November 9, 2004

Cisco has announced its Q1 Fiscal Year 2005 financial results. John Chambers, Cisco president and CEO, and Dennis Powell, CFO and senior vice president, had this to say regarding the company's results and business outlook.

How would you characterize the first quarter?

More Information News Release Cisco Systems Reports First Quarter Earnings Related Links Customer Highlights and Technology Innovations Fact Sheet: First Quarter, FY 2005 Q&A: Dennis Powell Discusses Cisco's Q1 Financial Position Can you provide an update on your operating expense goal? Dennis Powell: We continue to make very solid progress in achieving our pro forma operating expenses as a percentage of revenue goal of 35 percent, and our productivity goal of $700 thousand annualized revenue per employee. In Q1, pro forma operating expenses were at approximately 35 percent and productivity came in at $688 thousand per employee. We are pleased with the continued major improvements in both categories against the goals we have set. For comparison purposes on our productivity metrics, in Q1 of fiscal 2002 productivity was at $470 thousand annualized revenue per employee. Can you characterize this quarter's business momentum? Dennis Powell: We saw normal bookings seasonality during Q1 across all our theaters. In terms of bookings, Q4 is almost always our strongest quarter of the year. On the other hand, Q1, following strong Q4s, has been flat to down in three out of the last four years. This is due primarily to two factors-a strong Q4 and seasonally slower orders, especially in Europe, due to customer's vacations. Can you update us on Cisco's cash position? Dennis Powell: In Q1, Cisco's total cash, cash-equivalents, and short- and long-term investments was $17.7 billion, down from $19.3 billion at the end of Q4. As expected, during Q1 we generated approximately $1.5 billion in cash flow from operations. The decrease in cash flow from Q4 related to our annual bonus payout and tax payments. Also, during Q1FY05 we repurchased approximately $3 billion, or 156 million shares of our stock at an average price of $19.24 per share. Our cumulative purchases, since the inception of the repurchase program in September 2001 are approximately $20 billion, or 1.1 billion shares at an average price of $17.92 per share. The cumulative repurchases Cisco has made pursuant to the repurchase program have dramatically exceeded exercises of stock options in the same period. Specifically, since the inception of our repurchase program, we have repurchased 1.1 billion shares, versus 207 million options exercised, and 850 million shares granted. Cisco today also announced that on November 8, 2004 its board of directors authorized up to $10 billion in additional repurchases of its common stock. With this additional authorization, the remaining approved amount for stock repurchase is approximately $15 billion.

John Chambers: Cisco started the fiscal year with continued improvement and solid results across almost all of our financial measurements. We have achieved six consecutive quarters of sequential revenue growth-driven by balance across all of our markets and by orders for our Advanced Technologies, which crossed the $1 billion per quarter mark in Q1. We generated the highest GAAP net income and earnings per share in the company's history, while tying our record for pro forma earnings per share. We continue to execute well across several key operational metrics.

Can you provide an update regarding Cisco's Advanced Technology areas?

John Chambers: We have currently identified six Advanced Technologies for particular focus: home networking, IP telephony, optical networking, security, storage area networking, and wireless technology. Momentum in the Advanced Technologies this quarter continued to be solid both from an order and revenue perspective. In terms of revenue growth in Q1, our Advanced Technologies averaged approximately 5 percent sequential growth and over 30 percent year-over-year. As a point of comparison, orders for our Advanced Technologies crossed the $1 billion per quarter mark in Q1, and grew in the high single-digits sequentially and over 40 percent year-over-year.

We encourage our investors to think about these Advanced Technologies as an architectural network evolution with each technology being linked to the others. Not only are we creating what we expect will be a number of new billion dollar revenue streams, but our value proposition to our customers continues to expand as each of these Advanced Technologies are integrated into the fabric of the core network.

Cisco turns 20 years old next month. Why do you feel that the company is well positioned for the future?

John Chambers: As Cisco nears its twentieth anniversary, we believe we are uniquely positioned-based on our strategy of investing across customer markets, emerging geographic markets, as well as in both technology and business architectures-to address the future evolution of networking. As customers integrate data, voice and video across a combination of networks, they are asking for a common technology architecture to deliver networked applications and services in a way that is transparent to the end user. This is Cisco's vision of how the network will evolve into the Intelligent Information Network, which we believe we are uniquely positioned for.

How did Cisco's business fair across geographic areas and markets this quarter?

John Chambers: We saw normal bookings seasonality during Q1 across our theaters. In the U.S. market, we experienced our normal seasonality in Enterprise, Commercial, and Federal markets. Federal showed normal seasonal sequential growth due to the end of their fiscal year, although down year-over-year. On the other hand, Enterprise and Commercial grew in the upper teens on a year-over-year basis with normal sequential decreases. U.S. Service Provider, following a solid Q4, maintained its momentum in Q1 and saw year-over-year increases in the mid teens.

In Europe, Middle East, and Africa, as expected we saw a seasonal, sequential decrease in quarterly bookings. In EMEA, Q1 is often down in the mid teens to low double digits following a solid Q4. This year we were down approximately 10 percent sequentially. This was a little better than we expected. To put seasonality into proper perspective, year-over-year orders in this region increased in the low 20's. In Asia Pacific, we saw normal seasonality in most of the operations including Australia and New Zealand, Korea, India, Taiwan and Hong Kong with year-over-year growth in these countries of approximately 20 percent. After a strong fiscal 2004 in China, we did experience a soft Q1.

We saw good growth, in Americas International both in terms of the quarter and year-over-year. Orders were up sequentially in the mid-single digits and year-over-year in the upper twenties. There was especially solid growth in Brazil and the rest of South America. Finally, Japan orders which tend to be very lumpy due to large Service Provider orders during the year, were approximately flat versus Q4.

This quarter, Cisco announced several new research and development initiatives in Asia. Can you give us some insight into your global development efforts?

John Chambers: Cisco's technology development and innovation strategy is driven by our customer needs. In fiscal 2004, we invested $3.1 billion in research and development and have three major global R&D centers in the US, and major R&D sites internationally in Ottawa, Canada; Shanghai, China; Bangalore India; and Herzliya, Israel. Our development efforts are focused on increasing our market share in our core markets-routing and switching-and our continued investment in Advanced Technologies. One of Cisco's chief differentiators is our ability to make targeted investments-not only through R&D, but also through acquisitions and partnerships-to address our customers' needs through a systems approach with scalable intelligence and performance.

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CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per-share amounts)
(Unaudited)

	Three Months Ended
	October 30, 2004	October 25, 2003
NET SALES:
Product	$ 5,033	$ 4,263
Service	938	838
Total net sales	5,971	5,101
COST OF SALES:
Product	1,646	1,316
Service	310	279
Total cost of sales	1,956	1,595
GROSS MARGIN	4,015	3,506
OPERATING EXPENSES:
Research and development	787	735
Sales and marketing	1,102	1,071
General and administrative	225	195
Payroll tax on stock option exercises	1	2
Amortization of deferred stock-based compensation	40	51
Amortization of purchased intangible assets	60	62
In-process research and development	12	-
Total operating expenses	2,227	2,116
OPERATING INCOME	1,788	1,390
Interest income	130	137
Other income, net	40	1
Interest and other income, net	170	138
INCOME BEFORE PROVISION FOR INCOME TAXES	1,958	1,528
Provision for income taxes	562	442
NET INCOME	$ 1,396	$ 1,086
Net income per share:
Basic	$ 0.21	$ 0.16
Diluted	$ 0.21	$ 0.15
Shares used in per-share calculation:
Basic	6,635	6,932
Diluted	6,773	7,110

Cisco Systems, Inc.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per-share amounts)
(Unaudited)

	Three Months Ended
	October 30, 2004	October 25, 2003
NET SALES:
Product	$ 5,033	$ 4,263
Service	938	838
Total net sales	5,971	5,101
COST OF SALES:
Product	1,646	1,316
Service	310	279
Total cost of sales	1,956	1,595
GROSS MARGIN	4,015	3,506
OPERATING EXPENSES:
Research and development	787	735
Sales and marketing	1,102	1,071
General and administrative	225	195
Total operating expenses (a) (b) (c) (d)	2,114	2,001
OPERATING INCOME (a) (b) (c) (d)	1,901	1,505
Interest income	130	137
Other income (loss), net (e)	(13)	1
Interest and other income (loss), net (e)	117	138
INCOME BEFORE PROVISION FOR INCOME TAXES (a) (b) (c) (d) (e)	2,018	1,643
Provision for income taxes (f)	565	460
NET INCOME	$ 1,453	$ 1,183
Net income per share:
Basic	$ 0.22	$ 0.17
Diluted	$ 0.21	$ 0.17
Shares used in per-share calculation:
Basic	6,635	6,932
Diluted	6,773	7,110
A reconciliation between net income on a GAAP basis and pro forma net income is as follows:
GAAP net income	$ 1,396	$ 1,086
(a) In-process research and development	12	-
(b) Payroll tax on stock option exercises	1	2
(c) Amortization of deferred stock-based compensation	40	51
(d) Amortization of purchased intangible assets	60	62
(e) Gain on publicly traded equity securities	(53)	-
(f) Income tax effect	(3)	(18)
Pro forma net income	$ 1,453	$ 1,183

For the three month period ended July 31, 2004, pro forma net income and pro forma net income per share excluded the following items: payroll tax on stock option exercises of $4 million, amortization of deferred stock-based compensation of $56 million, amortization of purchased intangible assets of $60 million, and income tax effect of ($20) million.

Cisco Systems, Inc.

CONSOLIDATED BALANCE SHEETS

	October 30, 2004	July 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$ 3,309	$ 3,722
Short-term investments	3,489	4,947
Accounts receivable, net of allowance for doubtful accounts of $179 at October 30, 2004 and July 31, 2004	1,792	1,825
Inventories	1,210	1,207
Deferred tax assets	1,798	1,827
Prepaid expenses and other current assets	878	815
Total current assets	12,476	14,343
Investments	10,929	10,598
Property and equipment, net	3,279	3,290
Goodwill	4,535	4,198
Purchased intangible assets, net	399	325
Other assets	2,695	2,840
TOTAL ASSETS	$ 34,313	$ 35,594
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 680	$ 657
Income taxes payable	1,161	963
Accrued compensation	1,187	1,466
Deferred revenue	3,291	3,527
Other accrued liabilites	2,307	2,090
Total current liabilities	8,626	8,703
Deferred revenue	970	975
Total liabilities	9,596	9,678
Minority interest	128	90
Shareholders' equity	24,589	25,826
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 34,313	$ 35,594

Cisco Systems, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)
(Unaudited)

	Three Months Ended
	October 30, 2004	October 25, 2003
Cash flows from operating activities:
Net income	$ 1,396	$ 1,086
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	291	397
Provision for doubtful accounts	-	7
Provision for inventory	62	35
Deferred income taxes	74	116
Tax benefits from employee stock option plans	48	62
In-process research and development	12	-
Net (gains) losses and impairment charges on investments	(44)	1
Change in operating assets and liabilities:
Accounts receivable	37	(44)
Inventories	(63)	(37)
Prepaid expenses and other current assets	(10)	(39)
Accounts payable	16	8
Income taxes payable	188	(16)
Accrued compensation	(283)	(286)
Deferred revenue	(241)	(101)
Other accrued liabilities	28	(216)
Net cash provided by operating activities	1,511	973
Cash flows from investing activities:
Purchases of short-term investments	(1,735)	(2,969)
Proceeds from sales and maturities of short-term investments	3,535	3,065
Purchases of investments	(3,437)	(5,076)
Proceeds from sales and maturities of investments	3,002	6,153
Acquisition of property and equipment	(159)	(173)
Acquisition of businesses, net of cash and cash equivalents	(229)	-
Change in lease receivables, net	(52)	4
Change in investments in privately held companies	(48)	(14)
Other	70	64
Net cash provided by investing activities	947	1,054
Cash flows from financing activities:
Issuance of common stock	96	173
Repurchase of common stock	(3,001)	(1,998)
Other	34	31
Net cash used in financing activities	(2,871)	(1,794)
Net (decrease) increase in cash and cash equivalents	(413)	233
Cash and cash equivalents, beginning of period	3,722	3,925
Cash and cash equivalents, end of period	$ 3,309	$ 4,158

Cisco Systems, Inc.

ADDITIONAL FINANCIAL INFORMATION

(In millions)
(Unaudited)

	October 30, 2004	July 31, 2004
CASH AND CASH EQUIVALENTS AND TOTAL INVESTMENTS
Cash and cash equivalents	$ 3,309	$ 3,722
Fixed income securities	13,174	14,411
Publicly traded equity securities	1,244	1,134
Total	$ 17,727	$ 19,267
INVENTORIES
Raw materials	$ 60	$ 58
Work in process	408	459
Finished goods:
Distributor inventory and deferred cost of sales	338	316
Manufacturing finished goods	235	206
Service-related spares	141	134
Total finished goods	714	656
Demonstration systems	28	34
Total	$ 1,210	$ 1,207
PROPERTY AND EQUIPMENT, NET
Land, buildings, and leasehold improvements	$ 3,457	$ 3,429
Computer equipment and related software	1,164	1,120
Production, engineering, and other equipment	2,737	2,643
Operating lease assets	101	94
Furniture and fixtures	359	356
	7,818	7,642
Less, accumulated depreciation and amortization	(4,539)	(4,352)
Total	$ 3,279	$ 3,290
LEASE RECEIVABLES, NET (a)
Current	236	215
Noncurrent	254	231
Total	$ 490	$ 446
OTHER ASSETS
Deferred tax assets	$ 1,027	$ 1,130
Investments in privately held companies	345	354
Income tax receivable	690	690
Lease receivables, net	254	231
Other	379	435
Total	$ 2,695	$ 2,840
DEFERRED REVENUE
Service	$ 2,885	$ 3,047
Product	1,376	1,455
Total	$ 4,261	$ 4,502
Reported as:
Current	3,291	3,527
Noncurrent	970	975
Total	$ 4,261	$ 4,502

(a) The current portion of lease receivables, net, is recorded in prepaid expenses and other current assets, and the noncurrent portion is recorded in other assets in the Consolidated Balance Sheets.

This Q&A may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events and the future financial performance of Cisco that involve risks and uncertainties. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including: business and economic conditions and growth trends in the networking industry and in various geographic regions; global economic conditions and uncertainties in the geopolitical environment; overall information technology spending; the growth of the Internet and levels of capital spending on Internet-based systems; variations in customer demand for products and services, including sales to the service provider market; the timing of orders and manufacturing lead times; changes in customer order patterns or customer mix; insufficient, excess or obsolete inventory; variability of component costs; variations in sales channels, product costs or mix of products sold; the ability to successfully acquire businesses and technologies and to successfully integrate and operate these acquired businesses and technologies; increased competition in the networking industry; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters; the ability to recruit and retain key personnel; our ability to manage financial risk; currency fluctuations and other international factors; potential volatility in operating results and other factors listed in Cisco's most recent reports on Form 10-K, 10-Q and 8-K. The financial information contained in this Q&A should be read in conjunction with the consolidated financial statements and notes thereto included in Cisco's most recent reports on Form 10-K and Form 10-Q, each as it may be amended from time to time. Cisco's results of operations for the three months ended October 30, 2004 are not necessarily indicative of Cisco's operating results for any future periods. Any projections in this Q&A are based on limited information currently available to Cisco, which is subject to change. Although any such projections and the factors influencing them will likely change, Cisco will not necessarily update the information, since Cisco will only provide guidance at certain points during the year. Such information speaks only as of the date of this Q&A.

Cisco provides pro forma net income and pro forma net income per share data as additional information to help investors better understand its operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from pro forma measures used by other companies. Cisco believes that this presentation of pro forma net income and pro forma net income per share provides useful information to management and investors regarding certain additional financial and business trends relating to its financial condition and results of operations. Cisco believes when GAAP net income and GAAP net income per share are viewed in conjunction with pro forma net income and pro forma net income per share, investors are provided with a more meaningful understanding of Cisco's ongoing operating performance. In addition, Cisco's management uses these measures for reviewing the financial results of Cisco.

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