10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2008
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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

                                                                                                              (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

As of April 30, 2008, 160,997,535 shares of the registrant’s common stock, $0.01 par value, were outstanding.

MCAFEE, INC.

FORM 10-Q

March 31, 2008

CONTENTS

Item
Number			Page
PART I: FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets: March 31, 2008 and December 31, 2007		3
		Condensed Consolidated Statements of Income and Comprehensive Income: Three months ended March 31, 2008 and March 31, 2007		4
		Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 2008 and March 31, 2007		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		43
	Item 4.	Controls and Procedures		43
PART II: OTHER INFORMATION
	Item 1.	Legal Proceedings		45
	Item 1A.	Risk Factors		47
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		63
	Item 3.	Defaults upon Senior Securities		64
	Item 4.	Submission of Matters to a Vote of Security Holders		64
	Item 5.	Other Information		64
	Item 6.	Exhibits		64
Signatures				65
Exhibit Index				66
Letter Agreement - Mark Cochran
Letter Agreement - Michael DeCesare
Amendment of Stock Option - Christopher Bolin
1997 Stock Incentive Plan, as Amended
1993 Stock Option Plan of Outside Directors, as Amended
Foundstone Inc. 2000 Stock Plan, as Amended
2002 Employee Stock Purchase Plan, as Amended
Form of Performance Stock Unit Issuance Agreement
Certification of Chief Executive Officer and Chief Accounting Officer Pursuant to Section 302
Certification of Chief Executive Officer and Chief Accounting Officer Pursuant to Section 906

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PART I: FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)

MCAFEE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2008			2007
	(In thousands, except share data)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	454,312		$	394,158
Short-term marketable securities		349,942			338,770
Accounts receivable, net of allowance for doubtful accounts of $5,905 and $4,076, respectively		195,113			232,056
Prepaid expenses and prepaid taxes		196,551			162,574
Deferred income taxes		249,701			256,188
Other current assets		25,909			24,000
Total current assets		1,471,528			1,407,746
Long-term marketable securities		488,830			585,874
Property and equipment, net		93,826			94,670
Deferred income taxes		299,690			321,342
Intangible assets, net		227,275			220,126
Goodwill		804,384			750,089
Other assets		49,651			34,256
Total assets	$	3,435,184		$	3,414,103
LIABILITIES
Current liabilities:
Accounts payable	$	40,876		$	45,858
Accrued income taxes		72,806			79,553
Accrued compensation		70,899			99,652
Other accrued liabilities		166,824			150,961
Deferred revenue		837,635			801,577
Total current liabilities		1,189,040			1,177,601
Deferred revenue, less current portion		243,109			242,936
Accrued taxes and other long-term liabilities		88,273			88,241
Total liabilities		1,520,422			1,508,778
Commitments and contingencies (Notes 11 and 12)
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value:
Authorized: 5,000,000 shares; Issued and outstanding: none in 2008 and 2007		—			—
Common stock, $0.01 par value:
Authorized: 300,000,000 shares; Issued: 177,169,508 shares at March 31, 2008 and 173,148,853 shares at December 31, 2007
Outstanding: 160,760,450 shares at March 31, 2008 and 160,545,422 shares at December 31, 2007		1,772			1,732
Treasury stock, at cost: 16,409,058 shares at March 31, 2008 and 12,603,431 shares at December 31, 2007		(430,445	)		(303,270	)
Additional paid-in capital		1,899,095			1,810,290
Accumulated other comprehensive income		50,096			32,498
Retained earnings		394,244			364,075
Total stockholders’ equity		1,914,762			1,905,325
Total liabilities and stockholders’ equity	$	3,435,184		$	3,414,103

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

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MCAFEE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Three Months Ended
	March 31,
	2008			2007
	(In thousands, except per
	share data)
	(Unaudited)
Net revenue:
Service and support	$	188,218		$	167,605
Subscription		160,974			128,368
Product		20,449			18,905
Total net revenue		369,641			314,878
Cost of net revenue:
Service and support		14,844			12,393
Subscription		46,590			37,386
Product		14,942			11,905
Amortization of purchased technology and patents		13,560			8,369
Total cost of net revenue		89,936			70,053
Operating costs:
Research and development		58,625			54,613
Marketing and sales		118,357			93,081
General and administrative		42,689			44,851
SEC and compliance costs		1,376			5,052
Amortization of intangibles		5,340			2,682
Restructuring charges		71			3,126
Total operating costs		226,458			203,405
Income from operations		53,247			41,420
Interest and other income, net		13,035			14,315
Gain on sale of investments, net		2,462			109
Income before provision for income taxes		68,744			55,844
Provision for income taxes		38,575			12,494
Net income	$	30,169		$	43,350
Other comprehensive income:
Unrealized (loss) gain on marketable securities, net of reclassification adjustment for gains (losses) recognized on marketable securities during the period and income tax	$	(937	)	$	469
Foreign currency translation gain		18,535			436
Comprehensive income	$	47,767		$	44,255
Net income per share — Basic	$	0.19		$	0.27
Net income per share — Diluted	$	0.18		$	0.27
Shares used in per share calculation — Basic		160,992			159,799
Shares used in per share calculation — Diluted		164,867			163,174

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

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MCAFEE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
	2008			2007
	(In thousands)
	(Unaudited)
Cash flows from operating activities:
Net income	$	30,169		$	43,350
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,489			20,278
Provision for (recovery of) doubtful accounts, net		302			(284	)
Non-cash restructuring (benefit) charge		(281	)		1,365
Discount amortization on marketable securities		(1,090	)		(1,431	)
Loss on sale of assets and technology		3			4
Gain on sale of investments		(2,462	)		(109	)
Deferred income taxes		34,587			6,668
Decrease in fair value of options accounted for as liabilities		(5,483	)		—
Non-cash stock-based compensation expense		11,657			20,707
Excess tax benefits from stock-based compensation		(9,520	)		(12	)
Changes in assets and liabilities, net of acquisitions and divestitures:
Accounts receivable		45,321			24,882
Prepaid expenses, prepaid taxes and other assets		(10,823	)		(3,223	)
Accounts payable		(7,741	)		1,102
Accrued taxes and other liabilities		(32,860	)		(6,268	)
Deferred revenue		(8,894	)		(5,248	)
Net cash provided by operating activities		71,374			101,781
Cash flows from investing activities:
Purchase of marketable securities		(178,052	)		(167,646	)
Proceeds from sales of marketable securities		176,400			95,227
Proceeds from maturities of marketable securities		89,515			59,835
Acquisitions, net of cash acquired		(55,041	)		—
(Increase) decrease in restricted cash		(12	)		352
Purchase of property, equipment and leasehold improvements		(10,493	)		(10,150	)
Proceeds from the sale of assets and technology		—			4,105
Net cash provided by (used in) investing activities		22,317			(18,277	)
Cash flows from financing activities:
Proceeds from issuance of common stock from option plans		53,677			—
Excess tax benefits from stock-based compensation		9,520			12
Repurchase of common stock		(127,175	)		(196	)
Net cash used in financing activities		(63,978	)		(184	)
Effect of exchange rate fluctuations on cash		30,441			3,932
Net increase in cash and cash equivalents		60,154			87,252
Cash and cash equivalents at beginning of period		394,158			389,627
Cash and cash equivalents at end of period	$	454,312		$	476,879
Non-cash investing and financing activities:
Unrealized (loss) gain on marketable securities, net	$	(937	)	$	469
Accrual for purchase of property, equipment and leasehold improvements	$	1,382		$	3,928
Accrual for intangibles	$	—		$	9,300
Fair value of assets acquired in business combination, excluding cash acquired	$	64,274		$	—
Liabilities assumed in business combination	$	13,973		$	—
Accrued purchase price	$	1,268		$	—
Modification of stock options — reclassification from equity to liability	$	—		$	4,326
Exercise of stock options — reclassification from liability to equity awards	$	16,994		$	—
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	9,155		$	10,688
Cash received from income tax refunds	$	1,905		$	1,113

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

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MCAFEE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   Organization and Business

McAfee, Inc. and our wholly owned subsidiaries (“we”, “us” or “our”) are a worldwide security technology company that secures systems and networks from known and unknown threats around the world. Our security solutions are offered primarily to large enterprises, governments, small and medium-sized businesses and consumers through a network of qualified partners. We operate our business in five geographic regions: North America; Europe, Middle East and Africa (“EMEA”); Japan; Asia-Pacific, excluding Japan; and Latin America.

2.   Summary of Significant Accounting Policies and Basis of Presentation

The accompanying condensed consolidated financial statements include our accounts as of March 31, 2008 and December 31, 2007 and for the three months ended March 31, 2008 and March 31, 2007. All intercompany accounts and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The December 31, 2007 condensed consolidated balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. However, we believe that all disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto, included in our annual report on Form 10-K for the year ended December 31, 2007.

In the opinion of our management, all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present our financial position, results of operations and cash flows for the interim periods presented have been included. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year or for any future periods.

Significant Accounting Policies

Inventory

Inventory, which consists primarily of finished goods held at fulfillment partner locations and inventory sold into our channel that has not been sold through to the end-user, is stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first in, first out basis. Inventory balances are included in other current assets in our condensed consolidated balance sheets and were $3.8 million as of March 31, 2008 and $3.0 million as of December 31, 2007.

Deferred Costs of Revenue

Deferred costs of revenue, which consist primarily of costs related to revenue-sharing arrangements and royalty arrangements, are included in prepaid expenses and other assets on our condensed consolidated balance sheets. We only defer direct and incremental costs related to revenue-sharing arrangements and recognize such deferred costs proportionate to the related revenue recognized. At March 31, 2008, our deferred costs were $99.2 million compared to $79.0 million at December 31, 2007.

SEC and Compliance Costs

SEC and compliance costs in 2008 include ongoing legal expenses arising as a result of our historical investigation into our stock option granting practices and in 2007 include various expenses related to our historical investigation into our stock option granting practices.

6

Fair Value Measurements

On January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. We hold financial assets, such as available for sale securities and foreign currency contracts, subject to valuation under SFAS 157. The following table details the fair value measurements within the fair value hierarchy of our financial assets (in thousands):

	Fair Value Measurements at March 31, 2008 Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			Using Identical		Observable Inputs		Unobservable
Description	March 31, 2008		Assets (Level 1)(1)		(Level 2)(2)		Inputs (Level 3)(3)
Available-for-sale securities:
The United States (“U.S.”) Government notes and bonds(4)	$	398,873	$	302,108	$	96,765	$	—
Corporate notes and bonds(4)		250,232		—		250,232		—
Asset-backed securities(4)		156,077		—		156,077		—
Mortgage-backed securities(4)		33,590		—		33,590		—
Cash and cash equivalents(5)		15,157		—		15,157		—
Total available-for-sale securities		853,929		302,108		551,821		—
Foreign exchange derivatives(6)		13,064		13,064		—		—
Total	$	866,993	$	315,172	$	551,821	$	—

(1)	Level 1 classification is applied to any asset that has a readily available quoted price from an active market where there is significant transparency in the executed/quoted price.
(2)	Level 2 classification is applied to assets that have evaluated prices received from fixed income vendors where the data inputs to these valuations, which are observable either directly or indirectly, but do not represent quoted prices from an active market.
(3)	Level 3 classification is applied to assets when prices are not derived from existing market data.
(4)	Included in both short-term and long-term marketable securities on our condensed consolidated balance sheets.
(5)	Included in cash and cash equivalents on our condensed consolidated balance sheets.
(6)	Included in accounts receivable and other accrued liabilities on our condensed consolidated balance sheets.

In February 2008, the Financial Accounting Standard Board (“FASB”) issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. Any amounts recognized upon adoption of this rule as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. FSP 157-2 is effective for us beginning January 1, 2009. We continue to assess the impact that FSP 157-2 may have on our consolidated financial position and results of operations.

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Fair Value Option

On January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 1” (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date. We did not elect the fair value measurement option for any of our financial assets or liabilities. Therefore, the adoption of SFAS 159 did not impact our consolidated financial position, results of operations or cash flows.

Recent Accounting Pronouncements

Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), to expand disclosures about an entity’s derivative instruments and hedging activities, but does not change SFAS 133’s scope of accounting. SFAS 161 is effective for us beginning January 1, 2009.

Noncontrolling Interests

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for us beginning January 1, 2009. We do not expect the adoption of SFAS 160 to have a material impact on our consolidated financial position, results of operations or cash flows.

Business Combinations

In December 2007, the FASB revised SFAS No. 141, “Business Combinations” (“SFAS 141(R)”), to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141(R) establishes principles and requirements for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in an acquisition, at their fair value as of the acquisition date. SFAS 141(R) is effective for us beginning January 1, 2009. We will assess how the adoption of SFAS 141(R) will impact our consolidated financial position, results of operations and cash flows if we complete an acquisition after the date of adoption. The accounting treatment related to pre-acquisition uncertain tax positions will change when SFAS 141(R) becomes effective. At such time, any changes to the recognition or measurement of uncertain tax positions related to pre-acquisition periods will be recorded through income tax expense, whereas currently the accounting treatment would require any adjustment to be recognized through the purchase accounting.

3.   Employee Stock Benefit Plans

We record compensation expense for stock-based awards issued to employees and outside directors in exchange for services provided based on the estimated fair value of the awards on their grant dates. Compensation expense is recognized over the required service or performance period of the awards. Our stock-based awards include stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), restricted stock units with performance-based vesting (“PSUs”) and our Employee Stock Purchase Plan (“ESPP”).

8

The following table summarizes stock-based compensation expense (in thousands):

	Three Months Ended March 31,
	2008			2007
Amortization of fair value of options	$	5,577		$	5,058
Extension of post-termination exercise period		—			10,738
(Benefit) expense related to cash settlement of options		(382	)		231
Restricted stock awards and units		5,825			4,911
Restricted stock units with performance-based vesting		255			—
Tender offer		601			—
Total stock-based compensation expense	$	11,876		$	20,938

Amortization of fair value of options.  We recognize the fair value of stock options issued to employees and outside directors as stock-based compensation expense over the vesting period of the awards. As we adopted SFAS No. 123(R), “ Share-Based Payment” (“SFAS 123(R)”) using the modified prospective method, these charges include compensation expense for stock options granted prior to January 1, 2006 but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123, and compensation expense for stock options granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

Extension of post-termination exercise period.  From July 2006, when we announced that we might have to restate our historical financial statements as a result of our ongoing stock option granting practices investigation, through December 21, 2007, the date we became current on our reporting obligations under the Securities Exchange Act of 1934, as amended, (“blackout period”), we imposed restrictions on our ability to issue any shares, including those pursuant to stock option exercises. In January 2007, we extended the post-termination exercise period for vested options held by 640 former employees and outside directors that would expire during the blackout period. As a result of this modification, we recognized $10.7 million of stock-based compensation expense in the three months ended March 31, 2007, based on the fair value of the modified options. The expense was calculated in accordance with the guidance in SFAS 123(R). The options were deemed to have no value prior to the extension of the life beyond the blackout period.

Based on the guidance in SFAS 123(R) and related FASB Staff Positions, after the January 2007 modification, stock options held by former employees and outside directors that terminated prior to such modification became subject to the provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” (“EITF 00-19”). As a result, in January 2007, these options were reclassified as liability awards within current liabilities. Accordingly, at the end of each reporting period, we determined the fair value of these options utilizing the Black-Scholes valuation model and recognized any change in fair value of the options in our condensed consolidated statements of income and comprehensive income in the period of change.

In November 2007, due to a delay in our becoming current in our reporting obligations, we extended the post-termination exercise period for options held by 690 former employees and outside directors whose service to us terminated subsequent to the January 2007 modification and those previously modified in January 2007 as discussed above, until the earlier of (i) the ninetieth (90th) calendar day after December 21, 2007, the date we became current in our reporting obligations under the Securities Exchange Act of 1934, as amended, (ii) the expiration of the contractual terms of the options, or (iii) December 31, 2008. Based on the guidance in SFAS 123(R) and related FASB Staff Positions, after the November 2007 modification, stock options held by the former employees and outside directors that terminated subsequent to the January 2007 modification and prior to November 2007 became subject to the provisions of EITF 00-19. As a result, in November 2007, these options were reclassified as liability awards within current liabilities. Accordingly, at the end of each reporting period, we determined the fair value of these options utilizing the Black-Scholes valuation model and recognized any change in fair value of the options in our condensed consolidated statements of income and comprehensive income in the period of change.

9

As of March 31, 2008, the January 2007 and November 2007 modified options had been exercised or had expired. The fair values of the options that had been exercised during the three months ended March 31, 2008 were remeasured on the respective date of exercise and recorded as an increase to additional paid-in capital. The options that expired were remeasured to have no fair value. We recognized a total benefit of $5.5 million related to the change in fair value of these options in the three months ended March 31, 2008. We did not recognize any expense related to the change in fair value of these options in the three months ended March 31, 2007 as our stock price did not change significantly from the January 2007 modification through March 31, 2007. Such amounts are included in general and administrative expense in our condensed consolidated statements of income and comprehensive income, and are not reflected as stock-based compensation expense.

Cash settlement of options.  Certain stock options held by terminated employees expired during the blackout period as they could not be exercised during the 90-day period subsequent to termination. In January 2007, we determined that we would settle these options in cash. In the three months ended March 31, 2007, we recorded a liability of approximately $0.2 million, based on the intrinsic value of options held by current employees that expired during the blackout period. As of December 31, 2007, we recorded a liability of $5.7 million based on the intrinsic value of these options using our December 31, 2007 closing stock price. We paid $5.2 million in January 2008 to settle these options based on the average closing price of our common stock subsequent to December 21, 2007, the date we became current on our reporting obligations under the Securities Exchange Act of 1934, as amended. We recognized a benefit for the difference between the December 31, 2007 liability and the amount paid in the three months ended March 31, 2008.

Restricted stock awards and units.  We recognize stock-based compensation expense for the fair value of RSAs and RSUs. Fair value is determined as the difference between the closing price of our common stock on the grant date and the purchase price of the RSAs and RSUs. The fair value of these awards is recognized to expense over the requisite service period of the awards.

Restricted stock units with performance-based vesting.  We recognize stock-based compensation for the fair value of PSUs. These awards vest as follows: 50% vest only if performance criteria are met (“performance component”) and 50% cliff vest four years from the date of grant, with accelerated vesting if performance criteria are met (“service component”). Certain executive grants have only the performance component. The performance component will vest one-third each year from the date of grant, provided that the performance criteria are met for each respective year. If the performance criteria is not met in any one year, then the options that would have vested in that year are forfeited. The performance component is being recognized as expense one-third each year provided we determine it is probable that the performance criteria will be met. For certain of the PSUs, we have not communicated the performance criteria to the employees. For these awards, the accounting grant date will not occur until it is known whether the performance criteria are met, and such achievement or non-achievement is communicated to the employees. These awards will be marked-to-market at the end of each reporting period through the accounting grant date, and recognized over the expected vesting period. For the awards for which the performance criteria have been communicated, stock-based compensation expense has been measured on the grant date, and is being recognized over the expected vesting period.

The service component will cliff vest four years from the grant date, with an acceleration provision based on the same performance criteria as the performance component. If the performance criteria are met for each respective year, the awards will vest one-third each year from the grant date. The accounting grant date is deemed to have occurred and stock-based compensation has been measured on the grant date, and will be recognized over the expected vesting period.

Tender offer.  In January 2008, after we became current with our reporting obligations under the Securities Exchange Act of 1934, as amended, we filed a Tender Offer Statement on Schedule TO with the SEC. The tender offer extended an offer by us to holders of certain outstanding stock options to amend the exercise price on certain of their outstanding options. The purpose of the tender offer was to amend the exercise price on options to have the same price as the fair market value on the revised measurement dates that were identified during the investigation of our historical stock option grant practices. As part of this tender offer, we will pay a cash bonus of $1.7 million, of which $0.4 million was paid to Canadian employees in the three months ended March 31, 2008, and $1.3 million will be paid to U.S. employees in 2009, to reimburse optionees who elected to participate in the tender offer for any

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increase in the exercise price of their options resulting from the amendment. The impact of the cash bonus, as recorded during the three months ended March 31, 2008, resulted in stock-based compensation expense of $0.6 million and a decrease to additional paid-in capital of $1.1 million.

The following table summarizes pre-tax stock-based compensation expense recorded in our condensed consolidated statements of income and comprehensive income by line item in the three months ended March 31, 2008 and 2007 (in thousands):

	Three Months Ended March 31,
	2008			2007
Cost of net revenue — service and support	$	202		$	599
Cost of net revenue — subscription		98			358
Cost of net revenue — product		144			258
Stock-based compensation expense included in cost of net revenue		444			1,215
Research and development		3,621			4,972
Marketing and sales		3,748			8,513
General and administrative		4,063			6,238
Stock-based compensation expense included in operating costs		11,432			19,723
Total stock-based compensation expense		11,876			20,938
Deferred tax benefit		(3,207	)		(6,785	)
Total stock-based compensation expense, net of tax	$	8,669		$	14,153

We had no stock — based compensation costs capitalized as part of the cost of an asset.

At March 31, 2008, the estimated fair value of all unvested stock options, RSUs, PSUs and RSAs that have not yet been recognized as compensation expense was $113.2 million, net of expected forfeitures. We expect to recognize this amount over a weighted-average period of 2.3 years. This amount does not reflect compensation expense relating to 0.8 million PSUs for which the performance criteria has not been set.

Under SFAS 123(R), we used the Black-Scholes model to estimate the fair value of our option awards. The key assumptions used in the model during the three months ended March 31, 2008 and 2007, respectively, are provided below:

	Three Months Ended March 31,
	2008			2007
Stock option grants:
Risk free interest rate		2.9	%		4.8	%
Weighted average expected lives (years)		5.9			5.9
Volatility		39.0	%		27.0	%
Dividend yield		—			—

During the three months ended March 31, 2008 and 2007, we did not have any ESPP grants.

We derive the expected term of our options through the use of a lattice model that factors in historical data on employee exercise and post-vesting employment termination behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Since January 1, 2006, we have used the implied volatility of options traded on our stock with a term of one year or more to calculate the expected volatility of our option grants. We have not declared any dividends on our stock in the past and do not expect to do so in the foreseeable future.

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Internal Revenue Code Section 409A

Adverse tax consequences resulted from our revision of accounting measurement dates during our restatement due to our investigation into our stock option granting practices for stock options that vested subsequent to December 31, 2004 (“409A affected options”). These adverse tax consequences included a penalty tax payable by the option holder under Internal Revenue Code (“IRC”) Section 409A (and, as applicable, similar penalty taxes under state tax laws). As virtually all holders of options with revised measurement dates were not involved in or aware of their incorrect option exercise prices, we took certain actions to deal with the adverse tax consequences that were incurred by the holders of such options.

Section 16(a) Officers and Directors

In December 2006, our board of directors approved the amendment of 409A affected options for those who were Section 16(a) officers at the time they received 409A affected options to increase the exercise price to the fair market value of our common stock on the revised measurement date. These amended options are not subject to taxation under IRC Section 409A. Under Internal Revenue Service (“IRS”) regulations, these option amendments had to be completed by December 31, 2006 for anyone subject to Section 16(a) requirements upon receipt of the 409A affected options. There were no costs associated with this action, as the modifications increased the exercise price, which resulted in no incremental expense.

In the three months ended March 31, 2008, for one executive officer, we amended the exercise price on options to have the same price as the fair market value on the revised measurement dates that were identified during the investigation of our historical stock option grant practices. We will pay this executive officer a cash bonus of $0.1 million in 2009 as reimbursement for the increase in the exercise price of his options resulting from the amendment.

IRS Announcement 2007-18 Compliance

In February 2007, our board of directors approved our participation in a voluntary program under IRS Announcement 2007-18 and a similar state of California Announcement, whereby we paid additional 409A taxes on behalf of certain former U.S. employees who had already exercised 409A affected options for the additional taxes they incur under IRC Section 409A (and, as applicable, similar state of California tax law). Current and former Section 16(a) officers and directors were specifically excluded from the program. Through March 31, 2007, we recorded $1.3 million of expense associated with this program for Section 409A affected options exercised during this period. We had no expense associated with this program in the three months ended March 31, 2008.

Certain Former Employees Future Exercises of 409A Affected Options

In May 2007, our board of directors approved cash payments as necessary to certain former employees who exercised 409A affected options during 2006 or that may exercise 409A affected options in the future.

In November 2007, our board of directors approved the unilateral amendment of 409A affected options held by certain former employees who did not exercise 409A affected options during 2006 to increase the exercise price to the fair market value of our common stock on the revised measurement date, and to make cash payments as compensation for the increase in the exercise prices of amended options. These amended options would not be subject to taxation under IRC 409A.

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In the three months ended March 31, 2008, we recorded no costs associated with former employees’ exercises of certain Section 409A affected options. The following table summarizes for the three months ended March 31, 2007 costs associated with actions taken by us with respect to IRC Section 409A (in thousands):

	Three Months Ended
	March 31, 2007
Cost of net revenue	$	—
Research and development		789
Marketing and sales		321
General and administrative		194
Costs associated with IRC Section 409A	$	1,304

4.   Business Combinations

ScanAlert

In January 2008, we acquired 100% of the outstanding shares of ScanAlert, Inc. (“ScanAlert”), a provider of a vulnerability assessment and certification services for e-commerce sites, for $54.9 million. The purchase price consisted of the following (in thousands):

Cash paid to shareholders	$	42,098
Escrow deposit		6,382
Payment to third party for use of patent		4,500
Hold-back recorded as a liability		1,268
Direct acquisition costs		660
Total purchase price	$	54,908

In the fourth quarter of 2007, we paid $4.5 million to a third party to settle prior alleged patent infringement claims against ScanAlert and for a fully paid future license for the use of the patent until its expiration. We have accounted for this entire amount as part of the ScanAlert purchase price as the arrangement with the third party was entered into as a result of the pending ScanAlert acquisition. Of the total $4.5 million payment, $0.9 million was allocated to the assumption of the patent infringement liability and $3.6 million was allocated to prepaid license fees to be amortized over five years. We have recorded a $1.3 million long-term liability on our consolidated balance sheet as of March 31, 2008 for a portion of the purchase price held-back for future indemnification claims. The amount will be paid out, net of any claims, in July 2009. Excluding these two items from the total purchase price, cash paid for the acquisition in the first quarter of 2008 was $49.1 million.

The purchase agreement provides for two earn-out payments totaling $29.5 million contingent upon the achievement of ScanAlert net bookings targets during the three-year period subsequent to the close of the acquisition. The first earn-out payment is $12.5 million and the second earn-out payment is $17.0 million. We have not accrued any portion of the earn-out payments as purchase price as achievement of the earn-out targets is not determinable beyond a reasonable doubt. Approximately $1.3 million and $1.8 million of the first and second earn-out payments, respectively, are subject to certain employees providing future service. Therefore, the $1.3 million and $1.8 million portion of the first and second earn-outs, respectively, will be accounted for as post-acquisition compensation expense to the extent the earn-out targets are probable of being met. We have assessed the first earn-out target as being probable and the second earn-out target as not being probable. We are recognizing the $1.3 million compensatory portion of the first earn-out as compensation expense from the close of the acquisition through the end of 2009, resulting in $0.2 million of compensation expense being recognized in the quarter ended March 31, 2008.

Our management determined the purchase price allocation based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed. These estimates were arrived at utilizing recognized valuation techniques. We recorded $42.7 million of goodwill, which is deductible for tax purposes due to a Section 338(h)(10) election under the IRC. Goodwill resulted primarily from our expectation that we will be able to

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provide ScanAlert’s service offerings to our customers and enhance our existing products with those of ScanAlert. We plan to incorporate ScanAlert’s technology into our existing SiteAdvisor web rating system. We recorded no in-process research and development related to this acquisition.

The intangible assets, other than goodwill, are being amortized over their useful lives of 1.0 to 6.0 years or a weighted-average period of 5.5 years. As part of the acquisition, we did not assume any outstanding stock options or warrants. A performance and retention plan, which covers two employees and provides for payment of up to $1.5 million through January 2011, was established at the close of the acquisition. At March 31, 2008, $0.1 million had been expensed and no amounts had been paid related to this performance plan.

The following is a summary of the assets acquired and liabilities assumed in the acquisition of ScanAlert as based on our preliminary allocation (in thousands). This purchase price allocation is preliminary and subject to adjustment:

Technology	$	4,759
Other intangibles		14,505
Goodwill		42,655
Deferred tax assets		1,970
Cash		107
Prepaid license fees		3,627
Other assets		1,258
Total assets acquired		68,881
Accrued liabilities		8,894
Deferred revenue		5,079
Total liabilities assumed		13,973
Net assets acquired	$	54,908

The results of operations for ScanAlert have been included in our results of operations since the date of acquisition. Pro forma results of operations have not been presented because the effect of this acquisition was not material to our results of operations.

SafeBoot

In November 2007, we acquired 100% of the outstanding shares of SafeBoot Holding B.V. (“SafeBoot”) an enterprise security software vendor for data protection via encryption and access control, for $348.3 million. The purchase price consisted of the following (in thousands):

Cash paid as of December 31, 2007	$	294,887
Escrow deposit		43,750
Direct acquisition and other costs paid in the three months ended March 31, 2008		6,007
Fair value of options assumed		3,611
Total purchase price before imputed interest		348,255
Imputed interest		(1,002	)
Total purchase price	$	347,253

For convenience, we designated October 31, 2007 as the effective date for this acquisition, which resulted in $1.0 million of imputed interest being charged to results of operations.

Our management determined the purchase price allocation based on estimates of the fair values of the tangible and intangible assets acquired and liabilities assumed. These estimates were arrived at utilizing recognized valuation techniques. On the acquisition date, we recorded $215.8 million of goodwill, which is deductible for tax purposes. Goodwill resulted primarily from our expectation that we will now be able to provide our customers with

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comprehensive data protection, including endpoint, network, web, email and data security, as well as risk and compliance solutions. We have integrated SafeBoot technology into our centralized management console for enterprise customers. We recorded no in-process research and development related to this acquisition.

The intangible assets, other than goodwill, are being amortized over their useful lives of 1.0 to 8.0 years or a weighted-average period of 4.5 years. As part of the acquisition, we assumed approximately 0.5 million outstanding stock options.

The following is a summary of the assets acquired and liabilities assumed in the acquisition of SafeBoot as adjusted for purchase price adjustments (in thousands):

Technology	$	102,340
Other intangibles		41,800
Goodwill		216,588
Cash		9,760
Other assets		23,865
Total assets acquired		394,353
Accrued liabilities		25,904
Deferred revenue		9,394
Deferred tax liabilities		11,802
Total liabilities assumed		47,100
Net assets acquired	$	347,253

A performance and retention plan, which provides for payment of up to $0.3 million through 2008, was established at the closing of the acquisition. At March 31, 2008, $0.2 million had been expensed and no amounts had been paid related to this performance plan.

The following unaudited pro forma financial information presents our combined results with SafeBoot as if the acquisition had occurred at the beginning of 2007 (in thousands, except per share data):

	Three Months Ended
	March 31, 2007
Pro forma net revenue	$	325,073
Pro forma net income	$	34,458
Pro forma basic net income per share	$	0.22
Pro forma diluted net income per share	$	0.21
Shares used in per share calculation — basic		159,799
Shares used in per share calculation — diluted		163,174

5.   Goodwill and Other Intangible Assets

We perform our annual impairment review as of October 1 of each year or earlier if indicators of impairment exist. In 2007, this analysis indicated that goodwill was not impaired. The fair value of the reporting units was estimated using the average of the expected present value of future cash flows and of the market multiple value. We will continue to test for impairment on an annual basis and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting units below their carrying amounts.

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Goodwill by geographic region is as follows (in thousands):

							Effects of
							Foreign
	December 31,		Goodwill				Currency
	2007		Acquired		Adjustments		Exchange			March 31, 2008
North America	$	511,491	$	41,459	$	356	$	(241	)	$	553,065
EMEA		162,174		1,196		321		10,516			174,207
Japan		25,787		—		82		—			25,869
Asia-Pacific (excluding Japan)		34,217		—		26		—			34,243
Latin America		16,420		—		16		564			17,000
Total	$	750,089	$	42,655	$	801	$	10,839		$	804,384

The goodwill acquired during the three months ended March 31, 2008 is due to the acquisition of ScanAlert. The adjustments to goodwill are a result of purchase accounting adjustments for the SafeBoot acquisition.

The components of intangible assets are as follows (in thousands):

	March 31, 2008									December 31, 2007
					Accumulated							Accumulated
					Amortization							Amortization
					(Including							(Including
	Weighted				Effects of							Effects of
	Average		Gross		Foreign			Net		Gross		Foreign			Net
	Useful		Carrying		Currency			Carrying		Carrying		Currency			Carrying
	Life		Amount		Exchange)			Amount		Amount		Exchange)			Amount
Other intangible assets:
Purchased technologies		4.3 years	$	289,579	$	(141,225	)	$	148,354	$	282,293	$	(129,082	)	$	153,211
Trademarks and patents		5.0 years		43,392		(34,779	)		8,613		42,922		(33,956	)		8,966
Customer base and other intangibles		5.7 years		135,292		(64,984	)		70,308		117,731		(59,782	)		57,949
			$	468,263	$	(240,988	)	$	227,275	$	442,946	$	(222,820	)	$	220,126

The aggregate amortization expenses for the intangible assets listed above totaled $18.9 million and $11.1 million in the three months ended March 31, 2008 and 2007, respectively.

Expected future intangible asset amortization expense as of March 31, 2008 is as follows (in thousands):

Fiscal years:
Remainder of 2008	$	55,962
2009		62,843
2010		53,695
2011		35,373
2012		12,040
Thereafter		7,362
	$	227,275

6.   Restructuring Charges

We have initiated certain restructuring actions to reduce our cost structure and enable us to invest in certain strategic growth initiatives to enhance our competitive position.

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During 2008 (the “2008 Restructuring”), we took the following measures:

•  eliminated redundant positions related to the SafeBoot acquisition; and

•  realigned sales force.

During 2006 (the “2006 Restructuring”), we took the following measures:

•  reduced our workforce; and

•  continued our efforts to consolidate and dispose of excess facilities.

During 2004 and 2003 (the “2004 and 2003 Restructurings”), we took the following measures:

•  reduced our workforce;

•  continued our efforts to consolidate and dispose of excess facilities;

•  moved our European headquarters to Ireland and substantially vacated a leased facility in Amsterdam;

•  consolidated operations formerly housed in three leased facilities in Dallas, Texas into our regional headquarters facility in Plano, Texas;

•  relocated employees from Santa Clara, California headquarters site to our Plano facility as part of the consolidation activities; and

•  sold our Sniffer and Magic product lines in 2004.

Restructuring charges in the three months ended March 31, 2008 totaled $0.1 million, consisting of $2.5 million related to 2008 restructuring charges partially offset by a $2.4 million revision related primarily to previous estimates of base rent and sublease income for the Santa Clara lease which was restructured in 2003, net of accretion.

2008 Restructuring

Activity and liability balances related to our 2008 restructuring are as follows (in thousands):

	Severance
Balance, January 1, 2008	$	—
Restructuring accrual		2,477
Cash payments		(283	)
Balance, March 31, 2008	$	2,194

In the three months ended March 31, 2008, we recorded a restructuring charge of $0.7 million related to the elimination of certain positions at SafeBoot that were redundant to positions at McAfee. This charge was recorded in our EMEA operating segment. We also recorded a $1.8 million restructuring charge related to the realignment of our sales force, of which $0.5 million and $1.3 million were recorded in our North America and EMEA operating segments, respectively.

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2006 Restructuring

Activity and liability balances related to our 2006 restructuring are as follows (in thousands):

	Lease
	Termination			Severance and
	Costs			Other benefits			Total
Balance, January 1, 2007	$	—		$	2,390		$	2,390
Restructuring accrual		330			2,634			2,964
Adjustment to liability		(24	)		(196	)		(220	)
Cash payments		(233	)		(4,542	)		(4,775	)
Effects of foreign currency exchange		4			7			11
Balance, December 31, 2007		77			293			370
Cash payments		(8	)		—			(8	)
Balance, March 31, 2008	$	69		$	293		$	362

During 2007, we completed the restructuring activities that we began in the fourth quarter of 2006 when we permanently vacated several leased facilities and recorded a $0.3 million accrual for estimated lease related costs associated with the permanently vacated facilities. We also recorded a restructuring charge of $2.6 million in 2007 related to a reduction in headcount of 33 marketing and sales employees, of which $0.2 million, $2.3 million and $0.1 million was recorded in our North America, EMEA and Asia-Pacific operating segments, respectively.

Lease termination costs will be paid through 2009.

2004 and 2003 Restructurings

Activity and liability balances related to our 2004 and 2003 restructuring actions are as follows (in thousands):

	Lease
	Termination
	Costs
Balance, January 1, 2007	$	12,248
Cash payments		(2,235	)
Adjustment to liability		5,552
Effects of foreign currency exchange		99
Accretion		431
Balance, December 31, 2007		16,095
Cash payments		(687	)
Adjustment to liability		(2,557	)
Effects of foreign currency exchange		(10	)
Accretion		151
Balance, March 31, 2008	$	12,992

Lease termination costs included vacating several leased facilities, net of estimated sublease income, costs associated with subleasing the vacated facilities, asset disposals and discontinued use of certain leasehold improvements and furniture and equipment primarily in our North America operating segment. Other costs include legal expenses incurred in international locations in conjunction with headcount reductions. Lease termination costs will be paid through 2013.

The adjustment in 2008 primarily relates to changes in previous estimates of base rent and sublease income for the Santa Clara lease.

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7.   Line of Credit

We have a 14.0 million Euro credit facility with a bank. The credit facility is available on an offering basis, meaning that transactions under the credit facility will be on such terms and conditions, including interest rate, maturity, representations, covenants and events of default, as mutually agreed between us and the bank at the time of each specific transaction. The credit facility is intended to be used for short-term credit requirements, with terms of one year or less. The credit facility can be cancelled at any time. No balances were outstanding as of March 31, 2008 and December 31, 2007.

8.   Net Income Per Share

A reconciliation of the numerator and denominator of basic and diluted net income per share is provided as follows (in thousands, except per share amounts):

	Three Months Ended March 31,
	2008		2007
Numerator — Basic and diluted net income	$	30,169	$	43,350
Denominator — Basic Basic weighted average common stock outstanding		160,992		159,799
Denominator — Diluted Basic weighted average common stock outstanding		160,992		159,799
Effect of dilutive securities:
Common stock options and restricted stock units and awards(1)		3,875		3,375
Diluted weighted average shares		164,867		163,174
Net income per share — Basic	$	0.19	$	0.27
Net income per share — Diluted	$	0.18	$	0.27

(1) In the three months ended March 31, 2008 and 2007, 4.6 million and 3.2 million RSUs and options to purchase common stock, respectively, were excluded from the calculation since the effect was anti-dilutive. In addition, we excluded 1.2 million PSUs for the three months ended March 31, 2008 because they are contingently issuable shares.

9.   Income Taxes

Our consolidated provision for income taxes for the three months ended March 31, 2008 and 2007 was $38.6 million and $12.5 million, respectively, reflecting an effective tax rate of 56% and 22%, respectively. The effective tax rate for the three months ended March 31, 2008 differs from the U.S. federal statutory rate (“statutory rate”) primarily as a result of our acquisition integration activities, which resulted in an increase of 22 percentage points to our effective tax rate. We are currently in the process of seeking administrative relief with the U.S. Internal Revenue Service, which would reduce our tax expense related to these integration activities. If the administrative relief is granted, we will reverse the previously recorded tax expense in the period in which the relief is granted. The effective tax rate for the three months ended March 31, 2007 differs from the statutory rate primarily due to the benefit of lower tax rates in certain foreign jurisdictions.

We account for uncertainty in income taxes in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). As a result, we apply a more-likely-than-not recognition threshold for all tax uncertainties. FIN 48 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities.

10.   Business Segment Information

We have concluded that we have one business and operate in one industry. We develop, market, distribute and support computer and network security solutions for large enterprises, governments, small and medium-sized

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business and consumer users, as well as resellers and distributors. Management measures operations based on our five operating segments: North America; EMEA; Japan; Asia-Pacific, excluding Japan; and Latin America. Our chief operating decision maker is our chief executive officer.

We market and sell anti-virus and security software, hardware and services through our geographic regions. These products and services are marketed and sold worldwide primarily through resellers, distributors, systems integrators, retailers, original equipment manufacturers, internet service providers and directly by us. In addition, we offer web sites, which provide suites of online products and services personalized for the user based on the users’ personal computer configuration, attached peripherals and resident software. We also offer managed security and availability applications to corporations and governments on the internet.

Summarized financial information concerning our net revenue and income from operations by geographic region is as follows (in thousands):

	Three Months Ended
	March 31,
	2008			2007
Net revenue by region:
North America	$	189,750		$	164,526
EMEA		122,248			101,690
Japan		27,019			25,212
Asia-Pacific, excluding Japan		18,036			13,292
Latin America		12,588			10,158
Net revenue	$	369,641		$	314,878
Operating income by region:
North America	$	56,084		$	57,340
Europe		64,824			59,656
Japan		15,259			15,940
Asia-Pacific, excluding Japan		1,843			2,552
Latin America		7,653			6,903
Corporate		(92,416	)		(100,971	)
Income from operations	$	53,247		$	41,420

The difference between income from operations and income before provision for income taxes is reflected on the face of our condensed consolidated statements of income and comprehensive income.

The corporate expenses, which are not considered attributable to any specific geographic region, are as follows (in thousands):

	Three Months Ended
	March 31,
	2008		2007
General and administrative and other operating costs	$	38,020	$	44,143
Corporate marketing		20,478		14,407
Stock-based compensation		11,876		20,938
Amortization of purchased technology and other intangibles		18,900		11,051
SEC and compliance costs		1,376		5,052
Acquisition and retention bonuses		1,692		2,250
Restructuring charges		71		3,126
Loss on sale of assets and technology		3		4
Corporate expenses	$	92,416	$	100,971

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11.   Litigation

Settled Cases

In February 2007, we reached a confidential settlement of a breach of contract, fraud and bad faith lawsuit filed in June 2002 in the United States District Court, District of Massachusetts. As part of the settlement, we acquired and recorded ownership of intangible assets valued at $9.3 million with all remaining claims settled for $6.2 million, of which $5.0 million was recognized as expense in the three months ended June 30, 2006 with the balance of $1.2 million being expensed in 2004 and prior periods. The case was dismissed in March 2007.

Open Cases

We have described below our material legal proceedings and investigations that are currently pending and are not in the ordinary course of business. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. While we cannot predict the likelihood of future claims or inquiries, we expect that new matters may be initiated against us from time to time. The results of claims, lawsuits and investigations also cannot be predicted, and it is possible that the ultimate resolution of these matters, individually and in the aggregate, may have a material adverse effect on our business, financial condition, results of operations or cash flows.

Government Inquiries Relating to Historical Stock Option Practices

In May 2006, we announced that we had commenced an investigation of our historical stock option granting practices. As a result of that investigation, we concluded that certain stock options had been accounted for using incorrect measurement dates, which, in some instances, were chosen with the benefit of hindsight so as to intentionally give more favorable exercise prices. Consequently, certain of our historical financial statements needed to be restated to correct improper accounting for improperly priced stock options. In December 2007, we filed our Form 10-K for 2006, which included the effects of a restatement of our audited consolidated financial statements for 2004 and 2005, our selected financial data for 2002 through 2005, and our unaudited quarterly financial data for all quarters in 2005 and the first quarter of 2006.

On May 23, 2006, the SEC notified us that an investigation had begun regarding our historical stock option grants. On June 7, 2006, the SEC sent us a subpoena requesting certain documents related to stock option grants from January 1, 1995 through the date of the subpoena. At or around the same time, we received a notice of informal inquiry from the U.S. Department of Justice, the (“DOJ”), concerning our stock option granting practices. On August 15, 2006, we received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California relating to the termination of our former general counsel, his stock option related activities and the investigation. On November 6, 2006, we received a document request from the SEC for option grant data for McAfee.com, previously one of our consolidated subsidiaries that was a publicly traded company from December 1999 through September 2002.

On November 2, 2006, the investigative team created by the Special Committee of our board of directors met with the Enforcement Staff of the SEC in Washington D.C. and presented the initial findings of the investigation. Pursuant to discussions between the investigative team and the SEC during that meeting, the scope of the investigation was expanded to include a review of the historical McAfee.com option grants along with our historical exercise activity with a view toward determining potential exercise date manipulation and post-employment arrangements with former executives.

We have provided documents requested, and we are cooperating with the SEC and DOJ. The SEC investigation is still in its preliminary stages thus we are unable to determine the ultimate outcome at this time. As such, no provision has been recorded in the financial statements for this matter.

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Securities Cases

On May 31, 2006, a purported stockholder derivative lawsuit — styled Dossett v. McAfee, Inc., No. 5:06CV3484 (JF) — was filed in the United States District Court for the Northern District of California against certain of our current and former directors and officers (“Dossett”). On June 7, 2006, another purported stockholder’s derivative lawsuit — styled Heavy & General Laborers Locals 472 & 172 Pension & Annuity Funds v. McAfee, Inc., No. 5:06CV03620 (JF) — was filed in the United States District Court for the Northern District of California against certain of our current and former directors and officers (“Laborers”). The Dossett and Laborers actions generally allege that we improperly backdated stock option grants between 1997 and the present, and that certain of our current and former officers or directors either participated in this backdating or allowed it to happen. The Dossett and Laborers actions assert claims purportedly on behalf of us for, inter alia, breach of fiduciary duty, abuse of control, constructive fraud, corporate waste, unjust enrichment, gross mismanagement, and violations of the federal securities laws. On July 13, 2006, the United States District Court for the Northern District of California entered an order consolidating the Dossett and Laborers actions as In re McAfee, Inc. Derivative Litigation, Master File No. 5:06CV03484 (JF) (the “Consolidated Action”). On January 22, 2007, we moved to dismiss the complaint in the Consolidated Action on the grounds that plaintiffs lack standing to sue on our behalf because, inter alia, they did not make a pre-suit demand on our board of directors. At the parties’ request, the Court continued on several occasions the due date for the plaintiffs’ opposition to our motion to dismiss and the date for the hearing of that motion. As a result of the settlement described below, there is no deadline by which plaintiffs must file an opposition to the motion to dismiss.

On August 7, 2007, a new stockholders’ derivative lawsuit — styled Webb v. McAfee, Inc., No. C 07 4048 (PVT) — was filed in the United States District Court for the Northern District of California against certain of our current and former directors and officers (“Webb”). The new lawsuit generally alleges the same facts and causes of action that plaintiffs have asserted in the Consolidated Action. The plaintiff in Webb requested that his action be consolidated with the Consolidated Action. On September 21, 2007, the Court consolidated the Webb action with the Consolidated Action.

On June 2, 2006, three identical lawsuits — styled Greenberg v. Samenuk, No. 106CV064854, Gordon v. Samenuk, No. 106CV064855, and Golden v. Samenuk, No. 106CV064856 — were filed in the Superior Court of the State of California, County of Santa Clara against certain of our current and former directors and officers (the “State Actions”). Like the Consolidated Action, the State Actions generally allege that we improperly backdated stock option grants between 2000 and the present, and that certain of our current and former officers or directors either participated in this backdating or allowed it to happen. Like the Consolidated Action, the State Actions assert claims purportedly on behalf of us for, inter alia, breach of fiduciary duty, abuse of control, corporate waste, unjust enrichment, and gross mismanagement. On June 23, 2006, we moved to dismiss these actions in favor of the first-filed Consolidated Action. On September 18, 2006, the Court consolidated the State Actions and denied our motions to dismiss, but stayed the State Actions due to the first-filed action in federal court. The stay, which was continued by the Court on several occasions, expired in December 2007.

In December 2007, we reached a tentative settlement with the plaintiffs in the Consolidated Action and the State Actions. The tentative agreement must be submitted to and approved by the Court. We accrued $13.8 million in the condensed consolidated financial statements as of June 30, 2006 due to our ongoing stock option investigation and restatement related to expected payments pursuant to the tentative settlement and expect to complete the documentation and the required approvals in the second half of 2008. While we cannot predict the ultimate outcome of the lawsuits in the event that the tentative settlement is not approved by the Court, the provision recorded in the financial statements represents our best estimate at this time.

Certain investment bank underwriters, our company, and certain of our directors and officers have been named in a putative class action for violation of the federal securities laws in the United States District Court for the Southern District of New York, captioned In re McAfee.com Corp. Initial Public Offering Securities Litigation, 01 Civ. 7034 (SAS). This is one of a number of cases challenging underwriting practices in the initial public offerings (“IPOs”) of more than 300 companies. These cases have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). Plaintiffs generally allege that certain underwriters engaged in undisclosed and improper underwriting activities, namely the receipt of excessive brokerage commissions and

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customer agreements regarding post-offering purchases of stock in exchange for allocations of IPO shares. Plaintiffs also allege that various investment bank securities analysts issued false and misleading analyst reports. The complaint against us claims that the purported improper underwriting activities were not disclosed in the registration statements for McAfee.com’s IPO and seeks unspecified damages on behalf of a purported class of persons who purchased our securities or sold put options during the time period from December 1, 1999 to December 6, 2000. On February 19, 2003 the Court issued an Opinion and Order dismissing certain of the claims against us with leave to amend. We accepted a settlement proposal on July 15, 2003.

We, together with the other issuer defendants and plaintiffs, entered into a stipulation of settlement and release of claims against the issuer defendants that was submitted to the Court for approval in June 2004. On August 31, 2005, the Court preliminarily approved the settlement which, among other things, was conditioned upon class certification. In December 2006, the appellate court overturned the certification of classes making it unlikely that the proposed settlement would receive final Court approval. As a result, on June 25, 2007, the Court entered an order terminating the proposed settlement. Plaintiffs have indicated that they will seek to amend their allegations and file amended complaints. It is uncertain whether there will be any revised or future settlement. Thus, the ultimate outcome, and any ultimate effect on us, cannot be precisely determined at this time.

Other

In February 2008, a former executive notified us of his intent to seek arbitration of claims associated with his employment. He alleges that McAfee breached his employment contract and committed certain additional wrongful acts related to the expiration of his stock options. The arbitration demand was filed on April 11, 2008 and we anticipate that arbitration will begin in October of 2008. We believe these claims are without merit, and intend to contest them vigorously. No provision has been recorded in the financial statements related to this matter.

On January 7, 2007, a former executive filed an arbitration demand with the American Arbitration Association, Dallas Texas, (the “Texas arbitration”) seeking the arbitration of claims associated with his employment. The Texas arbitration is scheduled to begin in September 2008. On September 5, 2007, a “Complaint for Damages and Other Relief” was also filed by the same former executive, in the Superior Court of the State of California, County of Santa Clara, No. 107CV-093592 (the “California litigation”). The California litigation generally contained the same claims as were filed in the Texas arbitration. A Motion to Compel Arbitration of the California litigation with the Texas arbitration was granted in December 2007. We have filed counterclaims against the former executive, who was terminated. The board determined this termination was for cause. We believe the claims associated with the Texas arbitration and the California litigation are without merit. We intend to vigorously contest these claims, and no provision has been recorded in the financial statements for either the Texas arbitration or the California litigation.

On August 17, 2006, a patent infringement lawsuit — captioned Deep Nines v. McAfee, Inc., No. 9:06CV174, (“Deep Nines litigation”) was filed in the United States District Court for the Eastern District of Texas. The lawsuit asserts that (i) several of our Enterprise products infringe a Deep Nines’ patent, and (ii) we falsely marked certain products with a McAfee patent that was abandoned after its issuance. The lawsuit seeks preliminary and permanent injunctions against the sale of certain products as well as damages. We have counter-asserted that Deep Nines has infringed various McAfee patents. The Deep Nines litigation is still in the discovery stage thus we are unable to determine the ultimate outcome at this time. However, we believe that we have meritorious defenses to this lawsuit and intend to vigorously defend against it. No provision has been recorded in the financial statements for this matter.

In addition, we are engaged in certain legal and administrative proceedings incidental to our normal business activities and believe that these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

12.   Warranty Accrual and Guarantees

We offer a 90 day warranty on our hardware and software products and record a liability for the estimated future costs associated with warranty claims, which is based upon historical experience and our estimate of the level

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of future costs. A reconciliation of the change in our warranty obligation as of March 31, 2008 and December 31, 2007 follows (in thousands):

	Warranty
	Accrual
Balance, January 1, 2007	$	662
Additional accruals		1,546
Costs incurred during the period		(1,719	)
Balance, December 31, 2007		489
Additional accruals		840
Costs incurred during the period		(745	)
Balance, March 31, 2008	$	584

The following is a summary of certain guarantee and indemnification agreements as of March 31, 2008:

•  Under the terms of our software license agreements with our customers, we agree that in the event the software sold infringes upon any patent, copyright, trademark, or any other proprietary right of a third-party, we will indemnify our customer licensees against any loss, expense, or liability from any damages that may be awarded against our customer. We include this infringement indemnification in our software license agreements and selected managed service arrangements. In the event the customer cannot use the software or service due to infringement and we can not obtain the right to use, replace or modify the license or service in a commercially feasible manner so that it no longer infringes, then we may terminate the license and provide the customer a pro-rata refund of the fees paid by the customer for the infringing license or service. We have recorded no liability associated with this indemnification, as we are not aware of any pending or threatened infringement actions that are probable losses. We believe the estimated fair value of these intellectual property indemnification clauses is minimal.

•  Under the terms of certain vendor agreements, in particular, vendors used as part of our managed services, we have agreed that in the event the service provided to the customer by the vendor on behalf of us infringes upon any patent, copyright, trademark, or any other proprietary right of a third-party, we will indemnify our vendor, against any loss, expense, or liability from any damages that may be awarded against our vendor. No maximum liability is stipulated in these vendor agreements. We have recorded no liability associated with this indemnification, as we are not aware of any pending or threatened infringement actions or claims that are probable losses. We believe the estimated fair value of these indemnification clauses is minimal.

•  As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is not limited; however, we have director and officer insurance coverage that reduces our exposure and may enable us to recover a portion or all of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

•  Under the terms of our agreement to sell Magic in January 2004, we agreed to indemnify the purchaser for any breach of representations or warranties in the agreement as well as for any liabilities related to the assets prior to sale that were not included in the purchaser assumed liabilities (undiscovered liabilities). Subject to limited exceptions, the maximum potential loss related to the indemnification is $10.0 million. To date, we have paid no amounts under the representations and warranties indemnification. We have not recorded any accruals related to these agreements.

•  Under the terms of our agreement to sell Sniffer in July 2004, we agreed to indemnify the purchaser for any breach of representations or warranties in the agreement as well as for any liabilities related to the assets prior to sale that were not included in the purchaser assumed liabilities (undiscovered liabilities). Subject to limited exceptions, the maximum potential loss related to the indemnification is $200.0 million. To date, we have paid no amounts under the representations and warranties indemnification. We have not recorded any accruals related to these agreements.

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•  Under the terms of our agreement to sell McAfee Labs assets in December 2004, we agreed to indemnify the purchaser for any breach of representations or warranties in the agreement as well as for any liabilities related to the assets prior to sale that were not included in the purchaser assumed liabilities (undiscovered liabilities). Subject to limited exceptions, the maximum potential loss related to the indemnification is $1.5 million. We have not recorded any accruals related to these agreements.

If we believe a liability associated with any of the aforementioned indemnifications becomes probable and the amount of the liability is reasonably estimable or the minimum amount of a range of loss is reasonably estimable, then an appropriate liability will be established.

13.   Related Party Transaction

David G. DeWalt, our chief executive officer, is a director of Polycom, Inc., one of our customers. We did not recognize any revenue from the sales to Polycom, Inc. during the three months ended March 31, 2008. At March 31, 2008, our outstanding accounts receivable balance related to Polycom, Inc., was $0.1 million. Our deferred revenue balance related to Polycom, Inc. was $0.1 million at March 31, 2008.

14.   Subsequent Events

In May 2008, we have repurchased approximately 1.5 million shares of our common stock in the open market for approximately $52.2 million through May 9, 2008.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements; Trademarks

This Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. These statements include, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this Report on Form 10-Q are based on information available to us on the date hereof. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “targets,” “goals,” “projects,” “continue,” or variations of such words, similar expressions, or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Neither we nor any other person can assume responsibility for the accuracy and completeness of forward-looking statements. Important factors that may cause actual results to differ from expectations include, but are not limited to, those discussed in “Risk Factors” in Part II, Item 1A in this quarterly report and in Part I, Item 1A in our annual report on Form 10-K for the fiscal year ended December 31, 2007. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. We encourage you to read these sections carefully.

This report includes registered trademarks and trade names of McAfee and other corporations. Trademarks or trade names owned by McAfee and/or its affiliates include: “McAfee,” “Network Associates,” “ePolicy Orchestrator,” “ePO,” “VirusScan,” “IntruShield,” “Entercept,” “Foundstone,” “McAfee SiteAdvisor,” “Avert,” “Preventsys,” “Hercules,” “Citadel,” “Policy Enforcer,” “Total Protection,” “AntiSpyware,” “SecurityAlliance,” “McAfee Security,” “Onigma,” “SafeBoot,” “ScanAlert” and “HackerSafe.”

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. The results shown herein are not necessarily indicative of the results to be expected for the full year or any future periods.

Overview and Executive Summary

We are a leading dedicated security technology company that secures systems and networks from known and unknown threats around the world. We empower home users, businesses, government agencies, service providers and our partners with the ability to block attacks, prevent disruptions, and continuously track and improve their security. We apply business discipline and a pragmatic approach to security that is based on four principles of security risk management (identify and prioritize assets; determine acceptable risk; protect against threats; enforce and measure compliance). We incorporate some or all of these principles into our solutions. Our solutions protect systems and networks, blocking immediate threats while proactively providing protection from future threats.

We also provide software to manage and enforce security policies for organizations of any size. Finally, we incorporate expert services and technical support to ensure a solution is actively meeting our customers’ needs. These integrated solutions help our customers solve problems, enhance security and reduce costs.

We have one business and operate in one industry, developing, marketing, distributing and supporting computer security solutions for large enterprises, governments, small and medium-sized businesses and consumers either directly or through a network of qualified partners. We derive our revenue from three sources: (i) service and support revenue, which include support and maintenance, training, consulting and web security revenue; (ii) subscription revenue, which consists of revenue from online subscription arrangements; and (iii) product revenue, which includes revenue from perpetual software licenses (those with a one-time license fee) and hardware sales and retail product sales. We continue to focus our efforts on building a full line of complementary network and system protection solutions. During the fourth quarter of 2007, we acquired SafeBoot for $347.3 million net of imputed interest. During the first quarter of 2008, we acquired ScanAlert for $54.9 million, of which $49.1 was paid in the three months ended March 31, 2008 and $4.5 million was paid in the last quarter of 2007. We have recorded a

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$1.3 million long-term liability on our consolidated balance sheet as of March 31, 2008 for a portion of the purchase price held-back for future indemnification claims. The amount will be paid out, net of any claims, in July 2009.

We evaluate our consolidated financial performance utilizing a variety of indicators. Two of the primary indicators that we utilize are total net revenue and net income. As discussed more fully below, our net revenue in the three months ended March 31, 2008 grew by $54.7 million to $369.6 million from $314.9 million in the three months ended March 31, 2007. We believe net revenue is a key indicator of the growth and health of our business. Our net revenue is directly impacted by corporate information technology, government and consumer spending levels. We believe net income is a key indicator of the profitability of our business. Our net income for the three months ended March 31, 2008 declined by $13.2 million to $30.2 million from $43.4 million for the three months ended March 31, 2007 primarily due to our increased investment in sales activities and an increase in our effective tax rate discussed in “Provision for Income Taxes” below.

Critical Accounting Policies and Estimates

We had no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2008 as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2007.

Fair Value Measurements

On January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. We hold financial assets, such as available for sale securities and foreign currency contracts, subject to valuation under SFAS 157. In February 2008, the Financial Accounting Standard Board (“FASB”) issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. Any amounts recognized upon adoption of this rule as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. FSP 157-2 is effective for us beginning January 1, 2009. We continue to assess the impact that FSP 157-2 may have on our consolidated financial position and results of operations. See Note 2 to the condensed consolidated financial statements for further discussion.

Results of Operations

Net Revenue

The following table sets forth, for the periods indicated, a year-over-year comparison of the key components of our net revenue:

	Three Months Ended
	March 31,						2008 vs. 2007
	2008			2007			$		%
	(Dollars in thousands)
Net revenue:
Service and support	$	188,218		$	167,605		$	20,613		12	%
Subscription		160,974			128,368			32,606		25
Product		20,449			18,905			1,544		8
Total net revenue	$	369,641		$	314,878		$	54,763		17	%
Percentage of total net revenue:
Service and support		51	%		53	%
Subscription		44			41
Product		5			6
Total net revenue		100	%		100	%

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The increase in net revenue in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 reflected (i) a $30.0 million, or 16%, increase in our corporate business and (ii) a $24.8 million, or 19%, increase in our consumer business. Transactions from our corporate business include the sale of product offerings intended for enterprise, mid-market and small business use. Transactions from our consumer business include the sale of product offerings primarily intended for consumer use, as well as any revenues or activities associated with providing an overall safe consumer experience on the internet or cellular networks. The latter category includes annotation, scanning and search revenue associated with ScanAlert and SiteAdvisor as the primary benefit of such offerings is to protect the consumer internet and mobile experience and a majority of the fees generated are based on underlying consumer activity. In the three months ended March 31, 2008, approximately 82% of our total net revenue came from prior-period deferred revenue.

Net revenue from our corporate business increased during the three months ended March 31, 2008 compared to the three months ended March 31, 2007 primarily due to a 21% increase in revenues from our network protection offerings, a 16% increase in revenues from our end point solutions, which includes revenue from data encryption products integrated from our SafeBoot acquisition, and an 8% increase in our vulnerability and risk management offerings. During the three months ended March 31, 2008 compared to the three months ended March 31, 2007, we generally increased price points for our end point solutions. We also experienced an increase in both the number and size of larger transactions sold to customers through a solution selling approach which bundles multiple products and services into suite offerings, which positively impacted deferred revenue and will impact our revenue in future periods.

Net revenue from our consumer market increased during the three months ended March 31, 2008 compared to the three months ended March 31, 2007 primarily due to (i) online subscriber growth due partly to an increase in our customer base and expansion to additional countries, (ii) increased online renewal subscriptions from both a larger customer base and higher renewal rates, and (iii) increased conversions from point products to suite offerings due to our previous launch of McAfee Consumer Suites. We continued to strengthen our relationships with strategic channel partners, such as Acer, Cox, Dell and Toshiba Europe.

Net Revenue by Geography

The following table sets forth, for the periods indicated, net revenue in each of the five geographic regions in which we operate:

	Three Months Ended
	March 31,						2008 vs. 2007
	2008			2007			$		%
	(Dollars in thousands)
Net revenue:
North America	$	189,750		$	164,526		$	25,224		15	%
Europe, Middle East and Africa (“EMEA”)		122,248			101,690			20,558		20
Japan		27,019			25,212			1,807		7
Asia-Pacific, excluding Japan		18,036			13,292			4,744		36
Latin America		12,588			10,158			2,430		24
Total net revenue	$	369,641		$	314,878		$	54,763		17	%
Percentage of total net revenue:
North America		51	%		52	%
EMEA		33			33
Japan		7			8
Asia-Pacific, excluding Japan		5			4
Latin America		4			3
Total net revenue		100	%		100	%

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Net revenue outside of North America accounted for approximately 49% and 48% of net revenue in the three months ended March 31, 2008 and 2007, respectively. Net revenue from North America and EMEA has historically comprised between 80% and 90% of our business.

The increase in total net revenue in North America during the three months ended March 31, 2008 was primarily related to (i) a $7.2 million increase in corporate revenue in North America due to increased revenue from our network protection offerings, our end point solutions and our vulnerability and risk management offerings and (ii) an $18.0 million increase in consumer revenue in North America due to an increase in our customer base and increased conversions from point products to suite offerings.

The increase in total net revenue in EMEA during the three months ended March 31, 2008 was attributable to (i) a $16.8 million increase in corporate revenue due to increased revenue from our network protection offerings and our end point solutions offset by a slight decline in our vulnerability and risk management offerings and (ii) a $3.8 million increase in consumer revenue due to an increase in our customer base, expansion to additional countries and increased conversions from point products to suite offerings. Net revenue from EMEA was also positively impacted by the strengthening Euro against the United States (“U.S.”) Dollar, which resulted in an approximate $14.1 million impact to EMEA net revenue in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 that is included in the corporate and consumer increases above.

Our Japan, Latin America and Asia-Pacific operations combined have historically comprised less than 20% of our total net revenue, and we expect this trend to continue.

Risks inherent in international revenue include the impact of longer payment cycles, greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, seasonality, political instability, tariffs and other trade barriers, currency fluctuations, a high incidence of software piracy in some countries, product localization, international labor laws and our relationship with our employees and regional work councils and difficulties staffing and managing foreign operations. These factors may have a material adverse effect on our future international revenue.

Service and Support Revenue

The following table sets forth, for the periods indicated, each category of our service and support revenue as a percent of total service and support revenue:

	Three Months Ended
	March 31,						2008 vs. 2007
	2008			2007			$		%
	(Dollars in thousands)
Net service and support revenue:
Support and maintenance	$	175,941		$	160,230		$	15,711		10	%
Consulting, training and other services		12,277			7,375			4,902		66
Total service and support revenue	$	188,218		$	167,605		$	20,613		12	%
Percentage of service and support revenue:
Support and maintenance		93	%		96	%
Consulting, training and other services		7			4
Total service and support revenue		100	%		100	%

Service and support revenue includes revenue from software support and maintenance contracts, training, consulting and other services. The increase in service and support revenue in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 was attributable to an increase in support and maintenance primarily due to amortization of previously deferred revenue from support arrangements and an increase in sales of support renewals. In addition, revenue from consulting increased due to both our Foundstone Consulting Services, which includes threat modeling, security assessments and education, and McAfee Consulting Services, which provide product design and deployment support. During the three months ended March 31, 2008,

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we recognized for the first time web security revenue, which includes annotation, scanning and search revenue associated with ScanAlert and is included in consulting, training and other services above.

Although we expect our service and support revenue to increase, our growth rate and net revenue depend significantly on renewals of support arrangements as well as our ability to respond successfully to the pace of technological change and expand our customer base. If our renewal rate or our pace of new customer acquisition slows, our net revenue and operating results would be adversely affected.

Subscription Revenue

The following table sets forth, for the periods indicated, the change in subscription revenue from March 31, 2007 to March 31, 2008:

	Three Months Ended
	March 31,				2008 vs. 2007
	2008		2007		$		%
	(Dollars in thousands)
Total subscription revenue	$	160,974	$	128,368	$	32,606		25	%

Subscription revenue includes revenue from online subscription arrangements. The increase in subscription revenue in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 was attributable to (i) an increase in our online subscription arrangements due to our continued relationships with strategic channel partners, such as Acer, Cox, Dell and Toshiba Europe. (ii) an increase in revenue from our McAfee Total Protection Service for small and mid-market businesses and (iii) an increase in royalties from sales by our strategic channel partners. Subscription revenue continues to be positively impacted by our launch of McAfee Consumer Suites, including McAfee VirusScan Plus, McAfee Internet Security, and McAfee Total Protection Solutions, as these suites utilize a subscription-based model.

Product Revenue

The following table sets forth, for the periods indicated, each major category of our product revenue as a percent of total product revenue:

	Three Months Ended
	March 31,						2008 vs. 2007
	2008			2007			$			%
	(Dollars in thousands)
Net product revenue:
Licenses	$	9,634		$	10,074		$	(440	)		(4	)%
Hardware		8,771			7,533			1,238			16
Retail and other		2,044			1,298			746			57
Total product revenue	$	20,449		$	18,905		$	1,544			8	%
Percentage of product revenue:
Licenses		47	%		53	%
Hardware		43			40
Retail and other		10			7
Total product revenue		100	%		100	%

Product revenue includes revenue from perpetual software licenses, hardware sales and retail product sales. The increase in product revenue for the three months ended March 31, 2008, compared to the three months ended March 31, 2007, was attributable to decreased incentive rebates and funds provided to our partners for marketing which are recorded as an offset to revenue and included in retail and other revenue in the table above, partially offset by a decrease in licenses revenue. Licenses revenue continues to decrease as a result of the launch of our McAfee Consumer Suites. All new consumer licenses are subscription-based and included in subscription revenue.

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Cost of Net Revenue

The following table sets forth, for the periods indicated a comparison of cost of net revenue:

	Three Months Ended March 31,						2008 vs. 2007
	2008			2007			$		%
	(Dollars in thousands)
Cost of net revenue:
Service and support	$	14,844		$	12,393		$	2,451		20	%
Subscription		46,590			37,386			9,204		25
Product		14,942			11,905			3,037		26
Amortization of purchased technology and patents		13,560			8,369			5,191		62
Total cost of net revenue	$	89,936		$	70,053		$	19,833		28	%
Components of Gross margin:
Service and support	$	173,374		$	155,212
Subscription		114,384			90,982
Product		5,507			7,000
Amortization of purchased technology and patents		(13,560	)		(8,369	)
Total gross margin	$	279,705		$	244,825
Total gross margin percentage		76	%		78	%

Cost of Service and Support Revenue

Cost of service and support revenue consists principally of salaries, benefits and stock-based compensation related to employees providing customer support, training and consulting and web security services. During the three months ended March 31, 2008, we recognized for the first time, costs related to delivering annotation, scanning and search services, associated with ScanAlert. The cost of service and support revenue increased for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 due to increased outsourcing of professional services related to both Foundstone Consulting Services and McAfee Consulting Services. The cost of service and support revenue as a percentage of service and support net revenue for the three months ended March 31, 2008 remained consistent when compared to the same period in 2007.

We anticipate the cost of service and support revenue will fluctuate in absolute dollars in connection with service and support revenue growth.

Cost of Subscription Revenue

Cost of subscription revenue consists primarily of costs related to the sale of online subscription arrangements, the majority of which include revenue-share arrangements and royalties paid to our strategic channel partners, and the costs of media, manuals and packaging related to McAfee Consumer Suites, as these suites utilize a subscription-based model. The increase in subscription costs for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 was primarily attributed to an increase in the volume of online subscription arrangements and royalties paid to our online strategic channel partners.

We anticipate that the cost of subscription revenue will increase in absolute dollars due to increased demand for our subscription-based products with associated revenue-sharing costs.

Cost of Product Revenue

Cost of product revenue consists primarily of the cost of media, manuals and packaging for products distributed through traditional channels and, with respect to hardware-based security products, the cost of computer platforms, other hardware and embedded third party components. The cost of product revenue for the three months

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ended March 31, 2008 increased from the three months ended March 31, 2007 due to increased sales of hardware-based security products and increased costs of materials and overhead. Cost of product revenue for the three months ended March 31, 2008 also increased as a percentage of product revenue compared to the same period in 2007, due primarily to (i) increased costs on hardware product sales (ii) a shift in product mix from higher margin licensing revenue to lower margin hardware revenue, partially offset by (iii) decreased incentive rebates and marketing funds.

We anticipate that cost of product revenue will increase or decrease in absolute dollars depending on the mix and size of certain enterprise-related transactions.

Amortization of Purchased Technology and Patents

The increase in amortization of purchased technology and patents in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 is driven by the acquisitions of ScanAlert in February 2008 and SafeBoot in November 2007. Amortization for the purchased technology and patents related to these acquisitions was $6.6 million in the three months ended March 31, 2008.

Our purchased technology is being amortized over estimated useful lives of up to seven years. Amortization associated with purchased technology recorded as of March 31, 2008 is expected to be an aggregate of approximately $39.5 million for the remainder of 2008.

Stock-based Compensation Expense

We record compensation expense for stock-based awards issued to employees and outside directors in exchange for services provided based on the estimated fair value of the awards on their grant dates. Compensation expense is recognized over the required service or performance period of the awards. Our stock-based awards include stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), restricted stock units with performance-based vesting (“PSUs”) and our Employee Stock Purchase Plan (“ESPP”).

The following table summarizes stock-based compensation expense (in thousands):

	Three Months Ended
	March 31,
	2008			2007
Amortization of fair value of options	$	5,577		$	5,058
Extension of post-termination exercise period		—			10,738
(Benefit) expense related to cash settlement of options		(382	)		231
Restricted stock awards and units		5,825			4,911
Restricted stock units with performance-based vesting		255			—
Tender offer		601			—
Total stock-based compensation expense	$	11,876		$	20,938

Amortization of fair value of options.  We recognize the fair value of stock options issued to employees and outside directors as stock-based compensation expense over the vesting period of the awards. As we adopted SFAS 123(R) using the modified prospective method, these charges include compensation expense for stock options granted prior to January 1, 2006 but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123, and compensation expense for stock options granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

Extension of post-termination exercise period.  From July 2006, when we announced that we might have to restate our historical financial statements as a result of our ongoing stock option granting practices investigation, through December 21, 2007, the date we became current on our reporting obligations under the Securities Exchange Act of 1934, as amended, (“blackout period”), we imposed restrictions on our ability to issue any shares, including those pursuant to stock option exercises. In January 2007, we extended the post-termination exercise period for vested options held by 640 former employees and outside directors that would expire during the blackout period. As a result of this modification, we recognized $10.7 million of stock-based compensation expense in the three months

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ended March 31, 2007, based on the fair value of the modified options. The expense was calculated in accordance with the guidance in SFAS 123(R). The options were deemed to have no value prior to the extension of the life beyond the blackout period.

Based on the guidance in SFAS 123(R) and related FASB Staff Positions, after the January 2007 modification, stock options held by former employees and outside directors that terminated prior to such modification became subject to the provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” (“EITF 00-19”). As a result, in January 2007, these options were reclassified as liability awards within current liabilities. Accordingly, at the end of each reporting period, we determined the fair value of these options utilizing the Black-Scholes valuation model and recognized any change in fair value of the options in our condensed consolidated statements of income and comprehensive income in the period of change.

In November 2007, due to a delay in our becoming current in our reporting obligations, we extended the post-termination exercise period for options held by 690 former employees and outside directors whose service to us terminated subsequent to the January 2007 modification and those previously modified in January 2007 as discussed above, until the earlier of (i) the ninetieth (90th) calendar day after December 21, 2007, the date we became current in our reporting obligations under the Securities Exchange Act of 1934, as amended, (ii) the expiration of the contractual terms of the options, or (iii) December 31, 2008. Based on the guidance in SFAS 123(R) and related FASB Staff Positions, after the November 2007 modification, stock options held by the former employees and outside directors that terminated subsequent to the January 2007 modification and prior to November 2007 became subject to the provisions of EITF 00-19. As a result, in November 2007, these options were reclassified as liability awards within current liabilities. Accordingly, at the end of each reporting period, we determined the fair value of these options utilizing the Black-Scholes valuation model and recognized any change in fair value of the options in our condensed consolidated statements of income and comprehensive income in the period of change.

As of March 31, 2008, the January 2007 and November 2007 modified options had been exercised or had expired. The fair values of the options that had been exercised during the three months ended March 31, 2008 were remeasured on the respective date of exercise and recorded as an increase to additional paid-in capital. The options that expired were remeasured to have no fair value. We recognized a total benefit of $5.5 million related to the change in fair value of these options in the three months ended March 31, 2008. We did not recognize any expense related to the change in fair value of these options in the three months ended March 31, 2007 as our stock price did not change significantly from the January 2007 modification through March 31, 2007. Such amounts are included in general and administrative expense in our condensed consolidated statements of income and comprehensive income, and are not reflected as stock-based compensation expense.

Cash settlement of options.  Certain stock options held by terminated employees expired during the blackout period as they could not be exercised during the 90-day period subsequent to termination. In January 2007, we determined that we would settle these options in cash. In the three months ended March 31, 2007, we recorded a liability of approximately $0.2 million, based on the intrinsic value of options held by current employees that expired during the blackout period. As of December 31, 2007, we recorded a liability of $5.7 million based on the intrinsic value of these options using our December 31, 2007 closing stock price. We paid $5.2 million in January 2008 to settle these options based on the average closing price of our common stock subsequent to December 21, 2007, the date we became current on our reporting obligations under the Securities Exchange Act of 1934, as amended. We recognized a benefit for the difference between the December 31, 2007 liability and the amount paid in the three months ended March 31, 2008.

Restricted stock awards and units.  We recognize stock-based compensation expense for the fair value of RSAs and RSUs. Fair value is determined as the difference between the closing price of our common stock on the grant date and the purchase price of the RSAs and RSUs. The fair value of these awards is recognized to expense over the requisite service period of the awards.

Restricted stock units with performance-based vesting.  We recognize stock-based compensation for the fair value of PSUs. These awards vest as follows: 50% vest only if performance criteria are met (“performance component”) and 50% cliff vest four years from the date of grant, with accelerated vesting if performance criteria

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are met (“service component”). Certain executive grants have only the performance component. The performance component will vest one-third each year from the date of grant, provided that the performance criteria are met for each respective year. If the performance criteria is not met in any one year, then the options that would have vested in that year are forfeited. The performance component is being recognized as expense one-third each year provided we determine it is probable that the performance criteria will be met. For certain of the PSUs, we have not communicated the performance criteria to the employees. For these awards, the accounting grant date will not occur until it is known whether the performance criteria are met, and such achievement or non-achievement is communicated to the employees. These awards will be marked-to-market at the end of each reporting period through the accounting grant date, and recognized over the expected vesting period. For the awards for which the performance criteria have been communicated, stock-based compensation expense has been measured on the grant date, and is being recognized over the expected vesting period.

The service component will cliff vest four years from the grant date, with an acceleration provision based on the same performance criteria as the performance component. If the performance criteria are met for each respective year, the awards will vest one-third each year from the grant date. The accounting grant date is deemed to have occurred and stock-based compensation has been measured on the grant date, and will be recognized over the expected vesting period.

Tender offer.  In January 2008, after we became current with our reporting obligations under the Securities Exchange Act of 1934, as amended, we filed a Tender Offer Statement on Schedule TO with the Securities and Exchange Commission (“SEC”). The tender offer extended an offer by us to holders of certain outstanding stock options to amend the exercise price on certain of their outstanding options. The purpose of the tender offer was to amend the exercise price on options to have the same price as the fair market value on the revised measurement dates that were identified during the investigation of our historical stock option grant practices. As part of this tender offer, we will pay a cash bonus of $1.7 million, of which $0.4 million was paid to Canadian employees in the three months ended March 31, 2008, and $1.3 million will be paid to U.S. employees in 2009, to reimburse optionees who elected to participate in the tender offer for any increase in the exercise price of their options resulting from the amendment. The impact of the cash bonus, as recorded during the three months ended March 31, 2008, resulted in stock-based compensation expense of $0.6 million and a decrease to additional paid-in capital of $1.1 million.

The following table summarizes pre-tax stock-based compensation expense recorded in our condensed consolidated statements of income and comprehensive income by line item in the three months ended March 31, 2008 and 2007 (in thousands):

	Three Months Ended
	March 31,
	2008			2007
Cost of net revenue — service and support	$	202		$	599
Cost of net revenue — subscription		98			358
Cost of net revenue — product		144			258
Stock-based compensation expense included in cost of net revenue		444			1,215
Research and development		3,621			4,972
Marketing and sales		3,748			8,513
General and administrative		4,063			6,238
Stock-based compensation expense included in operating costs		11,432			19,723
Total stock-based compensation expense		11,876			20,938
Deferred tax benefit		(3,207	)		(6,785	)
Total stock-based compensation expense, net of tax	$	8,669		$	14,153

We had no stock — based compensation costs capitalized as part of the cost of an asset.

For existing employees, we grant RSUs that vest over a specified period of time based on service or based on the achievement of performance criteria. For new employees, we continue to grant stock options. Going forward,

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our management and compensation committee will consider utilizing all types of equity compensation to reward top-performing employees.

At March 31, 2008, the estimated fair value of all unvested stock options, RSUs, PSUs and RSAs that have not yet been recognized as compensation expense was $113.2 million, net of expected forfeitures. We expect to recognize this amount over a weighted-average period of 2.3 years. This amount does not reflect compensation expense relating to 0.8 million PSUs for which the performance criteria has not been set.

Internal Revenue Code Section 409A

Adverse tax consequences resulted from our revision of accounting measurement dates during our restatement due to our investigation into our stock option granting practices for stock options that vested subsequent to December 31, 2004 (“409A affected options”). These adverse tax consequences included a penalty tax payable by the option holder under Internal Revenue Code (“IRC”) Section 409A (and, as applicable, similar penalty taxes under state tax laws). As virtually all holders of options with revised measurement dates were not involved in or aware of their incorrect option exercise prices, we took certain actions to deal with the adverse tax consequences that were incurred by the holders of such options.

Section 16(a) Officers and Directors

In December 2006, our board of directors approved the amendment of 409A affected options for those who were Section 16(a) officers at the time they received 409A affected options to increase the exercise price to the fair market value of our common stock on the revised measurement date. These amended options are not subject to taxation under IRC Section 409A. Under the Internal Revenue Service (“IRS”) regulations, these option amendments had to be completed by December 31, 2006 for anyone subject to Section 16(a) requirements upon receipt of the 409A affected options. There were no costs associated with this action, as the modifications increased the exercise price, which resulted in no incremental expense.

In the three months ended March 31, 2008, for one executive officer, we amended the exercise price of his options to have the same price as the fair market value on the revised measurement dates that were identified during the investigation of our historical stock option grant practices. We will pay this executive officer a cash bonus of $0.1 million in 2009 to reimburse for the increase in the exercise price of his options resulting from the amendment.

IRS Announcement 2007-18 Compliance

In February 2007, our board of directors approved our participation in a voluntary program under IRS Announcement 2007-18 and a similar state of California Announcement, whereby we paid additional 409A taxes on behalf of certain former United States employees who had already exercised 409A affected options for the additional taxes they incur under IRC Section 409A (and, as applicable, similar state of California tax law). Current and former Section 16(a) officers and directors were specifically excluded from the program. Through March 31, 2007, we recorded $1.3 million of expense associated with this program for Section 409A affected options exercised during this period. We had no expense associated with this program in the three months ended March 31, 2008.

Certain Former Employees Future Exercises of 409A Affected Options

In May 2007, our board of directors approved cash payments as necessary to certain former employees who exercised 409A affected options during 2006 or that may exercise 409A affected options in the future.

In November 2007, our board of directors approved the unilateral amendment of 409A affected options held by certain former employees who did not exercise 409A affected options during 2006 to increase the exercise price to the fair market value of our common stock on the revised measurement date, and to make cash payments as compensation for the increase in the exercise prices of amended options. These amended options would not be subject to taxation under IRC 409A.

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In the three months ended March 31, 2008, we recorded no costs associated with former employees’ exercises of certain Section 409A affected options. The following table summarizes for the three months ended March 31, 2007 costs associated with actions taken by us with respect to IRC Section 409A (in thousands):

	Three Months Ended
	March 31, 2007
Cost of net revenue	$	—
Research and development		789
Marketing and sales		321
General and administrative		194
Costs associated with IRC Section 409A	$	1,304

Operating Costs

Research and Development

The following table sets forth, for the periods indicated, a comparison of our research and development expenses:

	Three Months Ended
	March 31						2008 vs. 2007
	2008			2007			$		%
	(Dollars in thousands)
Research and development(1)	$	58,625		$	54,613		$	4,012		7	%
Percentage of net revenue		16	%		17	%

(1) Includes stock-based compensation charges of $3,621 and $4,972 in the three months ended March 31, 2008 and 2007, respectively.

Research and development expenses consist primarily of salary, benefits, and stock-based compensation for our development and a portion of our technical support staff, contractors’ fees and other costs associated with the enhancements of existing products and services and development of new products and services. The increase in research and development expenses in the three months ended March 31, 2008 was primarily attributable to (i) a $5.1 million increase in salary and benefit expense for individuals performing research and development activities due to an increase in average headcount and salary increases, (ii) a $1.3 million increase due to strengthening foreign currencies in EMEA and Japan against the U.S. Dollar in the three months ended March 31, 2008 compared to the same prior-year period, and (iii) increases in various other expenses related to research and development activities, partially offset by (i) a $1.6 million decrease attributable to acquisition-related bonuses, primarily related to the SiteAdvisor acquisition, and (ii) a $1.4 million decrease in stock-based compensation expense.

We believe that continued investment in product development is critical to attaining our strategic objectives. We expect research and development expenses will increase in absolute dollars during the remainder of 2008.

Marketing and Sales

The following table sets forth, for the periods indicated, a comparison of our marketing and sales expenses:

	Three Months Ended
	March 31,						2008 vs. 2007
	2008			2007			$		%
	(Dollars in thousands)
Marketing and sales(1)	$	118,357		$	93,081		$	25,276		27	%
Percentage of net revenue		32	%		30	%

(1) Includes stock-based compensation charges of $3,748 and $8,513 in the three months ended March 31, 2008 and 2007.

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Marketing and sales expenses consist primarily of salary, commissions, stock-based compensation and benefits for marketing and sales personnel and costs associated with travel for our marketing and sales personnel, advertising and promotions. The increase in marketing and sales expenses during the three months ended March 31, 2008 compared to the three months ended March 31, 2007 reflected (i) a $18.4 million increase in salary and benefit expense, including commissions, for individuals performing marketing and sales activities due to an increase in average headcount and salary increases, (ii) a $3.3 million increase due to strengthening foreign currencies in EMEA and Japan against the U.S. Dollar in the three months ended March 31, 2008 compared to the same prior-year period, (iii) a $3.3 million increase related to worldwide travel expense, (iv) a $2.7 million increase in contract labor, and (v) a $2.7 million increase due to increased investment in sales, marketing, promotion and advertising programs, including marketing spend for SiteAdvisor and corporate branding initiatives, partially offset by (i) a $4.8 million decrease in stock-based compensation expense, and (ii) decreases in various other expenses associated with marketing and sales activities.

We anticipate that marketing and sales expenses will increase in absolute dollars primarily due to our planned branding initiatives and our additional investment in sales capacity for 2008.

General and Administrative

The following table sets forth, for the periods indicated, a comparison of our general and administrative expenses:

	Three Months Ended
	March 31,						2008 vs. 2007
	2008			2007			$			%
	(Dollars in thousands)
General and administrative(1)	$	42,689		$	44,851		$	(2,162	)		(5	)%
Percentage of net revenue		12	%		14	%

(1) Includes stock-based compensation charges of $4,063 and $6,238 in the three months ended March 31, 2008 and 2007, respectively.

General and administrative expenses consist principally of salary, stock-based compensation and benefit costs for executive and administrative personnel, professional services and other general corporate activities. The decrease in general and administrative expenses during the three months ended March 31, 2008 compared to the three months ended March 31, 2007 reflected (i) $5.5 million benefit related to the change in fair value of certain stock options subject to the provisions of EITF 00-19, (ii) a $2.2 million decrease in legal expenses, and (iii) a $2.2 million decrease in stock-based compensation expense, partially offset by (i) a $3.6 million increase in salary and benefit expense for individuals performing general and administrative activities due to an increase in average headcount and salary increases, (ii) a $1.8 million increase in contract labor, (iii) a $1.2 million increase due to strengthening foreign currencies in EMEA and Japan against the U.S. Dollar in the three months ended March 31, 2008 compared to the same prior-year period, and (iv) increases in various other expenses related to general and administrative activities.

We anticipate that general and administrative expenses will increase in absolute dollars during the remainder of 2008.

SEC and Compliance Costs

The following table sets forth, for the periods indicated, a comparison of SEC and compliance costs:

	Three Months Ended
	March 31,				2008 vs. 2007
	2008		2007		$			%
	(Dollars in thousands)
SEC and compliance costs	$	1,376	$	5,052	$	(3,676	)		(73	)%

SEC and compliance costs consist principally of costs arising as a result of our historical investigation into our stock option granting practices. The decrease in SEC and compliance costs during the three months ended March 31,

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2008 compared to the three months ended March 31, 2007 is attributable to a decrease in costs associated with the investigation. The costs in 2008 are all ongoing legal costs associated with the investigation.

Amortization of Intangibles

The following table sets forth, for the periods indicated, a comparison of the amortization of intangibles:

	Three Months Ended
	March 31,				2008 vs. 2007
	2008		2007		$		%
	(Dollars in thousands)
Amortization of intangibles	$	5,340	$	2,682	$	2,658		99	%

Intangibles consist of identifiable intangible assets such as trademarks and customer lists. The increase in amortization of intangibles was attributable to our 2008 and 2007 acquisitions, in which we acquired approximately $60.1 million of intangible assets related to the SafeBoot and ScanAlert acquisitions.

Restructuring Charges

The following table sets forth, for the periods indicated, a comparison of our restructuring charges:

	Three Months Ended
	March 31,				2008 vs. 2007
	2008		2007		$			%
	(Dollars in thousands)
Restructuring charges	$	71	$	3,126	$	(3,055	)		(98	)%

Restructuring charges in the three months ended March 31, 2008 totaled $0.1 million, of which $2.5 million was related to the elimination of certain positions at SafeBoot that were redundant to positions at McAfee and the realignment of our sales force, offset by a $2.4 million benefit related primarily to previous estimates of base rent and sublease income for the Santa Clara lease which was restructured in 2003 and 2004. During the three months ended March 31, 2007, we permanently vacated several leased facilities and recorded a $0.3 million accrual for estimated lease related costs associated with the permanently vacated facilities and we recorded a restructuring charge of $2.6 million related to a reduction in headcount.

Interest and Other Income

The following table sets forth, for the periods indicated, a comparison of our interest and other income:

	Three Months Ended
	March 31,				2008 vs. 2007
	2008		2007		$			%
	(Dollars in thousands)
Interest and other income	$	13,035	$	14,315	$	(1,280	)		(9	)%

Interest and other income includes interest earned on investments, as well as net foreign currency transaction gains or losses. The decrease in interest and other income is partially due to a lower average rate of annualized return on our investments from approximately 5% in the three months ended March 31, 2007 to approximately 4% in the three months ended March 31, 2008.

During the three months ended March 31, 2008 and 2007, we recorded a net foreign currency transaction loss in our condensed consolidated statements of income of $0.9 million and $0.7 million, respectively.

We anticipate that interest and other income will decrease during 2008 as a result of a declining interest rate environment and lower cash balances due to our stock repurchase program.

Gain on Sale of Investment, Net

During the three months ended March 31, 2008 and 2007, we recognized a gain on the sales of marketable securities of $2.5 million and $0.1 million, respectively. Our investments are classified as available-for-sale and we

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may sell securities from time to time to move funds into investments with more lucrative yields or for liquidity purposes, thus resulting in gains and losses on sale.

Provision for Income Taxes

The following table sets forth, for the periods indicated, a comparison of our provision for income taxes:

	Three Months Ended
	March 31,						2008 vs. 2007
	2008			2007			$		%
	(Dollars in thousands)
Provision for income taxes	$	38,575		$	12,494		$	26,081		**
Effective tax rate		56	%		22	%

** Calculation not meaningful.

We estimate our annual effective tax rate based on year to date operating results and our forecast of operating results for the remainder of the year, by jurisdiction, and apply this rate to the year to date operating results. If our actual results, by jurisdiction, differ from each successive interim period’s forecasted operating results or if we change our forecast of operating results for the remainder of the year, our effective tax rate will change accordingly, affecting tax expense for both that successive interim period as well as year-to-date interim results.

The effective tax rate for the three months ended March 31, 2008 differs from the U.S. federal statutory rate (“statutory rate”) primarily due to an increase in our estimated annual effective tax rate resulting from acquisition integration activities. The increase in the effective tax rate for the three months ended March 31, 2008 as compared to the prior period is primarily a result of our acquisition integration activities, which resulted in an increase of 22 percentage points to our effective tax rate. We are currently in the process of seeking administrative relief with the U.S. Internal Revenue Service, which would reduce our tax expense related to these integration activities. If the administrative relief is granted, we will reverse the previously recorded tax expense in the period in which the relief is granted. The effective tax rate for the three months ended March 31, 2007 differs from the statutory rate primarily due to the benefit of lower tax rates in certain foreign jurisdictions offset by the impact of adjustments to tax reserves.

The earnings from our foreign operations in India are subject to a tax holiday from a grant effective through March 31, 2009. The tax holiday provides for zero percent taxation on certain classes of income and requires certain conditions to be met. We are in compliance with these conditions as of March 31, 2008.

Recent Accounting Pronouncements

See Note 2 to the condensed consolidated financial statements.

Acquisitions

ScanAlert

In January 2008, we acquired 100% of the outstanding shares of ScanAlert, a provider of a vulnerability assessment and certification services for e-commerce sites, for $54.9 million. Of this amount, we paid $4.5 million in the fourth quarter of 2007 to a third party to settle prior alleged patent infringement claims against ScanAlert and for a fully paid future license for the use of the patent until its expiration and we paid $49.0 million, net of cash received, in the three months ended March 31, 2008. We have recorded a $1.3 million long-term liability on our consolidated balance sheet as of March 31, 2008 for a portion of the purchase price held-back for future indemnification claims.

We plan to incorporate ScanAlert’s technology into our existing SiteAdvisor web rating system. The results of operations for ScanAlert have been included in our results of operations since the date of acquisition. See Note 4 to the condensed consolidated financial statements for further discussions.

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Liquidity and Capital Resources

	Three Months Ended
	March 31,
	2008			2007
	(In thousands)
Net cash provided by operating activities	$	71,374		$	101,781
Net cash provided by (used in) investing activities		22,317			(18,277	)
Net cash used in financing activities		(63,978	)		(184	)

Overview

At March 31, 2008, our cash, cash equivalents and marketable securities totaled $1,293.1 million and we did not have any debt. Our principal source of liquidity was our existing cash, cash equivalents and short-term marketable securities of $804.3 million. During the three months ended March 31, 2008, we had net income of $30.2 million and we received $53.7 million from proceeds from the issuance of common stock under our employee options plans. We paid $49.0 million, net of cash received, for the purchase of 100% of the outstanding shares of ScanAlert, Inc. and we paid $6.0 million for direct acquisition costs accrued at December 31, 2007 for our acquisition of SafeBoot. In addition, we used $127.2 million for repurchases of our common stock, including commissions, and $10.5 million for purchases of property and equipment, of the $127.2 million used for stock repurchases, $113.5 million was used for share repurchases in the open market and $13.7 million was used to repurchase shares of common stock in connection with our obligation to holders of restricted stock to withhold the number of shares required to satisfy the holders’ tax liabilities in connection with the vesting of such shares.

Our management plans to use our cash and cash equivalents for future operations, potential acquisitions and repurchases of our common stock on the open market. We believe that our cash and cash equivalent balances and cash that we generate over time from operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the foreseeable future.

Operating Activities

Net cash provided by operating activities in the three months ended March 31, 2008 and 2007 was primarily the result of our net income of $30.2 million and $43.4 million, respectively. Net income for the three months ended March 31, 2008 was adjusted for non-cash items such as depreciation and amortization of $28.5 million, non-cash stock-based compensation expense of $11.7 million, changes in deferred income taxes of $34.6 million, and changes in various assets and liabilities such as a decrease in accounts receivable of $45.3 million, a decrease in accrued taxes and other liabilities of $32.9 million, an increase in prepaid expenses, prepaid taxes and other assets of $10.8 million, a decrease in deferred revenue of $8.9 million and a decrease in accounts payable of $7.7 million.

Net income for the three months ended March 31, 2007 was adjusted for non-cash items such as depreciation and amortization of $20.3 million, non-cash stock compensation expense of $20.7 million, changes in deferred income taxes of $6.7 million, and changes in various assets and liabilities such as a decrease in accounts receivable of $24.9 million, a decrease in accrued taxes and other liabilities of $6.3 million, a decrease in deferred revenue of $5.2 million and an increase in prepaid expenses, prepaid taxes, and other assets of $3.2 million.

Historically, our primary source of operating cash flow was the collection of accounts receivable from our customers and the timing of payments to our vendors and service providers. One measure of the effectiveness of our collection efforts is average accounts receivable days sales outstanding, or “DSO”. DSOs were 48 days and 42 days in the three months ended March 31, 2008 and 2007, respectively. We calculate accounts receivable DSO on a “net” basis by dividing the net accounts receivable balance at the end of the quarter by the amount of net revenue recognized for the quarter multiplied by 90 days. We expect DSOs to vary from period to period because of changes in quarterly revenue and the effectiveness of our collection efforts. In 2008 and 2007, we did not make any significant changes to our payment terms for our customers, which are generally “net 30.” In the three months ended March 31, 2008 compared to the three months ended March 31, 2007, DSOs increased due to the acquisition of SafeBoot in the fourth quarter of 2007 and the acquisition of ScanAlert in the first quarter of 2008. We expect our DSOs will continue to be impacted by the acquisitions of SafeBoot and ScanAlert.

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Our operating cash flows, including changes in accounts payable and accrued liabilities, are impacted by the timing of payments to our vendors for accounts payable and taxing authorities. We typically pay our vendors and service providers in accordance with invoice terms and conditions, and take advantage of invoice discounts when available. The timing of future cash payments in future periods will be impacted by the nature of accounts payable arrangements and strategic channel partner arrangements. In the three months ended March 31, 2008 and 2007, we did not make any significant changes to our payment timing to our vendors.

Our cash and marketable securities balances are held in numerous locations throughout the world, including substantial amounts held outside the United States. As of March 31, 2008, approximately $412.9 million was held outside the United States. We utilize a variety of tax planning and financing strategies to ensure that our worldwide cash is available in the locations in which it is needed.

We incurred material expenses in 2007 as a direct result of the investigation into our historical stock option granting practices and related accounting. These costs primarily related to professional services for the investigation, legal, historical accounting and taxing guidance. In addition, we incurred costs related to litigation, the investigation by the SEC, the grand jury subpoena from the U.S. Attorney’s Office for the Northern District of California and the preparation and review of our restated consolidated financial statements. We expect that we may be subject to certain fines and/or penalties resulting from the findings of the investigation. We cannot reasonably estimate the range of fines and/or penalties, if any, that might be incurred as a result of the investigation. We expect to pay for these fines and/or penalties with available cash.

We expect to meet our obligations as they become due through available cash and internally generated funds. We expect to continue generating positive working capital through our operations. However, we cannot predict whether current trends and conditions will continue or what the effect on our business might be from the competitive environment in which we operate. In addition, we currently cannot predict the outcome of the litigation described in Note 11.

Investing Activities

Our investing activities for the three months ended March 31, 2008 and 2007 are as follows (in thousands):

	Three Months Ended
	March 31,
	2008			2007
Net proceeds from sales or maturities (purchases) of marketable securities	$	87,863		$	(12,584	)
Acquisitions, net of cash acquired		(55,041	)		—
(Increase) decrease in restricted cash		(12	)		352
Purchase of property, equipment and leasehold improvements		(10,493	)		(10,150	)
Proceeds from the sale of assets and technology		—			4,105
Net cash provided by (used in) investing activities	$	22,317		$	(18,277	)

Investments

In the three months ended March 31, 2008, net proceeds from the sale and maturity of marketable securities were $87.9 million compared to net purchases of marketable securities of $12.6 million in the three months ended March 31, 2007. We have classified our investment portfolio as “available-for-sale,” and our investments are made with a policy of capital preservation and liquidity as the primary objectives. We generally hold investments in money market, U.S. government fixed income, U.S. government agency fixed income, mortgage-backed and investment grade corporate fixed income securities to maturity; however, we may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive or we are in need of cash. Because we invest only in investment securities that are highly liquid with a ready market, we believe that the purchase, maturity or sale of our investments has no material impact on our overall liquidity. We expect to continue our investing activities, including investment securities of a short-term and long-term nature.

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Acquisitions

During the three months ended March 31, 2008, we paid $49.0 million, net of cash received, related to the acquisition of ScanAlert, Inc. and $6.0 million for direct acquisition costs accrued at December 31, 2007 for our acquisition of SafeBoot. Our available cash and equity securities may be used to acquire or invest in complementary companies, products and technologies in the future.

Restricted Cash

The restricted cash, which is included in other assets, of $0.6 million at both March 31, 2008 and December 31, 2007 consisted primarily of cash collateral related to leases in the United States and India, as well as workers’ compensation insurance coverage.

Property and Equipment

The $10.5 million of property and equipment purchased during the three months ended March 31, 2008 was primarily for purchases of computers, equipment and software for ongoing projects. The $10.2 million of property and equipment purchased during the three months ended March 31, 2007 was primarily for purchases of computers, equipment and software for ongoing projects and for leasehold improvements related to our expanded research and development facility in Beaverton, Oregon.

We anticipate that we will continue to purchase property and equipment necessary in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including our hiring of employees, the rate of change in computer hardware/software used in our business and our business outlook.

Proceeds from the sale of assets and technology

The $4.1 million of proceeds from the sale of assets during the three months ended March 31, 2007 was primarily related to the sale of our fractional interests in corporate aircraft.

Financing Activities

Our financing activities for the three months ended March 31, 2008 and 2007 are as follows (in thousands):

	Three Months Ended
	March 31,
	2008			2007
Proceeds from issuance of common stock from option plans	$	53,677		$	—
Excess tax benefits from stock-based compensation		9,520			12
Repurchase of common stock		(127,175	)		(196	)
Net cash used in financing activities	$	(63,978	)	$	(184	)

Stock Option and Stock Purchase Plans

Historically, our recurring cash flows provided by financing activities have been from the receipt of cash from the issuance of common stock under stock option and ESPPs. Beginning in July 2006, we suspended purchases under our ESPP and prohibited our employees from exercising stock options due to the announced investigation into our historical stock option granting practices and our inability to become current on our reporting obligations under the Securities Exchange Act of 1934, as amended. Therefore, in the three months ended March 31, 2007, we received no proceeds from the issuance of common stock under stock option and stock purchase plans. On December 21, 2007, we became current on our reporting obligations and our employees were able to exercise stock options for the first time in over 18 months. We received cash proceeds from these plans in the amount of $53.7 million in the three months ended March 31, 2008. We do not expect proceeds from the exercise of stock options to be as significant in future quarterly periods.

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While we expect to continue to receive these proceeds in future periods, the timing and amount of such proceeds are difficult to predict and are contingent on a number of factors including the price of our common stock, the number of employees participating in the plans and general market conditions. For existing employees, we grant RSUs that vest over a specified period of time based on service or based on the achievement of performance criteria. For new employees, we continue to grant stock options. Going forward, our management and compensation committee will consider utilizing all types of equity compensation to reward top-performing employees. If management and our compensation committee decide to grant only RSUs and PSUs, which provide no proceeds to us, going forward, our proceeds from issuance of common stock will be significantly less than proceeds that we received historically. We plan to reinstate our ESPP with a six-month offering period, a 15% discount and a six-month look back feature beginning in the three months ended June 30, 2008.

Excess Tax Benefits from Stock-Based Compensation

The excess tax benefit reflected as a financing cash inflow in the three months ended March 31, 2008 and 2007 represents excess tax benefits realized relating to stock-based payments to our employees, in accordance with SFAS 123(R). There is a corresponding cash outflow included in cash flows from operating activities.

Repurchase of Common Stock

In January 2008, our board of directors authorized the repurchase of up to $750.0 million of our common stock from time to time in the open market or through privately negotiated transactions through July 2009, depending on market conditions, share price and other factors. During the three months ended March 31, 2008, we used $113.5 million to repurchase 3.4 million shares of our common stock in the open market, including commissions paid on these transactions.

During the three months ended March 31, 2008 and the three months ended March 31, 2007, we used $13.7 million and $0.2 million, respectively, to repurchase shares of common stock in connection with our obligation to holders of restricted stock to withhold the number of shares required to satisfy the holders’ tax liabilities in connection with the vesting of such shares. These shares were not part of the publicly announced repurchase program.

In May 2006, we suspended repurchases of our common stock in the open market due to the announced investigation into our historical stock option granting practices until December 21, 2007, the date we became current on our filing obligations. Therefore, in the three months ended March 31, 2007, we had no repurchases of our common stock pursuant to a publicly announced plan or program.

Credit Facility

We have a 14.0 million Euro credit facility with a bank. The credit facility is available on an offering basis, meaning that transactions under the credit facility will be on such terms and conditions, including interest rate, maturity, representations, covenants and events of default, as mutually agreed between us and the bank at the time of each specific transaction. The credit facility is intended to be used for short-term credit requirements, with terms of one year or less. The credit facility can be cancelled at any time. No balances were outstanding as of March 31, 2008 and December 31, 2007.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Our market risks at March 31, 2008, are consistent with those discussed in Item 7A of our annual report on Form 10-K for the year ended December 31, 2007 filed with the SEC.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and our chief accounting officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) and concluded that because of the material weaknesses in

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our internal controls over financial reporting discussed below, our disclosure controls and procedures were not effective as of March 31, 2008.

A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Our management, including our chief executive officer and chief accounting officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been detected. These inherent limitations include the reality that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. The design of any control system is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

Material Weaknesses in Internal Control over Financial Reporting

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Our management identified the following material weakness in our internal controls over financial reporting as of March 31, 2008.

Our management identified errors in the tax calculations for the quarterly and annual financial statements resulting from: (i) historical analyses not being prepared in sufficient detail, (ii) current period tax calculations not being accurately prepared, and (iii) reviews of tax calculations not being performed with sufficient precision. Due to the number and amount of the errors identified resulting from these internal control deficiencies and the absence of mitigating controls, management has concluded that these internal control deficiencies constitute a material weakness in internal control because there is a reasonable possibility that a material misstatement of the interim and annual financial statements would not have been prevented or detected on a timely basis.

As described below under the heading “Changes in Internal Controls Over Financial Reporting,” we have taken a number of steps designed to improve our accounting for income taxes.

Changes in Internal Controls Over Financial Reporting

Except as described below, there have been no changes in our internal control over financial reporting since December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We continue the process of remediating the material weakness in accounting for income taxes by hiring more tax accounting personnel, with an emphasis on hiring personnel having international tax expertise. We will continue to make personnel additions and changes, and as necessary, implement additional remedial steps as indicated below:

•  We have automated key elements of the calculation of the provision for income taxes and the account reconciliation processes by implementing a new tax accounting system.

•  We continue to enhance the training and education of our tax accounting personnel.

•  We continue to improve our interim and annual review processes for various calculations including the tax provision computation process.

We believe the above steps will provide us with the infrastructure and processes necessary to accurately calculate our tax provision on a quarterly basis. We will continue to implement these remedial steps to ensure operating effectiveness of the improved internal controls over financial reporting.

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PART II: OTHER INFORMATION

Item 1.   Legal Proceedings

Settled Cases

In February 2007, we reached a confidential settlement of a breach of contract, fraud and bad faith lawsuit filed in June 2002 in the United States District Court, District of Massachusetts. As part of the settlement, we acquired and recorded ownership of intangible assets valued at $9.3 million with all remaining claims settled for $6.2 million, of which $5.0 million was recognized as expense in the three months ended June 30, 2006 with the balance of $1.2 million being expensed in 2004 and prior periods. The case was dismissed in March 2007.

Open Cases

We have described below our material legal proceedings and investigations that are currently pending and are not in the ordinary course of business. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. While we cannot predict the likelihood of future claims or inquiries, we expect that new matters may be initiated against us from time to time. The results of claims, lawsuits and investigations also cannot be predicted, and it is possible that the ultimate resolution of these matters, individually and in the aggregate, may have a material adverse effect on our business, financial condition, results of operations or cash flows.

Government Inquiries Relating to Historical Stock Option Practices

In May 2006, we announced that we had commenced an investigation of our historical stock option granting practices. As a result of that investigation, we concluded that certain stock options had been accounted for using incorrect measurement dates, which, in some instances, were chosen with the benefit of hindsight so as to intentionally give more favorable exercise prices. Consequently, certain of our historical financial statements needed to be restated to correct improper accounting for improperly priced stock options. In December 2007, we filed our Form 10-K for 2006, which included the effects of a restatement of our audited consolidated financial statements for 2004 and 2005, our selected financial data for 2002 through 2005, and our unaudited quarterly financial data for all quarters in 2005 and the first quarter of 2006.

On May 23, 2006, the Securities and Exchange Commission (“SEC”) notified us that an investigation had begun regarding our historical stock option grants. On June 7, 2006, the SEC sent us a subpoena requesting certain documents related to stock option grants from January 1, 1995 through the date of the subpoena. At or around the same time, we received a notice of informal inquiry from the Department of Justice (“DOJ”), concerning our stock option granting practices. On August 15, 2006, we received a grand jury subpoena from the United States (“U.S.”) Attorney’s Office for the Northern District of California relating to the termination of our former general counsel, his stock option related activities and the investigation. On November 6, 2006, we received a document request from the SEC for option grant data for McAfee.com, previously one of our consolidated subsidiaries that was a publicly traded company from December 1999 through September 2002.

On November 2, 2006, the investigative team created by the Special Committee of our board of directors met with the Enforcement Staff of the SEC in Washington D.C. and presented the initial findings of the investigation. Pursuant to discussions between the investigative team and the SEC during that meeting, the scope of the investigation was expanded to include a review of the historical McAfee.com option grants along with our historical exercise activity with a view toward determining potential exercise date manipulation and post-employment arrangements with former executives.

We have provided documents requested, and we are cooperating with the SEC and DOJ. The SEC investigation is still in its preliminary stages thus we are unable to determine the ultimate outcome at this time. As such, no provision has been recorded in the financial statements for this matter.

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Securities Cases

On May 31, 2006, a purported stockholder derivative lawsuit — styled Dossett v. McAfee, Inc., No. 5:06CV3484 (JF) — was filed in the United States District Court for the Northern District of California against certain of our current and former directors and officers (“Dossett”). On June 7, 2006, another purported stockholder’s derivative lawsuit — styled Heavy & General Laborers Locals 472 & 172 Pension & Annuity Funds v. McAfee, Inc., No. 5:06CV03620 (JF) — was filed in the United States District Court for the Northern District of California against certain of our current and former directors and officers (“Laborers”). The Dossett and Laborers actions generally allege that we improperly backdated stock option grants between 1997 and the present, and that certain of our current and former officers or directors either participated in this backdating or allowed it to happen. The Dossett and Laborers actions assert claims purportedly on behalf of us for, inter alia, breach of fiduciary duty, abuse of control, constructive fraud, corporate waste, unjust enrichment, gross mismanagement, and violations of the federal securities laws. On July 13, 2006, the United States District Court for the Northern District of California entered an order consolidating the Dossett and Laborers actions as In re McAfee, Inc. Derivative Litigation, Master File No. 5:06CV03484 (JF) (the “Consolidated Action”). On January 22, 2007, we moved to dismiss the complaint in the Consolidated Action on the grounds that plaintiffs lack standing to sue on our behalf because, inter alia, they did not make a pre-suit demand on our board of directors. At the parties’ request, the Court continued on several occasions the due date for the plaintiffs’ opposition to our motion to dismiss and the date for the hearing of that motion. As a result of the settlement described below, there is no deadline by which plaintiffs must file an opposition to the motion to dismiss.

On August 7, 2007, a new stockholders’ derivative lawsuit — styled Webb v. McAfee, Inc., No. C 07 4048 (PVT) — was filed in the United States District Court for the Northern District of California against certain of our current and former directors and officers (“Webb”). The new lawsuit generally alleges the same facts and causes of action that plaintiffs have asserted in the Consolidated Action. The plaintiff in Webb requested that his action be consolidated with the Consolidated Action. On September 21, 2007, the Court consolidated the Webb action with the Consolidated Action.

On June 2, 2006, three identical lawsuits — styled Greenberg v. Samenuk, No. 106CV064854, Gordon v. Samenuk, No. 106CV064855, and Golden v. Samenuk, No. 106CV064856 — were filed in the Superior Court of the State of California, County of Santa Clara against certain of our current and former directors and officers (the “State Actions”). Like the Consolidated Action, the State Actions generally allege that we improperly backdated stock option grants between 2000 and the present, and that certain of our current and former officers or directors either participated in this backdating or allowed it to happen. Like the Consolidated Action, the State Actions assert claims purportedly on behalf of us for, inter alia, breach of fiduciary duty, abuse of control, corporate waste, unjust enrichment, and gross mismanagement. On June 23, 2006, we moved to dismiss these actions in favor of the first-filed Consolidated Action. On September 18, 2006, the Court consolidated the State Actions and denied our motions to dismiss, but stayed the State Actions due to the first-filed action in federal court. The stay, which was continued by the Court on several occasions, expired in December 2007.

In December 2007, we reached a tentative settlement with the plaintiffs in the Consolidated Action and the State Actions. The tentative agreement must be submitted to and approved by the Court. We accrued $13.8 million in the condensed consolidated financial statements as of June 30, 2006 due to our ongoing stock option investigation and restatement related to expected payments pursuant to the tentative settlement and expect to complete the documentation and the required approvals in the second half of 2008. While we cannot predict the ultimate outcome of the lawsuits in the event that the tentative settlement is not approved by the Court, the provision recorded in the financial statements represents our best estimate at this time.

Certain investment bank underwriters, our company, and certain of our directors and officers have been named in a putative class action for violation of the federal securities laws in the United States District Court for the Southern District of New York, captioned In re McAfee.com Corp. Initial Public Offering Securities Litigation, 01 Civ. 7034 (SAS). This is one of a number of cases challenging underwriting practices in the initial public offerings (“IPOs”), of more than 300 companies. These cases have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). Plaintiffs generally allege that certain underwriters engaged in undisclosed and improper underwriting activities, namely the receipt of excessive brokerage commissions and

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customer agreements regarding post-offering purchases of stock in exchange for allocations of IPO shares. Plaintiffs also allege that various investment bank securities analysts issued false and misleading analyst reports. The complaint against us claims that the purported improper underwriting activities were not disclosed in the registration statements for McAfee.com’s IPO and seeks unspecified damages on behalf of a purported class of persons who purchased our securities or sold put options during the time period from December 1, 1999 to December 6, 2000. On February 19, 2003 the Court issued an Opinion and Order dismissing certain of the claims against us with leave to amend. We accepted a settlement proposal on July 15, 2003.

We, together with the other issuer defendants and plaintiffs, entered into a stipulation of settlement and release of claims against the issuer defendants that was submitted to the Court for approval in June 2004. On August 31, 2005, the Court preliminarily approved the settlement which, among other things, was conditioned upon class certification. In December 2006, the appellate court overturned the certification of classes making it unlikely that the proposed settlement would receive final Court approval. As a result, on June 25, 2007, the Court entered an order terminating the proposed settlement. Plaintiffs have indicated that they will seek to amend their allegations and file amended complaints. It is uncertain whether there will be any revised or future settlement. Thus, the ultimate outcome, and any ultimate effect on us, cannot be precisely determined at this time.

Other

In February 2008, a former executive notified us of his intent to seek arbitration of claims associated with his employment. He alleges that McAfee breached his employment contract and committed certain additional wrongful acts related to the expiration of his stock options. The arbitration demand was filed on April 11, 2008 and we anticipate that arbitration will begin in October of 2008. We believe these claims are without merit, and intend to contest them vigorously. No provision has been recorded in the financial statements related to this matter.

On January 7, 2007, a former executive filed an arbitration demand with the American Arbitration Association, Dallas Texas, (the “Texas arbitration”) seeking the arbitration of claims associated with his employment. The Texas arbitration is scheduled to begin in September 2008. On September 5, 2007, a “Complaint for Damages and Other Relief” was also filed by the same former executive, in the Superior Court of the State of California, County of Santa Clara, No. 107CV-093592 (the “California litigation”). The California litigation generally contained the same claims as were filed in the Texas arbitration. A Motion to Compel Arbitration of the California litigation with the Texas arbitration was granted in December 2007. We have filed counterclaims against the former executive, who was terminated. The board determined this termination was for cause. We believe the claims associated with the Texas arbitration and the California litigation are without merit. We intend to vigorously contest these claims, and no provision has been recorded in the financial statements for either the Texas arbitration or the California litigation.

On August 17, 2006, a patent infringement lawsuit — captioned Deep Nines v. McAfee, Inc., No. 9:06CV174, (“Deep Nines litigation”) was filed in the United States District Court for the Eastern District of Texas. The lawsuit asserts that (i) several of our Enterprise products infringe a Deep Nines’ patent, and (ii) we falsely marked certain products with a McAfee patent that was abandoned after its issuance. The lawsuit seeks preliminary and permanent injunctions against the sale of certain products as well as damages. We have counter-asserted that Deep Nines has infringed various McAfee patents. The Deep Nines litigation is still in the discovery stage thus we are unable to determine the ultimate outcome at this time. However, we believe that we have meritorious defenses to this lawsuit and intend to vigorously defend against it. No provision has been recorded in the financial statements for this matter.

In addition, we are engaged in certain legal and administrative proceedings incidental to our normal business activities and believe that these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A.   Risk Factors

Investing in our common stock involves a high degree of risk. Some but not all of the risks we face are described below. Any of the following risks could materially adversely affect our business, operating results financial condition and cash flows and reduce the value of an investment in our common stock.

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We face intense competition and we expect competitive pressures to increase in the future. This competition could have a negative impact on our business and financial results.

The markets for our products are intensely competitive and we expect both product and pricing competition to increase. If our competitors gain market share in the markets for our products, our sales could grow more slowly or decline. Competitive pressures could also lead to increases in expenses such as advertising expenses, product rebates, product placement fees, and marketing funds provided to our channel partners.

Advantages of larger competitors

Our principal competitors in each of our product categories and geographic markets are described in “Business — Competition” in our 2007 Form 10-K. Our competitors include some large enterprises such as Microsoft, Cisco Systems, Symantec, IBM, Google and Trend Micro. Some of our competitors have longer operating histories, more extensive international operations, greater name recognition, larger technical staffs, established relationships with more distributors and hardware vendors and/or greater financial, technical and marketing resources than we do.

Increasingly, our competitors are large vendors of hardware or operating system software. These competitors are continuously incorporating system and network protection functionality into their products, and enhancing that functionality either through internal development or increasingly through acquisitions. For example, in 2006 Microsoft released its consumer security solution and continues to boost the security functionality of its Windows platform through its acquisition strategy. More details about competitors expanding their system and network protection offerings are described in “Business — Competition” in our 2007 Form 10-K. These large vendors have significantly greater product development and acquisition budgets and resources than we do. This might enable them to provide greater functionality and to expand that functionality more quickly than we are able to do.

Consumer business competition

More than 40% of our revenue comes from our consumer business. Our growth of this business relies on direct sales and sales through relationships with ISPs such as AOL, Cox and Comcast, and PC OEMs, such as Acer, Dell, Sony Computer and Toshiba. As competition in this market increases, we have and will continue to experience pricing pressures that could have a negative effect on our ability to sustain our revenue and market share growth. As our consumer business becomes increasingly more dependent upon the partner model, our retail businesses may continue to decline. Further, as penetration of the consumer anti-virus market through the ISP model increases, we expect that pricing and competitive pressures in this market will become even more acute.

Low-priced or free competitive products

Security protection is increasingly being offered by third parties at significant discounts to our prices or, in some cases is bundled for free. For example, Microsoft over time has sought to add security features to its operating systems that would provide functionality similar to what our products offer, while at the same time making it more difficult for us to integrate our products with its operating systems. The widespread inclusion of lower-priced or free products that perform the same or similar functions as our products within computer hardware or other companies’ software products could reduce the perceived need for our products or render our products obsolete and unmarketable — even if these incorporated products are inferior or more limited than our products. The expansion of these competitive trends could have a significant negative impact on our sales and financial results.

We also face competition from numerous smaller companies, shareware and freeware authors and open source projects that may develop competing products, as well as from future competitors, currently unknown to us, who may enter the markets because the barriers to entry are fairly low. Smaller and/or newer companies often compete aggressively on price.

We face product development risks due to rapid changes in our industry. Failure to keep pace with these changes could harm our business and financial results.

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The markets for our products are characterized by rapid technological developments, continually-evolving industry trends and standards and ongoing changes in customer requirements. Our success depends on our ability to timely and effectively keep pace with these developments.

Keeping pace with industry changes

We must enhance and expand our product offerings to reflect industry trends, new technologies and new operating environments as they become increasingly important to customer deployments. For example, we must expand our offerings for virtual computer environments; we must continue to expand our security technologies for mobile environments to support a broader range of mobile devices such as mobile phones and personal digital assistants; we must develop products that are compatible with new or otherwise emerging operating systems, while remaining compatible with popular operating systems such as Linux, Sun’s Solaris, UNIX, Macintosh OS_X, and Windows XP, NT and Vista; and we must continue to expand our business models beyond traditional software licensing and subscription models. Specifically, software-as-a-service (SaaS) is becoming an increasingly important method and business model for the delivery of applications. Because of the advantages that SaaS models offer to customers over traditional software sales and licensing, competitors using SaaS models to a greater extent than we do could enjoy growth in their businesses and, as a result, we could lose business to such competitors.

We must also continuously work to ensure that our products meet changing industry certifications and standards. Failure to keep pace with any changes that are important to our customers could cause us to lose customers and could have a negative impact on our business and financial results.

Impact of product development delays or competitive announcements

Our ability to adapt to changes can be hampered by product development delays. We may experience delays in product development as we have at times in the past. Complex products like ours may contain undetected errors or version compatibility problems, particularly when first released, which could delay or adversely impact market acceptance. In addition, we may choose not to deliver a previously announced, partially-developed product, thereby increasing our development costs without a corresponding benefit. For example, if Microsoft incorporates a product that performs the same or similar function as one of our products under development into the Windows platform, we might discontinue development if we believe the Microsoft product will undermine the market for our product. This could happen even if Microsoft’s product is inferior or more limited than our product, especially if the Microsoft product is lower-priced or made available at no additional cost to customers. The occurrence of these events could negatively impact our business.

If our products do not work properly, we could experience negative publicity, damage to our reputation, legal liability, declining sales and increased expenses.

Failure to protect against security breaches

Our products are used to protect and manage computer systems and networks that may be critically important to our customers. Customers rely on our products to protect against security risks, prevent the loss of sensitive data and manage compliance activities. Because of the complexity of our products, they could contain undetected errors when first introduced and when new versions or enhancements are released. We have from time to time found errors in versions of our products, and we may find such errors in the future. Furthermore, because of the complexity of the environments in which our products operate, our products may have errors or defects that customers identify after deployment.

Failures, errors or defects in our products could result in security breaches or compliance violations for our customers, disruption or damage to their networks or other negative consequences. Any such product problems could have a negative impact on us as well. For example, failure of our products to identify or block viruses could result in negative publicity, damage to our reputation, declining sales, increased expenses and customer relation issues. Such failures could also result in product liability damage claims against us by our customers, even though our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. Furthermore, the correction of defects could divert the attention of engineering personnel from our product development efforts. A major security breach at one of our customers that is attributable to or not

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preventable by our products could be very damaging to our business. Any actual or perceived breach of network or computer security at one of our customers, regardless of whether the breach is attributable to our products, could adversely affect the market’s perception of our security products.

False alarms

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

Our email and web solutions (anti-spam, anti-spyware and safe search products) may falsely identify emails, programs or web sites as unwanted “spam”, “potentially unwanted programs” or “unsafe.” They may also fail to properly identify unwanted emails, programs or unsafe web sites, particularly because spam emails, spyware or malware are often designed to circumvent anti-spam or spyware products and to incorrectly identify legitimate web sites as unsafe. Parties whose emails or programs are incorrectly blocked by our products, or whose web sites are incorrectly identified as unsafe or as utilizing phishing techniques, may seek redress against us for labeling them as spammers or unsafe and/or for interfering with their businesses. In addition, false identification of emails or programs as unwanted spam or potentially unwanted programs may discourage potential customers from using or continuing to use these products.

Customer misuse of products

Our products may also not work properly if they are misused or abused by customers or non-customer third parties who obtain access and use of our products. These situations may arise where an organization uses our products in a manner that impacts their end users’ or employees’ privacy or where our products are misappropriated to censor private access to the Internet. Any of these situations could impact the perceived reliability of our products, result in negative press coverage, negatively affect our reputation and adversely impact our financial results.

Our international operations involve risks that could divert the time and attention of management, increase our expenses and otherwise adversely impact our business and financial results.

Our international operations increase our risks in several aspects of our business, including but not limited to risks relating to revenue, legal and tax compliance, and the overall political climate and potential political instability. Net revenue in our operating regions outside of North America represented 49% of total net revenue in the three months ended March 31, 2008, increasing from 48% in the three months ended March 31, 2007. The risks associated with our continued focus on international operations could adversely affect our business and financial results.

Revenue risks

Revenue risks include, among others, longer payment cycles, greater difficulty in collecting accounts receivable, tariffs and other trade barriers, seasonality, currency fluctuations, and the high incidence of software piracy and fraud in some countries. The primary product development risk to our revenue is our ability to deliver new products in a timely manner and to successfully localize our products for a significant number of international markets in different languages.

Legal and compliance risks

We face a variety of legal and compliance risks.  One primary legal risk is that some of our computer security solutions, particularly those incorporating encryption technology, may be subject to export restrictions. As a result, some products cannot be exported to international customers without prior United States (“U.S.”) government approval. The list of products and end users for which export approval is required, and the related regulatory policies, are subject to revision by the U.S. government at any time. The cost of compliance with U.S. and

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international export laws and changes in existing laws could affect our ability to sell certain products in certain markets and could have a material adverse effect on our international revenue and expense. If we, or our resellers, fail to comply with applicable law and regulations, we may become subject to penalties and fines or restrictions that may adversely affect our business.

Another significant legal risk resulting from our international operations is compliance with the Foreign Corrupt Practices Act (“FCPA”). In many foreign countries, particularly in those with developing economies, it may be common for non-McAfee personnel to engage in business practices that are prohibited by the FCPA or other U.S. laws and regulations. For example, in some countries it is customary to make payments to government regulators in order to encourage prompt and desirable regulatory actions. Such payments by U.S. companies, employees or agents of U.S. companies are prohibited by the FCPA. Although we have implemented training along with policies and procedures designed to ensure compliance with this and similar laws, there can be no assurance that all of our employees, and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies. Any such violation, even if prohibited by our policies and training programs, could have a material adverse effect on our business.

Other legal risks include international labor laws and our relationship with our employees and regional work councils; compliance with more stringent consumer protection and privacy laws; and unexpected changes in regulatory requirements. Our principal tax risks are potentially adverse tax consequences due to foreign value-added taxes, restrictions on the repatriation of earnings and changes in tax laws.

Currency exchange and interest rate risks

A significant portion of our transactions outside of the U.S. are denominated in foreign currencies. Accordingly, our future operating results will continue to be subject to fluctuations in foreign currency rates. Fluctuations in currency exchange rates and economic instability, such as higher interest rates in the U.S. and inflation, could reduce our customers’ ability to obtain financing for software products, or could make our products more expensive or could increase our costs of doing business in certain countries During the three months ended March 31, 2008 and 2007, we recorded a net foreign currency transaction loss of $0.9 million and $0.7 million respectively in our consolidated statements of income and comprehensive income. We may be positively or negatively affected by fluctuations in foreign currency rates in the future, especially if international sales continue to grow as a percentage of our total sales.

General operating risks

More general risks of international business operations include the increased costs of establishing, managing and coordinating the activities of geographically dispersed and culturally diverse operations (particularly sales and support, and shared service centers) located on multiple continents in a wide range of time zones.

We face a number of risks related to our product sales through distributors and other third parties.

Significant percentage of sales through distributors

We sell a significant amount of our products through third party intermediaries such as distributors, value-added resellers, PC OEMs, ISPs and other distribution channel partners (referred to collectively as distributors). Reliance on third parties for distribution exposes us to a variety of risks, some of which are described below, that could have a material adverse impact on our business and financial results.

Limited control over timing of product delivery

We have limited control over the timing of the delivery of our products to customers by third-party distributors. We generally do not require our resellers and OEM partners to meet minimum sales volumes, so their sales may vary significantly from period to period. In particular, the volume of our products shipped by our OEM partners depends on the volume of computers shipped by the PC OEMs, which is outside of our control. These factors can make it difficult for us to forecast our revenue accurately and they also can cause our revenue to fluctuate unpredictably.

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Competitive aspects of distributor relationships

Our distributors may sell other vendors’ products that compete with our products. Although we offer our distributors incentives to focus on sales of our products, they may give greater priority to products of our competitors, for a variety of reasons. In order to maximize sales of our products rather than those of our competitors, we must effectively support these partners with, among other things, appropriate financial incentives to encourage them to invest in sales tools, such as online sales and technical training and product collateral needed to support their customers and prospects. If we do not properly support our partners, they may focus more on our competitors’ products, and their sales of our products would decline.

Our PC OEMs partners are also in a position to exert competitive pricing pressure. Competition for OEMs’ business continues to increase, and it gives the OEMs leverage to demand lower product prices from us in order to secure their business. Even if we negotiate what we believe are favorable pricing terms when we first establish a relationship with an OEM, at the time of the renewal of the agreement, we may be required to renegotiate our agreement with them on less favorable terms. Lower net prices for our products would adversely impact our operating margins.

Loss of distributors

We invest significant time, money and resources to establish and maintain relationships with our distributors, but we have no assurance that any particular relationship will continue for any specific period of time. The agreements we have with our distributors, including those with Ingram Micro Inc. and Tech Data Corporation, our two largest distributors, can generally be terminated by either party without cause with no or minimal notice or penalties. If any significant distributor terminates its agreement with us, we could experience a significant interruption in the distribution of our products and our revenues could decline. We could also lose the benefit of our investment of time, money and resources in the distributor relationship.

A significant portion of our net revenue is attributable to a fairly small number of distributors. Our top ten distributors represented 37% of our net revenue in each period for the three months ended March 31, 2008 and 2007. Reliance on a relatively small number of third parties for a significant portion of our distribution exposes us to significant risks to net revenue and net income if our relationship with one or more of our key distributors is terminated for any reason.

Although a distributor can terminate its relationship with us for any reason, one factor that may lead to termination is a divergence of our business interests and those of our distributors and potential conflicts of interest. For example, our acquisition activity has resulted in the termination of distributor relationships that no longer fit with the distributors’ business priorities. Future acquisition activity could cause similar termination of, or disruption in, our distributor relationships, which could adversely impact our revenues.

Credit risk

Some of our distributors may experience financial difficulties, which could adversely impact our collection of accounts receivable. Our allowance for doubtful accounts was approximately $5.9 million as of March 31, 2008. We regularly review the collectability and credit-worthiness of our distributors to determine an appropriate allowance for doubtful accounts. Our uncollectible accounts could exceed our current or future allowances, which could adversely impact our financial results.

We face risks associated with past and future acquisitions.

We may buy or make investments in complementary companies, products and technologies. We may not realize the anticipated benefits from these acquisitions. Future acquisitions could result in significant acquisition-related charges and dilution to our stockholders in addition to the risks noted below.

We face a number of risks relating to our acquisitions, including the following, any of which could harm our ability to achieve the anticipated benefits of our past or future acquisitions.

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Integration

Integration of an acquired company or technology is a complex, time consuming and expensive process. The successful integration of an acquisition requires, among other things, that we integrate and retain key management, sales, research and development and other personnel; integrate the acquired products into our product offerings from both 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.

The geographic distance between the companies, the complexity of the technologies and operations being integrated and the disparate corporate cultures being combined may increase the difficulties of integrating an acquired company or technology. Management’s focus on the integration of operations may distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts. In addition, it is common in the technology industry for aggressive competitors to attract customers and recruit key employees away from companies during the integration phase of an acquisition. If integration of our acquired businesses or assets is not successful, we may experience adverse financial or competitive effects.

Internal controls, policies and procedures

Acquired companies or businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, billing, information and other systems. This risk is amplified by the increased costs and efforts in connection with compliance with the Sarbanes-Oxley Act. Acquisitions of privately held and/or non-US companies are particularly challenging because their prior practices in these areas typically do not meet the requirements of the Sarbanes-Oxley Act.

Use of cash and securities

Our available cash and securities may be used to acquire or invest in companies or products. Moreover, when we acquire a company, we may have to incur or assume that company’s liabilities, including liabilities that may not be fully known at the time of acquisition. To the extent we continue to make acquisitions, we will require additional cash and/or shares of our common stock as payment. The use of securities would cause dilution for our existing stockholders.

Key employees from acquired companies may be difficult to retain and assimilate

The success of many acquisitions depends to a great extent on our ability to retain key employees from the acquired company. This can be challenging, particularly in the highly competitive market for technical personnel. Retaining key executives for the long-term can also be difficult due to other opportunities available to them. It could be difficult, time consuming and expensive to replace any key management members or other critical personnel that do not accept employment with McAfee following the acquisition. In addition to retaining key employees, we must integrate them into our company, which can be difficult and costly. Changes in management or other critical personnel may be disruptive to our business and might also result in our loss of some unique skills and the departure of existing employees and/or customers.

Accounting consequences

Acquisitions may result in substantial accounting charges for restructuring and other expenses, write-offs of in-process research and development, future impairment of goodwill, amortization of intangible assets and stock-based compensation expense, any of which could materially adversely affect our operating results.

Following an acquisition, we may be required to defer the recognition of revenue that we receive from the sale of products that we acquired, or from the sale of a bundle of products that includes products that we acquired, if we have not established vendor specific objective evidence (“VSOE”) of the separate value of the acquired product. A delay in the recognition of revenue from sales of acquired products or bundles that include acquired products may cause fluctuations in our quarterly financial results and may adversely affect our operating margins. If our quarterly

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financial results or our predictions of future financial results fail to meet the expectations of securities analysts and investors, our stock price could be negatively affected.

Critical personnel may be difficult to attract, assimilate and retain.

Our success depends in large part on our ability to attract and retain senior management personnel, as well as technically qualified and highly-skilled sales, consulting, technical, finance and marketing personnel. Other than members of executive management who have “at will” employment agreements, our employees are not typically subject to an employment agreement or non-competition agreement. In the recent past we have experienced significant turnover in our senior management team and in our worldwide sales and finance organizations and replacing this personnel remains difficult.

It could be difficult, time consuming and expensive to replace any key management member or other critical personnel. Integrating new management and other key personnel also may be difficult and costly. Changes in management or other critical personnel may be disruptive to our business and might also result in our loss of unique skills and the departure of existing employees and/or customers. It may take significant time to locate, retain and integrate qualified management personnel.

Other personnel related issues that we may encounter include:

Competition for personnel; need for competitive pay packages

Competition for qualified individuals in our industry is intense. To attract and retain critical personnel, we believe that we must maintain an open and collaborative work environment. We also believe we need to provide a competitive compensation package, including stock options, other stock awards and other incentives. Increases in shares available for issuance under our stock option plans require stockholder approval. Institutional stockholders, or our other stockholders, may not approve future requests for increases in shares available under our equity incentive plans. For example, at our 2003 annual meeting held in December 2003, our stockholders did not approve a proposed increase in shares available for grant under our employee stock option plans. We continue to evaluate our compensation programs and in particular our equity compensation philosophy. In the future, we may decide to issue fewer stock options, RSAs, RSUs or PSUs, possibly impairing our ability to attract and retain necessary personnel. Conversely, issuing a comparable number of stock options RSAs, RSUs or PSUs, could adversely impact our results of operations due to the accounting charges required in connection with equity compensation and the dilutive impact on earning per share.

Risks relating to new hires and senior management changes

We continue to hire in key areas and have added a number of new employees in connection with our acquisitions. We have also increased our hiring in Bangalore, India in connection with the relocation of a significant portion of our research and development operations to India.

During 2007, we experienced significant changes in our senior management team, as a number of officers resigned or were terminated and several key management positions were vacant for a significant period of time. In April 2007, David DeWalt was hired as our chief executive officer and president. Later in 2007 we also appointed other senior executives. In March 2008, our chief financial officer Eric Brown resigned and in April 2008, we announced we had hired Albert “Rocky” Pimentel as our new chief financial officer. We may continue to experience changes in senior management going forward.

For new employees, including senior management, there may be reduced levels of productivity as recent additions or hires are trained or otherwise assimilate and adapt to our organization and culture. The significant turnover in our senior management team during 2007 and 2008 may make it difficult to attract new employees and retain existing employees. Further, this turnover may also make it difficult to execute on our business plan and achieve our planned financial results.

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Our financial results can fluctuate significantly, making it difficult for us to accurately estimate operating results.

Impact of fluctuations

Over the years our revenues, gross margins and operating results have fluctuated significantly from quarter to quarter and from year to year, and we expect fluctuations in our operating results to continue in the future. Thus, our operating results for prior periods may not be effective predictors of our future performance. The fluctuations make it difficult for us to accurately estimate operating results. Furthermore, because our expenses are based in part on our expectations regarding future revenues, expenses in the short term are relatively fixed. This makes it difficult for us to adjust our expenses in time to compensate for any unexpected revenue shortfall in a given period.

Volatility in our quarterly financial results may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our stock. If our quarterly financial results or our predictions of future financial results fail to meet the expectations of securities analysts and investors, our stock price could be negatively affected.

Factors that may cause our revenues, gross margins and other operating results to fluctuate significantly from period to period, include, but are not limited to the following:

Timing of product orders

A significant portion of our revenue in any quarter comes from previously deferred revenue, which is a somewhat predictable component of our quarterly revenue. However, a meaningful part of revenue depends on contracts entered into or orders booked and shipped in the current quarter. Typically we generate the most orders in the last month of our quarters. Some customers believe they can enhance their bargaining power by waiting until the end of our quarter to place their order. Any failure or delay in closing significant new orders in a given quarter could have a material adverse impact on our results for that quarter. Also, personnel limitations and system processing constraints could adversely impact our ability to process the large number of orders that typically occur near the end of a fiscal quarter.

Reliability and timeliness of expense data

We increasingly rely upon third-party manufacturers to manufacture our hardware-based products, therefore, our reliance on their ability to provide us with timely and accurate product cost information exposes us to risk. A failure of our third-party manufacturers to provide us with timely and accurate product cost information may impact our costs of goods sold and negatively impact our ability to accurately and timely report our operating results.

Issues relating to third party distribution, manufacturing and fulfillment relationships

We rely heavily on third parties to distribute our products. Any changes in the performance of the relationships with our distribution partners can impact our operating results. We also rely on third parties to manufacture our products. Changes in our supply chain could result in product fulfillment delays that contribute to fluctuations in operating results from period to period. We typically fulfill delivery of our hardware-based products from centralized distribution centers. We have in the past and may in the future make changes in our product delivery network. Changes in our product delivery network may disrupt our ability to timely and efficiently meet our product delivery commitments, particularly at the end of a quarter. As a result, we may experience increased costs in the short term as temporary delivery solutions are implemented to address unanticipated delays in product delivery. In addition, product delivery delays may negatively impact our ability to recognize revenue if shipments are delayed at the end of a quarter.

Product mix

Another source of fluctuations in our operating results and, in particular, gross profit margins, is the mix of products we sell and services we offer, including the mix between corporate versus consumer products; hardware-based compared to software-based products; perpetual licenses versus subscription licenses; and maintenance and support services compared to consulting services or product revenue. Product mix can impact operating expenses as

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well as the amount of revenue and the timing of revenue recognition, so our profitability can fluctuate significantly based on product mix.

Timing of new products and customers

The timing of the introduction and adoption of new products, product upgrades or updates by us or our competitors can have a significant impact on revenue from period to period. For example, revenues tend to be higher shortly after we introduce new products compared to periods without new products. Our revenues may decline after new product introductions by competitors. In addition, the volume, size, and terms of new customer licenses can cause fluctuations in our revenue.

Additional cash and non-cash sources of fluctuations

A number of other factors that are peripheral to our core, ongoing business operations and our cash flow also contribute to variability in our operating results. These include, but are not limited to, expenses related to our acquisition and disposition activities, stock-based compensation expense, unanticipated costs associated with litigation or investigations, costs related to Sarbanes-Oxley compliance efforts, costs and charges related to certain extraordinary events such as restructurings and financial restatements, substantial declines in estimated values of long-lived assets below the value at which they are reflected in our financial statements, and changes in generally accepted accounting principles.

Conditions and changes in the national and global economic and political environments may adversely affect our business and financial results.

Adverse economic conditions in markets in which we operate can harm our business. Economic growth in the United States slowed in the fourth quarter of 2007 and remained slow for the first quarter of 2008. Many customers may delay or reduce technology purchases as a result of this slow down or if the United States’ economy remains slow or contracts or other countries’ economies slow. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, weakness in the end-user market could negatively affect the cash flow of our distributors and resellers who could, in turn, delay paying their obligations to us. This would increase our credit risk exposure and cause delays in our recognition of revenues on future sales to these customers. Specific economic trends, such as declines in the demand for PCs, servers, and other computing devices, or softness in corporate information technology spending, could have a more direct impact on our business. Any of these events would likely harm our business, operating results and financial condition.

Recent turmoil in the political environment in many parts of the world, including terrorist activities and military actions, the continuing tension in and surrounding Iraq, and increases in energy costs due to instability in oil-producing regions may continue to put pressure on global economic conditions. If global economic and market conditions, or economic conditions in the United States or other key markets deteriorate, we may experience material impacts on our business, operating results, and financial condition.

We have experienced, and may continue to experience, material weaknesses and significant deficiencies in our internal control and financial reporting environment, which impacts the accuracy, completeness and timeliness of our external financial reporting.

Section 404 of the Sarbanes-Oxley Act requires that management report annually on the effectiveness of our internal control over financial reporting and identify any material weaknesses in our internal control and financial reporting environment. In our Form 10-K for the year ended December 31, 2007, our management identified a material weakness relating to our accounting for income taxes. We have implemented, and will continue to implement, additional controls and procedures to address the material weakness related to accounting for income taxes. See Item 9A, “Controls and Procedures” in our 2007 Form 10-K and Item 4, “Controls and Procedures” in this Form 10-Q, for details of these material weakness remediation programs. These efforts have resulted, and could further result, in significant expenses and could divert management attention away from operating our business. Even though our management believes that our efforts to remediate internal control deficiencies have improved the

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operation of our internal control over financial reporting, we cannot be certain that the measures we have taken or we are planning to take will sufficiently and satisfactorily remediate the identified material weaknesses. Ongoing material weaknesses in internal controls create a reasonable possibility that a material misstatement of our interim and annual financial statements would not be prevented or detected on a timely basis.

If management identifies additional material weaknesses or significant deficiencies in the future, their correction could require additional remedial measures which could be costly and time-consuming. In addition, the presence of further material weaknesses could result in financial statement errors which in turn could require us to restate our operating results. If a material weakness is identified for a future period year-end or if our previously identified material weaknesses are not remediated, our independent auditors would be unable to express an opinion on the effectiveness of our internal controls. This in turn could damage investor confidence in the accuracy and completeness of our financial reports, which could affect our stock price and potentially subject us to litigation.

We face numerous risks relating to the enforceability of our intellectual property rights and our use of third party intellectual property, many of which could result in the loss of our intellectual property rights as well as other material adverse impacts on our business and financial results and condition.

Limited protection of our intellectual property rights against potential infringers

We rely on a combination of contractual rights, trademarks, trade secrets, patents and copyrights to establish and protect proprietary rights in our software. However, the steps we have taken to protect our proprietary software may not deter its misuse, theft or misappropriation. Competitors may independently develop technologies or products that are substantially equivalent or superior to our products or that inappropriately incorporate our proprietary technology into their products. We are aware that a number of users of our security products have not paid license, technical support, or subscription fees to us. Certain jurisdictions may not provide adequate legal infrastructure for effective protection of our intellectual property rights. Changing legal interpretations of liability for unauthorized use of our software or lessened sensitivity by corporate, government or institutional users to refraining from intellectual property piracy or other infringements of intellectual property could also harm our business.

Frequency, expense and risks of intellectual property litigation in the network and system security market

Litigation may be necessary to enforce and protect our trade secrets, patents and other intellectual property rights. Similarly, we may be required to defend against claimed infringement by others. For example, as discussed in Item 1, “Legal Proceedings,” we are currently defending a patent infringement case that seeks to prevent us from selling certain of our products.

The litigation process is subject to inherent uncertainties, so we may not prevail in litigation matters regardless of the merits of our position. In addition to the expense and distraction associated with litigation, adverse determinations could cause us to lose our proprietary rights, prevent us from manufacturing or selling our products, require us to obtain licenses of patents or other intellectual property rights that may be held invalid or infringed upon by our products (licenses may not be available on reasonable commercial terms or at all), and subject us to significant liabilities, including monetary liabilities.

If we acquire technology to include in our products from third parties, our exposure to infringement actions may increase because we must rely upon these third parties to verify the origin and ownership of any software we acquire. Similarly, we face exposure to infringement actions if we hire software engineers who were previously employed by competitors and those employees inadvertently or deliberately incorporate proprietary technology of our competitors into our products despite efforts by our competitors and us to prevent such infringement.

Potential risks of using of “open source” software

Like many other software companies, we use and distribute “open source” software in order to add functionality to our products quickly and inexpensively. We face certain risks relating to our use of open source code. Open source license terms may be ambiguous and may result in unanticipated or uncertain obligations regarding our products. For example, the scope and requirements of the most common open source software license,

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the GNU General Public License (“GPL”) have not been interpreted in court. Our use of GPL or other open source software could subject certain portions of our proprietary software to the GPL requirements or other similar requirements. That may have an adverse impact on our sale of the products incorporating the open source software. Other forms of open source software licensing present license compliance risks for us. If we fail to comply with the license obligations, we could be sued and/or lose the right to use the open source code.

Our use of open source code could also result in us developing and selling products that infringe third-party intellectual property rights. It may be difficult for us to accurately determine the developers of the open source code and whether the code incorporates proprietary software. We have processes and controls in place that are designed to address these risks and concerns, including a review process for screening requests from our development organizations for the use of open source. However, we cannot be sure that all open source is submitted for approval prior to use in our products.

We also have processes and controls in place to review the use of open source in the products developed by companies that we acquire. Despite having conducted appropriate due diligence prior to completing the acquisition, products or technologies that we acquire may nonetheless include open source software that was not identified during the initial due diligence. Our ability to commercialize products or technologies of acquired companies that incorporate open source software or to otherwise fully realize the anticipated benefits of any acquisition may be restricted for the reasons described in the preceding two paragraphs.

Our strategic alliances and our relationships with manufacturing partners expose us to a range of business risks and uncertainties that could have a material adverse impact on our business and financial results.

Strategic alliances

Uncertainty of realizing anticipated benefits.  We have entered into strategic alliances with numerous third parties to support our future growth plans. These relationships may include technology licensing, joint technology development and integration, research cooperation, co-marketing activities and sell-through arrangements. We face a number of risks relating to our strategic alliances, including those described below. These risks may prevent us from realizing the desired benefits from our strategic alliances on a timely basis or at all, which could have a negative impact on our business and financial results.

Challenges relating to integrated products.  Strategic alliances require significant coordination between the parties involved, particularly if an alliance requires that we integrate the other company’s products with our products. This could involve significant time and expenditure by our technical staff and the technical staff of our strategic partner. The integration of products from different companies may be more difficult than we anticipate, and the risk of integration difficulties, incompatible products and undetected programming errors or defects may be higher than that normally associated with new products. The marketing and sale of products that result from strategic alliances might also be more difficult than that normally associated with new products. Sales and marketing personnel may require special training, as the new products may be more complex than our other products.

We invest significant time, money and resources to establish and maintain relationships with our strategic partners, but we have no assurance that any particular relationship will continue for any specific period of time. Our agreements relating to our strategic alliances are terminable without cause with no or minimal notice or penalties. If we lose a significant strategic partner, we could lose the benefit of our investment of time, money and resources in the relationship. In addition, we could be required to incur significant expenses to develop a new strategic alliance or to determine and implement an alternative plan to pursue the opportunity that we targeted with the former partner.

Third-party manufacturing relationships

Less control of the manufacturing process and outcome.  We rely on a limited number of third parties to manufacture some of our hardware-based network protection and system protection products. We expect the number of our hardware-based products and our reliance on third-party manufacturers to increase as we continue to expand these types of solutions. We also rely on third parties to replicate and package our boxed software products.

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This reliance on third parties involves a number of risks that could have a negative impact on our business and financial results. These risks include, but are not limited to, lack of control over the quality and timing of the manufacturing process, limited control over the cost of manufacturing, and the potential absence or unavailability of adequate manufacturing capacity.

Inadequate capacity.  If any of our third-party manufacturers fails for any reason to manufacture products of acceptable quality, in required volumes, and in a cost-effective and timely manner, it could be costly as well as disruptive to product shipments. We might be required to seek additional manufacturing capacity, which might not be available on commercially reasonable terms or at all. Even if additional capacity was available, the process of qualifying a new vendor could be lengthy and could cause significant delays in product shipments and could strain partner and customer relationships. In addition, supply disruptions or cost increases could increase our costs of goods sold and negatively impact our financial performance. Our risk is relatively greater in situations where our hardware products contain critical components supplied by a single or a limited number of third parties. Any significant shortage of components could lead to cancellations of customer orders or delays in placement of orders, which would adversely impact revenue.

Hardware obsolescence.  Hardware-based products may face greater obsolescence risks than software products. We could incur losses or other charges in disposing of obsolete hardware inventory. In addition, to the extent that our third-party manufacturers upgrade or otherwise alter their manufacturing processes, our hardware-based products could face supply constraints or risks associated with the transition of hardware-based products to new platforms. This could increase the risk of losses or other charges associated with obsolete inventory.

Our tax strategy may expose us to risk.

We are generally required to account for taxes in each jurisdiction in which we operate. This process may require us to make assumptions, interpretations and judgments with respect to the meaning and application of promulgated tax laws and related administrative and judicial interpretations thereof of the jurisdictions in which we operate. The positions that we take and our interpretations of the tax laws may differ from the positions and interpretations of the tax authorities in the jurisdictions in which we operate. We are presently under audit in many jurisdictions, including notably the United States, California and The Netherlands. An adverse outcome in one or more of these ongoing audits, or in any future audits that may occur, could have a significant negative impact on our cash position and net income. Although we have established reserves for these audit contingencies, there can be no assurance that the reserves will be sufficient to cover our ultimate liabilities.

Our provision for income taxes is subject to volatility and can be adversely affected by a variety of factors, including but not limited to changes in tax laws, regulations and accounting principles (including accounting for uncertain tax positions), or interpretations of those changes. Significant judgment is required to determine the recognition and measurement attribute prescribed in FIN 48. In addition, FIN 48 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or goodwill.

Increased customer demands on our technical support services may adversely affect our relationships with our customers and negatively impact our financial results.

We offer technical support services with many of our products. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors or successfully integrate support for our customers. Further customer demand for these services, without corresponding revenues, could increase costs and adversely affect our operating results.

We have outsourced a substantial portion of our worldwide consumer support functions to third-party service providers. If these companies experience financial difficulties, service disruptions, do not maintain sufficiently skilled workers and resources to satisfy our contracts, or otherwise fail to perform at a sufficient level under these contracts, the level of support services to our customers may be significantly disrupted, which could materially harm our relationships with these customers.

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We face risks related to customer outsourcing to system integrators.

Some of our customers have outsourced the management of their information technology departments to large system integrators. If this trend continues, our established customer relationships could be disrupted and our products could be displaced by alternative system and network protection solutions offered by system integrators that do not bundle our solutions. Significant product displacements could negatively impact our revenue and have a material adverse effect on our business.

If we fail to effectively upgrade or modify our information technology system, we may not be able to accurately report our financial results or prevent fraud.

As part of our efforts to continue improving our internal control over financial reporting, we upgraded our existing SAP information technology system during 2007 in order to automate certain controls that were previously performed manually. We may experience difficulties in transitioning to new or upgraded systems and in applying maintenance patches to existing systems, including loss of data and decreases in productivity as personnel become familiar with new, upgraded or modified systems. Our management information systems will require modification and refinement as we grow and as our business needs change, which could prolong the difficulties we experience with systems transitions, and we may not always employ the most effective systems for our purposes. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems and respond to changes in our business needs, our operating results could be harmed or we may fail to meet our reporting obligations. We may also experience similar results if we have difficulty applying routine maintenance patches to existing systems in a timely manner.

Computer “hackers” may damage our products, services and systems.

Due to our high profile in the network and system protection market, we have been a target of computer hackers who have, among other things, created viruses to sabotage or otherwise attack our products and services, including our various web sites. For example, we have seen the spread of viruses, or worms, that intentionally delete anti-virus and firewall software. Similarly, hackers may attempt to penetrate our network security and misappropriate proprietary information or cause interruptions of our internal systems and services. Also, a number of web sites have been subject to denial of service attacks, where a web site is bombarded with information requests eventually causing the web site to overload, resulting in a delay or disruption of service. If successful, any of these events could damage users’ or our own computer systems. In addition, since we do not control disk duplication by distributors or our independent agents, media containing our software may be infected with viruses.

Business interruptions may impede our operations and the operations of our customers.

We are continually updating or modifying our accounting and other internal and external facing business systems. Modifications of these types of systems are often disruptive to business and may cause us to incur higher costs than we anticipate. Failure to properly manage this process could materially harm our business operations.

In addition, we and our customers face a number of potential business interruption risks that are beyond our respective control. Natural disasters or other events could interrupt our business or the business of our customers, and each of us is reliant on external infrastructure that may be antiquated. Our corporate headquarters in California is located near a major earthquake fault. The potential impact of a major earthquake on our facilities, infrastructure and overall operations is not known, but could be quite severe. Despite safety precautions that have been implemented, an earthquake could seriously disrupt our entire business process. We are largely uninsured for losses and business disruptions caused by an earthquake and other natural disasters.

We face the risk of a decrease in our cash balances and losses in our investment portfolio.

Investment income is an important component of our net income. The ability to achieve our investment objectives is affected by many factors, some of which are beyond our control. We rely on third-party money managers to manage the majority of our investment portfolio in a risk-controlled framework. Our cash throughout the world is invested in high-quality fixed-income securities and is affected by changes in interest rates. Interest

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rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Most amounts held outside the United States could be repatriated to the United States, but, under current law, would be subject to U.S. federal income tax, less applicable foreign tax credits.

The outlook for our investment income is dependent on the future direction of interest rates, the amount of any share repurchases or acquisitions that we effect and the amount of cash flows from operations that are available for investment. Any significant decline in our investment income or the value of our investments as a result of falling interest rates, deterioration in the credit of the securities in which we have invested, or general market conditions, could have an adverse effect on our net income.

Our investment strategy attempts to manage interest rate risk and limit credit risk. By policy, we only invest in what we view as very high quality debt securities and our largest holdings are short-term U.S. Government securities and high-quality, well-collateralized asset-backed securities. We do not hold any sub-prime mortgages, auction rate securities or structured investment vehicles. We do not invest in below investment-grade securities.

Our historical stock option granting practices have resulted in, and could continue to result in, continued or new litigation, regulatory proceedings, government enforcement actions and remedial actions, all of which have had, and will continue to have, a negative impact on our business and financial results.

In May 2006, we announced that we had commenced an investigation of our historical stock option granting practices. As a result of that investigation, we concluded that certain stock options had been accounted for using incorrect measurement dates, which, in some instances, were chosen with the benefit of hindsight so as to intentionally give more favorable exercise prices. Consequently, certain of our historical financial statements needed to be restated to correct improper accounting for improperly priced stock options. In December 2007, we filed our Form 10-K for 2006, which included the effects of a restatement of our audited consolidated financial statements for 2004 and 2005, our selected financial data for 2002 through 2005, and our unaudited quarterly financial data for all quarters in 2005 and the first quarter of 2006.

Shortly after we announced an internal investigation of our historical stock option granting practices, both the SEC and the DOJ, commenced investigations of our stock option practices. The filing of our restated consolidated financial statements did not resolve the pending SEC or DOJ inquiries. We are engaged in ongoing discussions with, and continue to provide information to, the SEC regarding certain of our prior period consolidated financial statements. The resolution of the SEC inquiry into our historical stock option granting practices could require us to file additional restatements of our prior consolidated financial statements or require that we take other actions not presently contemplated.

As part of the remedial actions we have taken in connection with the investigation and restatement, we terminated the employment of certain employees, including former executive officers. We are involved in litigation and other legal proceedings in connection with such terminations, as well as other stockholder lawsuits related to our historical stock option granting practices. We expect that there may be additional legal proceedings in the future which will require additional management time and additional expense. Any resolution of the legal proceedings may require us to make severance, settlement or other related payments in the future. See Note 11 to the consolidated financial statements included elsewhere in the report for more details about ongoing legal proceedings.

We cannot predict the outcome of the pending government inquiries or stockholder or other lawsuits, and we may face additional government inquiries, stockholder lawsuits and other legal proceedings. We cannot predict what, if any, enforcement action the SEC or DOJ will take with respect to our failure to be current in our periodic reports or our historical stock option granting practices.

As a result of our investigation and our conclusion that certain options had been mispriced, some of our employees and former employees were potentially exposed to significantly increased income tax liabilities and penalties and/or were unable to realize the benefits of their stock options. We have taken a number of steps to remedy this situation for employees, which has contributed to increased operating expenses. We believe we have taken, or are in the process of taking all corrective actions to compensate for the economic effects of mispriced stock

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options for many of our current and former employees and directors, but it is possible that there will be other actions required.

All of the events described above have required us to devote significant management time and to incur significant accounting, legal, and other expenses. These consequences have diverted management attention from business operations and have affected our financial condition and results of operations. We anticipate that these impacts will continue to varying degrees in future periods.

Pending or future litigation could have a material adverse impact on our results of operation, financial condition and liquidity.

In addition to intellectual property litigation, from time to time, we have been, and may be in the future, subject to other litigation including stockholder derivative actions or actions brought by current or former employees. Where we can make a reasonable estimate of the liability relating to pending litigation and determine that an adverse liability resulting from such litigation is probable, we record a related liability. As additional information becomes available, we assess the potential liability and revise estimates as appropriate. However, because of the inherent uncertainties relating to litigation, the amount of our estimates could be wrong. In addition to the related cost and use of cash, pending or future litigation could cause the diversion of management’s attention. In this regard, we and a number of our current and former officers and directors are involved in or the subject of various legal actions. Managing, defending and indemnity obligations related to these actions have caused significant diversion of management’s and the board of director’s time and resulted in material expense to us. See Note 11 to the consolidated financial statements for additional information with respect to currently pending legal matters.

We face risks related to our 2006 settlement agreement with the SEC.

On February 9, 2006, the United States District Court for the Northern District of California entered a final judgment permanently enjoining us and our officers and agents from future violations of the securities laws. This final judgment resolved the charges filed against us in connection with the SEC’s investigation of our accounting practices that commenced in March 2002. As a result of the judgment, we will forfeit for three years the ability to invoke the “safe harbor” for the forward-looking statements provision of the Private Securities Litigation Reform Act (“Reform Act”). This safe harbor provided us enhanced protection from liability related to forward-looking statements if the forward-looking statements were either accompanied by meaningful cautionary statements or were made without actual knowledge that they were false or misleading. While we may still rely on the “bespeaks caution” doctrine that existed prior to the Reform Act for defenses against securities lawsuits, without the statutory safe harbor, it may be more difficult for us to defend against any such claims. In addition, due to the permanent restraint and injunction against violating applicable securities laws, any future violation of the securities laws would be a violation of a federal court order and potentially subject us to a contempt order. For instance, if, at some point in the future, we were to discover a fact that caused us to restate our financial statements similar to the restatements that were the subject of the SEC action, we could be found to have violated the final judgment. We cannot predict whether the SEC might assert that our failure to remain current in our periodic reporting obligations or our historical stock option practices violated the final judgment or what, if any, enforcement action the SEC might take upon such a determination. Further, any collateral criminal or civil investigation, proceeding or litigation related to any future violation of the judgment, such as the compliance actions mandated by the judgment, could result in the distraction of management from our day-to-day business and may materially and adversely affect our reputation and results of operations.

Our stock price has been volatile and is likely to remain volatile.

During 2007 and up to the date of this filing, our stock price was highly volatile, ranging from a high of $41.35 to a low of $28.00. On April 30, 2008, our stock’s closing price was $33.25. Announcements, business developments, such as a material acquisitions or dispositions, litigation developments and our ability to meet the expectations of investors with respect to our operating and financial results, may contribute to current and future stock price volatility. In addition, third-party announcements such as those made by our partners and competitors may contribute to current and future stock price volatility. For example, future announcements by Microsoft

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Corporation related to its consumer and corporate security solutions may contribute to future volatility in our stock price. Certain types of investors may choose not to invest in stocks with this level of stock price volatility.

In addition to the volatility that is related to our business activities and those of others in our industry, our stock price may also experience volatility that is completely unrelated to our performance or that of the security industry. During 2007 through April 2008, the major US and international stock markets have been extremely volatile. Fluctuations in these broad market indices can impact McAfee’s stock price regardless of McAfee’s performance.

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

Under our certificate of incorporation, our board of directors has the authority to issue up to 5.0 million shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock and could have the effect of discouraging a change of control of the company or changes in management.

Our classified board and other provisions of Delaware law and our certificate of incorporation and bylaws, could also delay or make a merger, tender offer or proxy contest involving us or changes in our board of directors and management more difficult. For example, any stockholder wishing to make a stockholder proposal (including director nominations) at our 2008 annual meeting must meet the qualifications and follow the procedures specified under both the Securities Exchange Act of 1934 and our bylaws.

Our rights plan

Our board of directors has adopted a stockholders’ rights plan. The rights would become exercisable on the tenth day after a person or group announces the acquisition of 15% or more of our common stock or announces the commencement of a tender or exchange offer the consummation of which would result in ownership by the person or group of 15% or more of our common stock. If the rights become exercisable, the holders of the rights (other than the person acquiring 15% or more of our common stock) will be entitled to acquire in exchange for the rights’ exercise price, shares of our common stock or shares of any company in which we are merged with a value equal to twice the rights’ exercise price. The rights plan makes it more difficult for a third party to acquire a majority of our outstanding voting stock and discourages a change of control of the company not approved by our board of directors.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

Stock Repurchases

In January 2008, our board of directors authorized the repurchase of up to $750.0 million of our common stock in the open market or through privately negotiated transactions through July 2009, depending upon market conditions, share price and other factors. For the three months ended on March 31, 2008, we repurchased approximately 3.4 million shares of our common stock in the open market for approximately $113.4 million, excluding commission paid.

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The table below sets forth all repurchases by us of our common stock during the quarter ended March 31, 2008:

							Approximate Dollar
					Total Number of		Value of Shares
	Total				Shares Purchased as		That May Yet Be
	Number of		Average		Part of Publicly		Purchased Under Our
	Shares		Price Paid		Announced Plan or		Stock Repurchase
Period	Purchased		Per Share		Repurchase Program		Program
	(In thousands, except price per share)
February 1, 2008 through February 29, 2008		1,507	$	33.50		1,507	$	699,518
March 1, 2008 through March 31, 2008		1,890		33.29		1,890		636,593
Total		3,397	$	33.38		3,397

During the three months ended March 31, 2008, we also used $13.7 million to repurchase shares of common stock in connection with our obligation to holders of restricted stock units to withhold the number of shares required to satisfy the holders’ tax liabilities in connection with the vesting of such shares. These shares were not part of the publicly announced repurchase program.

Item 3.   Defaults upon Senior Securities

None.

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

None.

Item 5.   Other Information

None.

Item 6.   Exhibits

(a) Exhibits.  The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

McAfee Inc.

/s/  Keith S. Krzeminski

Keith S. Krzeminski

Chief Accounting Officer and
Senior Vice President of Finance

May 12, 2008

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EXHIBIT INDEX

		Incorporated by Reference
Exhibit			File	Exhibit		Filed with
Number	Description	Form	Number	Number	Filing Date	this 10-Q
3.1	Second Restated Certificate of Incorporation of the Registrant, as amended on December 1, 1997	S-4	333-48593	3.1	March 25, 1998
3.2	Certificate of Ownership and Merger between Registrant and McAfee, Inc.	10-Q	001-31216	3.2	November 8, 2004
3.3	Second Amended and Restated Bylaws of the Registrant.	10-Q	001-31216	3.3	November 8, 2004
3.4	Certificate of Designation of Series A Preferred Stock of the Registrant	10-Q	000-20558	3.3	November 14, 1996
3.5	Certificate of Designation of Rights, Preferences and Privileges of Series B Participating Preferred Stock of the Registrant	8-K	000-20558	5.0	October 22, 1998
10.1*	Letter agreement, dated August 16, 2007, between Registrant and Mark Cochran						X
10.2*	Letter agreement, dated September 14, 2007, between Registrant and Michael DeCesare						X
10.3*	Amendment of Stock Options, dated February 11, 2008, between Registrant and Christopher Bolin						X
10.4*	1997 Stock Incentive Plan, as amended						X
10.5*	1993 Stock Option Plan for Outside Directors, as amended						X
10.6*	Foundstone Inc. 2000 Stock Plan, as amended						X
10.7*	2002 Employee Stock Purchase Plan, as amended						X
10.8*	Form of Performance Stock Unit Issuance Agreement						X
31.1	Certification of Chief Executive Officer and Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002						X
32.1	Certification of Chief Executive Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002						X

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

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EX-10.1

Exhibit 10.1

August 16, 2007

Mark Cochran
[Address Omitted}

Re: Offer of Employment

Dear Mark:

I am pleased to offer you a position at McAfee as Executive Vice President, General Counsel reporting directly to me. If you decide to join us, your annual base salary will be $350,000 which will be paid semi-monthly in the amount of $14,583.33 less applicable withholdings. This is an exempt position. Additionally, you will be eligible to participate in the McAfee Bonus Plan at an annual target bonus of $250,000 which will be pro rated in your first year. You will receive more specific information on this plan after you have started employment with the company.

In addition, I will recommend to the Board of Directors that you receive a stock option grant for 75,000 shares of the Company’s Common Stock with a grant date, vesting commencement date, and strike price to be determined at the sole discretion of the Board of Directors and/or its Compensation Committee. This option will vest over a four year period, with 25% vesting on the first anniversary of the grant date and the remainder in equal amounts over the next 36 monthly periods. It shall be subject to the terms of the Company’s Stock Option Plan and the standard option agreements pursuant to the plan. You will receive information on this Plan at a later date.

I am also pleased to inform you that I will recommend to the Board of Directors that you receive a restricted stock unit (“RSU”) award for 40,000 shares of the Company’s Common Stock with a grant date, vesting commencement date, and par value to be determined at the sole discretion of the Board of Directors and/or its Compensation Committee. The RSU award will vest 1/3 on the first anniversary of the vesting start date, 1/3 on the second anniversary of the vesting start date and 1/3 on the third anniversary of the vesting start date. These units and their vesting shall be subject to the terms of the Company’s Stock Plan. You will receive further information on this Plan at a later date.

If you choose to accept this offer, your employment with McAfee, Inc. will be voluntarily entered into and will be for no specified period. As a result, you will be free to resign at any time, for any reason or for no reason, as you deem appropriate. McAfee, Inc. will have a similar right and may conclude its employment relationship with you at any time, with or without cause. Upon separation from the company for any reason, you also agree to return to the Company any equipment that has been provided to you or reimburse the Company the cost for such equipment. The Company reserves the right to deduct such costs from any final payments made to you in accordance with state and federal laws.

You agree to devote your full business efforts and time to the Company and will use good faith efforts to discharge your obligations to the best of your ability and in accordance with the Company’s written guidelines and policies. You agree not to actively engage in any other employment, occupation, or consulting activity for any direct or indirect remuneration without the prior approval of the Board or its Compensation Committee (the “Compensation Committee”).

In the event your “at-will” employment by McAfee, Inc. is terminated for any reason, you will be entitled to receive payment for all accrued pay and allowances, as well as payment for the value of all accrued but unused vacation time as set out on the books of the Company, less all appropriate withholdings. You may

also be entitled to severance benefits as set out below under the circumstances described hereinafter. Neither you nor your estate will be entitled to the severance benefits described hereinafter in the event of your death or total disability, neither of which is considered to constitute a resignation for Good Reason.

Should you be terminated as a result of a Resignation for Good Reason, which is defined as the occurrence of any of the following, without your consent: (i) a reduction of your Base Salary below the amount set forth in this offer letter agreement or as increased during the course of your employment with the Company; (ii) a reduction in your Target Bonus below the amount set forth in this offer letter agreement or as increased during the course of your employment with the Company, or a material reduction in the aggregate benefits provided in this offer letter agreement; (iii) any material reduction in your title, (iv) a material reduction in your duties or responsibilities, or (v) requiring you to relocate to a location more than thirty-five (35) miles from your then current office location, provided, however, that Good Reason shall not exist unless you have provided the Company with written notice of the purported grounds for such Good Reason and such purported grounds, after good faith negotiations, are not cured within thirty (30) days of the Company’s receipt of such written notice, then as consideration for your execution of a Release of Claims and compliance with SOX certification requirements in form and with substance provided by McAfee in its absolute discretion, you will be eligible to receive all severance benefits listed below, less appropriate withholdings.

Additionally, except for a termination for cause or a termination resulting from our inability to obtain a clear background investigation, you will be eligible for the severance benefits listed below. A termination for cause means a termination of an executive’s employment by the Company based upon a good faith determination by the Board of Directors or its designee, that one of the following has occurred.

(A)	Executive’s commission of a material act of fraud with respect to the Company in connection with executive carrying out his responsibilities as an employee;
(B)	Any intentional refusal or willful failure to carry out the reasonable instructions of the Chief Executive Officer or the Board of Directors
(C)	Executive’s conviction of, or plea of nolo contendere to, a misdemeanor crime of moral turpitude or to any felony; or
(D)	Executive’s gross misconduct in connection with the performance of his duties

Severance Benefits:

1.	a sum equivalent to twelve (12) months of base salary and bonus and,
2.	any prorated bonus for the current year to which you are otherwise entitled, and
3.	if you are then covered by the Company health care plan, the equivalent of twelve (12) months cost of pre-tax COBRA coverage, and
4.	for the initial new hire stock option grant only which are subject to grant approval by the Board of Directors and/or its Compensation Committee as noted above, the Company will accelerate their vesting by one full year the exerciseability of which will remain subject to the terms of the Option Plan and any blackout which might then exist.

Please note further that in the event you receive less than your full bonus payout for performance reasons either of you or of the Company, this does not create a condition qualifying as resignation for Good Reason.

It is not the intention for any payment under this Agreement to create or constitute a “nonqualified deferred compensation plan” within the meaning of Section 409A of the Internal Revenue Code of 1986 (as amended). Should it be reasonably determined that any payment hereunder falls within the purview of Section 409A thus subjecting you to additional tax liability, the Company shall be entitled on written request by you, to defer such payment until the expiry of six months following the date of termination of employment. If such payment is deferred as provided for herein, upon conclusion of the period of deferral, such amounts shall be paid in a lump sum, less all appropriate withholdings.

For purposes of federal immigration law, you will be required to provide to McAfee, Inc. documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three business days of your date of hire with McAfee, Inc., or our employment relationship with you may be terminated.

McAfee, Inc. requires that job candidates provide certain information on their employment application and other documents so McAfee, Inc. can undertake appropriate investigations regarding the backgrounds of all job candidates. A candidate must successfully complete the background investigation to be eligible for employment with McAfee, Inc. The Company considers background information and investigation results when making hiring decisions. Therefore, all employment offers are contingent upon the successful completion of the background investigation. In the event for any reason you have commenced employment prior to a full background investigation having been completed and it is ultimately determined that the background investigation results are not acceptable, as determined by McAfee in its sole discretion, your employment relationship will be terminated and none of the Severance Benefits as described above will either be due or payable.

You will be required to sign an Employee Inventions and Proprietary Rights Assignment Agreement as a condition of your employment. In addition, you will also be required to complete a Form W-4 and sign and abide by the McAfee, Inc.’ Insider Trading Policy, and its Drug Free Workplace Policy. This letter, along with any agreements relating to proprietary rights between you and McAfee, Inc., set forth the terms of your employment with McAfee, Inc. and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by writing signed by McAfee, Inc.

In the event of any dispute or claim relating to or arising out of our employment relationship, this agreement, or the termination of our employment relationship (including, but not limited to, any claims of retaliation, wrongful termination or age, sex, disability, race or other discrimination), you and McAfee, Inc. agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in California or the state in which you work if other than California, and we waive our rights to have such disputes tried by a court or jury. However, we both agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of your or the Company’s trade secrets or proprietary information.

To indicate your acceptance of the McAfee, Inc. offer, please sign, date and return this letter to Roger Bean, Vice President of Human Resources/North America at (972) 987-2783 or US mail to 5000 Headquarters Drive, Plano TX 75024 no later than August 23, 2007. If we do not hear from you by August 23, 2007 we will assume you have decided not to join McAfee, Inc.

If you do accept employment with McAfee, Inc., it is very important that you submit your new hire documentation within 1 day of your start date. McAfee, Inc. needs the following: 1) I-9 Form, 2) W-4 Form, 3) Employment Application, 4) Emergency Contact, 5) Direct Deposit information, and 6) an original signed

offer letter to enter you into the McAfee, Inc. payroll. Additionally, on your first day of employment, please contact your HR Manager; you can refer to the list of managers in the new hire packet.

Mark, we look forward to working with you at McAfee, Inc. If you have any questions regarding any points in this letter please contact me. Welcome aboard!

Sincerely,
 

/s/ David DeWalt  

David DeWalt 

President and CEO
McAfee, Inc. 

I accept the terms of this letter and agree to keep the terms of this letter confidential.

/s/ Mark Cochran Signature of Mark Cochran	8/21/2007 Date
I agree to start work for McAfee on:	9/10/2007 Start Date

EX-10.2

Exhibit 10.2

September 14, 2007

Michael DeCesare
[Address Omitted]

Re: Offer of Employment

Dear Michael:

I am pleased to offer you a position at McAfee as Executive Vice President, WW Field Operations reporting directly to me. If you decide to join us, your annual base salary will be $600,000 which will be paid semi-monthly in the amount of $25,000 less applicable withholdings. This is an exempt position. Additionally, you will be eligible to participate in the McAfee Executive Bonus Plan for your position at an annual target bonus of $600,000 which will be pro rated in your first year. You will receive more specific information on this plan after you have started employment with the company.

In addition, I will recommend to the Board of Directors that you receive a stock option grant for 100,000 shares of the Company’s Common Stock with a grant date, vesting commencement date, and strike price to be determined at the sole discretion of the Board of Directors and/or its Compensation Committee. This option will vest over a four year period, with 25% vesting on the first anniversary of the grant date and the remainder in equal amounts over the next 36 monthly periods. It shall be subject to the terms of the Company’s Stock Option Plan and the standard option agreements pursuant to the plan. You will receive information on this Plan at a later date.

I am pleased to inform you that I will recommend to the Board of Directors that you receive a restricted stock unit (“RSU”) award for 50,000 shares of the Company’s Common Stock with a grant date, vesting commencement date, and par value to be determined at the sole discretion of the Board of Directors and/or its Compensation Committee. The RSU award will vest 1/3 on the first anniversary of the vesting start date, 1/3 on the second anniversary of the vesting start date and 1/3 on the third anniversary of the vesting start date. These units and their vesting shall be subject to the terms of the Company’s Stock Plan. You will receive further information on this Plan at a later date.

I am also pleased to inform you that I will recommend to the Board of Directors that you receive a performance stock unit (“PSU”) award for 50,000 shares of the Company’s Common Stock with a grant date, vesting commencement date, and par value to be determined at the sole discretion of the Board of Directors and/or its Compensation Committee. The PSU award will vest 1/3 on the first anniversary of the vesting start date, 1/3 on the second anniversary of the vesting start date and 1/3 on the third anniversary of the vesting start date assuming specific qualitative and quantitative financial milestones as set forth by the Board of Directors or its designee are met during each potential vesting period. Should these milestones not be met during each potential vesting period then 50% of the balance of all unvested PSUs award will vest five years from the original grant date. These units and their vesting shall be subject to the terms of the Company’s Stock Plan. You will receive further information on this Plan at a later date.

If you choose to accept this offer, your employment with McAfee, Inc. will be voluntarily entered into and will be for no specified period. As a result, you will be free to resign at any time, for any reason or for no reason, as you deem appropriate. McAfee, Inc. will have a similar right and may conclude its employment relationship with you at any time, with or without cause. Upon separation from the company for any reason, you also agree to return to the Company any equipment that has been provided to you or reimburse the

Company the cost for such equipment. The Company reserves the right to deduct such costs from any final payments made to you in accordance with state and federal laws.

You agree to devote your full business efforts and time to the Company and will use good faith efforts to discharge your obligations to the best of your ability and in accordance with the Company’s written guidelines and policies. You agree not to actively engage in any other employment, occupation, or consulting activity for any direct or indirect remuneration without the prior approval of the Board or its Compensation Committee (the “Compensation Committee”).

In the event your “at-will” employment by McAfee, Inc. is terminated for any reason, you will be entitled to receive payment for all accrued pay and allowances, as well as payment for the value of all accrued but unused vacation time as set out on the books of the Company, less all appropriate withholdings. You may also be entitled to severance benefits as set out below under the circumstances described hereinafter. Neither you nor your estate will be entitled to the severance benefits described hereinafter in the event of your death or total disability, neither of which is considered to constitute a resignation for Good Reason.

Should you be terminated as a result of a Resignation for Good Reason, which is defined as the occurrence of any of the following, without your consent: (i) a reduction of your Base Salary below the amount set forth in this offer letter agreement; (ii) a reduction in your Target Bonus below the amount set forth in this offer letter agreement, or a material reduction in the aggregate benefits provided in this offer letter agreement other than as part of an across the board policy change for senior executives; (iii) any material reduction in your title, (iv) a material reduction in your duties or responsibilities, or (v) a requirement to relocate more than thirty-five (35) miles from your then current office location, provided, however, that Good Reason shall not exist unless you have provided the Company with written notice of the purported grounds for such Good Reason and such purported grounds, after good faith negotiations, are not cured within thirty (30) days of the Company’s receipt of such written notice, then as consideration for your execution of a Release of Claims and compliance with SOX certification requirements in form and with substance provided by McAfee in its absolute discretion, you will be eligible to receive all severance benefits listed below, less appropriate withholdings.

Additionally, except for a termination for cause or a termination resulting from our inability to obtain a clear background investigation, you will be eligible for the severance benefits listed below. A termination for cause means a termination of an executive’s employment by the Company based upon a good faith determination by the Board of Directors or its designee, that one of the following has occurred.

(A)	Executive’s commission of a material act of fraud with respect to the Company in connection with executive carrying out his responsibilities as an employee;
(B)	Any intentional refusal or willful failure to carry out the reasonable instructions of the Chief Executive Officer or the Board of Directors
(C)	Executive’s conviction of, or plea of nolo contendere to, a misdemeanor crime of moral turpitude or to any felony; or
(D)	Executive’s gross misconduct in connection with the performance of his duties

Severance Benefits:

1. a sum equivalent to twelve (12) months of base salary and bonus and,

2.	if you are then covered by the Company health care plan, the equivalent of twelve (12) months cost of pre-tax COBRA coverage, and
3.	for the initial new hire stock option grant only which are subject to grant approval by the Board of Directors and/or its Compensation Committee as noted above, the Company will fully accelerate their vesting by one full year the exerciseability of which will remain subject to the terms of the Option Plan and any blackout which might then exist.

Please note further that in the event you receive less than your full bonus payout for performance reasons either of you or of the Company, this does not create a condition qualifying as resignation for Good Reason.

It is not the intention for any payment under this Agreement to create or constitute a “nonqualified deferred compensation plan” within the meaning of Section 409A of the Internal Revenue Code of 1986 (as amended). Should it be reasonably determined that any payment hereunder falls within the purview of Section 409A thus subjecting you to additional tax liability, the Company shall be entitled on written request by you, to defer such payment until the expiry of six months following the date of termination of employment. If such payment is deferred as provided for herein, upon conclusion of the period of deferral, such amounts shall be paid in a lump sum, less all appropriate withholdings.

You will be eligible to participate in the Executive Change of Control program commensurate for your position with McAfee.

For purposes of federal immigration law, you will be required to provide to McAfee, Inc. documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three business days of your date of hire with McAfee, Inc., or our employment relationship with you may be terminated.

McAfee, Inc. requires that job candidates provide certain information on their employment application and other documents so McAfee, Inc. can undertake appropriate investigations regarding the backgrounds of all job candidates. A candidate must successfully complete the background investigation to be eligible for employment with McAfee, Inc. The Company considers background information and investigation results when making hiring decisions. Therefore, all employment offers are contingent upon the successful completion of the background investigation. In the event for any reason you have commenced employment prior to a full background investigation having been completed and it is ultimately determined that the background investigation results are not acceptable, as determined by McAfee in its sole discretion, your employment relationship will be terminated and none of the Severance Benefits as described above will either be due or payable.

You will be required to sign an Employee Inventions and Proprietary Rights Assignment Agreement as a condition of your employment. In addition, you will also be required to complete a Form W-4 and sign and abide by the McAfee, Inc.’ Insider Trading Policy, and its Drug Free Workplace Policy. This letter, along with any agreements relating to proprietary rights between you and McAfee, Inc., set forth the terms of your employment with McAfee, Inc. and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by writing signed by McAfee, Inc.

In the event of any dispute or claim relating to or arising out of our employment relationship, this agreement, or the termination of our employment relationship (including, but not limited to, any claims of retaliation, wrongful termination or age, sex, disability, race or other discrimination), you and McAfee, Inc. agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in California or the state in which you work if other than California, and we

waive our rights to have such disputes tried by a court or jury. However, we both agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of your or the Company’s trade secrets or proprietary information.

To indicate your acceptance of the McAfee, Inc. offer, please sign, date and return this letter to Roger Bean, Vice President of Human Resources/Americas at (972) 987-2783 or US mail to 5000 Headquarters Drive, Plano TX 75024 no later than September 21, 2007. If we do not hear from you by August 23, 2007 we will assume you have decided not to join McAfee, Inc.

If you do accept employment with McAfee, Inc., it is very important that you submit your new hire documentation within 1 day of your start date. McAfee, Inc. needs the following: 1) I-9 Form, 2) W-4 Form, 3) Employment Application, 4) Emergency Contact, 5) Direct Deposit information, and 6) an original signed offer letter to enter you into the McAfee, Inc. payroll. Additionally, on your first day of employment, please contact your HR Manager; you can refer to the list of managers in the new hire packet.

Michael, we look forward to working with you at McAfee, Inc. If you have any questions regarding any points in this letter please contact me. Welcome aboard!

Sincerely,
 

/s/ David DeWalt  

David DeWalt 

President and CEO
McAfee, Inc. 

I accept the terms of this letter and agree to keep the terms of this letter confidential.

/s/ Michael DeCesare Signature of Michael DeCesare	9/26/2007 Date
I agree to start work for McAfee on:	10/2/2007 Start Date

EX-10.3

Exhibit 10.3

McAFEE, INC.

Amendment of Stock Options

     By electing to amend your discount options, the outstanding Stock Option Agreements (the "Agreements”) related to grants number 23552, 31936, and 32115 under the McAfee, Inc. (the "Company”) 1997 Stock Incentive Plan and the Networks Associates, Inc. 2000 Nonstatutory Stock Option Plan (together, the “Plans”) by and between the Company and Christopher Bolin (“Optionee”) are hereby amended as follows:

     Unless otherwise defined herein, initially capitalized terms shall have the same meanings as defined in the Plan.

     1. Effective Date. This Amendment of Stock Options and Election to Amend Stock Options (“Amendment”) is effective as of the last date on which this Agreement is executed (the “Effective Date”).

     2. Amendments to Exercise Price Per Share.

(a)	The exercise price of the options which vest January 1, 2005 or later, to purchase 2,083 shares of Company common stock under grant number 23552 are hereby increased to $6.03 per share;
(b)	The exercise price of the options which vest January 1, 2005 or later, to purchase 30,000 shares of Company common stock under grant number 31936 are hereby increased to $18.90 per share; and
(c)	The exercise price of the options which vest January 1, 2005 or later, to purchase 75,000 shares of Company common stock under grant number 32115 are hereby increased to $16.75 per share.

     3. Option Agreements. To the extent not expressly amended hereby, the Agreements remain in full force and effect.

     4. Payment. In order to compensate you for 100% of the value lost by increasing your option exercise prices, the Company agrees to pay you $135,532.72 on the first payroll date in January 2009, irrespective of whether or not you are an employee of the Company on such date.

     5. Entire Agreement. This Amendment, taken together with the Agreements (to the extent not expressly amended hereby), and any duly authorized written or electronic agreement entered into by and between the Company and Optionee relating to the stock option grants evidenced by the Agreements, represent the entire agreement of the parties, supersede any and all previous contracts, arrangements or understandings between the parties with respect to the stock option grants evidenced by the Agreements, and may be amended at any time only by mutual written agreement of the parties hereto.

     This Amendment must be properly completed and signed by you and delivered to Jared Ross at McAfee, Inc., 5000 Headquarters Dr., Plano, Texas, 75024, U.S.A.

     IN WITNESS WHEREOF, this instrument is effective as of the Effective Date.

McAFEE, INC.	OPTIONEE
/s/ Eric Brown Signature	/s/ Christopher Bolin Signature
2/11/08 Date of Signature	2/11/08 Date of Signature
Eric Brown Print Name	Christopher Bolin Print Name
CFO & COO Title	EVP & CTO Title
	[Omitted] Residence Address

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Equity Summary

Section 16

Chris Bolin

									FMV on
							Revised		Revised						Outstanding		Outstanding		Number of
		Original		Exercise		Discounted	Measurement		Measurement				Shares		Shares Subject		Shares Not		Shares Eligible		Potential Cash
Grant Number	Grant Type	Grant Date		Price		Grant	Date		Date		Original Grant		Outstanding *		to 409A *		Subject to 409A *		for Repricing		Payment
35505	RSU		3/7/2006	$	0.00	N/A						50,000		50,000		0		50,000
35418	RSA		8/23/2005	$	0.01	N/A						50,000		16,666		0		16,666
33886	NQO		4/19/2005	$	21.61	No						80,000		80,000		0		80,000
32115	NQO		5/4/2004	$	16.57	Yes		7/21/2004	$	16.75		75,000		75,000		75,000		0		75,000	$	13,500.00
31936	NQO		1/2/2004	$	14.96	Yes		4/13/2004	$	18.90		30,000		30,000		30,000		0		30,000	$	118,200.00
29068	NQO		1/2/2003	$	16.90	No		4/8/2003	$	13.75		35,000		35,000		0		35,000
26488	NQO		1/16/2002	$	25.43	No		4/9/2002	$	22.50		40,000		40,000		0		40,000
23552	NQO		1/2/2001	$	4.19	Yes		2/12/2001	$	6.03		100,000		72,500		2,083		70,417		2,083	$	3,832.72
20390	NQO		7/3/2000	$	21.13	No						20,000		20,000		0		20,000
18779	NQO		1/4/2000	$	24.56	Yes		5/9/2000	$	25.00		4,500		4,500		0		4,500
15184	NQO		10/18/1999	$	16.94	Yes		1/24/2000	$	28.50		10,000		10,000		0		10,000
13753	NQO		4/22/1999	$	11.06	No						10,000		10,000		0		10,000
9893	NQO		4/20/1999	$	11.06	No						5,000		5,000		0		5,000
									NQO TOTAL:					382,000		107,083		274,917		107,083	$	135,532.72

* Data presented as of January 28, 2008

EX-10.4

Exhibit 10.4

McAFEE, INC.
1997 STOCK INCENTIVE PLAN
(as amended on October 23, 2007)

ARTICLE 1. INTRODUCTION

     The Plan was adopted by the Board effective December 1, 1997. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights.

     The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions).

ARTICLE 2. ADMINISTRATION

     2.1 Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist exclusively of two or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy:

          (a) Such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and

          (b) Such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under section 162(m)(4)(C) of the Code.

The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not satisfy the foregoing requirements, who may administer the Plan with respect to Employees and Consultants who are not considered officers or directors of the Company under section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and Consultants and may determine all terms of such Awards.

     2.2 Committee Responsibilities. The Committee shall (a) select the Employees, Outside Directors and Consultants who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan and (d) make all other decisions relating to the operation of the Plan, including but not limited

to delegation of authority to an administrative committee in keeping with the Plan and applicable laws. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws and to otherwise accommodate the requirements of local laws and procedures outside the United States. The Committee’s determinations under the Plan shall be final and binding on all persons.

ARTICLE 3. SHARES AVAILABLE FOR GRANTS

     3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Options, SARs, Stock Units and Restricted Shares awarded under the Plan shall not exceed (a) 43,475,000 plus (b) the additional Common Shares described in Section 3.2. The limitation of this Section 3.1 shall be subject to adjustment pursuant to Article 10.

     3.2 Additional Shares. If Restricted Shares, Stock Units, Options or SARs granted under this Plan or the Predecessor Plan are forfeited or if Options or SARs granted under this Plan or the Predecessor Plan terminate for any other reason before being exercised, then the corresponding Common Shares shall become available for Awards under the Plan. If Stock Units are settled, all Common Shares underlying such Stock Units shall reduce the number available under Section 3.1. If SARs are exercised, all Common Shares underlying such SARs shall reduce the number available under Section 3.1. The foregoing notwithstanding, the aggregate number of Common Shares that may be issued under the Plan upon the exercise of ISOs shall not be increased when Restricted Shares are forfeited. In addition, to the extent that (i) Common Shares are surrendered to the Company in payment of the Exercise Price of an Option, (ii) Common Shares are purchased by the Company in the open market with the proceeds from the sale of Common Shares pursuant to the exercise of Options, or (iii) Restricted Shares are repurchased by the Company at their original purchase price, in each case, such Common Shares shall not be available for issuance under the Plan.

ARTICLE 4. ELIGIBILITY

     4.1 Incentive Stock Options. Only Employees who are common-law employees of the Company, a Parent or a Subsidiary on the date of grant shall be eligible for the grant of ISOs. In addition, an Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the requirements set forth in section 422(c)(6) of the Code are satisfied.

     4.2 Other Grants. Only Employees, Outside Directors and Consultants shall be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs.

     4.3 Prospective Employees and Consultants. For purposes of this Article 4, (a) “Employees” shall include prospective Employees to whom Awards are granted in connection with written offers of employment from the Company, a Parent or a Subsidiary and (b) “Consultants” shall include prospective Consultants to whom Awards are granted in connection with written offers of engagement from the Company, a Parent or a Subsidiary. If an ISO is granted

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to a prospective Employee, the date when his or her service as an Employee commences shall be deemed to be the date of grant of such ISO for all purposes under the Plan (including, without limitation, Section 5.3). No Award granted to a prospective Employee or prospective Consultant shall become exercisable or vested unless and until his or her service as an Employee or Consultant commences.

ARTICLE 5. OPTIONS

     5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee’s other compensation. A Stock Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she exercises a prior Option and pays the Exercise Price in the form described in Section 6.2.

     5.2 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10. Options granted to any Optionee in a single fiscal year of the Company shall not cover more than 1,000,000 Common Shares, except that Options granted to a new Employee in the fiscal year of the Company in which his or her service as an Employee first commences shall not cover more than 1,500,000 Common Shares. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 10.

     5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise Price under an ISO shall in no event be less than 100% of the Fair Market Value of a Common Share on the date of grant and the Exercise Price under an NSO shall in no event be less than 85% of the Fair Market Value of a Common Share on the date of grant. In the case of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the NSO is outstanding.

     5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date or event when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited.

     5.5 Effect of Transfer of Control. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become exercisable as to all or part of the Common Shares subject to such Option in the event that a Transfer of Control occurs with respect to

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the Company, except that the exercisability of an ISO shall not be accelerated without the Optionee’s written consent. In addition, a separate agreement between the Optionee and the Company may provide that such Optionee’s Options shall become exercisable as to all or part of the Common Shares subject to such Options in the event that a Transfer of Control occurs with respect to the Company.

     5.6 Substitution of Options. The Committee may accept the cancellation of outstanding options granted by another issuer in return for the grant of new Options under the Plan for the same or a different number of Common Shares and at the same or a different Exercise Price.

     5.7 Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in cash, cash equivalents, Shares or other form of equity compensation available under the Company’s stock plans, an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish and in compliance with applicable laws. Notwithstanding anything contained in this Section 5.7 to the contrary, the Committee shall not be allowed to authorize a buyout of underwater options or stock appreciation rights without the prior consent of the Company’s stockholders.

ARTICLE 6. PAYMENT FOR OPTION SHARES

     6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash or cash equivalents at the time when such Common Shares are purchased, except as follows:

          (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. The Stock Option Agreement may specify that payment may be made in any form(s) described in this Article 6.

          (b) In the case of an NSO, the Committee may at any time accept payment in any form(s) described in this Article 6 to the extent permissible under applicable laws.

     6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, all or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, Common Shares that are already owned by the Optionee. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Common Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes.

     6.3 Exercise/Sale. To the extent that this Section 6.3 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to a securities broker approved by the Company to sell all or part of the Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to the Company.

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     6.4 Exercise/Pledge. To the extent that this Section 6.4 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to pledge all or part of the Common Shares being purchased under the Plan to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company.

     6.5 Promissory Note. To the extent that this Section 6.5 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) a full-recourse promissory note; provided that the par value of the Common Shares being purchased under the Plan shall be paid in cash or cash equivalents.

     6.6 Other Forms of Payment. To the extent that this Section 6.6 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid in any other form that is consistent with applicable laws, regulations and rules.

ARTICLE 7. STOCK APPRECIATION RIGHTS

     7.1 SAR Agreement. Each grant of an SAR under the Plan shall be evidenced by an SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee’s other compensation to the extent permissible under applicable laws.

     7.2 Number of Shares. Each SAR Agreement shall specify the number of Common Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Article 10. SARs granted to any Optionee in a single calendar year shall in no event pertain to more than 1,000,000 Common Shares, except that SARs granted to a new Employee in the fiscal year of the Company in which his or her service as an Employee first commences shall not pertain to more than 1,500,000 Common Shares. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 10.

     7.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price. An SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding.

     7.4 Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. An SAR Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s service. SARs may be awarded in combination with Options, and such an Award may provide that the SARs will not be exercisable unless the related Options are forfeited. An SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. An SAR granted under the Plan may provide that it will be exercisable only in the event of a Transfer of Control.

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     7.5 Effect of Transfer of Control. The Committee may determine, at the time of granting an SAR or thereafter, that such SAR shall become exercisable as to all or part of the Common Shares subject to such SAR in the event that a Transfer of Control occurs with respect to the Company. In addition, a separate agreement between the Optionee and the Company may provide that such Optionee’s SARs shall become exercisable as to all or part of the Common Shares subject to such SARs in the event that a Transfer of Control occurs with respect to the Company.

     7.6 Exercise of SARs. Upon exercise of an SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b) cash or (c) a combination of Common Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Common Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Common Shares subject to the SARs exceeds the Exercise Price. If, on the date when an SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion.

     7.7 Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an SAR shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR.

ARTICLE 8. RESTRICTED SHARES

     8.1 Restricted Stock Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical. Restricted Shares may be granted in consideration of a reduction in the recipient’s other compensation.

     8.2 Payment for Awards. To the extent that an Award is granted in the form of newly issued Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash or cash equivalents an amount equal to the par value of such Restricted Shares. To the extent that an Award is granted in the form of Restricted Shares from the Company’s treasury, no cash consideration shall be required of the Award recipients. Any amount not paid in cash may be paid with a full-recourse promissory note, subject to applicable laws allowing such form of payment.

     8.3 Vesting Conditions. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. The Committee may include among such conditions the requirement that the performance of the Company or a business unit of the Company for a specified

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period of one or more years equal or exceed a target determined in advance by the Committee. Such performance shall be determined by the Company’s independent auditors. Such target shall be based on one or more of the criteria set forth in Appendix A. The Committee shall determine such target not later than the 90th day of such period. In no event shall the number of Restricted Shares which are subject to performance-based vesting conditions and which are granted to any Participant in a single calendar year exceed 300,000, subject to adjustment in accordance with Article 10. A Restricted Stock Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events.

     8.4 Effect of Transfer of Control. The Committee may determine, at the time of granting Restricted Shares or thereafter, that all or part of such Restricted Shares shall become vested in the event that a Transfer of Control occurs with respect to the Company. In addition, a separate agreement between the Participant and the Company may provide that all or part of such Participant’s Restricted Shares shall become vested in the event that a Transfer of Control occurs with respect to the Company.

     8.5 Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other stockholders. A Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid.

ARTICLE 9. STOCK UNITS

     9.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient’s other compensation.

     9.2 Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients.

     9.3 Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. The Committee may include among such conditions the requirement that the performance of the Company or a business unit of the Company for a specified period of one or more years equal or exceed a target determined in advance by the Committee. Such performance shall be determined by the Company’s independent auditors. Such target shall be based on one or more of the criteria set forth in Appendix A. The Committee shall determine such target not later than the 90th day of such period. In no event shall the number of Stock Units which are subject to performance-based vesting conditions and which are granted to any Participant in a single calendar year exceed 300,000, subject to adjustment in accordance with Article 10. A Stock Unit Agreement

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may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events.

     9.4 Effect of Transfer of Control. The Committee may determine, at the time of granting Stock Units or thereafter, that all or part of such Stock Units shall become vested in the event that a Transfer of Control occurs with respect to the Company. In addition, a separate agreement between the Participant and the Company may provide that all or part of such Participant’s Stock Units shall become vested in the event that a Transfer of Control occurs with respect to the Company.

     9.5 Voting and Dividend Rights. The holders of Stock Units shall have no voting or dividend rights.

     9.6 Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Common Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 10.

     9.7 Death of Recipient. Any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan may designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient’s death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units that become payable after the recipient’s death shall be distributed to the recipient’s estate.

     9.8 Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement.

ARTICLE 10. PROTECTION AGAINST DILUTION

     10.1 Adjustments. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off or a similar occurrence, the

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Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of:

          (a) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Article 3;

          (b) The limitations set forth in Sections 5.2, 7.2, 8.3 and 9.3;

          (c) The number of Common Shares covered by each outstanding Option and SAR;

          (d) The Exercise Price under each outstanding Option and SAR; or

          (e) The number of Stock Units included in any prior Award which has not yet been settled.

Except as provided in this Article 10, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class.

     10.2 Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company.

     10.3 Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement shall provide for (a) the continuation of the outstanding Awards by the Company, if the Company is a surviving corporation, (b) the assumption of the outstanding Awards by the surviving corporation or its parent or subsidiary, (c) the substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding Awards, (d) full exercisability or vesting and accelerated expiration of the outstanding Awards or (e) settlement of the full value of the outstanding Awards in cash or cash equivalents followed by cancellation of such Awards. If such agreement does not provide for any of the above, all outstanding Awards shall fully vest, become immediately exercisable or payable or have all restrictions lifted as may apply to the type of Award upon or after a Change in Control unless otherwise determined by the Committee.

ARTICLE 11. DEFERRAL OF AWARDS

     The Committee (in its sole discretion) may permit or require a Participant to:

          (a) Have cash that otherwise would be paid to such Participant as a result of the exercise of an SAR or the settlement of Stock Units credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company’s books;

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          (b) Have Common Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR converted into an equal number of Stock Units; or

          (c) Have Common Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR, or the settlement of Stock Units, converted into amounts credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company’s books. Such amounts shall be determined by reference to the Fair Market Value of such Common Shares as of the date when they otherwise would have been delivered to such Participant.

A deferred compensation account established under this Article 11 may be credited with interest or other forms of investment return, as determined by the Committee. A Participant for whom such an account is established shall have no rights other than those of a general creditor of the Company. Such an account shall represent an unfunded and unsecured obligation of the Company and shall be subject to the terms and conditions of the applicable agreement between such Participant and the Company. If the deferral or conversion of Awards is permitted or required, the Committee (in its sole discretion) may establish rules, procedures and forms pertaining to such Awards, including (without limitation) the settlement of deferred compensation accounts established under this Article 11.

ARTICLE 12. AWARDS UNDER OTHER PLANS

     The Company may grant awards under other plans or programs. Such awards may be settled in the form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Common Shares available under Article 3.

ARTICLE 13. LIMITATION ON RIGHTS

     13.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee, Outside Director or Consultant. The Company and its Parents, Subsidiaries and Affiliates reserve the right to terminate the service of any Employee or Consultant at any time, with or without cause, subject to applicable laws and a written employment agreement (if any).

     13.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the time when a stock certificate for such Common Shares is issued or, if applicable, the time when he or she becomes entitled to receive such Common Shares by filing any required notice of exercise and paying any required Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except as expressly provided in the Plan.

     13.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The

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Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing.

ARTICLE 14. WITHHOLDING TAXES

     14.1 General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied.

     14.2 Share Withholding. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Common Shares that he or she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash.

ARTICLE 15. FUTURE OF THE PLAN

     15.1 Term of the Plan. The Plan, as set forth herein, shall become effective on June 5, 1997. The Plan shall remain in effect until it is terminated under Section 15.2, except that no ISOs shall be granted on or after the 10th anniversary of the later of (a) the date when the Board adopted the Plan or (b) the date when the Board adopted the most recent increase in the number of Common Shares available under Article 3 which was approved by the Company’s stockholders.

     15.2 Amendment or Termination. The Board or the Committee may, at any time and for any reason, amend, suspend or terminate the Plan. An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan.

     15.3 No Repricing. The exercise price for the Common Shares to be issued pursuant to an already granted Stock Option or Stock Appreciation Right may not be lowered without the prior consent of the Company’s stockholders. This shall include, without limitation, a repricing of the Stock Option or Stock Appreciation Right as well as a Stock Option or Stock Appreciation Right exchange program whereby the Participant agrees to cancel an existing Stock Option or Stock Appreciation Right in exchange for an Option, Stock Appreciation Right or other Award.

ARTICLE 16. DEFINITIONS

     16.1 “Affiliate” means any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own not less than 50% of such entity.

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     16.2 “Award” means any award of an Option, an SAR, a Restricted Share or a Stock Unit under the Plan.

     16.3 “Board” means the Company’s Board of Directors, as constituted from time to time.

     16.4 “Code” means the Internal Revenue Code of 1986, as amended.

     16.5 “Committee” means a committee of the Board, as described in Article 2.

     16.6 “Common Share” means one share of the Common Stock of the Company.

     16.7 “Company” means McAfee, Inc., a Delaware corporation.

     16.8 “Consultant” means a consultant or adviser who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a Consultant shall be considered employment for all purposes of the Plan, except as provided in Section 4.1.

     16.9 “Employee” means a common-law employee of the Company, a Parent, a Subsidiary or an Affiliate.

     16.10 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

     16.11 “Exercise Price,” in the case of an Option, means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of an SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR.

     16.12 “Fair Market Value” means the market price of Common Shares, determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal. Such determination shall be conclusive and binding on all persons.

     16.13 “ISO” means an incentive stock option described in section 422(b) of the Code.

     16.14 “NSO” means a stock option not described in sections 422 or 423 of the Code.

     16.15 “Option” means an ISO or NSO granted under the Plan and entitling the holder to purchase Common Shares.

     16.16 “Optionee” means an individual or estate who holds an Option or SAR.

     16.17 “Outside Director” shall mean a member of the Board who is not an Employee. Service as an Outside Director shall be considered employment for all purposes of the Plan, except as provided in Section 4.1.

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     16.18 “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date.

     16.19 “Participant” means an individual or estate who holds an Award.

     16.20 “Plan” means this McAfee, Inc. 1997 Stock Incentive Plan, as amended from time to time.

     16.21 “Predecessor Plan” means the McAfee, Inc. 1995 Stock Incentive Plan, as amended.

     16.22 “Restricted Share” means a Common Share awarded under the Plan.

     16.23 “Restricted Stock Agreement” means the agreement between the Company and the recipient of a Restricted Share which contains the terms, conditions and restrictions pertaining to such Restricted Share.

     16.24 “SAR” means a stock appreciation right granted under the Plan.

     16.25 “SAR Agreement” means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR.

     16.26 “Stock Option Agreement” means the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option.

     16.27 “Stock Unit” means a bookkeeping entry representing the equivalent of one Common Share, as awarded under the Plan.

     16.28 “Stock Unit Agreement” means the agreement between the Company and the recipient of a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit.

     16.29 “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

     16.30 “Transfer of Control” shall mean:

          (a) The direct or indirect sale or exchange by the stockholders of the Company of all or substantially all of the voting stock of the Company wherein the stockholders of the Company immediately before such sale or exchange do not retain in substantially the same proportions as their

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ownership of shares of the Company’s voting stock immediately before such event, directly or indirectly (including, without limitation, through their ownership of shares of the voting stock of a corporation which, as a result of such sale or exchange, owns the Company either directly or through one or more subsidiaries), at least a majority of the beneficial interest in the voting stock of the Company immediately after such sale or exchange;

          (b) A merger or consolidation wherein the stockholders of the Company immediately before such merger or consolidation do not retain in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately before such event, directly or indirectly (including, without limitation, through their ownership of shares of the voting stock of a corporation which, as a result of such merger or consolidation, owns the Company either directly or through one or more subsidiaries), at least a majority of the beneficial interest in the voting stock of the Company immediately after such merger or consolidation;

          (c) The sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange, or transfer to one or more corporations (the “Transferee Corporation(s)”) wherein the stockholders of the Company immediately before such sale, exchange, or transfer retain in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately before such event, directly or indirectly (including, without limitation, through their ownership of shares of the voting stock of a corporation which owns the Transferee Corporation(s) either directly or through one or more subsidiaries), at least a majority of the beneficial interest in the voting stock of the Transferee Corporation(s) immediately after such event; or

          (d) A liquidation or dissolution of the Company.

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APPENDIX A

McAfee, Inc. 1997 Stock Incentive Plan

Performance Goals

• cash flow,	• return on capital,
• earnings per share,	• return on stockholder equity,
• gross margin,	• growth with respect to any of the foregoing measures,
• net income,	• expense reduction,
• operating income,	• growth in bookings,
• operating margin,	• growth in revenues, and
• pre-tax profit,	• stock price increase.
• return on assets,

EX-10.5

Exhibit 10.5

McAFEE, INC.
AMENDED AND RESTATED 1993 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
(as amended October 23, 2007)

ARTICLE I

INTRODUCTION

     1.1 Establishment. On January 19, 1993, McAfee, Inc., a Delaware corporation, the predecessor to McAfee, Inc., a Delaware corporation (together with any successor corporation thereto, the “Company”), established the McAfee, Inc. Stock Option Plan for Outside Directors (the “Initial Plan”) for certain members of its Board (as defined in Section 2.1(d)) who are not employees of the Company or any Affiliated Corporation (as defined in Section 2.1(b)) and who are eligible to participate in the Plan based upon the definition of an Outside Director set forth in Section 2.1(i). The Initial Plan was amended and restated in its entirety in April 1995 by the Board of Directors of the Company and ratified by the Company’s stockholders in June 1995 as the Amended and Restated McAfee, Inc. Stock Option Plan for Outside Directors (the “Plan”).

     1.2 Purposes. The purpose of the Plan is to provide certain directors of the Company who are not also employees of the Company or an Affiliated Corporation (as defined in Section 2.1(b)) added incentive to continue in the service of the Company and a more direct interest in the future success of the operations of the Company.

     1.3 Effective Date. The effective date of the Plan shall be January 1, 1993 (the “Effective Date”), subject to approval by the affirmative votes of the holders of a majority of the shares of the Company present or represented and entitled to vote at a meeting duly held (in person or through written consent) in accordance with governing law within one year following the Effective Date. If the stockholders of the Company do not approve the Plan as specified above, Options granted under the Plan shall be deemed to be rescinded without any further action by the Board or the Company, and the Plan shall automatically terminate, notwithstanding any other provision in the Plan to the contrary.

ARTICLE II

DEFINITIONS

     2.1 Definitions. For purposes of the Plan:

          (a) “Affiliate” and “Associate” shall have the meanings specified in Rule 12b-2 or any successor regulation under the Exchange Act.

          (b) “Affiliated Corporation” means any corporation or other entity (including but not limited to a partnership) that is affiliated with the Company through stock ownership or otherwise and is treated as a common employer under the provisions of Sections 414(b) and (c) of the Code.

          (c) “Annual Meeting” means the annual meeting of the Company’s stockholders.

          (d) “Board” means the Board of Directors of the Company. If a committee of the Board has been appointed to administer the Plan, “Board” also means such committee.

          (e) “Code” means the Internal Revenue Code of 1986, as amended from time to time.

          (f) “Disabled” or “Disability” shall have the meaning given to such terms in Section 22(e)(3) of the Code.

          (g) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.

          (h) “Fair Market Value” of a share of Stock shall be the last reported sale price of the Stock on the NASDAQ National Market System on the day the determination is to be made, or if no sale took place on such day, the average of the closing bid and asked prices of the Stock on the NASDAQ National Market System on such day, or if the market is closed on such day, on the last day prior to the date of determination on which the market was open for the transaction of business, as reported by NASDAQ. If, however, the Stock should be listed or admitted for trading on a national securities exchange, the Fair Market Value of a share of the Stock shall be the last reported sale price on such securities exchange on the date the determination is to be made, or if no sale took place on such day, the average of the closing bid and asked prices on such day, or if the market is closed on such day, on the last day prior to the date of determination on which the market was open for the transaction of business, as reported in the principal consolidated transaction reporting system for the principal national securities exchange on which the Stock is listed or admitted for trading. If the Stock is not listed or traded on the NASDAQ National Market System or on any national securities exchange, the Fair Market Value of the Stock for purposes of the grant of Options under the Plan shall be determined by the Board in good faith.

          (i) “Outside Director” is an individual who is (i) a member of the Board and (ii) not an employee of the Company or an Affiliated Corporation. For purposes of the Plan, an employee is an individual whose wages are subject to the withholding of federal income tax under Section 3401 of the Code. Furthermore, any individual who performs services, whether as an employee, partner, sole proprietor, director, trustee, independent contractor, or consultant, for any entity or group of affiliated entities which own at least ten percent (10%) of the total combined voting power of all classes of stock of the Company shall not be considered to be a “Outside Director” for purposes of the Plan.

          (j) “Holder” means an Outside Director who has received one or more Options under the terms of the Plan.

          (k) “Option” means a right granted under the Plan to purchase Stock at a stated price for a specified period of time. The Options granted under the Plan shall be nonstatutory stock options, that is options that do not satisfy the requirements of Section 422 of the Code.

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          (l) “Option Agreement” means a written agreement between the Company and the Holder of an Option as described in Section 3.2(c) hereof.

          (m) “Option Price” means the price at which shares of Stock subject to an Option may be purchased, determined in accordance with Section 3.3(b).

          (n) “Share” means a share of Stock.

          (o) “Stock” means the common stock of the Company.

ARTICLE III

OPTIONS

     3.1 Participation. Each Outside Director who is elected or re-elected at an Annual Meeting or at any other time (such as an individual who becomes an Outside Director by filling a vacancy on the Board or a newly created directorship) shall receive an Option as of the date of such election. Each Outside Director who is elected or re-elected for a term longer than one year, including Outside Directors elected or re-elected prior to the Effective Date, shall receive Options as of the date of his or her election and as of each anniversary date during his or her term. Options shall be granted in accordance with Section 3.2 on the terms and conditions herein described.

     3.2 Grant.

          (a) Annual Grants. Each Outside Director of the Company shall automatically receive, on the date of that Outside Director’s initial election to the Board, an Option to purchase 30,000 Shares (the “Initial Grant”). Each Outside Director of the Company who has already received an Initial Grant shall automatically receive, on each anniversary date of the Initial Grant, an Option to purchase 15,000 Shares.

          (b) Date of Grant. The date on which an Outside Director receives an Option hereunder is referred to as the date of grant of such Option.

          (c) Option Agreement. Each Option granted under the Plan shall be evidenced by an Option Agreement which shall incorporate and conform to the terms and conditions set forth in Section 3.3 of the Plan.

     3.3 Terms and Conditions. Options issued pursuant to the Plan shall have the following terms and conditions:

          (a) Number and Timing. Each Outside Director shall receive under the Plan Options to purchase the number of Shares determined as specified in Section 3.2, subject to adjustment as provided in Section 4.2. Such grants shall be made at the times specified in Section 3.2.

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          (b) Price. The price at which each Share covered by the Option may be purchased by each Outside Director shall be the Fair Market Value of a share of the Stock on the date of grant, subject to adjustment as provided in Section 4.2.

          (c) Duration of Options. Each Option shall expire ten years from the date the Option is granted (the “Option Period”), unless terminated sooner pursuant to Section 3.3(d) below or fully exercised prior to the end of such period.

          (d) Termination of Service, Death, Etc. An Option shall terminate in the following circumstances if the Holder ceases to be a director of the Company:

               (i) Removal for Cause. If the Holder is removed as a director of the Company during the Option Period for cause, the Option shall be void thereafter for all purposes, including as to Shares for which the Option was otherwise exercisable according to Section 3.3(g) prior to the Holder’s removal as a director of the Company.

               (ii) Disability. If the Holder ceases to be a director of the Company on account of Disability, the Option may be exercised by the Holder (or, in case of death thereafter, by the persons specified in Section 3.3(d)(iii)) within one year following the date on which the Holder ceased to be a director (if otherwise within the Option Period), but not thereafter. In any such case, the Option may be exercised only as to Shares for which the Option had become exercisable on or before the date the Holder ceased to be a director on account of Disability.

               (iii) Death. If the Holder dies during the Option Period while still serving as a director or within the three-month period referred to in Section 3.3(d)(iv) below, the Option may be exercised by those entitled to do so under the Holder’s will or by the laws of descent and distribution within one year following the Holder’s death (if otherwise within the Option Period), but not thereafter. In any such case, the Option may be exercised only as to the Shares for which the Option had become exercisable on or before the date of the Holder’s death.

               (iv) Other Termination. If the Holder ceases to be a director within the Option Period for any reason other than removal for cause, Disability or death, the Option may be exercised by the Holder within three months following the date of such termination (if otherwise within the Option Period), but not thereafter. In any such case, the Option may be exercised only as to the Shares for which the Option had become exercisable on or before the date the Holder ceased to be a director.

               (v) Extension if Holder Subject to Section 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Sections 3.3(d)(i), (ii), (iii), or (iv) of Shares acquired upon the exercise of the Option would subject the Holder to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10^th) day following the date on which a sale of such Shares by the Holder would no longer be subject to such suit, (ii) the one hundred and ninetieth (190^th) day after the Holder’s termination of service as a director, or (iii) the expiration of the Option Period.

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               (vi) Extension if Exercise Prevented by Law. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 3.3(d)(i), (ii), (iii) or (iv) is prevented by the provisions of Section 3.3(e)(iv), the Option shall remain exercisable until three (3) months after the date the Holder is notified by the Company that the Option is exercisable, but in any event no later than the expiration of the Option Period.

          (e) Transferability, Exercisability.

               (i) Each Option granted under the Plan shall not be transferable by a Holder other than by will or the laws of descent and distribution.

               (ii) Each Option granted under the Plan shall be exercisable during the Holder’s lifetime only by the Holder or, in the event of disability or incapacity, by the Holder’s guardian or legal representative.

               (iii) Notwithstanding any other provision of the Plan, no Option may be unconditionally granted unless and until the Plan is approved by the stockholders of the Company in accordance with Section 1.3, and for any Option granted prior to the time of such stockholder approval which is subject to such approval, the date of grant of the Option shall be the date on which the stockholders of the Company approve the Plan.

               (iv) The grant of an Option and the issuance of Shares upon exercise of an Option shall be subject to compliance with all applicable requirements of federal and state law with respect to such securities. An Option may not be exercised if the issuance of Shares upon exercise would constitute a violation of any applicable federal or state securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Option may not be exercised unless (i) a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares subject to an Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of an Option, the Company may require the Holder to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

          (f) Exercise, Payments, Etc.

               (i) Method of Exercise. The method for exercising each Option granted shall be by delivery to the Company of written notice specifying the number of shares with respect to which the Option is exercised. The purchase of Stock pursuant to the Option shall take place at the principal office of the Company within thirty days following delivery of such notice, at which

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time the purchase price of the Stock shall be paid in full by any of the methods set forth in Section 3.3(f)(ii) or a combination thereof. A properly executed certificate or certificates representing the Stock shall be delivered to the Holder upon payment therefore.

               (ii) Payment of Option Price. The Option Price shall be paid by any of the following methods or any combination of such methods, at the option of the Holder: (A) cash; (B) certified, cashier’s or other check acceptable to the Company, payable to the order of the Company; (C) delivery to the Company of certificates representing a number of shares of Stock then owned by the Holder, the Fair Market Value of which (determined as of the date the notice of exercise is delivered to the Company) equals the price of the Stock to be purchased pursuant to the Option, properly endorsed for transfer to the Company; or (D) by the assignment of the proceeds of a sale of some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (“Immediate Sales Proceeds”). No Option may be exercised by delivery to the Company of certificates representing Stock that has been held by the Option Holder for less than six months or such other period as shall be sufficient for the Company to avoid, if possible, the recognition of expense with respect to the Option for accounting purposes. The payment of the exercise price with Immediate Sales Proceeds shall comply with procedures established by the Company, which procedures may be changed from time to time in the Company’s sole discretion. The Company retains the right to discontinue the availability of payment with Immediate Sales Proceeds at any time.

          (g) Service Required for Exercise. Except as set forth in Section 1.3 and 3.3(d), the Initial Grant made to an Outside Director under the Plan shall become exercisable (i) for one-third (1/3) of the total number of shares subject to such Option after one year of continuous service by the Holder as a director of the Company after the date of grant and (ii) for an additional one-third (1/3) of the total number of shares subject to the Option at the end of each full year of continuous service as a director of the Company thereafter, in each case rounded to the nearest whole number of shares. Except as set forth in Sections 1.3 and 3.3(d), each subsequent Option granted to an Outside Director under the Plan shall be exercisable in its entirety after three (3) years of continuous service by the Holder as a director of the Company after the date of grant. Except as set forth in Section 5.2, the Option shall not be exercisable as to any Shares as to which the applicable continuous service requirements has not been satisfied, regardless of the circumstances under which the Holder ceased to be a director.

ARTICLE IV

AUTHORIZED STOCK

     4.1 The Stock. Subject to adjustment pursuant to Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be 1,132,813 and shall consist of authorized but unissued shares or treasury shares of Stock or any combination thereof. Shares of Stock underlying expired or canceled and unexercised Options shall again be available for issuance under the Plan. However, shares surrendered to the Company in payment of the Option Price of an Option and shares purchased by the Company in the open market with the proceeds from the sale of Stock pursuant to the exercise of Options shall not be available for issuance under the Plan.

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     4.2 Adjustments.

          (a) Stock Splits, Stock Dividends, Etc. If the Company at any time increases or decreases the number of its outstanding shares of Stock, or changes in any way the rights and privileges of such shares, by means of the payment of a stock dividend or the making of any other distribution upon such shares payable in Stock, or through a stock split or subdivision of shares, or a consolidation or combination of shares, or through a reclassification or recapitalization involving the Stock, then the class, numbers, rights and privileges of the following shall be increased, decreased or changed in like manner as if the Stock issuable upon exercise of the Option had been validly issued and outstanding, fully paid and nonassessable at the time of such occurrence: (i) the number and class of shares issuable pursuant to the Plan as provided in Section 4.1, (ii) the number and class of shares for which Options may be granted under the Plan pursuant to Section 3.2, (iii) the number and class of shares then subject to each outstanding Option granted under the Plan, and (iv) the Option Price for each outstanding Option.

     If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to a Transfer of Control (as defined in Section 5.1) shares of another corporation (the “New Shares”), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the Option Price of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its sole discretion.

          (b) Adjustments for Certain Distributions of Property. If the Company shall at any time distribute with respect to its outstanding Stock, assets or securities of other persons (excluding cash dividends, distributions payable out of capital surplus, and dividends or other distributions referred to in Sections 4.2(a) and (c)), then the Option Price of outstanding Options shall be adjusted to reflect the fair market value of the assets or securities distributed, the Company shall provide for the delivery upon exercise of such Options of cash in an amount equal to the appropriate portion of the fair market value of the assets or securities distributed, or a combination of such actions shall be taken, all as determined by the Company in its discretion. Fair market value of the assets or securities distributed for this purpose shall be as determined by the Company.

          (c) Distributions of Capital Stock and Indebtedness. If the Company at any time distributes to all holders of Stock shares of its capital stock (other than Stock), or evidences of its indebtedness, then a proportionate part of such capital stock and evidences of indebtedness shall be set aside for each outstanding Option and, upon exercise of the Option, delivered to the Holder of such Option.

     4.3 No Rights as Stockholder. A Holder shall have none of the rights of a stockholder with respect to the shares subject to an Option until such shares are transferred to the Holder upon exercise of such Option. Except as provided in Section 4.2, no adjustments shall be made for dividends, rights or other property distributed to stockholders (whether ordinary or extraordinary) for which the record date is prior to the date such shares are so transferred.

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     4.4 Fractional Shares. No adjustments or substitution provided for in this Article IV shall require the Company to sell a fractional share. The total substitution or adjustment with respect to each Option shall be limited by deleting any fractional share. In no event may the Option Price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option.

ARTICLE V

TRANSFER OF CONTROL

     5.1 Definition. A “Transfer of Control” shall be deemed to have occurred in the event any of the following occurs with respect to the Company.

          (a) the direct or indirect sale or exchange by the stockholders of the Company of all or substantially all of the voting stock of the Company wherein the stockholders of the Company immediately before such sale or exchange do not retain in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately before such event, directly or indirectly (including without limitation, through their ownership of shares of the voting stock of a corporation which, as a result of such sale or exchange, owns the Company either directly or through one or more subsidiaries), at least a majority of the beneficial interest in the voting stock of the Company’s immediately after such sale or exchange;

          (b) a merger or consolidation wherein the stockholders of the Company immediately before such merger or consolidation do not retain in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately before such event, directly or indirectly (including, without limitation, through their ownership of shares of the voting stock of a corporation which, as a result of such merger or consolidation, owns the Company either directly or through one or more subsidiaries), at least a majority of the beneficial interest in the voting stock of the Company immediately after such merger or consolidation;

          (c) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange, or transfer to one or more corporations (the “Transferee Corporation(s)”) wherein the stockholders of the Company immediately before such sale, exchange, or transfer retain in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately before such event, directly or indirectly (including, without limitation, through their ownership of shares of the voting stock of a corporation which owns the Transferee Corporation(s) either directly or through one or more subsidiaries, at least a majority of the beneficial interest in the voting stock of the Transferee Corporation(s) immediately after such event); or

          (d) a liquidation or dissolution of the Company.

     5.2 Effect on Options. In the event of a Transfer of Control, any unexercisable or unvested portion of the outstanding Options shall be immediately exercisable and vested in full as of the date ten (10) days prior to the date of the Transfer of Control, and the Company shall provide each Holder of an outstanding Option with at least ten (10) days advance written notice of the

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pending Transfer of Control prior to the consummation thereof. The exercise or vesting of any Option that was permissible solely by reason of this Section 5.2 shall be conditioned upon the consummation of the Transfer of Control. In addition, the Board, in its sole discretion, may arrange with the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the “Acquiring Corporation”), for the Acquiring Corporation to either assume the Company’s rights and obligations under outstanding Options or substitute substantially equivalent options for the Acquiring Corporation’s stock for such outstanding Options. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control shall terminate and cease to be outstanding effective as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of an Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of the Option Agreement evidencing such Option except as otherwise provided in such Option Agreement. If the corporation the stock of which is subject to the outstanding Options immediately prior to a Transfer of Control described in Section 8.1(a) is the surviving or continuing corporation, the outstanding Options shall be deemed to have been assumed by the Acquiring Corporation for purposes of this Section 5.2.

ARTICLE VI

GENERAL PROVISIONS

     6.1 Administration. The Plan shall be administered by the Board and/or any duly appointed committee of the Board having such powers as shall be specified by the Board. Unless the powers of the committee have been specifically limited, the committee shall have all of the powers of the Board granted herein, including, without limitation, the power to terminate or amend the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. The Board shall have no authority, discretion, or power to select the Outside Directors who will receive Options under the Plan, to set the Option Price of the Options, to determine the number of Shares to be granted under option or the time at which such Options are to be granted, to establish the duration of Options, or alter any other terms or conditions specified in the Plan, except in the sense of administering the Plan subject to the provisions of the Plan. All questions of interpretation of the Plan or of any Options granted under the Plan shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan and/or any Option. Any officer of the Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election.

     6.2 Expiration. The Plan shall terminate whenever the Board adopts a resolution to that effect. After termination, no additional Options shall be granted under the Plan, but the Company shall continue to recognize Options previously granted.

     6.3 Amendments, Etc. The Board may from time to time amend, modify, suspend or terminate the Plan. Nevertheless, no such amendment, modification, suspension or termination shall impair any Option theretofore granted under the Plan or deprive any Holder of any Shares that he

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may have acquired through or as a result of the Plan without the consent of the Holder. The Plan may not be amended more than once every six months with respect to the persons entitled to be granted Options hereunder, the timing of grants to Outside Directors, the number of Shares subject to an Option or the Option Price thereof, other than amendments necessary to comport with changes in the Code, ERISA or the rules and regulations thereunder. The Company shall obtain the approval of stockholders to any amendment or modification of the Plan to the extent required by Rule 16b-3 under the Exchange Act or by the listing requirements of the National Association of Securities Dealers, Inc. or any stock exchange on which the Company’s securities are quoted or listed for trading.

     6.4 Treatment of Proceeds. Proceeds from the sale of Stock pursuant to Options granted under the Plan shall constitute general funds of the Company.

     6.5 Paragraph Headings. The paragraph headings are included herein only for convenience, and they shall have no effect on the interpretation of the Plan.

     6.6 Severability. If any article, section, subsection or specific provision is found to be illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if such illegal and invalid provision had never been set forth in the Plan.

     6.7 Rule 16b-3. This Plan is intended to comply with the requirements of Rule 16b.3 under the Exchange Act. To the extent the Plan does not conform to such requirements, it shall be deemed amended to so conform without any further action on the part of the Board of Directors or stockholders.

     6.8 Continuation of Initial Plan as to Outstanding Options. Notwithstanding any other provision of the Plan to the contrary, the terms of the Initial Plan shall remain in effect and apply to all Options granted pursuant to the Initial Plan.

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EX-10.6

Exhibit 10.6

FOUNDSTONE, INC.

2000 STOCK PLAN

(Amended October 23, 2007)

     1. Purposes of the Plan. The purposes of this 2000 Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company’s business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan.

     2. Definitions. As used herein, the following definitions shall apply:

          (a) “Administrator” means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof.

          (b) “Applicable Laws” means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan.

          (c) “Board” means the Board of Directors of the Company.

          (d) “Code” means the Internal Revenue Code of 1986, as amended.

          (e) “Committee” means a committee of Directors appointed by the Board in accordance with Section 4 hereof.

          (f) “Common Stock” means the Common Stock of the Company.

          (g) “Company” means Foundstone, Inc., a Delaware corporation.

          (h) “Consultant” means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity.

          (i) “Director” means a member of the Board of Directors of the Company.

          (j) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

          (k) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any

successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

          (l) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (m) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

               (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

               (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or

               (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator.

          (n) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

          (o) “Nonstatutory Stock Option” means an Option not intended to qualify as an Incentive Stock Option.

          (p) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

          (q) “Option” means a stock option granted pursuant to the Plan.

          (r) “Option Agreement” means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

          (s) “Option Exchange Program” means a program whereby outstanding Options are exchanged for Options with a lower exercise price.

          (t) “Optioned Stock” means the Common Stock subject to an Option or a Stock Purchase Right.

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          (u) “Optionee” means the holder of an outstanding Option or Stock Purchase Right granted under the Plan.

          (v) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

          (w) “Plan” means this 2000 Stock Plan, as amended.

          (x) “Restricted Stock” means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below.

          (y) “Service Provider” means an Employee, Director or Consultant.

          (z) “Share” means a share of the Common Stock, as adjusted in accordance with Section 12 below.

          (aa) “Stock Purchase Right” means a right to purchase Common Stock pursuant to Section 11 below.

          (bb) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

     3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 1,250,000 Shares. The Shares may be authorized but unissued or reacquired Common Stock; provided, however, that Shares acquired by the Company with the proceeds from the sale of Shares pursuant to the exercise of Options may not be subject to option and sold under the Plan.

     If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, including, without limitation, any and all Shares of Restricted Stock that are repurchased by the Company at their original purchase price.

     4. Administration of the Plan.

          (a) Administrator. The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws.

          (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion:

               (i) to determine the Fair Market Value;

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               (ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder;

               (iii) to determine the number of Shares to be covered by each such award granted hereunder;

               (iv) to approve forms of agreement for use under the Plan;

               (v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

               (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock;

               (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted;

               (viii) to initiate an Option Exchange Program;

               (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws;

               (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and

               (xi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan.

          (c) Effect of Administrator’s Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees.

     5. Eligibility.

          (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.

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          (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

          (c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee’s relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company’s right to terminate such relationship at any time, with or without cause.

     6. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan.

     7. Term of Option. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

     8. Option Exercise Price and Consideration.

          (a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following:

               (i) In the case of an Incentive Stock Option

                    (A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

                    (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

               (ii) In the case of a Nonstatutory Stock Option

                    (A) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

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                    (B) granted to any other Service Provider, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant.

               (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction.

          (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company.

     9. Exercise of Option.

          (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Except in the case of Options granted to Officers, Directors and Consultants, Options shall become exercisable at a rate of no less than 20% per year over five (5) years from the date the Options are granted. Unless the Administrator provides otherwise, vesting of Options granted hereunder to Officers and Directors shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share.

     An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan.

     Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

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          (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

          (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

          (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee’s estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee’s termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

          (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made.

     10. Non-Transferability of Options and Stock Purchase Rights. The Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee.

     11. Stock Purchase Rights.

          (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the

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Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The terms of the offer shall comply in all respects with Section 260.140.42 of Title 10 of the California Code of Regulations. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator.

          (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine. Except with respect to Shares purchased by Officers, Directors and Consultants, the repurchase option shall in no case lapse at a rate of less than 20% per year over five (5) years from the date of purchase.

          (c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

          (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan.

     12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.

          (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right.

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          (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option or Stock Purchase Right until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option or Stock Purchase Right would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action.

          (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

     13. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant.

     14. Amendment and Termination of the Plan.

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          (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.

          (b) Shareholder Approval. The Board shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

          (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination.

     15. Conditions Upon Issuance of Shares.

          (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

          (b) Investment Representations. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

     16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

     17. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

     18. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws.

     19. Information to Optionees and Purchasers. The Company shall provide to each Optionee and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information.

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EX-10.7

Exhibit 10.7

McAFEE, INC.

2002 EMPLOYEE STOCK PURCHASE PLAN

(as amended April 28, 2008)

     1. Establishment, Purpose and Term of Plan.

          1.1 Establishment. The McAfee, Inc. 2002 Employee Stock Purchase Plan (the “Plan“) was established effective as of April 10, 2002 (the “Effective Date”) and was amended and restated as of April 7, 2005, with the increase of one million shares to the total number of shares reserved for issuance under the Plan on such date subject to approval by the Company’s stockholders at the annual meeting being held on May 25, 2005.

          1.2 Purpose. The purpose of the Plan is to advance the interests of the Company and its stockholders by providing an incentive to attract, retain and reward Eligible Employees of the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. The Plan provides such Eligible Employees with an opportunity to acquire a proprietary interest in the Company through the purchase of Stock. The Company intends that the Plan qualify as an “employee stock purchase plan” under Section 423 of the Code (including any amendments or replacements of such section), and the Plan shall be so construed. In addition, this Plan authorizes the grant of Purchase Rights which do not qualify under Section 423 of the Code pursuant to rules, procedures or sub-plans adopted by the Board designed to achieve desired tax or other objectives in particular locations outside the United States.

          1.3 Term of Plan. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued.

     2. Definitions and Construction.

          2.1 Definitions. Any term not expressly defined in the Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. Whenever used herein, the following terms shall have their respective meanings set forth below:

               (a) “Board” means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, “Board” also means such Committee(s).

               (b) “Code” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

               (c) “Committee” means a committee of the Board duly appointed to administer the Plan and having such powers as specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law.

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               (d) “Company” means McAfee, Inc., a Delaware corporation, or any successor corporation thereto.

               (e) “Compensation” means, with respect to any Offering Period, all amounts paid in cash and includable as “wages” subject to tax under section 3101(a) of the Code without applying the dollar limitation of section 3121(a) of the Code or, for Participants outside the United States, equivalent amounts as determined by the Board. Accordingly, Compensation may include, without limitation, salaries, commissions, bonuses, overtime, and salary deferrals under section 401(k) of the Code. Compensation shall be limited to amounts actually payable in cash directly to the Participant or deferred by the Participant during the Offering Period. Compensation shall not include reimbursements of expenses, allowances, or any amount deemed received without the actual transfer of cash or any amounts directly or indirectly paid pursuant to the Plan or any other stock purchase or stock option plan, or any other compensation not included above.

               (f) “Eligible Employee” means an Employee who meets the requirements set forth in Section 5 for eligibility to participate in the Plan.

               (g) “Employee” means a person treated as an employee of a Participating Company for purposes of Section 423 of the Code. A Participant shall be deemed to have ceased to be an Employee either upon an actual termination of employment or upon the corporation employing the Participant ceasing to be a Participating Company. For purposes of the Plan, an individual shall not be deemed to have ceased to be an Employee while on any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. If an individual’s leave of absence exceeds ninety (90) days, the individual shall be deemed to have ceased to be an Employee on the ninety-first (91st) day of such leave unless the individual’s right to reemployment with the Participating Company Group is guaranteed either by statute or by contract.

               (h) “Fair Market Value” means, as of any date:

                    (a) If the Stock is then listed on a national or regional securities exchange or market system or is regularly quoted by a recognized securities dealer, the closing sale price of a share of Stock (or the mean of the closing bid and asked prices if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq SmallCap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, or by such recognized securities dealer, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system or has been quoted by such securities dealer, the date on which the Fair Market Value is established shall be the last day on which the Stock was so traded or quoted prior to the relevant date, or such other appropriate day as determined by the Board, in its discretion.

     (b) If, on the relevant date, the Stock is not then listed on a national or regional securities exchange or market system or regularly quoted by a recognized securities dealer, the Fair Market Value of a share of Stock shall be as determined in good faith by the Board.

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               (i) “Offering” means an offering of Stock as provided in Section 6.1.

               (j) “Offering Date” means, for any Offering, the first day of the Offering Period.

               (k) “Offering Period” means a period established in accordance with Section 6.

               (l) “Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

               (m) “Participant” means an Eligible Employee who has become a participant in an Offering Period in accordance with Section 7 and remains a participant in accordance with the Plan.

               (n) “Participating Company” means the Company or any Parent Corporation or Subsidiary Corporation designated by the Board as a corporation the Employees of which may, if Eligible Employees, participate in the Plan. The Board shall have the sole and absolute discretion to determine from time to time which Parent Corporations or Subsidiary Corporations shall be Participating Companies.

               (o) “Participating Company Group” means, at any point in time, the Company and all other corporations collectively which are then Participating Companies.

               (p) “Purchase Date” means, for any Offering Period or Purchase Period, the last day of such period.

               (q) “Purchase Period” means a period established in accordance with Section 6.2.

               (r) “Purchase Price” means the price at which a share of Stock may be purchased under the Plan, as determined in accordance with Section 9.

               (s) “Purchase Right” means an option granted to a Participant pursuant to the Plan to purchase such shares of Stock as provided in Section 8, which the Participant may or may not exercise during the Offering Period in which such option is outstanding. Such option arises from the right of a Participant to withdraw any accumulated payroll deductions of the Participant not previously applied to the purchase of Stock under the Plan and to terminate participation in the Plan at any time during an Offering Period.

               (t) “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2.

               (u) “Subscription Agreement” means a written agreement in such form as specified by the Company, stating an Employee’s election to participate in the Plan and authorizing payroll deductions under the Plan from the Employee’s Compensation.

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               (v) “Subscription Date” means the last business day prior to the Offering Date of an Offering Period or such earlier date as the Company shall establish.

               (w) “Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

          2.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

     3. Administration.

          3.1 Administration by the Board. The Plan shall be administered by the Board. All questions of interpretation of the Plan, of any form of agreement or other document employed by the Company in the administration of the Plan, or of any Purchase Right shall be determined by the Board, and such determinations shall be final, binding and conclusive upon all persons having an interest in the Plan or the Purchase Right, unless fraudulent or made in bad faith. Subject to the provisions of the Plan, the Board shall determine all of the relevant terms and conditions of Purchase Rights; provided, however, that all Participants granted Purchase Rights pursuant to an Offering which are intended to comply with Section 423 of the Code shall have the same rights and privileges within the meaning of Section 423(b)(5) of the Code. Any and all actions, decisions and determinations taken or made by the Board in the exercise of its discretion pursuant to the Plan or any agreement thereunder (other than determining questions of interpretation pursuant to the second sentence of this Section 3.1) shall be final, binding and conclusive upon all persons having an interest therein.

          3.2 Authority of Officers. Any officer of the Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election that is the responsibility of or that is allocated to the Company herein, provided that the officer has apparent authority with respect to such matter, right, obligation, determination or election.

          3.3 Policies and Procedures Established by the Company. The Company may, from time to time, consistent with the Plan and the requirements of Section 423 of the Code, establish, change or terminate such rules, guidelines, policies, procedures, limitations, or adjustments as deemed advisable by the Company, in its discretion, for the proper administration of the Plan, including, without limitation, (a) a minimum payroll deduction amount required for participation in an Offering, (b) a limitation on the frequency or number of changes permitted in the rate of payroll deduction during an Offering, (c) an exchange ratio applicable to amounts withheld in a currency other than United States dollars, (d) a payroll deduction greater than or less than the amount designated by a Participant in order to adjust for the Company’s delay or mistake in processing a Subscription Agreement or in otherwise effecting a Participant’s election under the Plan or as advisable to comply with the requirements of Section 423 of the Code, and (e) determination of the date and manner by which the Fair Market Value of a share of Stock is determined for purposes of administration of the Plan. All such actions by the Company shall be

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taken consistent with the requirement under Section 423(b)(5) of the Code that all Participants granted Purchase Rights pursuant to an Offering (which are intended to comply with the requirements of Section 423 of the Code) shall have the same rights and privileges within the meaning of such section.

          3.4 Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.

     4. Shares Subject to Plan.

          4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.2, and subject to a 1,000,000 share increase in the number of shares issuable under the Plan being approved by the Company’s stockholders at the annual stockholders meeting being held on May 25, 2005, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be 5,000,000 (including such 1,000,000 share increase), and shall consist of authorized but unissued or reacquired shares of Stock, or any combination thereof. If an outstanding Purchase Right for any reason expires or is terminated or canceled, the shares of Stock allocable to the unexercised portion of that Purchase Right shall again be available for issuance under the Plan.

          4.2 Adjustments for Changes in Capital Structure. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, or in the event of any merger (including a merger effected for the purpose of changing the Company’s domicile), sale of assets or other reorganization in which the Company is a party, appropriate adjustments shall be made in the number and class of shares subject to the Plan and each Purchase Right, and in the Purchase Price. If a majority of the shares of the same class as the shares subject to outstanding Purchase Rights are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the “New Shares“), the Board may unilaterally amend the outstanding Purchase Rights to provide that such Purchase Rights are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the Purchase Price of, the outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as determined by the Board, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded

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down to the nearest whole number, and in no event may the Purchase Price be decreased to an amount less than the par value, if any, of the stock subject to the Purchase Right. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive.

     5. Eligibility.

          5.1 Employees Eligible to Participate. Each Employee of a Participating Company is eligible to participate in the Plan and shall be deemed an Eligible Employee, except the following excluded employees: (a) any Employee who has not completed thirty (30) days of continuous employment with a Participating Company as of the Offering Date, or (b) any Employee who is customarily employed by the Participating Company Group for less then twenty (20) hours per week unless, for Participants outside the United States, such exclusion is not permitted under foreign law.

          5.2 Exclusion of Certain Stockholders. Notwithstanding any provision of the Plan to the contrary, no Employee shall be treated as an Eligible Employee and granted a Purchase Right under the Plan if, immediately after such grant, the Employee would own or hold options to purchase stock of the Company or of any Parent Corporation or Subsidiary Corporation possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of such corporation, as determined in accordance with Section 423(b)(3) of the Code. For purposes of this Section 5.2, the attribution rules of Section 424(d) of the Code shall apply in determining the stock ownership of such Employee.

          5.3 Determination by Company. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee or an Eligible Employee and the effective date of such individual’s attainment or termination of such status, as the case may be. For purposes of an individual’s participation in or other rights, if any, under the Plan as of the time of the Company’s determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any court of law or governmental agency subsequently makes a contrary determination.

     6. Offerings.

          6.1 Offering Periods. With respect to Offering Periods commencing prior to August 1, 2005, the Plan was implemented by sequential and overlapping Offerings of approximately twenty four (24) months’ duration. Commencing with the Offering Period starting August 1, 2005, the Plan shall be implemented by sequential Offering Periods of approximately six (6) months duration; provided, however, that outstanding Offering Periods that commenced prior to August 1, 2005 will continue until the end of such twenty-four (24) month Offering Periods. Commencing with the Offering Period starting August 1, 2005, Offering Periods shall commence on or about August 1 and February 1 of each year and end on the or about the last day of the following January or July, respectively, occurring thereafter. Notwithstanding the foregoing, the Board may establish a different duration for one or more Offering Periods or different commencing or ending dates for such Offering Periods; provided, however, that no Offering Period may have a duration exceeding twenty-seven (27) months. If

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the first or last day of an Offering Period is not a day on which the national securities exchanges or Nasdaq Stock Market are open for trading, the Company shall specify the trading day that will be deemed the first or last day, as the case may be, of the Offering Period.

          6.2 Purchase Periods. Each Offering Period prior to the Offering Period commencing August 1, 2005 shall consist of four (4) consecutive purchase periods of approximately six (6) months duration, or such other number or duration as the Board shall determine (individually, a "Purchase Period"). A Purchase Period commencing on or about February 1 shall end on or about the next July 31. A Purchase Period commencing on or about August 1 shall end on or about the next January 31. Notwithstanding the foregoing, the Board may establish a different duration for one or more Purchase Periods or different commencing or ending dates for such Purchase Periods. If the first or last day of a Purchase Period is not a day on which the national securities exchanges or Nasdaq Stock Market are open for trading, the Company shall specify the trading day that will be deemed the first or last day, as the case may be, of the Purchase Period.

     7. Participation in the Plan.

          7.1 Initial Participation. An Eligible Employee may become a Participant in an Offering Period by delivering a properly completed Subscription Agreement to the office designated by the Company not later than the close of business for such office on the Subscription Date established by the Company for that Offering Period. An Eligible Employee who does not deliver a properly completed Subscription Agreement to the Company’s designated office on or before the Subscription Date for an Offering Period shall not participate in the Plan for that Offering Period or for any subsequent Offering Period unless the Eligible Employee subsequently delivers a properly completed Subscription Agreement to the appropriate office of the Company on or before the Subscription Date for such subsequent Offering Period. An Employee who becomes an Eligible Employee after the Offering Date of an Offering Period shall not be eligible to participate in that Offering Period but may participate in any subsequent Offering Period provided the Employee is still an Eligible Employee as of the Offering Date of such subsequent Offering Period.

          7.2 Continued Participation. A Participant shall automatically participate in the next Offering Period commencing immediately after the final Purchase Date of each Offering Period in which the Participant participates provided that the Participant remains an Eligible Employee on the Offering Date of the new Offering Period and has not either (a) withdrawn from the Plan pursuant to Section 12.1 or (b) terminated employment as provided in Section 13. A Participant who may automatically participate in a subsequent Offering Period, as provided in this Section, is not required to deliver any additional Subscription Agreement for the subsequent Offering Period in order to continue participation in the Plan. However, a Participant may deliver a new Subscription Agreement for a subsequent Offering Period in accordance with the procedures set forth in Section 7.1 if the Participant desires to change any of the elections contained in the Participant’s then effective Subscription Agreement.

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     8. Right to Purchase Shares.

          8.1 Grant of Purchase Right. Except as otherwise specified by the Board prior to the Offering Date of an Offering Period, on the Offering Date of each Offering Period, each Participant in that Offering Period shall be granted automatically a Purchase Right consisting of an option to purchase the lesser of (a) that number of whole shares of Stock determined by dividing Fifty Thousand Dollars ($50,000) by the Fair Market Value of a share of Stock on such Offering Date or (b) ten thousand (10,000) shares of Stock. No Purchase Right shall be granted on an Offering Date to any person who is not, on such Offering Date, an Eligible Employee.

          8.2 Calendar Year Purchase Limitation. Notwithstanding any provision of the Plan to the contrary, no Participant shall be granted a Purchase Right which permits his or her right to purchase shares of Stock under the Plan to accrue at a rate which, when aggregated with such Participant’s rights to purchase shares under all other employee stock purchase plans of a Participating Company intended to meet the requirements of Section 423 of the Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or such other limit, if any, as may be imposed by the Code) for each calendar year in which such Purchase Right is outstanding at any time. For purposes of the preceding sentence, the Fair Market Value of shares purchased during a given Offering Period shall be determined as of the Offering Date for such Offering Period. The limitation described in this Section shall be applied in conformance with applicable regulations under Section 423(b)(8) of the Code.

     9. Purchase Price.

          The Purchase Price at which each share of Stock may be acquired in an Offering Period upon the exercise of all or any portion of a Purchase Right shall be established by the Board; provided, however, that the Purchase Price on each Purchase Date shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair Market Value of a share of Stock on the Offering Date of the Offering Period or (b) the Fair Market Value of a share of Stock on the Purchase Date. Unless otherwise provided by the Board prior to the commencement of an Offering Period, the Purchase Price on each Purchase Date during that Offering Period shall be eighty-five percent (85%) of the lesser of (a) the Fair Market Value of a share of Stock on the Offering Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on the Purchase Date.

     10. Accumulation of Purchase Price through Payroll Deduction.

          Shares of Stock acquired pursuant to the exercise of all or any portion of a Purchase Right may be paid for by means of payroll deductions from the Participant’s Compensation accumulated during the Offering Period for which such Purchase Right was granted or, if authorized by the Board for Participants outside the United States, by means of contribution other than payroll deductions, subject to the following:

          10.1 Amount of Payroll Deductions. Except as otherwise provided herein, the amount to be deducted under the Plan from a Participant’s Compensation on each payday during an Offering Period shall be determined by the Participant’s Subscription Agreement. The

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Subscription Agreement shall set forth the percentage of the Participant’s Compensation to be deducted on each payday during an Offering Period in whole percentages of not less than one percent (1%) (except as a result of an election pursuant to Section 10.3 to stop payroll deductions effective following the first payday during an Offering) or more than ten percent (10%). The Board may change the foregoing limits on payroll deductions effective as of any Offering Date.

          10.2 Commencement of Payroll Deductions. Payroll deductions shall commence on the first payday following the Offering Date and shall continue to the end of the Offering Period unless sooner altered or terminated as provided herein.

          10.3 Election to Change or Stop Payroll Deductions. During an Offering Period, a Participant may elect to increase or decrease the rate of or to stop deductions from his or her Compensation by delivering to the Company’s designated office an amended Subscription Agreement authorizing such change on or before the Change Notice Date, as defined below. A Participant who elects, effective following the first payday of an Offering Period, to decrease the rate of his or her payroll deductions to one percent (1%) shall nevertheless remain a Participant in the current Offering Period unless such Participant withdraws from the Plan as provided in Section 12.1. The “Change Notice Date” shall be the day immediately prior to the beginning of the first pay period for which such election is to be effective, unless a different date is established by the Company and announced to the Participants.

          10.4 Administrative Suspension of Payroll Deductions. The Company may, in its sole discretion, suspend a Participant’s payroll deductions under the Plan as the Company deems advisable to avoid accumulating payroll deductions in excess of the amount that could reasonably be anticipated to purchase the maximum number of shares of Stock permitted (a) under the Participant’s Purchase Right or (b) during a calendar year under the limit set forth in Section 8.2. Payroll deductions shall be resumed at the rate specified in the Participant’s then effective Subscription Agreement at the beginning, respectively, of (I) the next Offering Period the first Purchase Date of which falls in the following calendar year, provided that the individual is a Participant in such Offering Period or (II) with respect to a 24 month Offering Period only, the next Purchase Period the Purchase Date of which falls in the following calendar year, unless the Participant has either withdrawn from the Plan as provided in Section 12.1 or has ceased to be an Eligible Employee.

          10.5 Participant Accounts. Individual bookkeeping accounts shall be maintained for each Participant. All payroll deductions from a Participant’s Compensation shall be credited to such Participant’s Plan account and shall be deposited with the general funds of the Company unless prohibited by foreign law for Participants outside the United States. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose.

          10.6 No Interest Paid. Interest shall not be paid on sums deducted from a Participant’s Compensation pursuant to the Plan unless required by foreign law for Participants outside the United States; provided, however, that upon a determination by the Company’s Board, the Company may elect to pay interest (without an obligation to do so) on sums previously deducted from a Participant’s Compensation in the event that the Company unilaterally returns such sums to the Participant prior to the end of a Purchase Period

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          10.7 Voluntary Withdrawal from Plan Account. A Participant may withdraw all of the payroll deductions credited to his or her Plan account and not previously applied toward the purchase of Stock by delivering to the Company’s designated office a written notice on a form provided by the Company for such purpose. Amounts withdrawn shall be returned to the Participant as soon as practicable after the Company’s receipt of the notice of withdrawal and may not be applied to the purchase of shares in any Offering under the Plan. The Company may from time to time establish or change limitations on the frequency of withdrawals permitted under this Section, establish a minimum dollar amount that must be retained in the Participant’s Plan account, or terminate the withdrawal right provided by this Section.

     11. Purchase of Shares.

          11.1 Exercise of Purchase Right. On each Purchase Date of an Offering Period, each Participant who has not withdrawn from the Plan and whose participation in the Offering has not otherwise terminated before such Purchase Date shall automatically acquire pursuant to the exercise of the Participant’s Purchase Right the number of whole shares of Stock determined by dividing (a) the total amount of the Participant’s payroll deductions accumulated in the Participant’s Plan account during the Offering Period and not previously applied toward the purchase of Stock by (b) the Purchase Price. However, in no event shall the number of shares purchased by the Participant during an Offering Period exceed the number of shares subject to the Participant’s Purchase Right. No shares of Stock shall be purchased on a Purchase Date on behalf of a Participant whose participation in the Offering or the Plan has terminated before such Purchase Date.

          11.2 Pro Rata Allocation of Shares. If the number of shares of Stock which might be purchased by all Participants in the Plan on a Purchase Date exceeds the number of shares of Stock available in the Plan as provided in Section 4.1, the Company shall make a pro rata allocation of the remaining shares in as uniform a manner as practicable and as the Company determines to be equitable. Any fractional share resulting from such pro rata allocation to any Participant shall be disregarded.

          11.3 Delivery of Certificates. As soon as practicable after each Purchase Date, the Company shall arrange the delivery to each Participant of a certificate representing the shares acquired by the Participant on such Purchase Date; provided that the Company may deliver such shares to a broker designated by the Company that will hold such shares for the benefit of the Participant. Shares to be delivered to a Participant under the Plan shall be registered in the name of the Participant, or, if requested by the Participant, in the name of the Participant and his or her spouse, or, if applicable, in the names of the heirs of the Participant.

          11.4 Return of Cash Balance. Any cash balance remaining in a Participant’s Plan account following any Purchase Date shall be refunded to the Participant as soon as practicable after such Purchase Date. However, if the cash balance to be returned to a Participant pursuant to the preceding sentence is less than the amount that would have been necessary to purchase an additional whole share of Stock on such Purchase Date, the Company may retain the cash balance in the Participant’s Plan account to be applied toward the purchase of shares of Stock in the subsequent Purchase Period or Offering Period, as the case may be.

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          11.5 Tax Withholding. At the time a Participant’s Purchase Right is granted or exercised, in whole or in part, or at the time a Participant disposes of some or all of the shares of Stock he or she acquires under the Plan, the Participant shall make adequate provision for the federal, state, local and foreign income, social insurance and other payroll tax withholding obligations, if any, of the Participating Company Group which arise upon the grant or exercise of the Purchase Right or upon such disposition of shares, respectively. The Participating Company Group may, but shall not be obligated to, withhold from the Participant’s compensation the amount necessary to meet such withholding obligations.

          11.6 Expiration of Purchase Right. Any portion of a Participant’s Purchase Right remaining unexercised after the end of the Offering Period to which the Purchase Right relates shall expire immediately upon the end of the Offering Period.

          11.7 Provision of Reports and Stockholder Information to Participants. Each Participant who has exercised all or part of his or her Purchase Right shall receive, as soon as practicable after the Purchase Date, a report of such Participant’s Plan account setting forth the total payroll deductions accumulated prior to such exercise, the number of shares of Stock purchased, the Purchase Price for such shares, the date of purchase and the cash balance, if any, remaining immediately after such purchase that is to be refunded or retained in the Participant’s Plan account pursuant to Section 11.4. The report required by this Section may be delivered in such form and by such means, including by electronic transmission, as the Company may determine. In addition, each Participant shall be provided information concerning the Company equivalent to that information provided generally to the Company’s common stockholders.

     12. Withdrawal from Plan or Offering.

          12.1 Voluntary Withdrawal from the Plan. A Participant may withdraw from the Plan by signing and delivering to the Company’s designated office a written notice of withdrawal on a form provided by the Company for this purpose. Such withdrawal may be elected at any time prior to the end of an Offering Period; provided, however, that if a Participant withdraws from the Plan after a Purchase Date, the withdrawal shall not affect shares of Stock acquired by the Participant on such Purchase Date. A Participant who voluntarily withdraws from the Plan is prohibited from resuming participation in the Plan in the same Offering from which he or she withdrew, but may participate in any subsequent Offering by again satisfying the requirements of Sections 5 and 7.1. The Company may impose, from time to time, a requirement that the notice of withdrawal from the Plan be on file with the Company’s designated office for a reasonable period prior to the effectiveness of the Participant’s withdrawal.

          12.2 Automatic Withdrawal from an Offering Period. With respect to twenty-four month Offering Periods only, if the Fair Market Value of a share of Stock on the first day of an Offering Period is higher than the Fair Market Value of a share of Stock on the first day of any subsequent Purchase Period, then every Participant automatically shall be (a) withdrawn from such Offering after the acquisition of shares of Stock on the Purchase Date of that Offering Period and (b) enrolled in the new Offering commencing immediately following such Purchase Date. A Participant may elect not to be automatically withdrawn from an Offering pursuant to this Section 12.2 by delivering to the Company’s designated office not later than the close of business on the Purchase Date a written notice indicating such election.

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          12.3 Return of Payroll Deductions. Upon a Participant’s voluntary withdrawal from the Plan pursuant to Section 12.1 or automatic withdrawal from an Offering pursuant to Section 12.2, the Participant’s accumulated payroll deductions which have not been applied toward the purchase of shares of Stock (except, in the case of an automatic withdrawal pursuant to Section 12.2, for an amount necessary to purchase an additional whole share of Stock as provided in Section 11.4) shall be refunded to the Participant as soon as practicable after the withdrawal, without the payment of any interest, and the Participant’s interest in the Plan or the Offering, as applicable, shall terminate. Such accumulated payroll deductions to be refunded in accordance with this Section may not be applied to any other Offering under the Plan.

     13. Termination of Employment or Eligibility.

          Upon a Participant’s ceasing, prior to a Purchase Date, to be an Employee of the Participating Company Group for any reason, including retirement, disability or death, or upon the failure of a Participant to remain an Eligible Employee, the Participant’s participation in the Plan shall terminate immediately. In such event, the Participant’s accumulated payroll deductions which have not been applied toward the purchase of shares shall, as soon as practicable, be returned to the Participant or, in the case of the Participant’s death, to the Participant’s beneficiary designated in accordance with Section 20, if any, or legal representative, and all of the Participant’s rights under the Plan shall terminate. Interest shall not be paid on sums returned pursuant to this Section 13 unless required by foreign law for Participants outside the United States. A Participant whose participation has been so terminated may again become eligible to participate in the Plan by satisfying the requirements of Sections 5 and 7.1.

     14. Change in Control.

          14.1 Definitions.

               (a) An “Ownership Change Event” shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company.

               (b) A “Change in Control” shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the “Transaction“) wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting securities of the Company or, in the case of a Transaction described in Section 14.1(a)(iii), the corporation or other business entity to which the assets of the Company were transferred (the “Transferee”), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities

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which own the Company or the Transferee, as the case may be, either directly or through one or more subsidiary corporations or other business entities. The Board shall have the right to determine whether multiple sales or exchanges of the voting securities of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive.

          14.2 Effect of Change in Control on Purchase Rights. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the “Acquiring Corporation”), may, without the consent of any Participant, assume the Company’s rights and obligations under the Plan. If the Acquiring Corporation elects not to assume the Company’s rights and obligations under the Plan, the Purchase Date of the then current Purchase Period or Offering Period shall be accelerated to a date before the date of the Change in Control specified by the Board, but the number of shares of Stock subject to outstanding Purchase Rights shall not be adjusted. All Purchase Rights which are neither assumed by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control.

     15. Nontransferability of Purchase Rights.

          Neither payroll deductions credited to a Participant’s Plan account nor a Participant’s Purchase Right may be assigned, transferred, pledged or otherwise disposed of in any manner other than as provided by the Plan or by will or the laws of descent and distribution. (A beneficiary designation pursuant to Section 20 shall not be treated as a disposition for this purpose.) Any such attempted assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw from the Plan as provided in Section 12.1. A Purchase Right shall be exercisable during the lifetime of the Participant only by the Participant.

     16. Compliance with Securities Law.

          The issuance of shares under the Plan shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities. A Purchase Right may not be granted or exercised if the grant of such Purchase Right or issuance of shares upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any securities exchange or market system upon which the Stock may then be listed. In addition, no Purchase Right may be exercised unless (a) a registration statement under the Securities Act of 1933, as amended, shall at the time of exercise of the Purchase Right be in effect with respect to the shares issuable upon exercise of the Purchase Right, or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Purchase Right may be issued in accordance with the terms of an applicable exemption from the registration requirements of said Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares under the Plan shall relieve the Company of any liability in respect of the failure to grant such Purchase Right or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the grant or exercise of a Purchase Right, the Company may require the Participant

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to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation, and to make any representation or warranty with respect thereto as may be requested by the Company.

     17. Rights As a Stockholder and Employee.

          A Participant shall have no rights as a stockholder by virtue of the Participant’s participation in the Plan until the date of the issuance of a certificate for the shares purchased pursuant to the exercise of the Participant’s Purchase Right (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 4.2. Nothing herein shall confer upon a Participant any right to continue in the employ of the Participating Company Group or interfere in any way with any right of the Participating Company Group to terminate the Participant’s employment at any time.

     18. Legends.

          The Company may at any time place legends or other identifying symbols referencing any applicable federal, state or foreign securities law restrictions or any provision convenient in the administration of the Plan on some or all of the certificates representing shares of Stock issued under the Plan. The Participant shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to a Purchase Right in the possession of the Participant in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include but shall not be limited to the following:

“THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER’S NAME (AND NOT IN THE NAME OF ANY NOMINEE).”

     19. Notification of Disposition of Shares.

          The Company may require the Participant to give the Company prompt notice of any disposition of shares acquired by exercise of a Purchase Right. The Company may require that until such time as a Participant disposes of shares acquired upon exercise of a Purchase Right, the Participant shall hold all such shares in the Participant’s name (or, if elected by the Participant, in the name of the Participant and his or her spouse but not in the name of any nominee) until the later of two years after the date of grant of such Purchase Right or one year after the date of exercise of such Purchase Right. The Company may direct that the certificates

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evidencing shares acquired by exercise of a Purchase Right refer to such requirement to give prompt notice of disposition.

     20. Designation of Beneficiary.

          20.1 Designation Procedure. Unless otherwise restricted by the Board for participants outside the United States, a Participant may file a written designation of a beneficiary who is to receive (a) shares and cash, if any, from the Participant’s Plan account if the Participant dies subsequent to a Purchase Date but prior to delivery to the Participant of such shares and cash or (b) cash, if any, from the Participant’s Plan account if the Participant dies prior to the exercise of the Participant’s Purchase Right. If a married Participant designates a beneficiary other than the Participant’s spouse, the effectiveness of such designation shall be subject to the consent of the Participant’s spouse. A Participant may change his or her beneficiary designation at any time by written notice to the Company.

          20.2 Absence of Beneficiary Designation. If a Participant dies without an effective designation pursuant to Section 20.1 of a beneficiary who is living at the time of the Participant’s death, the Company shall deliver any shares or cash credited to the Participant’s Plan account to the Participant’s legal representative.

     21. Notices.

          All notices or other communications by a Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.

     22. Amendment or Termination of the Plan.

          The Board may at any time amend or terminate the Plan, except that (a) no such amendment or termination shall affect Purchase Rights previously granted under the Plan unless expressly provided by the Board and (b) no such amendment or termination may adversely affect a Purchase Right previously granted under the Plan without the consent of the Participant, except to the extent permitted by the Plan or as may be necessary to qualify the Plan as an employee stock purchase plan pursuant to Section 423 of the Code or to comply with any applicable law, regulation or rule. In addition, an amendment to the Plan must be approved by the stockholders of the Company within twelve (12) months of the adoption of such amendment if such amendment would authorize the sale of more shares than are then authorized for issuance under the Plan or would change the definition of the corporations that may be designated by the Board as Participating Companies.

     23. Rules for Foreign Jurisdictions.

          23.1 Special Rules or Procedures. Notwithstanding any provision to the contrary in this Plan, the Board may adopt rules or procedures relating to the operation and administration of the Plan to accommodate the specific requirements of local laws and procedures for jurisdictions outside of the United States. Without limiting the generality of the foregoing, the Board is specifically authorized to adopt rules and procedures regarding eligibility

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to participate, the definition of Compensation, handling of payroll deductions, making of contributions to the Plan in forms other than payroll deductions, establishment of bank or trust accounts to hold payroll deductions, payment of interest, conversion of local currency, obligations to pay payroll tax, determination of beneficiary designation requirements, withholding procedures and handling of stock certificates which vary with local requirements.

          23.2 Non-423 Plan Rules, Procedures or Sub-Plans. The Board may also adopt rules, procedures or sub-plans applicable to particular Subsidiary Corporations or locations, which sub-plans may be designed to be outside the scope of Section 423 of the Code. The rules of such sub-plans may take precedence over other provisions of this Plan, with the exception of Sections 4.1 and 22, but unless otherwise superseded by the terms of such sub-plan, the provisions of this Plan shall govern the operation of such sub-plan. To the extent inconsistent with the requirements of Section 423 of the Code, the Purchase Rights granted under such sub-plans shall not be considered to comply with Section 423 of the Code.

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EX-10.8

Exhibit 10.8

MCAFEE, INC.

PERFORMANCE STOCK UNIT ISSUANCE AGREEMENT

     RECITALS

          A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees who provide services to the Corporation (or any Parent or Subsidiary).

          B. The Participant is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation’s issuance of shares of Common Stock to the Participant under the Plan.

          C. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix A.

     NOW, THEREFORE, it is hereby agreed as follows:

          1. Grant of Performance Stock Units. The Corporation hereby awards to the Participant, as of the Award Date, Performance Stock Units under the Plan. Each Performance Stock Unit represents the right to receive one share of Common Stock on the vesting date of that unit. Past services are deemed to be full consideration equal to the Performance Stock Unit par value. The number of shares of Common Stock subject to the awarded Performance Stock Units, the applicable vesting schedule for the Performance Stock Units and the underlying shares, the dates on which those vested shares shall be issued to the Participant and the remaining terms and conditions governing the award (the “Award”) shall be as set forth in this Agreement.

AWARD SUMMARY

Award Date:	, 200 ___
Number of Shares Subject to Award:	shares of Common Stock (the “Shares”)
Performance Period(s):
Performance Criteria:	of the Performance Stock Units will be allocated to each of the                      Performance Periods. With respect to each Performance Period, the Participant will vest in the Performance Stock Units allocated thereto in accordance with the Vesting Schedule subject to achievement of certain performance criteria, determined by the Committee. The performance criteria applicable to the Performance Stock Units allocated to each Performance Period is as follows:

Vesting Schedule:	The Shares shall vest as follows, provided that the performance criteria set forth for the applicable Performance Period have been achieved:
	[VESTING SCHEDULE] Such dates are herein designated the “Vesting Dates.” In no event shall any Shares vest after the date of the Participant’s termination of Service.
Issuance Schedule	The Shares in which the Participant vests in accordance with the foregoing Vesting Schedule will be issuable immediately upon vesting. However, the actual number of vested Shares to be issued will be subject to the automatic Share withholding provisions of Paragraph 7 pursuant to which the applicable Withholding Taxes are to be collected.

          2. Limited Transferability. Prior to actual receipt of the Shares which vest hereunder, the Participant may not sell, pledge, assign, hypothecate, transfer or dispose of in any way (whether by operation of law or otherwise) any interest in the Award or the underlying Shares, except pursuant to a domestic relations order governing the division of marital property. Upon any attempt to sell, pledge, assign, hypothecate, transfer or otherwise dispose of this Award, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this Award and the rights and privileges conferred hereby immediately will become null and void. Any Shares which vest hereunder but which otherwise remain unissued at the time of the Participant’s death may be transferred pursuant to the provisions of the Participant’s will or the laws of inheritance or to the Participant’s designated beneficiary or beneficiaries of this Award. The Participant may make such a beneficiary designation at any time by filing the appropriate form with the Plan Administrator or its designate.

          3. Cessation of Service. Except as otherwise provided herein, should the Participant cease Service for any reason prior to vesting in one or more Shares subject to this Award, then the Award will be immediately cancelled with respect to those unvested Shares, and the number of Performance Stock Units will be reduced accordingly. The Participant shall thereupon cease to have any right or entitlement to receive any Shares under those cancelled units.

          4. Transfer of Control.

               (a) Any Performance Stock Units subject to this Award at the time of a Transfer of Control may be assumed by the successor entity or otherwise continued in full force and effect or may be replaced with a cash incentive program of the successor entity which preserves the Fair Market Value of any unvested shares of Common Stock subject to the Award

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at the time of the Transfer of Control and provides for subsequent payout of that value in accordance with the vesting schedule applicable to the Award.

               (b) In the event the Award is assumed or otherwise continued in effect, the Performance Stock Units subject to the Award will be adjusted immediately after the consummation of the Transfer of Control so as to apply to the number and class of securities into which the Shares subject to those units immediately prior to the Transfer of Control would have been converted in consummation of that Transfer of Control had those Shares actually been issued and outstanding at that time. To the extent the actual holders of the outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Transfer of Control, the successor corporation may, in connection with the assumption or continuation of the Performance Stock Units subject to the Award at that time, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in the Transfer of Control transaction, provided such common stock is readily tradable on an established U.S. securities market.

               (c) If the Performance Stock Units subject to this Award at the time of the Transfer of Control are not so assumed or otherwise continued in effect or replaced with a cash incentive program in accordance with the foregoing provisions of this Paragraph 4, then those Performance Stock Units shall terminate immediately upon the consummation of that Transfer of Control, and the Participant shall cease to have any right or entitlement to receive any shares of Common Stock or other securities, property or consideration with respect to the terminated Performance Stock Units.

               (d) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

          5. Adjustment in Shares. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to the total number and/or class of securities issuable pursuant to this Award in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

          6. Issuance of Shares of Common Stock.

               (a) At such time as is set forth in the Issuance Schedule described in Paragraph 1 of this Award (but in no event later than the date that is two-and-one-half months from the end of the applicable Performance Period), the Corporation shall issue to or on behalf of the Participant a certificate (which may be in electronic form) for the applicable number of underlying shares of Common Stock, subject, however, to the Share withholding provisions of Paragraph 6(b) pursuant to which the applicable Withholding Taxes are to be collected. Prior to actual payment of any vested Shares, the Performance Stock Units shall represent an unsecured obligation. Notwithstanding anything in the Plan or this Agreement to the contrary, if the

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vesting of the balance, or some lesser portion of the balance, of the Performance Stock Units is accelerated in connection with the Participant’s termination of Service (provided that such termination is a “separation from service” within the meaning of Section 409A, as determined by the Corporation), other than due to death, and if (x) the Participant is a “specified employee” within the meaning of Section 409A at the time of such termination and (y) the payment of such accelerated Performance Stock Units will result in the imposition of additional tax under Section 409A if paid to the Participant on or within the six (6) month period following the Participant’s termination of Service, then the payment of such accelerated Performance Stock Units will not be made until the date six (6) months and one (1) day following the date of such termination, unless the Participant dies during such six (6) month period, in which case, the Performance Stock Units will be paid to the Participant’s estate as soon as practicable following his or her death, subject to Paragraph 6(b). It is the intent of this Agreement to comply with the requirements of Section 409A so that none of the Performance Stock Units provided under this Agreement or Shares issuable thereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. For purposes of this Agreement, “Section 409A” means Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and any proposed, temporary or final Treasury Regulations and Internal Revenue Service guidance thereunder, as each may be amended from time to time.

               (b) On the date the vested Shares are to be issued hereunder to the Participant, the Corporation shall automatically withhold a portion of those vested Shares with a Fair Market Value (measured as of the vesting date) equal to the amount of the applicable Withholding Taxes; provided, however, that the amount of the Shares so withheld shall not exceed the amount necessary to satisfy the Corporation‘s required tax withholding obligations using the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to supplemental taxable income. No fractional share of Common Stock shall be so withheld, and the Participant shall pay that portion of the Withholding Taxes in cash to the Corporation, either directly or through withholding from his or her other wages.

               (c) In no event will any fractional shares be issued.

               (d) The holder of this Award shall not have any stockholder rights, including voting or dividend rights, with respect to the Shares subject to the Award until the Participant becomes the record holder of those Shares following their actual issuance after the satisfaction of the applicable Withholding Taxes.

          7. Compliance with Laws and Regulations.

               (a) The issuance of shares of Common Stock pursuant to the Award shall be subject to compliance by the Corporation and the Participant with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq Stock Market, if applicable) on which the Common Stock may be listed for trading at the time of such issuance.

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               (b) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance of any Common Stock hereby shall relieve the Corporation of any liability with respect to the non-issuance of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals.

          8. Successors and Assigns. Except to the extent otherwise provided in this Agreement, the provisions of this Agreement shall inure to the benefit of, and be binding upon, (i) the Corporation and its successors and assigns and (ii) the Participant, the Participant’s assigns, the legal representatives, heirs and legatees of the Participant’s estate and any beneficiaries of the Award designated by the Participant.

          9. Notices. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to the Participant shall be in writing and addressed to the Participant at the address indicated below the Participant’s signature line on this Agreement. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

          10. Construction. This Agreement and the Award evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in the Award.

          11. Governing Law. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State’s conflict-of-laws rules.

          12. Employment at Will. Nothing in this Agreement or in the Plan shall confer upon the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Participant) or of the Participant, which rights are hereby expressly reserved by each, to terminate the Participant’s Service at any time for any reason, with or without cause.

[***SECTIONS 13, 14 & 15 TO BE USED ONLY FOR GRANTS TO NON-U.S. EMPLOYEES

          13. Nature of Grant; No Entitlement; No claim for Compensation. In accepting the grant of this Award for the number of Shares as specified above, the Participant acknowledges the following:

               (a) The Plan is established voluntarily by the Corporation; it is discretionary in nature and may be modified, amended, suspended or terminated by the

5

Corporation at any time. The grant of this Award is voluntary and occasional and does not create any contractual or other right to receive future grants of awards, or benefits in lieu of awards, even if awards have been granted repeatedly in the past. All decisions with respect to future awards, if any, will be at the sole discretion of the Plan Administrator.

               (b) This Award is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to the Corporation or its Parent or Subsidiaries (including, as applicable, the Participant’s employer) and which is outside the scope of the Participant’s employment contract, if any. This Award is not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments.

               (c) In the event that the Participant’s employer is not the Corporation, the grant of the Award will not be interpreted to form an employment contract or relationship with the Corporation and, furthermore, the grant of the Award will not be interpreted to form an employment contract with the Participant’s employer or any Subsidiary.

               (d) In consideration of the grant of this Award, no claim or entitlement to compensation or damages shall arise from termination of the Award or diminution in value of the Award or any of the Shares issuable under the Award from termination of the Participant’s employment by the Corporation or the Participant’s employer, as applicable (and for any reason whatsoever and whether or not in breach of contract or local labor laws), and the Participant irrevocably releases the Participant’s employer, the Corporation and its Parent and Subsidiaries, as applicable, from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Participant shall be deemed to have irrevocably waived his or her entitlement to pursue such claim.

          14. Data Privacy.

               (a) The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Participant’s personal data as described in this Agreement by and among, as applicable, the Participant’s employer, the Corporation and its Parent and Subsidiaries for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan.

               (b) The Participant understands that the Participant’s employer, the Corporation and its Parent and Subsidiaries, as applicable, hold certain personal information about the Participant regarding the Participant’s employment, the nature and amount of the Participant’s compensation and the fact and conditions of the Participant’s participation in the Plan, including, but not limited to, the Participant’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Corporation and its Parent and Subsidiaries, details of all options, awards or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Participant’s favor, for the purpose of

6

implementing, administering and managing the Plan (the “Data”). The Participant understands that the Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, including but not limited to outside auditors, that these recipients may be located in the Participant’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Participant’s country. The Participant understands that the Participant may request a list with the names and addresses of any potential recipients of the Data by contacting the Participant’s local human resources representative. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party. The Participant understands that the Data will be held only as long as is necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that the Participant may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Participant’s local human resources representative. The Participant understands, however, that refusing or withdrawing the Participant’s consent may affect the Participant’s ability to participate in the Plan. For more information on the consequences of the Participant’s refusal to consent or withdrawal of consent, the Participant understands that the Participant may contact Participant’s local human resources representative.

          15. Electronic Delivery. The Corporation may, in its sole discretion, decide to deliver any document related to the Award, the Plan or future awards that may be granted under the Plan by electronic means, and the Participant hereby consents to receive such documents by electronic delivery.]

          16. Restrictions on Sale of Securities. The Shares issued as payment for vested Performance Stock Units under this Agreement will be registered under U.S. federal securities laws and will be freely tradable upon receipt. However, a Participant’s subsequent sale of the Shares may be subject to any market blackout-period that may be imposed by the Corporation and must comply with the Corporation’s insider trading policies, and any other applicable securities laws.

          17. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

          18. Agreement Severable. In the event that any provision in this Agreement will be held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.

          19. Modifications to the Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. The Participant expressly warrants that he or she is not accepting this Agreement in reliance on any promises, representations, or inducements other than those contained herein. Modifications to this Agreement or the Plan can

7

be made only in an express written contract executed by a duly authorized officer of the Corporation. Notwithstanding anything to the contrary in the Plan or this Agreement, the Corporation reserves the right to revise this Agreement as it deems necessary or advisable, in its sole discretion and without the consent of the Participant, to comply with Section 409A or to otherwise avoid imposition of any additional tax or income recognition under Section 409A prior to the actual payment of Shares pursuant to this Award.

          20. Amendment, Suspension or Termination of the Plan. By accepting this Award, the Participant expressly warrants that he or she has received a right to receive stock under the Plan, and has received, read and understood a description of the Plan. The Participant understands that the Plan is discretionary in nature and may be amended, suspended or terminated by the Corporation at any time.

          IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above.

MCAFEE, INC.

By:

Title:

Address:

PARTICIPANT

Signature:

Address:

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APPENDIX A

DEFINITIONS

          The following definitions shall be in effect under the Agreement:

          A. Agreement shall mean this Performance Stock Unit Issuance Agreement.

          B. Award shall mean the award of Performance Stock Units made to the Participant pursuant to the terms of this Agreement.

          C. Award Date shall mean the date the Performance Stock Units are awarded to the Participant pursuant to the Agreement and shall be the date indicated in Paragraph 1 of the Agreement.

          D. Board shall mean the Corporation’s Board of Directors.

          E. Code shall mean the Internal Revenue Code of 1986, as amended.

          F. Common Stock shall mean shares of the Corporation’s common stock.

          G. Corporation shall mean McAfee, Inc., a Delaware corporation, and any successor corporation to all or substantially all of the assets or voting stock of McAfee, Inc. which shall by appropriate action adopt the Plan.

          H. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

          I. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

          (i) If the Common Stock is at the time traded on the Nasdaq Stock Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the Nasdaq National Market on the date in question, as such price is reported by the National Association of Securities Dealers and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

A-1

          (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

          J. Participant shall mean the person to whom the Award is made pursuant to the Agreement.

          K. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

          L. Plan shall mean the Corporation’s 1997 Stock Incentive Plan, as amended from time to time.

          M. Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan.

          N. Performance Stock Unit is defined as the right to receive one share of common stock with a par value of $0.01 upon vesting in accordance with the terms of the Agreement.

          O. Service shall mean the Participant’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor. For purposes of this Agreement, the Participant shall be deemed to cease Service immediately upon the occurrence of the either of the following events: (i) the Participant no longer performs services in any of the foregoing capacities for the Corporation (or any Parent or Subsidiary) or (ii) the entity for which the Participant performs such services ceases to remain a Parent or Subsidiary of the Corporation, even though the Participant may subsequently continue to perform services for that entity. Service shall not be deemed to cease during a personal leave approved by the Corporation.

          P. Stock Exchange shall mean the American Stock Exchange or the New York Stock Exchange.

          Q. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at

A-2

the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

          R. Transfer of Control shall mean a change in ownership or control of the Corporation effected through any of the following transactions:

          (i) the direct or indirect sale or exchange by the stockholders of the Corporation of all or substantially all of the voting stock of the Corporation wherein the stockholders of the Corporation immediately before such sale or exchange do not retain in substantially the same proportions as their ownership of shares of the Corporation’s voting stock immediately before such event, directly or indirectly (including, without limitation, through their ownership of shares of the voting stock of a corporation which, as a result of such sale or exchange, owns the Corporation either directly or indirectly through one or more subsidiaries), at least a majority of the beneficial interest in the voting stock of the Corporation immediately after such sale or exchange;

          (ii) a merger or consolidation where the stockholders of the Corporation immediately before such merger or consolidation do not retain in substantially the same proportions as their ownership of shares of the Corporation’s voting stock immediately before such event, directly or indirectly (including, without limitation, through their ownership of shares of the voting stock of a corporation which, as a result of such merger or consolidation, owns the Corporation either directly or through one or more subsidiaries), at least a majority of the beneficial interest in the voting stock of the Corporation immediately after such merger or consolidation;

          (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Corporation (other than a sale, exchange, or transfer to one or more corporations (the “Transferee Corporation(s)”) wherein the stockholders of the Corporation immediately before such sale, exchange or transfer retain in substantially the same proportions as their ownership of shares of the Corporation’s voting stock immediately before such event, directly or indirectly (including, without limitation, through their ownership of shares of the voting stock of a corporation which owns the Transferee Corporation(s) either directly or through one or more subsidiaries), at least a majority of the beneficial interest of the voting stock of the Transferee Corporation(s) immediately after such event; or

          (iv) a liquidation or dissolution of the Corporation.

          S. Withholding Taxes shall mean the federal, state and local income taxes and the employee portion of the federal, state and local employment taxes required to be withheld by the Corporation in connection with the issuance of the shares of Common Stock which vest under of the Award.

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EX-31.1

Exhibit 31.1

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, David G. DeWalt, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of McAfee, Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of our annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ David G. DeWalt  

David G. DeWalt

President and Chief Executive Officer 

May 12, 2008

1

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, Keith S. Krzeminski, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of McAfee, Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of our annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Keith S. Krzeminski  

Keith S. Krzeminski

Chief Accounting Officer and Senior Vice President of Finance

May 12, 2008

2

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, David G. DeWalt certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of McAfee, Inc. on Form 10-Q for the quarterly period ended March 31, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of McAfee, Inc.

By:	/s/ David G. DeWalt
	Name:	David G. DeWalt
	Title:	President and Chief Executive Officer

May 12, 2008

     I, Keith S. Krzeminski certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of McAfee, Inc. on Form 10-Q for the quarterly period ended March 31, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of McAfee, Inc.

By:	/s/ Keith S. Krzeminski
	Name:	Keith S. Krzeminski
	Title:	Chief Accounting Officer and        Senior Vice President of Finance

May 12, 2008