McAfee, Inc. Reports Third Quarter Revenue of $253 Million

SANTA CLARA, Calif., Oct. 27 /PRNewswire-FirstCall/ -- McAfee, Inc. today announced that for the third quarter ended September 30, 2005, consolidated net revenue was $253 million. On a GAAP basis, McAfee's third quarter net earnings were $23 million, or $0.13 per share -- diluted. On a non-GAAP basis, third quarter net earnings were $63 million, or $0.37 per share -- diluted. Pro-forma operating margins for the third quarter improved to 30.3% year over year and GAAP operating margins were 6.1% for the quarter.

Financial Highlights -- New McAfee revenue in the quarter grew by 20% year over year, with bookings increasing 17% globally. For comparison purposes, new McAfee revenue excludes the Magic and Sniffer businesses sold in 2004 and the McAfee Research business sold in April 2005. -- For comparison purposes, the Q3 2004 GAAP earnings per share number included a one-time $187 million gain primarily related to the sale of the Sniffer business. -- Overall, McAfee consumer revenue in the quarter grew by 26% year over year to $116 million, with bookings increasing by 14%. Revenue from the online consumer services in the quarter grew by 55% year over year. -- The McAfee online consumer services added 1.9 million net new subscribers in the quarter, bringing the total number of unique subscribers to 15 million. -- McAfee revenue from small and medium sized businesses (SMBs) increased 11% year over year, representing 24% of the company's net revenue. Revenue from large enterprises increased 20% year over year, representing 30% of the company's net revenue. -- Deferred revenue grew by $15.4 million in the quarter to end the quarter at $656.9 million. -- McAfee ended the third quarter with cash and cash equivalents, restricted cash, and investments of $1.198 billion ($50.6 million of which is restricted cash). Financial Outlook -- McAfee expects net revenue for the fourth quarter of 2005 to be between $255 million and $280 million and non-GAAP net earnings to be between $0.33 and $0.39 per share. The guidance reflects a 25% tax rate. -- McAfee is raising its full year 2005 net revenue guidance to between $990 million and $1.015 billion and non-GAAP net earnings guidance to between $1.28 and $1.34 per share. The guidance reflects a 25% tax rate. -- McAfee is providing full year 2006 preliminary guidance. The company expects net revenue of between $1.150 billion and $1.250 billion, representing 20% growth at the middle of the range. The company expects full year non-GAAP earnings per share of between $1.35 and $1.50. The guidance reflects a 27% tax rate.

"2005 has been a year of exceptional growth for McAfee, across all technologies and market segments," said George Samenuk, chairman and chief executive officer of McAfee, Inc. "We continue to hear positive feedback from our customers and partners about our market-leading technology and the strong results demonstrate the success of McAfee's focus on providing proven security solutions for users of all sizes."

Business Highlights -- During the quarter, McAfee was recognized for its commitment to its channel partners, receiving the prestigious Difference in Distribution award from Tech Data for its exceptional level of engagement with the distributor. Additionally, the company was awarded Best Software Company at the CompTIA Breakaway Conference. Voted on by conference participants, the award was given based on McAfee's strong commitment and the clear investments that have been made to the channel program in the last year. McAfee also received the Award of Excellence for the security category from Ingram Micro. -- During the quarter, the company introduced its Clean Pipes initiative to empower Service Providers (SPs) to deliver managed security services, thereby increasing their revenue earning opportunities. Through the Clean Pipes strategy, SPs will be able to offer their customers value-added services that stop threats before they impact networks, computing infrastructure or mobile devices, as a managed service. -- McAfee joined forces with the National Cyber Security Alliance (NCSA) and federal and state governments, major Internet corporations, associations, and universities to actively promote cyber security awareness through the October Awareness Month campaign. Organized by NCSA, the National Cyber Security Awareness Month is designed to actively promote the awareness of cyber security issues and online identity theft. -- McAfee teamed with the American Red Cross to support Hurricane Katrina and other natural disaster relief efforts. The company and its employees have given over $500,000 in financial contributions and product donations to the American Red Cross. Additionally, McAfee donated software to relief centers, held collection drives for items such as clothing, food and school supplies, and organized employee volunteer teams to assist relocated families. McAfee's financial contributions will be used to help support the immediate humanitarian relief efforts and will support the American Red Cross' Hurricane 2005 Relief Fund. -- McAfee expanded its partner base in the consumer space, including: o McAfee and Gateway announced an exclusive two-year agreement to preinstall the McAfee(R) Internet Security Suite on all Gateway and eMachines PCs sold worldwide for both the consumer direct and retail product lines starting at the end of this year. Consumers will get a free 90-day complimentary subscription to the McAfee Internet Security Suite, after which they can purchase a subscription. In addition, McAfee will be the exclusive security provider for Gateway's "Configure to Order" service for 15-month, 24-month or 36-month licenses to the McAfee Internet Security Suite. o Dell is providing more security solution choices to consumers and small businesses as the first McAfee partner to add 24-month and 36- month subscriptions options to McAfee(R) SecurityCenter, a comprehensive, multi-layered security solution that helps to protect against viruses, spyware, spammers, hackers, and "phishing" scams. These new multi-year offers complement the existing 15-month subscription that is available from Dell. o McAfee partnered with M-Systems, a global leader in the USB market, to develop McAfee Anti-Virus for the U3 platform for USB devices. Based on McAfee's award-winning anti-virus technology, it detects and removes viruses, worms, and Trojans, scanning the USB smart drive and the memory of the computer to which it connects, to ensure the U3 USB drive is protected against security threats. U3 USB smart drives host U3 smart applications, computer settings and data on the device, allowing people to carry their "personal workspace" with them for use on other PCs. McAfee Anti-Virus for the U3 USB device is pre-loaded on the device and is now available at Best Buy stores as a Geek Squad product. o Bulldog Communications, a Cable & Wireless company, is offering McAfee Internet Security Suite to its broadband customers. o McAfee partnered with Mobistar (EURONEXT BRUSSELS: MOBB), a leading telecommunications company in Belgium that serves 2.9 million customers, to offer McAfee VirusScan, Personal Firewall Plus, and SpamKiller programs. o McAfee partnered with KPN Internet, a leading telecommunications company in the Netherlands that serves 2.6 million customers, to offer their Planet Internet and Het Net customers McAfee security for their desktops. o AOL, a key strategic partner for the last few years, expanded its McAfee offering to include two new services, offering premium services to former or departing AOL members and enabling AOL to sell the McAfee Internet Security Bundle to non-AOL subscribers. o McAfee partnered with Comcast, a leading broadband provider, to provide McAfee VirusScan, McAfee Personal Firewall Plus, and McAfee Privacy Service to its 7.7 million high-speed Internet customers, providing them with one powerful, easy-to-use security solution for protection against online threats. o McAfee renewed its contract with MSN to provide McAfee VirusScan and McAfee Personal Firewall Plus to subscribers of MSN Premium services. -- McAfee continued to help its small to large business customers secure their systems and networks from malicious code, phishing, spyware and other online threats. o McAfee enhanced its Secure Content Management family of products with two new solution sets aimed at small to large businesses. McAfee released three new appliances, McAfee(R) Secure Web Gateway, Secure Messaging Gateway and Secure Internet Gateway, which help administrators block access to Web sites associated with potentially unwanted programs and malware. The company also announced McAfee(R) Secure Messaging Service for Small Businesses and McAfee Secure Messaging Service for Enterprises, which provide email threat prevention and flexible policy management to business customers looking to reduce the burden of securing and managing their email systems. o McAfee also released McAfee(R) ePolicy Orchestrator(R) (ePO(TM)) 3.6, the industry's first fully integrated system security management solution. With McAfee ePO 3.6, administrators enjoy comprehensive management of system security -- automating vital security activities, proactively mitigating the risk of non-compliant systems, and effectively monitoring and managing enterprise system protection. o McAfee extended its platform support for Macintosh users with the release of McAfee(R) Virex(R) for Macintosh(R). The solution now offers support for the Mac OS X 10.4 (Tiger) operating system. With extended support for Apple's newest Mac OS X, small to large businesses can implement real-time prevention of viruses, worms, Trojans and other potentially unwanted programs across their Macintosh and heterogeneous environments. o McAfee delivered the industry's first host intrusion prevention solution with USB device control capabilities. McAfee Entercept now offers new features to control the use of USB storage devices, helping organizations have a proven solution to protect the availability, integrity, and confidentiality of their data, applications, and other critical assets by blocking USB-based attacks before they can proliferate on the system or network. -- McAfee introduced its new line of 2006 products for consumers, including: o McAfee released McAfee(R) Wireless Home Network Security 2006, a software product for consumers that provides industry standard, wireless security protection against data theft, unauthorized network access, and broadband "freeloading" through an easy and intuitive one-click interface. McAfee developed Wireless Home Network Security based on the technology of Wireless Security Corp., a company it acquired in June. o McAfee released the McAfee(R) Internet Security Suite 2006. It helps prevent viruses, spyware, hackers, and "phishing" scams that may result in identity theft, damage -- including permanent loss -- of irreplaceable documents and files, such as digital photos and personal financial data. The software program also prohibits unauthorized access to and from the Internet, blocks unwanted or persistent pop-up ads or annoying potentially unwanted programs which may lead to poor PC performance, manages cookies, and filters unwanted and offensive Internet and e-mail content. o McAfee VirusScan(R) helps prevent viruses from damaging irreplaceable documents such as digital photos, family movies, and financial data. PC Magazine awarded McAfee VirusScan 2006 Editors' Choice award. o McAfee(R) Personal Firewall Plus helps prevent hacker attacks, safeguarding photos, documents, personal information, and online communications by continually preventing hacker attacks to the PC. o McAfee(R) Privacy Service, helps prevent sensitive content, including financial information, from being transmitted, while providing greater control over families' Internet experiences. o McAfee(R) SpamKiller(R) blocks unwanted and malicious email, helping users regain control of their inboxes. It also protects personal and financial information against known "phishing" scams by blocking access to known and potentially fraudulent websites. o McAfee(R) QuickClean(TM) optimizes PC performance by removing unused and sensitive files, folders, shortcuts, and temporary files that accumulate over time. o McAfee(R) AntiSpyware detects potentially unwanted programs, such as spyware and Trojans, before they compromise personal information or slows a PC's performance. -- McAfee received strong validation in the quarter, including the achievement of: o CMP Media's Software Development magazine awarded McAfee Best Employer in its Third Annual Reader's Choice awards. o Network World Magazine's Clear Choice Award for taking the top spot in a competitive anti-spyware review. McAfee(R) Secure Web Gateway was rated the top anti-spyware solution in this head-to-head comparative review, surpassing all other desktop and gateway anti- spyware solutions with its superior detection and prevention capabilities, instinctive installation and ease-of-use. o First place in eWeek's competitive anti-spyware review with McAfee Anti-Spyware Enterprise and McAfee VirusScan Enterprise 8.0i. According to the review, "Overall, we found that McAfee Anti-Spyware Enterprise generally provided the most complete spyware identification and cleaning capabilities." "Only McAfee's VirusScan Enterprise 8.0i suite is worthy of consideration as the sole anti- spyware solution on the corporate desktop at this time." o West Coast Labs' Checkmark certification for McAfee(R) Anti-Spyware Enterprise in the Spyware protection category. McAfee Anti-Spyware Enterprise detected 100% of the spyware samples in the test suite, providing IT administrators with the assurance that McAfee Anti- Spyware Enterprise meets West Coast Labs' stringent test requirements for the detection of spyware. o McAfee(R) VirusScan(R) 2006 for consumers was honored by PC Magazine with the Editors' Choice award in the anti-virus software category where its excellent anti-virus and spyware protection were noted. o McAfee Internet Security Suite for consumers was named "2005 Best Security Software" by PC World Latin America. -- In the third quarter, McAfee AVERT, the company's Anti-Virus and Vulnerability Emergency Response Team, provided proactive, zero-day protection against the exploitation of eighteen Microsoft vulnerabilities, several of the Cisco IOS vulnerabilities and safeguarded customers from a wave of threats that had been working to exploit a hole in the plug-and-play feature in the Windows operating system. This included the MS05-039ircbot.worm! -- rated High by McAfee -- which appeared seven days from the initial announcement of the Microsoft vulnerability. -- McAfee announced several customers that have benefited from McAfee's system and network security solutions, including: o SBC Communications Inc., which selected McAfee's anti-virus and content filtering technology for business and residential customers of the SBC Unified Communications(SM) service. o INAIL Italy, the Italian government insurance agency, purchased multiple products including anti-virus, intrusion prevention, WebShield, and professional services. o Vignette Corp., which implemented McAfee IntruShield, McAfee(R) Active Virus Defense suite and McAfee Anti-Spyware Enterprise to help detect and defend against attacks, while monitoring and quantifying all network activity. o The Cancer Council of South Australia, which selected and implemented McAfee(R) VirusScan(R) Enterprise 8.0i and McAfee Anti-Spyware Enterprise to protect its critical applications and data against today's powerful security threats. o Good Hope School, which implemented McAfee Managed VirusScan as a highly reliable, cost-effective managed security solution to safeguard its campus against malicious threats. Conference Call Information -- The company will host a conference call today at 1:30 p.m. Pacific, 4:30 p.m. Eastern to discuss its quarterly results. Participants should call 888-790-2935 (U.S.) or 517-623-4381 (international), pass code: MFE. -- Attendees should dial in at least 15 minutes prior to the conference call. -- A replay of the call will be available until November 30, 2005 by calling 800-262-4960 (U.S.), or 203-369-3221 (international). -- The audio of the call may also be found on the Internet at: http://www.mcafee.com/earnings . About McAfee, Inc.

McAfee, Inc., headquartered in Santa Clara, California and the global leader in Intrusion Prevention and Security Risk Management, delivers proactive and proven solutions and services that secure systems and networks around the world. With its unmatched security expertise and commitment to innovation, McAfee empowers home users, businesses, the public sector, and service providers with the ability to block attacks, prevent disruptions, and continuously track and improve their security. http://www.mcafee.com/.

NOTE: McAfee, VirusScan, ProtectionPilot, Virex, Foundstone, IntruShield, LinuxShield and ePolicyOrchestrator are registered trademarks or trademarks of McAfee, Inc. and/or its affiliates in the US and/or other countries. The color red in connection with security is distinctive of McAfee brand products. All other registered and unregistered trademarks herein are the sole property of their respective owners.

Disclosure Statements

Non-GAAP net earnings and pro-forma operating margin exclude amortization of purchased technology and intangibles expense, compensation charges relating to employee stock options, retention bonuses and severance payments related to acquisitions, gain or loss on sale of assets and technology, restructuring charges, divestiture expense, proposed legal settlement charge, in process research and development, gain on sale of securities, loss on debt redemption, litigation reimbursement, interest expense on convertible debt and reimbursements associated with the transition services agreement with Network General; non-GAAP net earnings assume an effective tax rate of 25% for 2005. McAfee's management uses non-GAAP net earnings and pro-forma operating results to evaluate the company's operating performance and believes that excluding these items enhances management's and its investors' ability to evaluate McAfee's comparable historical operating results. McAfee's management believes that all disclosures are adequate to make the information presented not misleading.

McAfee is unable to provide a non-GAAP to GAAP reconciliation of projected fourth quarter and full year 2005 net earnings and net earnings per share. Among other reasons, such amounts are not known or cannot be reasonably estimated at this time or, in the case of stock options, the amount of any compensation charge (credit) related to stock options may depend on changes in the trading price of McAfee's common stock.

McAfee estimates that every $1 increase, if any, in its stock price from the price on September 30, 2005, will increase its third quarter stock-based compensation charge by approximately $0.4 million, assuming that outstanding options subject to variable accounting remain constant. With respect to the other items, it is estimated that (i) for the fourth quarter of 2005 restructuring charges will be in the range of $0.1 million to $2 million based on decisions made prior to the first quarter of 2005 for which the actions will occur in 2005 but excluding additional restructuring activities that may be taken after September 30, 2005, (ii) for the fourth quarter 2005 amortization expense will be approximately $2.6 million on intangibles and trademarks, and $3.9 million on purchased technology and (iii) for the fourth quarter of 2005 other charges related to the IntruVert, Foundstone and Wireless Security Corporation acquisitions will be approximately $0.8 million. The estimate for amortization expense does not include any future impairment of intangible assets with respect to previous acquisitions nor does it include any intangible assets that may be acquired through future acquisitions.

Forward-Looking Statements

The foregoing contains forward-looking statements which include those regarding expected operating results for the fourth quarter and full-year 2005 and full year 2006; McAfee's continued commitment to the channel and its channel partners; the Clean Pipes initiative; new product introductions and related product benefits; estimates for certain charges for the fourth quarter and full year of 2005; and anticipated benefits of its partnerships. Actual results could vary perhaps materially and the expected results may not occur. McAfee may not succeed in its efforts to grow its business, build upon its technology leadership or capture market share, notwithstanding related commitment or related investment. The company may not benefit from its strategic alliances or partnerships as anticipated, customers may not respond as favorably as anticipated to the company's product or technical support offerings, the company may not satisfactorily anticipate or meet its customers' needs or expectations or the Clean Pipes initiative may be unsuccessful. McAfee's business, including its sales force and internal finance and IT operations, may be disrupted or otherwise strained due to company cost saving measures. Actual results are also subject to a number of other factors, including customer and distributor demand fluctuations and macro and other economic conditions both in the U.S. and internationally; successful sales force coordination and execution; attracting and retaining qualified sales force and other personnel; and successful development, introduction and adoption by customers of new products and enhancements that meet customer demand. The forward-looking statements contained in this release are also subject to other risks and uncertainties, including those more fully described in McAfee's filings with the SEC including its annual report on form 10-K as amended for the year ended December 31, 2004 and its quarterly reports filed on Form 10-Q.

Introduction to Tables

Non-GAAP net earnings and pro-forma operating margin exclude amortization of purchased technology and intangibles expense, compensation charges relating to employee stock options, retention bonuses and severance payments related to acquisitions, gain or loss on sale of assets and technology, restructuring charges, divestiture expense, proposed legal settlement charge, in process research and development, gain on sale of securities, loss on debt redemption, litigation reimbursement, interest expense on convertible debt and reimbursements associated with the transition services agreement with Network General.

McAFEE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (Unaudited) September 30, December 31, 2005 2004 Assets: Cash and marketable securities $1,147,732 $924,681 Restricted cash 50,624 617 Accounts receivable, net (1) 106,242 146,376 Prepaid expenses, income taxes and other current assets 111,117 103,687 Property and equipment, net 86,894 91,715 Deferred taxes 436,747 421,063 Goodwill, intangibles and other long term assets, net 546,482 558,393 Total assets $2,485,838 $2,246,532 Liabilities: Accounts payable $27,900 $32,891 Accrued liabilities (1) 211,598 206,224 Deferred revenue 656,910 601,373 Accrued taxes and other long term liabilities 173,239 204,796 Total liabilities 1,069,647 1,045,284 Stockholders' equity: Common stock 1,696 1,623 Treasury stock (47,351) -- Additional paid-in capital 1,338,079 1,178,855 Deferred stock-based compensation (630) (1,777) Accumulated other comprehensive income 28,996 27,361 Retained earnings (accumulated deficit) 95,401 (4,814) Total stockholders' equity 1,416,191 1,201,248 Total liabilities and stockholders' equity $2,485,838 $2,246,532 (1) As of December 31, 2004, from previously reported in 10-K accounts receivable, net and accrued liabilities each increased by $8,856. This is due to a reclassification from contra accounts receivable to accrued liabilities to conform with 2005 presentation. McAFEE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 Net revenue $252,911 $221,633 $734,020 $666,389 Cost of net revenue 33,155 31,461 100,932 99,548 Amortization of purchased technology 3,938 2,812 11,674 9,481 Gross profit 215,818 187,360 621,414 557,360 Operating costs: Research and development (1) 46,960 38,989 130,074 128,714 Marketing and sales (2) 71,878 82,945 219,198 272,017 General and administrative (3) 27,276 32,928 88,548 93,445 Reimbursement from transition services agreement (3) (3,671) (362) (3,671) Loss (gain) on sale/disposal of assets and technology 212 (187,179) (499) (232,583) Proposed legal settlement charge 50,000 -- 50,000 -- Litigation reimbursement -- -- -- (24,991) Amortization of intangibles 2,876 3,448 10,109 10,537 Restructuring charges (benefits) (4) (10) 8,681 5,962 11,841 In Process R&D -- -- 4,000 -- Restatement costs -- -- -- (250) Divestiture expense 207 - 996 803 Acquisition retention bonuses and severance 934 634 3,790 2,674 Total operating costs (benefits) 200,330 (23,225) 511,816 258,536 Income from operations 15,488 210,585 109,598 298,824 Interest and other income, net (4) 7,153 4,482 16,049 12,268 Interest expense on convertible debt -- (540) -- (3,418) Gain on sale of securities -- -- -- 246 Loss on redemption of debt -- (15,070) (15,070) Income before provision for income taxes 22,641 199,457 125,647 292,850 Provision for income taxes 94 81,309 25,432 106,532 Net income $22,547 $118,148 $100,215 $186,318 Net income per share - basic $0.14 $0.75 $0.61 $1.16 Net income per share - diluted (5) $0.13 $0.70 $0.60 $1.08 Shares used in per share calculation - basic 166,221 158,151 164,245 160,321 Shares used in per share calculation - diluted 170,712 172,103 168,383 180,192 (1) Includes stock-based compensation charges of $1,808 and $575 for the three months ended September 30, 2005 and 2004, respectively and $569 and $2,147 for the nine months ended September 30, 2005 and 2004, respectively. (2) Includes stock-based compensation charges of $480 and $203 for the three months ended September 30, 2005 and 2004, respectively and $188 and $890 for the nine months ended September 30, 2005 and 2004, respectively. (3) Includes stock-based compensation charges of $705 and $485 for the three months ended September 30, 2005 and 2004, respectively and $1,312 and $892 for the nine months ended September 30, 2005 and 2004, respectively. (4) Interest expense related to restructuring of $132 and $420 for the three and nine months ended September 30, 2004, respectively, has been reclassified out of Interest and other income, net into restructuring charges (benefits) in 2004 to conform with 2005 presentation. (5) In computing net income per share on a diluted basis for the three and nine months ended September 30, 2004 net income has been increased by $1,546 and $7,561, respectively for the after-tax amount of interest expense recognized in the period associated with the dilutive convertible securities. The shares used in net income per share on a diluted basis includes an additional 10.6 million and 16.2 million shares, respectively, that would have been outstanding if the diluted securities had been converted as of the beginning of the period. The convertible debt was redeemed on August 20, 2004. McAFEE, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 Net revenue $252,911 $221,633 $734,020 $666,389 Cost of net revenue 33,155 31,461 100,932 99,548 Amortization of purchased technology -- -- -- -- Gross profit 219,756 190,172 633,088 566,841 Operating costs: Research and development 45,152 38,414 129,505 126,567 Marketing and sales 71,398 82,742 219,010 271,127 General and administrative 26,571 32,443 87,236 92,553 Reimbursement from transition services agreement -- -- -- -- Loss (gain) on sale/disposal of assets and technology -- -- -- -- Proposed legal settlement charge Litigation reimbursement -- -- -- -- Amortization of intangibles -- -- -- -- Restructuring charges (benefits) (1) -- -- -- -- In Process R&D Restatement costs -- -- -- -- Divestiture expense -- -- -- -- Acquisition retention bonuses and severance -- -- -- -- Total operating costs 143,121 153,599 435,751 490,247 Income from operations 76,635 36,573 197,337 76,594 Interest and other income, net (1) 7,153 4,482 16,049 12,268 Interest expense on convertible debt -- -- -- -- Gain on sale of securities -- -- -- -- Loss on redemption of debt -- -- -- -- Income before provision for income taxes 83,788 41,055 213,386 88,862 Provision for income taxes 20,947 10,264 53,347 22,216 Pro forma net income $62,841 $30,791 $160,039 $66,646 Net income per share - diluted $0.37 $0.18 $0.95 $0.37 Shares used in per share calculation - diluted (2) 170,712 172,103 168,383 180,192 (1) Interest expense related to restructuring of $132 and $420 for the three and nine months ended September 30, 2004, respectively has been reclassified out of interest and other income, net into restructuring charges (benefits) in 2004 to conform with 2005 presentation. (2) The above per share calculations treat outstanding convertible debt on an as-converted basis, resulting in an increase of 10.6 million and 16.2 million shares for the three and nine months ended September 30, 2004. The convertible debt was redeemed on August 20, 2004.

The accompanying reconciliation of pro forma condensed consolidated statements of income to the condensed consolidated statements of income is an integral part of the above pro forma financial information. The Company believes that the above pro forma information is an additional meaningful measure of operating performance. However, this pro forma information will necessarily be different from comparable information provided by other companies and should not be used as an alternative to our operating results and other financial information as determined under accounting principles generally accepted in the United States of America.

McAFEE, INC. AND SUBSIDIARIES RECONCILIATION OF CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME TO THE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 McAfee, Inc. Pro forma net income $62,841 $30,791 $160,039 $66,646 Provision for income taxes 20,947 10,264 53,347 22,216 McAfee, Inc. pro forma income before provision for income taxes 83,788 41,055 213,386 88,862 Amortization of purchased technology (3,938) (2,812) (11,674) (9,481) Stock compensation charge (2,993) (1,263) (2,069) (3,929) Reimbursement from transition services agreement 3 3,671 362 3,671 (Loss) gain on sale/disposal of assets and technology (212) 187,179 499 232,583 Proposed legal settlement charge (50,000) -- (50,000) -- Litigation reimbursement -- -- -- 24,991 Amortization of intangibles (2,876) (3,448) (10,109) (10,537) Restructuring (charge) benefit 10 (8,681) (5,962) (11,841) In Process R&D -- -- (4,000) -- Restatement costs -- -- -- 250 Divestiture expense (207) -- (996) (803) Acquisition retention bonuses and severance (934) (634) (3,790) (2,674) Interest expense on convertible debt -- (540) -- (3,418) Gain on sale of securities -- -- -- 246 Loss on redemption of debt -- (15,070) -- (15,070) McAfee, Inc. income before provision for income taxes $22,641 $199,457 $125,647 $292,850 Provision for income taxes 94 81,309 25,432 106,532 McAfee, Inc. Consolidated net income $22,547 $118,148 $100,215 $186,318 McAfee, Inc. Revenue by Product Groups - Press Release - Total Consolidated (in thousands) Q3'05 Q2'05 Q1'05 McAfee $252,910 100% $245,207 100% $234,051 99% McAfee Corporate $136,993 54% $128,963 53% $132,924 56% - Enterprise 76,667 30% 72,072 29% 72,461 31% - SIB 60,327 24% 56,891 23% 60,462 26% McAfee Consumer $115,916 46% $116,243 47% $101,127 43% - McAfee.com 87,597 35% 88,582 36% 75,041 32% - Retail 28,319 11% 27,661 11% 26,086 11% Divested Business - NAI Labs 1 0% 175 0% 1,676 1% - Sniffer -- 0% -- 0% -- 0% - Magic -- 0% -- 0% -- 0% - PGP -- 0% -- 0% -- 0% Total MFE $252,911 100% $245,382 100% $235,727 100% Q4'04 Q3'04 Q2'04 McAfee $242,469 99% $209,910 95% $185,411 82% McAfee Corporate $150,937 62% $118,198 53% $116,458 52% - Enterprise 92,307 38% 63,758 29% 67,067 30% - SMB 58,631 24% 54,440 25% 49,391 22% McAfee Consumer $91,532 37% $91,712 41% $68,953 31% - McAfee.com 61,789 25% 56,518 26% 46,514 21% - Retail 29,742 12% 35,194 16% 22,439 10% Divested Business - NAI Labs 1,684 1% 1,536 1% 1,830 1% - Sniffer -- 0% 10,187 5% 38,438 17% - Magic -- 0% -- 0% -- 0% - PGP -- 0% -- 0% -- 0% Total MFE $244,153 100% $221,633 100% $225,679 100% McAfee, Inc. Bookings by Product Family (in thousands) Q3'05 Q2'05 Q1'05 McAfee $293,819 100% $317,466 100% $281,041 100% McAfee Corporate $159,767 54% $177,805 56% $148,938 53% - Enterprise 94,560 32% 101,251 32% 81,596 29% - SMB 65,207 22% 76,554 24% 67,342 24% McAfee Consumer $134,052 46% $139,661 44% $132,103 47% - McAfee.com 102,708 35% 113,866 36% 100,611 36% - McAfee Retail 31,344 11% 25,795 8% 31,492 11% Divested Business -- 0% -- 0% -- 0% - Sniffer -- 0% -- 0% -- 0% - Magic -- 0% -- 0% -- 0% - PGP -- 0% -- 0% -- 0% Total MFE $293,819 100% $317,466 100% $281,041 100% Q4'04 Q3'04 Q2'04 McAfee $315,579 100% $250,883 99% $266,010 87% McAfee Corporate $190,682 60% $133,042 53% $161,662 53% - Enterprise 119,678 38% 70,925 28% 95,709 31% - SMB 71,004 22% 62,117 25% 65,953 21% McAfee Consumer $124,897 40% $117,841 46% $104,348 34% - McAfee.com 81,923 26% 82,071 32% 73,402 24% - McAfee Retail 42,974 14% 35,770 14% 30,946 10% Divested Business -- 0% 1,511 1% 41,362 13% - Sniffer -- 0% 1,511 1% 41,427 13% - Magic -- 0% -- 0% (65) 0% - PGP -- 0% -- 0% -- 0% Total MFE $315,579 100% $252,394 100% $307,372 100%