            |                     |                |        |        | 
|------------------------------------------- | ------------------- | -------------- | ------ | ------ | 
|                                            |                     | (In thousands) |       
|Assets:                                     |                     |                |        |       
|                                            | Accounts receivable |                | $      | 12,991 | 
|                                            | Prepaid expenses    |                |        | 888    | 
|                                            | Inventory           |                |        | 20     | 
|                                            | Equipment, net      |                |        | 1,023  | 
|                                            | Goodwill            |                |        | 9,797  | 
|                                            |                     |                |       
|Assets held for sale                        |                     | $              | 24,719 |       
|                                            |                     |                |       
|Liabilities:                                |                     |                |        |       
|                                            | Accounts payable    |                | $      | 215    | 
|                                            | Accrued liabilities |                |        | 1,050  | 
|                                            | Deferred revenue    |                |        | 22,045 | 
|                                            |                     |                |       
|Liabilities related to assets held for sale |                     | $              | 23,310 |       
|                                            |                     |                |       







| |                  
| | -----------------
| | PGP Product Group



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                                    
|-- | ---------------------------------------------------
|6. | Marketable Securities and Cash and Cash Equivalents



|                                |  |           |         |  |            |   |     |            |  |   |            |   |  |   |         | 
|------------------------------- |  | --------- | ------- |  | ---------- | - | --- | ---------- |  | - | ---------- | - |  | - | ------- | 
|                                |  | 2004      |        
|                                |  |           |        
|                                |  | Purchase/ |         |  | Gross      |   |     | Gross      |  |   |           
|                                |  | Amortized |         |  | Unrealized |   |     | Unrealized |  |   | Aggregate  |  
|                                |  | Cost      |         |  | Gains      |   |     | Losses     |  |   | Fair Value |  
|                                |  |           |         |  |            |   |     |            |  |   |            |  
|U.S. Government debt securities |  | $         | 274,594 |  |            | $ | 40  |            |  | $ | (1,021     | ) |  | $ | 273,613 | 
|Corporate debt securities       |  |           | 340,037 |  |            |   | 138 |            |  |   | (1,458     | ) |  |   | 338,717 | 
|Municipal debt securities       |  |           | 4,850   |  |            |   |    |            |  |   |           |   |  |   | 4,850   | 
|Time deposits                   |  |           | 16,350  |  |            |   |    |            |  |   | (4         | ) |  |   | 16,346  | 
|                                |  |           |         |  |            |   |     |            |  |   |            |  
|                                |  | $         | 635,831 |  |            | $ | 178 |            |  | $ | (2,483     | ) |  | $ | 633,526 | 
|                                |  |           |         |  |            |   |     |            |  |   |            |  

|                                                 |  |           |         |  |            |   |       |            |  |   |            |   |  |   |         | 
|------------------------------------------------ |  | --------- | ------- |  | ---------- | - | ----- | ---------- |  | - | ---------- | - |  | - | ------- | 
|                                                 |  | 2003      |        
|                                                 |  |           |        
|                                                 |  | Purchase/ |         |  | Gross      |   |       | Gross      |  |   |           
|                                                 |  | Amortized |         |  | Unrealized |   |       | Unrealized |  |   | Aggregate  |  
|                                                 |  | Cost      |         |  | Gains      |   |       | Losses     |  |   | Fair Value |  
|                                                 |  |           |         |  |            |   |       |            |  |   |            |  
|U.S. Government debt securities                  |  | $         | 190,567 |  |            | $ | 401   |            |  | $ | (76        | ) |  | $ | 190,892 | 
|Corporate debt securities and money market funds |  |           | 484,156 |  |            |   | 607   |            |  |   | (180       | ) |  |   | 484,583 | 
|Equity securities                                |  |           | 118     |  |            |   | 293   |            |  |   |           |   |  |   | 411     | 
|                                                 |  |           |         |  |            |   |       |            |  |   |            |  
|                                                 |  | $         | 674,841 |  |            | $ | 1,301 |            |  | $ | (256       | ) |  | $ | 675,886 | 
|                                                 |  |           |         |  |            |   |       |            |  |   |            |  





|                                                                       |                                 |      |         |         |      |   |         |         | 
|---------------------------------------------------------------------- | ------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                       |                                 | 2004 |         |         | 2003 |  
|                                                                       |                                 |      |         |         |      |  
|Cash and money market funds, at cost which approximates fair
    value |                                 | $    | 262,216 |         |      | $ | 325,360 |        
|Corporate debt securities, primarily commercial paper                  |                                 |      | 28,939  |         |      |   | 8,291   |        
|                                                                       |                                 |      |         |         |      |  
|                                                                       | Total cash and cash equivalents |      | $       | 291,155 |      |   | $       | 333,651 | 
|                                                                       |                                 |      |         |         |      |  



|                |                          |      |        |        |      |   |       |       |  |   |       |       | 
|--------------- | ------------------------ | ---- | ------ | ------ | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                |                          | 2004 |        |        | 2003 |   |       | 2002  | 
|                |                          |      |        |        |      |   |       |       | 
|Realized gains  |                          | $    | 922    |        |      | $ | 3,753 |       |  | $ | 4,670 |      
|Realized losses |                          |      | (2,626 | )      |      |   | (677  | )     |  |   | (832  | )    
|                |                          |      |        |        |      |   |       |       | 
|                | Net realized (loss) gain |      | $      | (1,704 | )    |   | $     | 3,076 |  |   | $     | 3,838 | 
|                |                          |      |        |        |      |   |       |       | 

92



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |  |                     |         |            |                     |   |        |            |            |   |        |  |  |            |      |   |        |   |         |  |  |   |        |  
|------------------------------- |  | ------------------- | ------- | ---------- | ------------------- | - | ------ | ---------- | ---------- | - | ------ |  |  | ---------- | ---- | - | ------ | - | ------- |  |  | - | ------ | -
|                                |  | Less Than 12 Months |         |            | More Than 12 Months |   |        | Total      |           
|                                |  |                     |         |            |                     |   |        |            |           
|                                |  |                     |         | Gross      |                     |   |        |            | Gross      |   |        |  |  | Gross      |     
|                                |  |                     |         | Unrealized |                     |   |        |            | Unrealized |   |        |  |  | Unrealized |     
|                                |  | Fair Value          |         |            | Losses              |   |        | Fair Value |            |   | Losses |  |  | Fair Value |      |   | Losses |  
|                                |  |                     |         |            |                     |   |        |            |            |   |        |  |  |            |      |   |        |  
|U.S. Government debt securities |  | $                   | 242,316 |            |                     | $ | (1,056 | )          |            | $ | 2,625  |  |  | $          | (33  | ) |        | $ | 244,941 |  |  | $ | (1,089 | )
|Corporate debt securities       |  |                     | 185,359 |            |                     |   | (1,076 | )          |            |   | 48,241 |  |  |            | (318 | ) |        |   | 233,600 |  |  |   | (1,394 | )
|                                |  |                     |         |            |                     |   |        |            |            |   |        |  |  |            |      |   |        |  
|                                |  | $                   | 427,675 |            |                     | $ | (2,132 | )          |            | $ | 50,866 |  |  | $          | (351 | ) |        | $ | 478,541 |  |  | $ | (2,483 | )
|                                |  |                     |         |            |                     |   |        |            |            |   |        |  |  |            |      |   |        |  





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



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







|                       |  |          |     |  |       |   |     |          |  |   |       |   |  |   |     |  
|---------------------- |  | -------- | --- |  | ----- | - | --- | -------- |  | - | ----- | - |  | - | --- | -
|                       |  | 2004     |     |  | 2003  |  
|                       |  |          |     |  |       |  
|                       |  | Carrying |     |  | Fair  |   |     | Carrying |  |   | Fair  |  
|                       |  | Value    |     |  | Value |   |     | Value    |  |   | Value |  
|                       |  |          |     |  |       |   |     |          |  |   |       |  
|Euro                   |  | $        | 116 |  |       | $ | 116 |          |  | $ | 490   |   |  | $ | 490 |  
|British Pound Sterling |  |          | 288 |  |       |   | 288 |          |  |   | 54    |   |  |   | 54  |  
|Brazilian Real         |  |          | 420 |  |       |   | 420 |          |  |   |      |   |  |   |    |  
|Singapore Dollar       |  |          |    |  |       |   |    |          |  |   | (16   | ) |  |   | (16 | )
|Japanese Yen           |  |          | 1   |  |       |   | 1   |          |  |   |      |   |  |   |    |  
|Australian Dollar      |  |          | 4   |  |       |   | 4   |          |  |   | 75    |   |  |   | 75  |  
|Canadian Dollar        |  |          | 39  |  |       |   | 39  |          |  |   | 255   |   |  |   | 255 |  
|                       |  |          |     |  |       |   |     |          |  |   |       |  
|                       |  | $        | 868 |  |       | $ | 868 |          |  | $ | 858   |   |  | $ | 858 |  
|                       |  |          |     |  |       |   |     |          |  |   |       |  

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

















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



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




8.     Consolidated Balance Sheet
Detail (in thousands):


|                                  |                          |              |         |          |      |   |         |          |  
|--------------------------------- | ------------------------ | ------------ | ------- | -------- | ---- | - | ------- | -------- | -
|                                  |                          | December 31, |        
|                                  |                          |              |        
|                                  |                          | 2004         |         |          | 2003 |  
|                                  |                          |              |         |          |      |  
|Property and equipment:           |                          |              |         |          |      |   |         |         
|                                  | Building                 |              | $       | 19,828   |      |   | $       | 19,822   |  
|                                  | Furniture and fixtures   |              |         | 18,728   |      |   |         | 27,469   |  
|                                  | Computers and equipment  |              |         | 154,005  |      |   |         | 198,737  |  
|                                  | Leasehold improvements   |              |         | 21,421   |      |   |         | 26,179   |  
|                                  | Construction in progress |              |         | 2,034    |      |   |         | 23,505   |  
|                                  |                          |              |         |          |      |  
|                                  |                          |              | 216,016 |          |      |   | 295,712 |         
|                                  | Accumulated depreciation |              |         | (129,363 | )    |   |         | (189,102 | )
|                                  |                          |              |         |          |      |  
|                                  |                          |              | 86,653  |          |      |   | 106,610 |         
|Land                              |                          |              | 5,062   |          |      |   | 5,062   |         
|                                  |                          |              |         |          |      |  
|Total property and equipment, net |                          | $            | 91,715  |          |      | $ | 111,672 |         
|                                  |                          |              |         |          |      |  



|                     |                                   |              |         |        |      |   |         |        | 
|-------------------- | --------------------------------- | ------------ | ------- | ------ | ---- | - | ------- | ------ | 
|                     |                                   | December 31, |        
|                     |                                   |              |        
|                     |                                   | 2004         |         |        | 2003 |  
|                     |                                   |              |         |        |      |  
|Accrued liabilities: |                                   |              |         |        |      |   |         |       
|                     | Accrued income taxes, short term  |              | $       | 70,778 |      |   | $       | 10,123 | 
|                     | Accrued compensation              |              |         | 53,146 |      |   |         | 51,183 | 
|                     | Accrued marketing costs           |              |         | 2,806  |      |   |         | 3,622  | 
|                     | Accrued legal and accounting fees |              |         | 9,231  |      |   |         | 6,946  | 
|                     | Accrued interest                  |              |         |       |      |   |         | 6,843  | 
|                     | Other accrued expenses            |              |         | 61,407 |      |   |         | 68,564 | 
|                     |                                   |              |         |        |      |  
|                     |                                   | $            | 197,368 |        |      | $ | 147,281 |       
|                     |                                   |              |         |        |      |  

|                                                      |                                 |              |         |         |      |   |         |         | 
|----------------------------------------------------- | ------------------------------- | ------------ | ------- | ------- | ---- | - | ------- | ------- | 
|                                                      |                                 | December 31, |        
|                                                      |                                 |              |        
|                                                      |                                 | 2004         |         |         | 2003 |  
|                                                      |                                 |              |         |         |      |  
|Accrued income taxes and other long-term liabilities: |                                 |              |         |         |      |   |         |        
|                                                      | Accrued income taxes, long term |              | $       | 188,734 |      |   | $       | 209,287 | 
|                                                      | Other                           |              |         | 16,062  |      |   |         | 13,478  | 
|                                                      |                                 |              |         |         |      |  
|                                                      |                                 | $            | 204,796 |         |      | $ | 222,765 |        
|                                                      |                                 |              |         |         |      |  

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |               
|-- | --------------
|9. | Restructurings



| |                    
| | -------------------
| | 2004 Restructurings











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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                           |  |             |       |   |                |   |        |       |  |   |       |   |  |   |        |  
|-------------------------- |  | ----------- | ----- | - | -------------- | - | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                           |  | Lease       |       |   |                |   |        |       | 
|                           |  | Termination |       |   | Severance and  |   |        | Other |  |   |      
|                           |  | Costs       |       |   | Other Benefits |   |        | Costs |  |   | Total |  
|                           |  |             |       |   |                |   |        |       |  |   |       |  
|Balance, January 1, 2004   |  | $           |      |   |                | $ |       |       |  | $ |      |   |  | $ |       |  
|Restructuring accrual      |  |             | 8,685 |   |                |   | 7,932  |       |  |   | 480   |   |  |   | 17,097 |  
|Cash payments              |  |             | (579  | ) |                |   | (4,175 | )     |  |   | (63   | ) |  |   | (4,817 | )
|Adjustment to liability    |  |             | (222  | ) |                |   | (275   | )     |  |   |      |   |  |   | (497   | )
|Accretion                  |  |             | 74    |   |                |   |       |       |  |   |      |   |  |   | 74     |  
|                           |  |             |       |   |                |   |        |       |  |   |       |  
|Balance, December 31, 2004 |  | $           | 7,958 |   |                | $ | 3,482  |       |  | $ | 417   |   |  | $ | 11,857 |  
|                           |  |             |       |   |                |   |        |       |  |   |       |  





| |                   
| | ------------------
| | 2003 Restructuring









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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                           |  |             |        |   |                |   |        |       |  |   |       |   |  |   |        |  
|-------------------------- |  | ----------- | ------ | - | -------------- | - | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                           |  | Lease       |        |   |                |   |        |       | 
|                           |  | Termination |        |   | Severance and  |   |        | Other |  |   |      
|                           |  | Costs       |        |   | Other Benefits |   |        | Costs |  |   | Total |  
|                           |  |             |        |   |                |   |        |       |  |   |       |  
|Balance, January 1, 2003   |  | $           |       |   |                | $ |       |       |  | $ |      |   |  | $ |       |  
|Restructuring accrual      |  |             | 15,734 |   |                |   | 6,692  |       |  |   | 739   |   |  |   | 23,165 |  
|Cash payments              |  |             | (1,707 | ) |                |   | (6,259 | )     |  |   | (167  | ) |  |   | (8,133 | )
|Adjustment to liability    |  |             | (273   | ) |                |   | (116   | )     |  |   | (572  | ) |  |   | (961   | )
|Accretion                  |  |             | 463    |   |                |   |       |       |  |   |      |   |  |   | 463    |  
|                           |  |             |        |   |                |   |        |       |  |   |       |  
|Balance, December 31, 2003 |  |             | 14,217 |   |                |   | 317    |       |  |   |      |   |  |   | 14,534 |  
|Cash payments              |  |             | (1,841 | ) |                |   | (194   | )     |  |   |      |   |  |   | (2,035 | )
|Adjustment to liability    |  |             | (623   | ) |                |   | (123   | )     |  |   |      |   |  |   | (746   | )
|Accretion                  |  |             | 548    |   |                |   |       |       |  |   |      |   |  |   | 548    |  
|                           |  |             |        |   |                |   |        |       |  |   |       |  
|Balance, December 31, 2004 |  | $           | 12,301 |   |                | $ |       |       |  | $ |      |   |  | $ | 12,301 |  
|                           |  |             |        |   |                |   |        |       |  |   |       |  









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

Goodwill and
Other Intangible Assets.




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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |  |            |         |  |          |   |         |             |  |          |          |   |              |      |       |          |            |   |         |             |          |   |          |              |  |      |         |   |  |   |     |  |  |   |         | 
|------------------------------ |  | ---------- | ------- |  | -------- | - | ------- | ----------- |  | -------- | -------- | - | ------------ | ---- | ----- | -------- | ---------- | - | ------- | ----------- | -------- | - | -------- | ------------ |  | ---- | ------- | - |  | - | --- |  |  | - | ------- | 
|                               |  |            |         |  |          |   |         | Effects of  |  |          |          |   |              |      |       |          | Effects of |   |         |            
|                               |  |            |         |  |          |   |         | Foreign     |  |          |          |   |              |      |       |          | Foreign    |   |         |            
|                               |  | January 1, |         |  | Goodwill |   |         |             |  | Currency |          |   | December 31, |      |       | Goodwill |            |   |         |             | Currency |   |          | December 31, | 
|                               |  | 2003       |         |  | Acquired |   |         | Adjustments |  |          | Exchange |   |              | 2003 |       |          | Acquired   |   |         | Adjustments |          |   | Exchange |              |  | 2004 |        
|                               |  |            |         |  |          |   |         |             |  |          |          |   |              |      |       |          |            |   |         |             |          |   |          |              |  |      |        
|North America                  |  | $          | 232,122 |  |          | $ | 137,636 |             |  | $        | (6,671   | ) |              | $    | 1,238 |          |            | $ | 364,325 |             |          | $ | 59,235   |              |  | $    | (59,007 | ) |  | $ | 571 |  |  | $ | 365,124 | 
|EMEA                           |  | $          | 25,424  |  |          | $ | 21,477  |             |  | $        | (2,830   | ) |              | $    | 289   |          |            | $ | 44,360  |             |          | $ |         |              |  | $    | (2,930  | ) |  | $ | 221 |  |  | $ | 41,651  | 
|Japan                          |  | $          | 12,071  |  |          | $ | 4,678   |             |  | $        | (1       | ) |              | $    |      |          |            | $ | 16,748  |             |          | $ |         |              |  | $    | (351    | ) |  | $ |    |  |  | $ | 16,397  | 
|Asia-Pacific (excluding Japan) |  | $          | 2,301   |  |          | $ | 3,814   |             |  | $        | (28      | ) |              | $    |      |          |            | $ | 6,087   |             |          | $ |         |              |  | $    | (520    | ) |  | $ |    |  |  | $ | 5,567   | 
|Latin America                  |  | $          | 2,016   |  |          | $ | 3,905   |             |  | $        | 5,454    |   |              | $    | 698   |          |            | $ | 12,073  |             |          | $ |         |              |  | $    | (1,724  | ) |  | $ | 92  |  |  | $ | 10,441  | 
|                               |  |            |         |  |          |   |         |             |  |          |          |   |              |      |       |          |            |   |         |             |          |   |          |              |  |      |        
|Total                          |  | $          | 273,934 |  |          | $ | 171,510 |             |  | $        | (4,076   | ) |              | $    | 2,225 |          |            | $ | 443,593 |             |          | $ | 59,235   |              |  | $    | (64,532 | ) |  | $ | 884 |  |  | $ | 439,180 | 
|                               |  |            |         |  |          |   |         |             |  |          |          |   |              |      |       |          |            |   |         |             |          |   |          |              |  |      |        







|                         |                                                          |                   |           |              |                   |   |                    |            |  |   |              |         |   |                    |         |        |            |   |         |          |  |   |          |         |   |   |         |        | 
|------------------------ | -------------------------------------------------------- | ----------------- | --------- | ------------ | ----------------- | - | ------------------ | ---------- |  | - | ------------ | ------- | - | ------------------ | ------- | ------ | ---------- | - | ------- | -------- |  | - | -------- | ------- | - | - | ------- | ------ | 
|                         |                                                          | December 31, 2004 |           |              | December 31, 2003 |  
|                         |                                                          |                   |           |              |                   |  
|                         |                                                          |                   |           | Accumulated  |                   |   |                    |            |  |   | Accumulated  |         |   |                   
|                         |                                                          |                   |           | Amortization |                   |   |                    |            |  |   | Amortization |         |   |                   
|                         |                                                          | Weighted          |           |              |                   |   | (Including Effects |            |  |   |              |         |   | (Including Effects |         |        |           
|                         |                                                          | Average           |           |              | Gross             |   |                    | of Foreign |  |   | Net          |         |   | Gross              |         |        | of Foreign |   |         | Net      | 
|                         |                                                          | Useful            |           |              | Carrying          |   |                    | Currency   |  |   | Carrying     |         |   | Carrying           |         |        | Currency   |   |         | Carrying | 
|                         |                                                          | Life              |           |              | Amount            |   |                    | Exchange)  |  |   | Amount       |         |   | Amount             |         |        | Exchange)  |   |         | Amount   | 
|                         |                                                          |                   |           |              |                   |   |                    |            |  |   |              |         |   |                    |         |        |            |   |         |          | 
|Other Intangible assets: |                                                          |                   |           |              |                   |   |                    |            |  |   |              |         |   |                    |         |        |            |   |         |          |  |   |          |         |   |   |         |       
|                         | Purchased technologies                                   |                   |           | 6.0 years    |                   |   | $                  | 139,509    |  |   | $            | (74,400 | ) |                    | $       | 65,109 |            |   | $       | 116,037  |  |   | $        | (64,439 | ) |   | $       | 51,598 | 
|                         | Trademarks, patents customer base, and other intangibles |                   |           | 6.4 years    |                   |   |                    | 90,335     |  |   |              | (48,311 | ) |                    |         | 42,024 |            |   |         | 103,431  |  |   |          | (49,077 | ) |   |         | 54,354 | 
|                         |                                                          |                   |           |              |                   |   |                    |            |  |   |              |         |   |                    |         |        |            |   |         |          | 
|                         |                                                          |                   | 6.1 years |              |                   | $ | 229,844            |            |  | $ | (122,711     | )       |   | $                  | 107,133 |        |            | $ | 219,468 |          |  | $ | (113,516 | )       |   | $ | 105,952 |       
|                         |                                                          |                   |           |              |                   |   |                    |            |  |   |              |         |   |                    |         |        |            |   |         |          | 

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                     |                                                                                        |                |         |        |         |   |         |        |   | 
|------------------------------------ | -------------------------------------------------------------------------------------- | -------------- | ------- | ------ | ------- | - | ------- | ------ | - | 
|                                     |                                                                                        | 2004           |         |        | 2003    |  
|                                     |                                                                                        |                |         |        |         |  
|                                     |                                                                                        | (In thousands) |        
|Intangible assets, beginning of year |                                                                                        | $              | 219,468 |        |         | $ | 177,255 |       
|                                     | Add: Purchased technologies (amortized over one to seven years)                        |                |         | 27,000 |         |   |         | 40,523 |  
|                                     | Add: Trademarks, patents and other intangibles (amortized over
    one to seven years) |                |         | 1,600  |         |   |         | 4,704  |  
|                                     | Add: Change in value due to foreign exchange                                           |                |         | 2,122  |         |   |         | 2,738  |  
|                                     |                                                                                        |                |         |        |         |  
|                                     |                                                                                        |                | 250,190 |        |         |   | 225,220 |       
|                                     | Less: Transfers to goodwill                                                            |                |         |       |         |   |         | (5,752 | )
|                                     |                                                                                        |                |         |        |         |  
|                                     |                                                                                        | Dispositions   |         |        | (20,346 | ) |         |        |  | 
|Intangible Assets, end of year       |                                                                                        | $              | 229,844 |        |         | $ | 219,468 |       
|                                     |                                                                                        |                |         |        |         |  





|              |            |   |         |        | 
|------------- | ---------- | - | ------- | ------ | 
|Fiscal Years: |            |   |         |       
|              | 2005       |   | $       | 27,585 | 
|              | 2006       |   |         | 24,896 | 
|              | 2007       |   |         | 21,954 | 
|              | 2008       |   |         | 16,586 | 
|              | 2009       |   |         | 10,727 | 
|              | Thereafter |   |         | 5,385  | 
|              |            |   |        
|              |            | $ | 107,133 |       
|              |            |   |        



|    |            
|--- | -----------
|11. | Commitments



| |       
| | ------
| | Leases



|                                                |  |                  |  |  |                     | 
|----------------------------------------------- |  | ---------------- |  |  | ------------------- | 
|                                                |  | Lease Expiration |  |  | Renewal Option     
|                                                |  |                  |  |  |                    
|Corporate Headquarters, Santa Clara, California |  | March 2013       |  |  | None               
|European Headquarters, Cork, Ireland            |  | December 2014    |  |  | Two 5 year renewals
|Amsterdam, The Netherlands                      |  | June 2008        |  |  | 5 year renewal     
|Slough, England                                 |  | December 2017    |  |  | None               
|Paris, France                                   |  | April 2012       |  |  | None               
|Tokyo, Japan                                    |  | February 2006    |  |  | None               

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|           |       |          |        |          |        |   |       |       | 
|---------- | ----- | -------- | ------ | -------- | ------ | - | ----- | ----- | 
|           |       |          |        | Sublease |       
|           |       | Payments |        |          | Income |  
|           |       |          |        |          |        |  
|2005       |       | $        | 24,197 |          |        | $ | 1,294 |      
|2006       |       |          | 20,643 |          |        |   | 737   |      
|2007       |       |          | 16,558 |          |        |   |      |      
|2008       |       |          | 15,392 |          |        |   |      |      
|2009       |       |          | 14,889 |          |        |   |      |      
|Thereafter |       |          | 61,810 |          |        |   |      |      
|           |       |          |        |          |        |  
|           | Total |          | $      | 153,489  |        |   | $     | 2,031 | 
|           |       |          |        |          |        |  





|    |                                  
|--- | ---------------------------------
|12. | Warranty Provision and Guarantees



|                                      |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                      |  | 2004 |        |   | 2003 |   |        | 2002 | 
|                                      |  |      |        |   |      |   |        |      | 
|Warranty provision, beginning of year |  | $    | 1,103  |   |      | $ | 1,153  |      |  | $ | 982    |  
|Additional accruals                   |  |      | 8,037  |   |      |   | 3,881  |      |  |   | 4,624  |  
|Disposition of Sniffer                |  |      | (807   | ) |      |   |       |      |  |   |       |  
|Expenses incurred during the period   |  |      | (6,515 | ) |      |   | (3,931 | )    |  |   | (4,453 | )
|                                      |  |      |        |   |      |   |        |      | 
|Warranty provision, end of year       |  | $    | 1,818  |   |      | $ | 1,103  |      |  | $ | 1,153  |  
|                                      |  |      |        |   |      |   |        |      | 

Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Under the terms of the Companys software license
    agreements with its customers, the Company agrees that in the
    event the software sold infringes upon any patent, copyright,
    trademark, or any other proprietary right of a third party, it
    will indemnify its customer licensees against any loss, expense,
    or liability from any damages that may be awarded against its
    customer. The Company includes this infringement indemnification
    in all of its software license agreements and selected managed
    service arrangements. In the event the customer cannot use the
    software or service due to infringement and the Company can not
    obtain the right to use, replace or modify the license or
    service in a commercially

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | feasible manner so that it no longer infringes then the Company
    may terminate the license and provide the customer a pro-rata
    refund of the fees paid by the customer for the infringing
    license or service. The Company has recorded no liability
    associated with this indemnification, as it is not aware of any
    pending or threatened infringement actions that are probable
    losses. The Company believes 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 the Companys managed services, the
    Company has agreed that in the event the service provided to the
    customer by the vendor on behalf of the Company infringes upon
    any patent, copyright, trademark, or any other proprietary right
    of a third party, it will indemnify its vendor, against any
    loss, expense, or liability from any damages that may be awarded
    against its customer. No maximum liability is stipulated in
    these vendor agreements. The Company has recorded no liability
    associated with this indemnification, as it is not aware of any
    pending or threatened infringement actions or claims that are
    probable losses. The Company believes the estimated fair value
    of these indemnification clauses is minimal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The Company has agreed to indemnify members of the board of
    directors, as well as officers of the Company, if they are made
    a party or are threatened to be made a party to any proceeding
    (other than an action by or in the right of the Company) by
    reason of the fact that they are an agent of the Company, or by
    reason of anything done or not done by them in any such
    capacity. The indemnity is for any and all expenses and
    liabilities of any type whatsoever (including judgments, fines
    and amounts paid in settlement) actually and reasonably incurred
    by the directors or officers in connection with the
    investigation, defense, settlement or appeal of such proceeding,
    provided they acted in good faith. The Company maintains
    insurance coverage for directors and officers liability
    (D&O insurance). No maximum liability is
    stipulated in these agreements that include indemnifications of
    members of the board of directors and officers of the Company.
    The Company has recorded no liability associated with these
    indemnifications as it is not aware of any pending or threatened
    actions or claims against its members of the board of directors
    or officers that are probable losses in excess of amounts
    covered by its D&O insurance. As a result of the insurance
    policy coverage, the Company believes the estimated fair value
    of these indemnification agreements is minimal.
|
| |  | Under the terms of the Companys agreement to sell Magic in
    January 2004, the Company 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 are 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, the Company has paid no amounts
    under the representations and warranties indemnification. The
    Company has not recorded any accruals related to these
    agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Under the terms of the Companys agreement to sell Sniffer
    in July 2004, the Company 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 are 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, the Company has paid no amounts
    under the representations and warranties indemnification. The
    Company has not recorded any accruals related to these
    agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Under the terms of the Companys agreement to sell McAfee
    Labs assets in December 2004, the Company 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 are 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. The Company has not
    recorded any accruals related to these agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Under the terms of the Companys agreements to sell the PGP
    and Gauntlet assets in 2002, the Company agreed to indemnify the
    purchasers for any breach of representations or warranties in
    the agreement as well as for any liabilities related to the
    assets prior to sale that are not included in the purchaser
    assumed liabilities (undiscovered liabilities). The maximum
    potential loss related to the indemnification for breach of
    representations or warranties is $2.4 million. No maximum
    liability is stipulated in the agreement related to any
    undiscovered liabilities. To date, the Company has paid
    $0.4 million under the representations and warranties
    indemnification.





|    |                                    
|--- | -----------------------------------
|13. | Convertible Debt and Line of Credit





| |                                            
| | -------------------------------------------
| | Zero Coupon Convertible Debentures Due 2018









| |                                                 
| | ------------------------------------------------
| | 5.25% Convertible Subordinated Note Due
    2006



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












| |               
| | --------------
| | Line of Credit





|    |                       
|--- | ----------------------
|14. | Employee Benefit Plans



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





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



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                        
| | ---------------------------------------
| | McAfee.com Employee Stock Purchase Plan





|    |                     
|--- | --------------------
|15. | Stockholders Equity



| |             
| | ------------
| | Common Stock







105



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





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









106



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                       |  |           |        |                     |           |          |         |                 |  |           |               |  |          |       |          |   |  |   |       | 
|---------------------------------------------------------------------- |  | --------- | ------ | ------------------- | --------- | -------- | ------- | --------------- |  | --------- | ------------- |  | -------- | ----- | -------- | - |  | - | ----- | 
|                                                                       |  |           |        | Outstanding Options |          
|                                                                       |  |           |        |                     |          
|                                                                       |  |           |        |                     |           | Weighted |        
|                                                                       |  | Shares    |        |                     |           |          | Average |                
|                                                                       |  | Available |        |                     | Number of |          |         |                 |  | Aggregate |               |  | Exercise |      
|                                                                       |  | for Grant |        |                     | Shares    |          |         | Price per Share |  |           | Price         |  |          | Price |         
|                                                                       |  |           |        |                     |           |          |         |                 |  |           |               |  |          |       |         
|Balances, January 1, 2002                                              |  |           | 9,104  |                     |           |          | 31,771  |                 |  |           | $ 0.23-$48.72 |  |          | $     | 421,493  |   |  | $ | 13.27 | 
|Additional options reserved                                            |  |           | 5,000  |                     |           |          |        |                 |  |           |               |  |          |       |         |   |  |   |      | 
|Option plan expirations                                                |  |           | (984   | )                   |           |          |        |                 |  |           |               |  |          |       |         |   |  |   |      | 
|Options granted                                                        |  |           | (8,302 | )                   |           |          | 8,302   |                 |  |           | $ 0.01-$30.26 |  |          |       | 190,401  |   |  | $ | 22.93 | 
|Options issued in exchange of McAfee.com outstanding stock
    options |  |           |       |                     |           |          | 2,761   |                 |  |           | $ 4.63-$71.26 |  |          |       | 46,748   |   |  | $ | 16.93 | 
|Options exercised                                                      |  |           |       |                     |           |          | (8,197  | )               |  |           | $ 0.01-$28.50 |  |          |       | (107,454 | ) |  | $ | 13.11 | 
|Options canceled                                                       |  |           | 6,335  |                     |           |          | (6,335  | )               |  |           | $ 4.19-$34.69 |  |          |       | (124,025 | ) |  | $ | 19.58 | 
|                                                                       |  |           |        |                     |           |          |         |                 |  |           |               |  |          |       |         
|Balances, December 31, 2002                                            |  |           | 11,153 |                     |           |          | 28,302  |                 |  |           | $ 0.01-$71.26 |  |          | $     | 427,163  |   |  | $ | 15.09 | 
|Option plan expirations                                                |  |           | (1,326 | )                   |           |          |        |                 |  |           |               |  |          |       |         |   |  |   |      | 
|Options granted                                                        |  |           | (7,807 | )                   |           |          | 7,807   |                 |  |           | $10.80-$20.28 |  |          |       | 118,364  |   |  | $ | 15.16 | 
|Options exercised                                                      |  |           |       |                     |           |          | (2,548  | )               |  |           | $ 1.78-$29.82 |  |          |       | (20,532  | ) |  | $ | 8.06  | 
|Options canceled                                                       |  |           | 3,821  |                     |           |          | (3,821  | )               |  |           | $ 4.19-$65.38 |  |          |       | (69,982  | ) |  | $ | 18.32 | 
|                                                                       |  |           |        |                     |           |          |         |                 |  |           |               |  |          |       |         
|Balances, December 31, 2003                                            |  |           | 5,841  |                     |           |          | 29,740  |                 |  |           | $ 0.01-$71.26 |  |          | $     | 455,013  |   |  | $ | 15.30 | 
|Additional options of acquired company reserved                        |  |           | 747    |                     |           |          |        |                 |  |           |               |  |          |       |         |   |  |   |      | 
|Option plan expirations                                                |  |           | (1,993 | )                   |           |          |        |                 |  |           |               |  |          |       |         |   |  |   |      | 
|Options granted                                                        |  |           | (5,674 | )                   |           |          | 5,674   |                 |  |           | $14.96-$33.39 |  |          |       | 102,131  |   |  | $ | 18.00 | 
|Options assumed in conjunction with acquisition                        |  |           | (429   | )                   |           |          | 429     |                 |  |           | $ 1.11-$ 3.68 |  |          |       | 1,153    |   |  | $ | 2.69  | 
|Options exercised                                                      |  |           |       |                     |           |          | (9,152  | )               |  |           | $ 0.65-$38.23 |  |          |       | (106,235 | ) |  | $ | 11.61 | 
|Options canceled                                                       |  |           | 7,262  |                     |           |          | (7,262  | )               |  |           | $ 2.80-$58.71 |  |          |       | (139,753 | ) |  | $ | 19.24 | 
|                                                                       |  |           |        |                     |           |          |         |                 |  |           |               |  |          |       |         
|Balances, December 31, 2004                                            |  |           | 5,754  |                     |           |          | 19,429  |                 |  |           | $ 0.01-$71.26 |  |          | $     | 312,309  |   |  | $ | 16.08 | 
|                                                                       |  |           |        |                     |           |          |         |                 |  |           |               |  |          |       |         





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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |  |                     |        |           |                     |  |          |          |  |   |             |          |  |          |       |  |  |   |       | 
|------------------------ |  | ------------------- | ------ | --------- | ------------------- |  | -------- | -------- |  | - | ----------- | -------- |  | -------- | ----- |  |  | - | ----- | 
|                         |  | Options Outstanding |        |           | Options Exercisable | 
|                         |  |                     |        |           |                     | 
|                         |  |                     |        | Weighted  |                     |  |          |          | 
|                         |  |                     |        | Average   |                     |  | Weighted |          |  |   |             | Weighted | 
|                         |  |                     |        | Remaining |                     |  | Average  |          |  |   |             | Average  | 
|                         |  | Number              |        |           | Contractual         |  |          | Exercise |  |   | Number      |          |  | Exercise |      
|Range of Exercise Prices |  | Outstanding         |        |           | Life (Yrs)          |  |          | Price    |  |   | Exercisable |          |  | Price    |      
|                         |  |                     |        |           |                     |  |          |          |  |   |             |          |  |          |      
|$ 0.01-$ 1.98            |  |                     | 98     |           |                     |  | 4.3      |          |  | $ | 0.63        |          |  |          | 51    |  |  | $ | 1.21  | 
|$ 1.99-$ 4.12            |  |                     | 359    |           |                     |  | 5.1      |          |  | $ | 2.88        |          |  |          | 237   |  |  | $ | 2.80  | 
|$ 4.13-$ 6.19            |  |                     | 2,370  |           |                     |  | 5.1      |          |  | $ | 4.66        |          |  |          | 2,269 |  |  | $ | 4.67  | 
|$ 6.20-$ 9.30            |  |                     | 534    |           |                     |  | 5.5      |          |  | $ | 7.63        |          |  |          | 421   |  |  | $ | 7.58  | 
|$ 9.31-$13.97            |  |                     | 2,926  |           |                     |  | 7.2      |          |  | $ | 12.22       |          |  |          | 1,399 |  |  | $ | 11.98 | 
|$13.98-$20.97            |  |                     | 9,169  |           |                     |  | 8.1      |          |  | $ | 17.27       |          |  |          | 2,339 |  |  | $ | 17.09 | 
|$20.98-$31.47            |  |                     | 3,817  |           |                     |  | 6.3      |          |  | $ | 25.17       |          |  |          | 2,432 |  |  | $ | 24.98 | 
|$31.48-$47.22            |  |                     | 133    |           |                     |  | 6.0      |          |  | $ | 35.47       |          |  |          | 99    |  |  | $ | 36.13 | 
|$47.23-$74.00            |  |                     | 23     |           |                     |  | 3.7      |          |  | $ | 57.39       |          |  |          | 23    |  |  | $ | 57.53 | 
|                         |  |                     |        |           |                     |  |          |          |  |   |             |          |  |          |      
|                         |  |                     | 19,429 |           |                     |  | 7.1      |          |  | $ | 16.08       |          |  |          | 9,270 |  |  | $ | 14.76 | 
|                         |  |                     |        |           |                     |  |          |          |  |   |             |          |  |          |      





| |                                       
| | --------------------------------------
| | Proforma Stock Compensation Disclosure



|             |                         |      |  |      |      |  |  |      |   |  |  |      |  
|------------ | ----------------------- | ---- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|             |                         | 2004 |  |      | 2003 |  |  | 2002 |  
|             |                         |      |  |      |      |  |  |      |  
|The Company: |                         |      |  |      |      |  |  |      |   |  |  |     
|             | Risk free interest rate |      |  | 3.07 | %    |  |  | 2.44 | % |  |  | 3.46 | %
|             | Expected life (years)   |      |  | 4    |      |  |  | 4    |   |  |  | 4    |  
|             | Volatility              |      |  | 63   | %    |  |  | 96   | % |  |  | 84   | %
|             | Dividend yield          |      |  |     |      |  |  |     |   |  |  |     |  







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

|                        |  |            |      |         |            |  |      |  
|----------------------- |  | ---------- | ---- | ------- | ---------- |  | ---- | -
|                        |  |            |      | Options |           
|                        |  | Options    |      |         | Granted to | 
|                        |  | Granted to |      |         | Non-       | 
|                        |  | Employees  |      |         | Employees  | 
|                        |  | 2002       |      |         | 2002       | 
|                        |  |            |      |         |            | 
|Risk free interest rate |  |            | 3.82 | %       |            |  | 3.82 | %
|Expected life (years)   |  |            | 5    |         |            |  | 10   |  
|Volatility              |  |            | 110  | %       |            |  | 110  | %
|Dividend yield          |  |            |     |         |            |  |     |  

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |             
| | ------------
| | The Company:

|                        |  |      |             |   |      |  |             |      |  |  |           |  
|----------------------- |  | ---- | ----------- | - | ---- |  | ----------- | ---- |  |  | --------- | -
|                        |  | 2004 |             |   | 2003 |  |             | 2002 | 
|                        |  |      |             |   |      |  |             |      | 
|Risk free interest rate |  |      | 2.03        | % |      |  | 1.43        | %    |  |  | 2.05      | %
|Expected life (years)   |  |      | 1.25  years |   |      |  | 1.25  years |      |  |  | 6  months |  
|Volatility              |  |      | 48          | % |      |  | 72          | %    |  |  | 84        | %
|Dividend yield          |  |      |             |   |      |  |            |      |  |  |          |  





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

|                        |  |      |          |  
|----------------------- |  | ---- | -------- | -
|                        |  | 2002 |         
|                        |  |      |         
|Risk free interest rate |  |      | 1.72     | %
|Expected life (years)   |  |      | 6 months |  
|Volatility              |  |      | 110      | %
|Dividend yield          |  |      |         |  





| |                                  
| | ---------------------------------
| | Preferred Shares Rights Agreement





|    |                         
|--- | ------------------------
|16. | Stock-Based Compensation



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                |                                |                          |       |        |      |   |       |        |  |   |        |        | 
|--------------------------------------------------------------- | ------------------------------ | ------------------------ | ----- | ------ | ---- | - | ----- | ------ |  | - | ------ | ------ | 
|                                                                |                                | Years Ended December 31, |      
|                                                                |                                |                          |      
|                                                                |                                | 2004                     |       |        | 2003 |   |       | 2002   | 
|                                                                |                                |                          |       |        |      |   |       |        | 
|Exchange of McAfee.com options                                  |                                | $                        | 6,669 |        |      | $ | 3,369 |        |  | $ | 16,101 |       
|Former employees                                                |                                |                          | 1,216 |        |      |   | 1,125 |        |  |   | 10,118 |       
|New and existing executives and employees                       |                                |                          | 1,928 |        |      |   | 424   |        |  |   | 1,478  |       
|Extended life of vested options of terminated employees         |                                |                          | 1,164 |        |      |   | 3,720 |        |  |   |       |       
|Extended vesting term of options                                |                                |                          |      |        |      |   |      |        |  |   | 193    |       
|Extended period of Employee Stock Purchase Plan                 |                                |                          |      |        |      |   | 3,869 |        |  |   |       |       
|Shares purchased outside Employee Stock Purchase Plan and other |                                |                          |      |        |      |   |      |        |  |   | 62     |       
|Repriced options                                                |                                |                          | 3,343 |        |      |   |      |        |  |   | (5,548 | )     
|                                                                |                                |                          |       |        |      |   |       |        | 
|                                                                | Total stock-based compensation |                          | $     | 14,320 |      |   | $     | 12,507 |  |   | $      | 22,404 | 
|                                                                |                                |                          |       |        |      |   |       |        | 

Exchange of McAfee.com options. Issues Related to the Accounting for
Stock Compensation under APB Opinion No. 25, Accounting for Certain Transactions Involving Stock
Compensation  an Interpretation of APB Opinion
No. 25.


Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans.




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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Former Employees.








New and Existing Executives and Employees.








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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Extended life of vested options held by terminated
employees.




Extended Vesting Term of Options.


Extended period of Employee Stock Purchase Plan.


Shares Purchased Outside Employee Stock Purchase Plan.


112



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Repriced Options.


Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans  an Interpretation of APB Opinions No. 15
and 25.








|    |                           
|--- | --------------------------
|17. | Provision for Income Taxes



|         |  |      |         |  |      |   |        |      |  |   |         | 
|-------- |  | ---- | ------- |  | ---- | - | ------ | ---- |  | - | ------- | 
|         |  | 2004 |         |  | 2003 |   |        | 2002 | 
|         |  |      |         |  |      |   |        |      | 
|Domestic |  | $    | 180,462 |  |      | $ | 17,303 |      |  | $ | 278     | 
|Foreign  |  |      | 136,009 |  |      |   | 69,752 |      |  |   | 129,655 | 
|         |  |      |         |  |      |   |        |      | 
|         |  | $    | 316,471 |  |      | $ | 87,055 |      |  | $ | 129,933 | 
|         |  |      |         |  |      |   |        |      | 

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                          |          |                          |        |        |        |   |        |         |        |   |      |         |         |  
|----------------------------------------- | -------- | ------------------------ | ------ | ------ | ------ | - | ------ | ------- | ------ | - | ---- | ------- | ------- | -
|                                          |          | Years Ended December 31, |       
|                                          |          |                          |       
|                                          |          | 2004                     |        |        | 2003   |   |        | 2002    |       
|                                          |          |                          |        |        |        |   |        |         |       
|Federal:                                  |          |                          |        |        |        |   |        |         |        |   |      |        
|                                          | Current  |                          | $      | 2,630  |        |   | $      | 18,148  |        |   | $    | 39,916  |        
|                                          | Deferred |                          |        | 68,370 |        |   |        | (23,332 | )      |   |      | (61,674 | )      
|                                          |          |                          |        |        |        |   |        |         |       
|                                          |          | Total Federal            |        |        | 71,000 |   |        |         | (5,184 | ) |      |         | (21,758 | )
|State:                                    |          |                          |        |        |        |   |        |         |        |   |      |        
|                                          | Current  |                          |        | (1,834 | )      |   |        | 5,863   |        |   |      | 5,189   |        
|                                          | Deferred |                          |        | 8,439  |        |   |        | (4,802  | )      |   |      | (2,362  | )      
|                                          |          |                          |        |        |        |   |        |         |       
|                                          |          | Total State              |        |        | 6,605  |   |        |         | 1,061  |   |      |         | 2,827   |  
|Foreign:                                  |          |                          |        |        |        |   |        |         |        |   |      |        
|                                          | Current  |                          |        | 21,648 |        |   |        | 18,167  |        |   |      | 19,829  |        
|                                          | Deferred |                          |        | (7,847 | )      |   |        | 2,766   |        |   |      | (1,172  | )      
|                                          |          |                          |        |        |        |   |        |         |       
|                                          |          | Total Foreign            |        |        | 13,801 |   |        |         | 20,933 |   |      |         | 18,657  |  
|                                          |          |                          |        |        |        |   |        |         |       
|Provision for (benefit from) income taxes |          | $                        | 91,406 |        |        | $ | 16,810 |         |        | $ | (274 | )      
|                                          |          |                          |        |        |        |   |        |         |       





|                                             |  |                          |         |   |      |   |         |  
|-------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                             |  | Years Ended December 31, |        
|                                             |  |                          |        
|                                             |  | 2004                     |         |   | 2003 |  
|                                             |  |                          |         |   |      |  
|ASSETS                                      
|Deferred revenue                             |  | $                        | 154,910 |   |      | $ | 124,932 |  
|Accrued liabilities and allowances           |  |                          | 74,627  |   |      |   | 61,802  |  
|Depreciation and amortization                |  |                          | 165,279 |   |      |   | 137,554 |  
|Tax credits                                  |  |                          | 107,871 |   |      |   | 117,998 |  
|Deferred stock compensation                  |  |                          | 7,870   |   |      |   | 4,116   |  
|Net operating loss carryover                 |  |                          | 27,948  |   |      |   | 51,332  |  
|                                             |  |                          |         |   |      |  
|                                             |  |                          | 538,505 |   |      |   | 497,734 |  
|Valuation allowance                          |  |                          | (65,820 | ) |      |   | (88,283 | )
|                                             |  |                          |         |   |      |  
|Total deferred tax assets                    |  |                          | 472,685 |   |      |   | 409,451 |  
|                                             |  |                          |         |   |      |  
|                                            
|LIABILITIES                                 
|Intangibles not amortizable for tax purposes |  |                          | 39,677  |   |      |   | 40,178  |  
|Accrued liabilities and allowances           |  |                          | 11,947  |   |      |   | 9,527   |  
|                                             |  |                          |         |   |      |  
|Total deferred tax liability                 |  |                          | 51,624  |   |      |   | 49,705  |  
|                                             |  |                          |         |   |      |  
|Net deferred tax asset                       |  | $                        | 421,061 |   |      | $ | 359,746 |  
|                                             |  |                          |         |   |      |  
|Current portion                              |  | $                        | 200,459 |   |      | $ | 160,550 |  
|Noncurrent portion                           |  |                          | 220,602 |   |      |   | 199,196 |  
|                                             |  |                          |         |   |      |  
|                                             |  | $                        | 421,061 |   |      | $ | 359,746 |  
|                                             |  |                          |         |   |      |  

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)









|                                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                             |  | Years Ended December 31, |        
|                                                             |  |                          |        
|                                                             |  | 2004                     |         |   | 2003 |   |         | 2002 | 
|                                                             |  |                          |         |   |      |   |         |      | 
|U.S. Federal income tax provision at statutory rate          |  | $                        | 110,765 |   |      | $ | 30,470  |      |  | $ | 45,469  |  
|State provision                                              |  |                          | 8,979   |   |      |   | 1,258   |      |  |   | 2,725   |  
|Non deductible acquisition and other costs                   |  |                          |        |   |      |   | 2,310   |      |  |   | 5,343   |  
|Foreign earnings taxed at rates different than the U.S. Rate |  |                          | (10,266 | ) |      |   | (3,480  | )    |  |   | (26,724 | )
|Other permanent differences                                  |  |                          | (2,335  | ) |      |   | 867     |      |  |   | (957    | )
|Tax credits                                                  |  |                          | (12,183 | ) |      |   | (2,532  | )    |  |   | (26,096 | )
|Difference between book and tax basis of businesses sold     |  |                          | 22,840  |   |      |   |        |      |  |   |        |  
|Benefit from accruals for tax exposures no longer required   |  |                          | (25,036 | ) |      |   | (12,083 | )    |  |   |        |  
|Other                                                        |  |                          | (1,358  | ) |      |   |        |      |  |   | (34     | )
|                                                             |  |                          |         |   |      |   |         |      | 
|                                                             |  | $                        | 91,406  |   |      | $ | 16,810  |      |  | $ | (274    | )
|                                                             |  |                          |         |   |      |   |         |      | 





|    |                     
|--- | --------------------
|18. | Net Income Per Share



|                  |                                                                   |                          |   |         |         |  |   |        |        |  |   |         |         | 
|----------------- | ----------------------------------------------------------------- | ------------------------ | - | ------- | ------- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                  |                                                                   | Years Ended December 31, |  
|                  |                                                                   |                          |  
|                  |                                                                   | 2004                     |   |         | 2003    |  |   | 2002   |       
|                  |                                                                   |                          |   |         |         |  |   |        |       
|Numerator  Basic |                                                                   |                          |   |         |         |  |   |        |        |  |   |        
|                  | Income before cumulative effect of change in accounting principle |                          | $ | 225,065 |         |  | $ | 59,905 |        |  | $ | 128,312 |        
|                  | Cumulative effect of change in accounting principle, net of tax   |                          |   |        |         |  |   | 10,337 |        |  |   |        |        
|                  |                                                                   |                          |   |         |         |  |   |        |       
|                  |                                                                   | Net income               |   | $       | 225,065 |  |   | $      | 70,242 |  |   | $       | 128,312 | 
|                  |                                                                   |                          |   |         |         |  |   |        |       

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                              |                                                                         |                                                  |   |         |         |  |   |         |         |  |   |         |         | 
|----------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------ | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                                                                         | Years Ended December 31,                         |  
|                              |                                                                         |                                                  |  
|                              |                                                                         | 2004                                             |   |         | 2003    |  |   | 2002    |        
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|Numerator  Diluted           |                                                                         |                                                  |   |         |         |  |   |         |         |  |   |        
|                              | Income before cumulative effect of change in accounting principle       |                                                  | $ | 225,065 |         |  | $ | 59,905  |         |  | $ | 128,312 |        
|                              | Cumulative effect of change in accounting principle, net of tax         |                                                  |   |        |         |  |   | 10,337  |         |  |   |        |        
|                              | Interest on convertible debentures(1)                                   |                                                  |   | 7,556   |         |  |   |        |         |  |   | 12,042  |        
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|                              |                                                                         | Net income, adjusted                             |   | $       | 232,621 |  |   | $       | 70,242  |  |   | $       | 140,354 | 
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|Denominator  Basic           |                                                                         |                                                  |   |         |         |  |   |         |         |  |   |        
|                              | Weighted average shares of common stock outstanding                     |                                                  |   | 160,714 |         |  |   | 160,338 |         |  |   | 149,641 |        
|                              | Less: weighted average shares of common stock subject to
    repurchase |                                                  |   |        |         |  |   |        |         |  |   | (200    | )      
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|                              |                                                                         | Basic weighted average common shares outstanding |   |         | 160,714 |  |   |         | 160,338 |  |   |         | 149,441 | 
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|Denominator  Diluted         |                                                                         |                                                  |   |         |         |  |   |         |         |  |   |        
|                              | Basic weighted average common shares outstanding                        |                                                  |   | 160,714 |         |  |   | 160,338 |         |  |   | 149,641 |        
|                              | Effective of dilutive securities:                                       |                                                  |   |         |         |  |   |         |         |  |   |         |        
|                              |                                                                         | Convertible debentures(1)                        |   |         | 12,154  |  |   |         |        |  |   |         | 19,092  | 
|                              |                                                                         | Common stock options(2)                          |   |         | 4,207   |  |   |         | 3,992   |  |   |         | 7,333   | 
|                              |                                                                         | Warrants                                         |   |         | 24      |  |   |         | 159     |  |   |         | 183     | 
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|                              |                                                                         | Diluted weighted average shares                  |   |         | 177,099 |  |   |         | 164,489 |  |   |         | 176,249 | 
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|Basic net income per share:   |                                                                         |                                                  |   |         |         |  |   |         |         |  |   |        
|                              | Income before cumulative effect of change in accounting principle       |                                                  | $ | 1.40    |         |  | $ | 0.37    |         |  | $ | 0.86    |        
|                              | Cumulative effect of change in accounting principle, net of tax         |                                                  |   |        |         |  |   | 0.07    |         |  |   |        |        
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|                              |                                                                         | Net income per share  Basic                     |   | $       | 1.40    |  |   | $       | 0.44    |  |   | $       | 0.86    | 
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|Diluted net income per share: |                                                                         |                                                  |   |         |         |  |   |         |         |  |   |        
|                              | Income before cumulative effect of change in accounting principle       |                                                  | $ | 1.31    |         |  | $ | 0.36    |         |  | $ | 0.80    |        
|                              | Cumulative effect of change in accounting principle, net of tax         |                                                  |   |        |         |  |   | 0.07    |         |  |   |        |        
|                              |                                                                         |                                                  |   |         |         |  |   |         |        
|                              |                                                                         | Net income per share  Diluted                   |   | $       | 1.31    |  |   | $       | 0.43    |  |   | $       | 0.80    | 
|                              |                                                                         |                                                  |   |         |         |  |   |         |        






|    |                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Convertible debt interest and related 19.1 million as-if
    converted shares were excluded from the calculation since the
    effect was anti-dilutive in 2003. The total number of shares
    excluded from the calculation related to as-if converted shares
    was 3.1 million for 2002.
|   
|(2) | At December 31, 2004, 2003 and 2002, 5.1 million,
    15.6 million, and 9.9 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



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                   |                  |                          |         |         |      |   |          |         |  |   |          |           | 
|---------------------------------- | ---------------- | ------------------------ | ------- | ------- | ---- | - | -------- | ------- |  | - | -------- | --------- | 
|                                   |                  | Years Ended December 31, |        
|                                   |                  |                          |        
|                                   |                  | 2004                     |         |         | 2003 |   |          | 2002    | 
|                                   |                  |                          |         |         |      |   |          |         | 
|Net revenue by region:             |                  |                          |         |         |      |   |          |         |  |   |          |          
|North America                      |                  | $                        | 554,641 |         |      | $ | 606,685  |         |  | $ | 653,532  |          
|EMEA                               |                  |                          | 241,724 |         |      |   | 240,616  |         |  |   | 298,659  |          
|Japan                              |                  |                          | 54,609  |         |      |   | 40,519   |         |  |   | 39,369   |          
|Asia-Pacific (excluding Japan)     |                  |                          | 38,494  |         |      |   | 29,014   |         |  |   | 33,595   |          
|Latin America                      |                  |                          | 21,074  |         |      |   | 19,502   |         |  |   | 17,889   |          
|                                   |                  |                          |         |         |      |   |          |         | 
|                                   | Net revenue      |                          | $       | 910,542 |      |   | $        | 936,336 |  |   | $        | 1,043,044 | 
|                                   |                  |                          |         |         |      |   |          |         | 
|Operating income (loss) by region: |                  |                          |         |         |      |   |          |         |  |   |          |          
|North America                      |                  | $                        | 195,195 |         |      | $ | 215,027  |         |  | $ | 156,080  |          
|EMEA                               |                  |                          | 90,612  |         |      |   | 88,884   |         |  |   | 135,629  |          
|Japan                              |                  |                          | 18,650  |         |      |   | 11,061   |         |  |   | 8,710    |          
|Asia-Pacific (excluding Japan)     |                  |                          | 11,903  |         |      |   | 5,962    |         |  |   | 6,682    |          
|Latin America                      |                  |                          | 4,188   |         |      |   | 1,338    |         |  |   | 2,436    |          
|Corporate                          |                  |                          | 2,123   |         |      |   | (257,870 | )       |  |   | (185,509 | )        
|                                   |                  |                          |         |         |      |   |          |         | 
|                                   | Operating income |                          | $       | 322,671 |      |   | $        | 64,402  |  |   | $        | 124,028   | 
|                                   |                  |                          |         |         |      |   |          |         | 

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |              |              |           |           |      |   |           |           | 
|------------------------------ | ------------ | ------------ | --------- | --------- | ---- | - | --------- | --------- | 
|                               |              | December 31, |          
|                               |              |              |          
|                               |              | 2004         |           |           | 2003 |  
|                               |              |              |           |           |      |  
|North America                  |              | $            | 1,579,401 |           |      | $ | 1,452,407 |          
|EMEA                           |              |              | 533,987   |           |      |   | 485,613   |          
|Japan                          |              |              | 64,736    |           |      |   | 51,331    |          
|Asia-Pacific (excluding Japan) |              |              | 25,794    |           |      |   | 25,479    |          
|Latin America                  |              |              | 19,729    |           |      |   | 17,839    |          
|Corporate                      |              |              | 14,029    |           |      |   | 87,829    |          
|                               |              |              |           |           |      |  
|                               | Total assets |              | $         | 2,237,676 |      |   | $         | 2,120,498 | 
|                               |              |              |           |           |      |  



|                |  |      |        |  |      |   |         |      |  |   |        | 
|--------------- |  | ---- | ------ |  | ---- | - | ------- | ---- |  | - | ------ | 
|                |  | 2004 |        |  | 2003 |   |         | 2002 | 
|                |  |      |        |  |      |   |         |      | 
|United States   |  | $    | 72,769 |  |      | $ | 89,857  |      |  | $ | 73,990 | 
|Japan           |  |      | 4,038  |  |      |   | 5,484   |      |  |   | 4,560  | 
|India           |  |      | 3,667  |  |      |   | 4,261   |      |  |   | 1,506  | 
|The Netherlands |  |      | 2,354  |  |      |   | 3,991   |      |  |   | 1,835  | 
|Other countries |  |      | 8,887  |  |      |   | 8,079   |      |  |   | 7,386  | 
|                |  |      |        |  |      |   |         |      | 
|Total           |  | $    | 91,715 |  |      | $ | 111,672 |      |  | $ | 89,277 | 
|                |  |      |        |  |      |   |         |      | 



|                |  |      |         |  |      |   |         |      |  |   |           | 
|--------------- |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | --------- | 
|                |  | 2004 |         |  | 2003 |   |         | 2002 | 
|                |  |      |         |  |      |   |         |      | 
|United States   |  | $    | 520,211 |  |      | $ | 573,263 |      |  | $ | 618,936   | 
|United Kingdom  |  |      | 67,443  |  |      |   | 67,229  |      |  |   | 87,010    | 
|Germany         |  |      | 41,910  |  |      |   | 43,717  |      |  |   | 50,533    | 
|Japan           |  |      | 54,609  |  |      |   | 40,519  |      |  |   | 39,369    | 
|Other countries |  |      | 226,369 |  |      |   | 211,608 |      |  |   | 247,196   | 
|                |  |      |         |  |      |   |         |      | 
|Total           |  | $    | 910,542 |  |      | $ | 936,336 |      |  | $ | 1,043,044 | 
|                |  |      |         |  |      |   |         |      | 

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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                  |  |      |         |  |      |   |         | 
|----------------- |  | ---- | ------- |  | ---- | - | ------- | 
|                  |  | 2004 |         |  | 2003 |  
|                  |  |      |         |  |      |  
|McAfee            |  | $    | 766,696 |  |      | $ | 634,812 | 
|Sniffer           |  |      | 90,878  |  |      |   | 210,176 | 
|Magic             |  |      | 2,850   |  |      |   | 63,164  | 
|IntruShield       |  |      | 43,707  |  |      |   | 15,510  | 
|McAfee Labs       |  |      | 6,411   |  |      |   | 11,023  | 
|PGP               |  |      |        |  |      |   | 1,651   | 
|                  |  |      |         |  |      |  
|Total net revenue |  | $    | 910,542 |  |      | $ | 936,336 | 
|                  |  |      |         |  |      |  





|                                  |       |      |         |         |      |   |         |         |  |   |         |           | 
|--------------------------------- | ----- | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | --------- | 
|                                  |       | 2004 |         |         | 2003 |   |         | 2002    | 
|                                  |       |      |         |         |      |   |         |         | 
|Software licenses                 |       | $    | 157,983 |         |      | $ | 341,188 |         |  | $ | 459,707 |          
|Support and maintenance           |       |      | 436,299 |         |      |   | 313,731 |         |  |   | 310,473 |          
|Hardware                          |       |      | 79,828  |         |      |   | 99,502  |         |  |   | 93,359  |          
|Retail                            |       |      | 27,787  |         |      |   | 45,993  |         |  |   | 63,236  |          
|Consulting                        |       |      | 19,157  |         |      |   | 27,421  |         |  |   | 36,740  |          
|Training                          |       |      | 8,394   |         |      |   | 9,486   |         |  |   | 12,527  |          
|On-line subscription arrangements |       |      | 152,529 |         |      |   | 72,088  |         |  |   | 51,754  |          
|Other                             |       |      | 28,565  |         |      |   | 26,927  |         |  |   | 15,248  |          
|                                  |       |      |         |         |      |   |         |         | 
|                                  | Total |      | $       | 910,542 |      |   | $       | 936,336 |  |   | $       | 1,043,044 | 
|                                  |       |      |         |         |      |   |         |         | 





|    |           
|--- | ----------
|20. | Litigation



| |        
| | -------
| | General



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                 
| | ----------------
| | Securities Cases

In re Network
Associates, Inc. II Securities Litigation


In re McAfee.com Corp. Initial Public
Offering Securities Litigation In re Initial Public Offering
Securities Litigation




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







|    |                           
|--- | --------------------------
|21. | Related Party Transactions



120



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MCAFEE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                  
|--- | -----------------
|22. | Subsequent Events



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SIGNATURES






| |             
| | ------------
| | McAfee, Inc.



| |     |                   
| | --- | ------------------
| | By: | /s/ George Samenuk

| |                          
| | -------------------------
| |                          
| | George Samenuk           
| | Chairman of the Board and
| | Chief Executive Officer  



|                                               |  |                                                   |  |                |  | 
|---------------------------------------------- |  | ------------------------------------------------- |  | -------------- |  | 
|Signature                                      |  | Title                                             |  | Date          
|                                               |  |                                                   |  |               
|                                              
|/s/ George Samenuk(George
    Samenuk)         |  | Chairman of the Board and Chief Executive Officer |  | March 31, 2005
|                                              
|/s/ Eric F. Brown(Eric
    F. Brown)           |  | Chief Financial Officer                           |  | March 31, 2005
|                                              
|/s/ Robert B. Bucknam(Robert
    B. Bucknam)   |  | Director                                          |  | March 31, 2005
|                                              
|/s/ Leslie G. Denend(Leslie
    G. Denend)     |  | Director                                          |  | March 31, 2005
|                                              
|/s/ Robert Dutkowsky(Robert
    Dutkowsky)     |  | Director                                          |  | March 31, 2005
|                                              
|/s/ Denis J.
    OLeary(Denis
    J. OLeary) |  | Director                                          |  | March 31, 2005
|                                              
|/s/ Robert Pangia(Robert
    Pangia)           |  | Director                                          |  | March 31, 2005
|                                              
|/s/ Liane Wilson(Liane
    Wilson)             |  | Director                                          |  | March 31, 2005

122



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EXHIBIT INDEX


|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ---- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 2  | .1   |  |            |  | Asset Purchase Agreement made and entered into as of
    April 22, 2004, by and among, Network General Corporation
    (formerly named Starburst Technology Holdings, Inc.), on the one
    hand; and (ii) McAfee, Inc. (formerly named Networks
    Associates, Inc.), Network Associates Technology, Inc., Network
    Associates International BV, Network Associates (India) Private
    Limited, McAfee Japan Co., Ltd. (formerly named Network
    Associates Japan Co., Ltd.), on the other hand, as amended by
    Amendment No. 1 thereto dated as of July 15, 2004.(1)
|       
|        | 3  | .1   |  |            |  | Second Restated Certificate of Incorporation of the Registrant,
    as amended on December 1, 1997.(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       
|        | 3  | .2   |  |            |  | Certificate of Ownership and Merger between Registrant and
    McAfee, Inc.(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|        | 3  | .3   |  |            |  | Amended and Restated Bylaws of the Registrant.(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       
|        | 3  | .4   |  |            |  | Certificate of Designation of Series A Preferred Stock of
    the Registrant.(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 3  | .5   |  |            |  | Certificate of Designation of Series B Participating
    Preferred Stock of the Registrant.(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|        | 4  | .3   |  |            |  | Indenture dated as of August 17, 2001 between the
    Registrant and State Street Bank and Trust Company of
    California.(7)                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|        | 10 | .1   |  |            |  | Lease Assignment dated November 17, 1997 for facility at
    3965 Freedom Circle, Santa Clara, California by and between
    Informix Corporation and McAfee Associates, Inc.(8)                                                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 10 | .2   |  |            |  | Consent to Assignment Agreement dated December 19, 1997 by
    and among Birk S. McCandless, LLC, Guaranty Federal Bank,
    F.S.B., Informix Corporation and the Registrant.(8)                                                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 10 | .3   |  |            |  | Subordination, Nondisturbance and Attornment Agreement dated
    December 18, 1997, between Guaranty Federal Bank, F.S.B.,
    the Registrant and Birk S. McCandless, LLC.(8)                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 10 | .4   |  |            |  | Lease dated November 22, 1996 by and between Birk S.
    McCandless, LLC and Informix Corporation for facility at 3965
    Freedom Circle, Santa Clara, California.(8)                                                                                                                                                                                                                                                                                                                                                                                                          
|       
|        | 10 | .5*  |  |            |  | 2002 Employee Stock Purchase Plan.(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       
|        | 10 | .6*  |  |            |  | 1997 Stock Incentive Plan, as Amended.(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .7*  |  |            |  | Amended and Restated 1993 Stock Option Plan for Outside
    Directors.(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .8*  |  |            |  | 2000 Nonstatutory Stock Option Plan.(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .9*  |  |            |  | Amended and Restated Employment Agreement between George Samenuk
    and the Registrant, dated October 9, 2001.(11)                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       
|        | 10 | .10* |  |            |  | Employment agreement between Stephen C. Richards and the
    Registrant, dated April 3, 2001.(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       
|        | 10 | .11  |  |            |  | 1st Amendment to Lease dated March 20, 1998 between
    Birk S. McCandless, LLC and the Registrant.(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       
|        | 10 | .12  |  |            |  | Confirmation, Amendment and Notice of Security Agreement dated
    March 20, 1998 among Informix Corporation, Birk S.
    McCandless, LLC and the Registrant.(13)                                                                                                                                                                                                                                                                                                                                                                                                               
|       
|        | 10 | .13  |  |            |  | Second Amendment to Lease dated September 1, 1998 among
    Informix Corporation, Birk S. McCandless, LLC and the
    Registrant.(13)                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       
|        | 10 | .14  |  |            |  | Subordination, Nondisturbance and Attornment Agreement dated
    June 21, 2000, among Column Financial, Inc., Informix
    Corporation, Birk S. McCandless, LLC, and the Registrant.(13)                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .15  |  |            |  | Lease Agreement dated November 14, 1996 between Blue Lake
    Partners and McAfee Associates, Inc.(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       
|        | 10 | .16  |  |            |  | Lease Amendment dated November 24, 1997 between Blue Lake
    Partners and McAfee Software, Inc.(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       
|        | 10 | .17  |  |            |  | Lease Amendment dated March 17, 1998 between Blue Lake
    Partners and McAfee Software, Inc.(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       
|        | 10 | .18  |  |            |  | Lease Amendment dated March 27, 1998 between Blue Lake
    Partners and McAfee Software, Inc.(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

123



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##### Table of Contents



|        |    |      |  |   |             |                                                                                                                                       
|------- | -- | ---- |  | - | ----------- | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |   |            
|Number  |    |      |  |   | Description
|        |    |      |  |   |            
|       
|        | 10 | .19  |  |  |             | Lease Amendment dated June 4, 1998 between Blue Lake
    Partners and McAfee Software, Inc.(13)                                       
|       
|        | 10 | .20  |  |  |             | Lease Amendment dated July 21, 1998 between Blue Lake
    Partners and McAfee Software, Inc.(13)                                      
|       
|        | 10 | .21  |  |  |             | Lease Amendment dated November 20, 1998 between Blue Lake
    Partners and McAfee Software, Inc.(13)                                  
|       
|        | 10 | .22  |  |  |             | Lease Amendment dated March 18, 1999 between Blue Lake
    Partners and McAfee Software, Inc.(13)                                     
|       
|        | 10 | .23  |  |  |             | Lease Amendment dated June 3, 1999 between Blue Lake
    Partners and McAfee Software, Inc.(13)                                       
|       
|        | 10 | .24  |  |  |             | Lease Amendment dated October 7, 1999 between Blue Lake
    Partners and McAfee Software, Inc.(13)                                    
|       
|        | 10 | .25  |  |  |             | Lease Amendment dated March 25, 2000 between Daltex Centre
    LP and the Registrant.(13)                                             
|       
|        | 10 | .26  |  |  |             | Lease Amendment dated July 31, 2000 between Daltex Centre
    LP and the Registrant.(13)                                              
|       
|        | 10 | .27  |  |  |             | Lease Amendment dated January 24, 2001 between Daltex
    Centre LP and the Registrant.(13)                                           
|       
|        | 10 | .28  |  |  |             | Lease Amendment dated May 31, 2001 between Daltex Centre LP
    and the Registrant.(13)                                               
|       
|        | 10 | .29* |  |  |             | Employment Agreement between Kent H. Roberts and the Registrant,
    dated October 9, 2001.(14)                                       
|       
|        | 10 | .30* |  |  |             | Employment Agreement between Vernon Gene Hodges and the
    Registrant, dated December 3, 2001.(14)                                   
|       
|        | 10 | .31* |  |  |             | Employment Agreement between Raymond J. Smets and the
    Registrant, dated October 7, 2002(14)                                       
|       
|        | 10 | .32* |  |  |             | Employment Agreement between Kevin M. Weiss and the Registrant
    Dated October 15, 2002.(17)                                        
|       
|        | 10 | .33  |  |  |             | Form of Indemnification Agreement between the Registrant and its
    Executive Officers(17)                                           
|       
|        | 10 | .34* |  |  |             | Summary of Pay for Performance Plan.(4)                                                                                               
|       
|        | 10 | .35* |  |  |             | Network Associates, Inc. Tax Deferred Savings Plan.(16)                                                                               
|       
|        | 10 | .36  |  |  |             | Umbrella Credit Facility of Registrant dated April 15,
    2004.(18)                                                                  
|       
|        | 10 | .37  |  |  |             | Fifth Amendment to Network Associates, Inc. Tax Deferred Savings
    Plan.(18)                                                        
|       
|        | 10 | .38  |  |  |             | Amendment to Employment Agreement of George Samenuk effective as
    of January 20, 2004.(18)                                         
|       
|        | 10 | .39  |  |  |             | Amendment to Employment Agreement of Stephen C. Richards
    effective as of January 20, 2004.(18)                                    
|       
|        | 10 | .40  |  |  |             | Sniffer Bonus Plan.(18)                                                                                                               
|       
|        | 10 | .41  |  |  |             | Form of Sniffer Bonus Plan Participation Agreement (Ray
    Smets).(18)                                                               
|       
|        | 10 | .42  |  |  |             | Addendum to Raymond J. Smets Employment Agreement.(20)                                                                                
|       
|        | 10 | .43  |  |  |             | Sixth Amendment to Network Associates, Inc. Tax Deferred Savings
    Plan.(20)                                                        
|       
|        | 10 | .44  |  |  |             | Transition Agreement by and between Registrant and Stephen C.
    Richards.(19)                                                       
|       
|        | 10 | .45  |  |  |             | Employment Agreement between Registrant and Eric F. Brown dated
    December 10, 2004 (22)                                            
|       
|        | 10 | .46* |  |  |             | 2005 Independent Director Cash Compensation Plan                                                                                      
|       
|        | 21 | .1   |  |  |             | Subsidiaries of the Registrant                                                                                                        
|       
|        | 23 | .1   |  |  |             | Consent of Deloitte & Touche LLP, Independent
    Registered Public Accounting Firm                                                   
|       
|        | 23 | .2   |  |  |             | Consent of PricewaterhouseCoopers LLP, Independent Registered
    Public Accounting Firm                                              
|       
|        | 31 | .1   |  |  |             | Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002
|       
|        | 32 | .1   |  |  |             | Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002

124



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##### Table of Contents








|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from the Registrants Report on
    Form 8-K filed with the Commission on July 16, 2004.                                                     
|   
|(2) | Incorporated by reference from the Registrants Report on
    Form 10-Q for the quarter ended September 30, 2004,
    filed with the Commission on November 8, 2004.   
|   
|(3) | Incorporated by reference from the Registrants
    Registration Statement on Form S-4 filed with the
    Commission on March 25, 1998.                                
|   
|(4) | Incorporated by reference from the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2002, filed with the Commission on October 31, 2003.
|   
|(5) | Incorporated by reference from the Registrants Report on
    Form 10-Q for the quarter ended September 30, 1996,
    filed with the Commission on November 14, 1996.  
|   
|(6) | Incorporated by reference from the Registrants Report on
    Form 8-A filed with the Commission on October 22, 1998.                                                  
|   
|(7) | Incorporated by reference from the Registrants
    Registration Statement on Form S-3 filed with the
    Commission on November 9, 2001.                              
|   
|(8) | Incorporated by reference from the Registrants
    Registration Statement on Form S-3, filed with the
    Commission on February 11, 1998.                            
|   
|(9) | Incorporated by reference from the Registrants
    Registration Statement on Form S-8 filed with the
    Commission on June 28, 2002.                                 



|     |                                                                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the Registrants report on
    Form 10-K for the year ended December 31, 2000, filed
    with the Commission on April 2, 2001.        
|    
|(11) | Incorporated by reference from the Registrants report on
    Form 10-K for the year ended December 31, 2001, filed
    with the Commission on February 8, 2002.     
|    
|(12) | Incorporated by reference from the Registrants report on
    Form 10-Q for the quarter ended March 31, 2001, filed
    with the Commission on May 15, 2001.         
|    
|(13) | Incorporated by reference from the Registrants report on
    Form 10-Q for the quarter ended September 30, 2001,
    filed with the Commission on November 13, 2001.
|    
|(14) | Incorporated by reference from the Registrants report on
    Form 10-K for the year ended December 31, 2001, filed
    with the Commission on February 8, 2002.     
|    
|(15) | Incorporated by reference from the Registrants report on
    Form 10-Q for the quarter ended September 30, 2002,
    filed with the Commission on November 12, 2002.
|    
|(16) | Incorporated by reference from the Registrants
    Registration Statement on Form S-8 filed with the
    Commission on November 5, 2003.                            
|    
|(17) | Incorporated by reference from the Registrants report on
    Form 10-K for the year ended December 31, 2003, filed
    with the Commission on March 9, 2004.        
|    
|(18) | Incorporated by reference from the Registrants report on
    Form 10-Q for the quarter ended March 31, 2004, filed
    with the Commission on May 10, 2004.         
|    
|(19) | Incorporated by reference from the Registrants report on
    Form 8-K filed with the Commission on September 7,
    2004.                                           
|    
|(20) | Incorporated by reference from the Registrants report on
    Form 10-Q for the quarter ended June 30, 2004, filed
    with the Commission on August 9, 2004.        
|    
|(21) | Incorporated by reference from the Registrants report on
    Form 10-Q for the quarter ended September 30, 2004,
    filed with the Commission on November 8, 2004. 
|    
|(22) | Incorporated by reference from the Registrants report on
    Form 8-K filed with the Commission on December 14,
    2004.                                           



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

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##### Table of Contents



SCHEDULE II


NETWORKS ASSOCIATES, INC.


VALUATION AND QUALIFYING ACCOUNTS


|                                                                    |  |                |       |               |                   |   |               |            |  |   |            |   |  |   |       | 
|------------------------------------------------------------------- |  | -------------- | ----- | ------------- | ----------------- | - | ------------- | ---------- |  | - | ---------- | - |  | - | ----- | 
|                                                                    |  |                |       | Provision for |                   |   |               |            | 
|                                                                    |  |                |       | Doubtful      |                   |   |               |            | 
|                                                                    |  |                |       | Accounts,     |                   |   | Write-Offs of |            |  |  
|                                                                    |  | Balance at     |       |               | Additions Charged |   |               | Previously |  |   | Balance at |  
|                                                                    |  | Beginning of   |       |               | to Expense or     |   |               | Provided   |  |   | End of     |  
|                                                                    |  | Period         |       |               | Revenue Net(1)    |   |               | Accounts   |  |   | Period     |  
|                                                                    |  |                |       |               |                   |   |               |            |  |   |            |  
|                                                                    |  | (In thousands) |      
|Year Ended December 31, 2004
    Allowance for Doubtful Accounts    |  | $              | 3,070 |               |                   | $ | 1,716         |            |  | $ | (2,250     | ) |  | $ | 2,536 | 
|Year Ended December 31, 2003
    Allowance for Doubtful Accounts(2) |  | $              | 6,638 |               |                   | $ | (1,216        | )          |  | $ | (2,352     | ) |  | $ | 3,070 | 
|Year Ended December 31, 2002
    Allowance for Doubtful Accounts    |  | $              | 8,394 |               |                   | $ | (219          | )          |  | $ | (1,537     | ) |  | $ | 6,638 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Provision for Doubtful Accounts, Net. The provision for
    doubtful accounts, net consists of our estimates with respect to
    the uncollectibility of our receivables, net of recoveries of
    amounts previously written off. Our management must make
    estimates of the uncollectibility of our accounts receivables.
    Management specifically analyzes accounts receivable and
    analyzes historical bad debts, customer concentrations, customer
    credit-worthiness, current economic trends and changes in our
    customer payment terms when evaluating the adequacy of the
    allowance for doubtful accounts.
|   
|(2) | The allowance for doubtful accounts in the consolidated balance
    sheet as of December 31, 2003 is net of the
    $0.2 million allowance for Magic, which is included in
    assets held for sale.                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                              |  |                |        |               |               |   |         |             |  |   |            |   |  |   |        | 
|------------------------------------------------------------- |  | -------------- | ------ | ------------- | ------------- | - | ------- | ----------- |  | - | ---------- | - |  | - | ------ | 
|                                                              |  |                |        | Provision for |               |   |         |             | 
|                                                              |  | Balance at     |        |               | Sales Returns |   |         | Actual      |  |   | Balance at |  
|                                                              |  | Beginning of   |        |               | and Other     |   |         | Returns and |  |   | End of     |  
|                                                              |  | Period         |        |               | Allowances(3) |   |         | Allowances  |  |   | Period     |  
|                                                              |  |                |        |               |               |   |         |             |  |   |            |  
|                                                              |  | (In thousands) |       
|Year Ended December 31, 2004
    Sales Returns and Allowances |  | $              | 39,599 |               |               | $ | 65,350  |             |  | $ | (75,725    | ) |  | $ | 29,224 | 
|Year Ended December 31, 2003
    Sales Returns and Allowances |  | $              | 32,337 |               |               | $ | 85,612  |             |  | $ | (78,350    | ) |  | $ | 39,599 | 
|Year Ended December 31, 2002
    Sales Returns and Allowances |  | $              | 32,586 |               |               | $ | 130,163 |             |  | $ | (130,412   | ) |  | $ | 32,337 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Provision for Sales Returns and Allowances. The provision
    for sales returns and allowances consists of our estimates of
    potential future product returns related to current period
    product revenue, and specific provisions for distributor,
    reseller, and retailer sales incentives (allowances)
    that are reductions in the revenue to be realized. Management
    analyzes historical returns, current economic trends, and
    changes in customer demand and acceptance of our products when
    evaluating the adequacy of the sales returns and allowances.
    Significant management judgments and estimates must be made and
    used in connection with establishing the sales returns and
    allowances in any accounting period. Material differences may
    result in the amount and timing of our revenue for any period if
    management made different judgments or utilized different
    estimates.

126