February 8, 2005 Cisco has announced its Q2 Fiscal Year 2005 financial results. John Chambers, Cisco president and CEO, and Dennis Powell, CFO and senior vice president, had these comments regarding the company's quarterly results and business outlook. Were you pleased with the company's performance? John Chambers: The second quarter of fiscal year 2005 was another solid quarter for Cisco from an Advanced Technologies, Core Routing and Switching technologies, product leadership, customer markets and financial perspective. It was a record quarter for Cisco for both GAAP and pro forma net income and pro forma earnings per share and is our eleventh consecutive quarter of having pro forma net income exceed $1 billion and our pro forma profits exceed 20 percent of revenue. We were comfortable with our Q2 results of $6.1 billion in revenue, an approximate 2 percent sequential quarter-over-quarter and 12 percent year-over-year increase. We continue to believe we have uniquely positioned Cisco as the recovery in technology spending continues to gain momentum on a global basis. How would you characterize momentum in your product areas? John Chambers: We were especially pleased with the balanced order growth across our Core Routing and Switching products and our Advanced Technologies. Perhaps the top highlight of the entire quarter was our Advanced Technologies' balanced order growth and market share success. All six Advanced Technologies experienced very strong year-over-year revenue growth. Each of these new technologies grew between 30 percent and 75 percent year-over-year from a revenue perspective. Our success in the Advanced Technologies is the result of the strategic choices we made 3-5 years ago to integrate our Advanced Technologies with one another and into our Core Routing and Switching platforms. We believe the market has shifted to favor the innovation, investment protection and cost of ownership value of integration. We believe that customer momentum for this approach has reached the tipping point-providing Cisco with a sustainable differentiator from traditional and new competitors. We also saw solid year-over-year order growth in both our Core Routing and Switching product families. The year-over-year order growth for these core products was in the 10 percent to 15 percent range. The balanced year-over-year booking growth across routers, switches and all six Advanced Technologies is the best we can remember. In May 2004, Cisco announced its Carrier Routing System (CRS) and in September 2004 you released the Integrated Series Router (ISR)-both which were characterized as significant additions to your core family of products. How would you characterize the adoption of these new products? John Chambers: While it does take time as you make these transitions within product families, we are very pleased with the positioning, mindshare and architectural evolution that these product families are receiving. The CRS had a very solid quarter and we continue to be pleased with the architectural wins and trials to date. We have a dozen customers using the CRS and twelve more customers trialing the product. The feedback, from even some of our toughest critics who are very committed to our peer competitors, has been extremely positive in terms of the clear architectural and software capabilities leadership. The resulting revenues achieved today were primarily a result of the customer architectural decisions made 2-3 years ago. And in the same terms, while the revenues of these architectural wins, are not material in the current quarter, the long term revenue implications could be dramatic. In less than two quarters since the ISR was launched, we achieved a yearly run-rate of over a billion dollars in orders and over $600 million in shipments. This represents the fastest ramp-up for a product in our history. In terms of product innovation leadership, market share and time to market we were especially pleased with this execution. We feel that many of our current and future competitors will come at our markets with a single product or a product loosely coupling one or two technologies. Our view, and time will tell if this is right or wrong, is that there will be a close coupling between the technologies, and this integrated architecture has to be designed into the product from the initial product requirements phase, not as an afterthought. The ISR is a very good example of our philosophy and the acceptance by our customers of this view. The volume of the ISR routers speaks for itself, but of equal interest is the fact that 40 percent of them are shipped with tightly coupled security and 20 percent of them with voice. How did Cisco's business fare across geographic areas and markets this quarter? John Chambers: We saw normal bookings seasonality during Q2 across our theaters. The Q2 year-over-year product order growth was in the mid-teens for both the US and Japan, approximately 20 percent for EMEA and Americas International, and in the mid-single digits for Asia Pacific.

Q&Amp;A: Dennis Powell Discusses Cisco's Q2 Financial Position How would you characterize momentum regarding your long-term financial priorities this quarter? Dennis Powell: I was pleased with our focus and execution on our three long-term key financial priorities. As we continue to focus on profitable growth, we have been able to achieve a 12 percent increase in revenue year-over-year, and pro-forma profit of 24.4 percent of revenue, while at the same time increasing our investments in strategic areas of the business to drive growth. Second, we continue to execute on our productivity goal of pro forma operating expense as a percentage of revenue of 35 percent. Our business model will continue to allow Cisco to balance profitability with strategic investment. Third, I am pleased that, over the last three years, Return on Invested Capital has grown from the mid-teens to currently above 50 percent. We will continue to make strategic investment in certain customer markets, technologies and theaters, while maintaining a healthy and conservative balance sheet. Can you provide an update on your cash reserves? Dennis Powell: The total of cash, cash-equivalents, and short- and long-term investments was $16.5 billion, down from $17.7 billion at the end of Q1. As expected, during Q2 we generated approximately $1.8 billion in cash flow from operations. The sequential increase in cash flow related primarily to the absence of our annual bonus payout that occurred in the first quarter, partially offset by higher tax payments and other working capital requirements. Also, during Q2FY05 we repurchased $2.7 billion, or 140 million shares of our stock at an average price of $19.30. Our cumulative purchases since the inception of the repurchase program in September 2001 are approximately $23 billion, or 1.3 billion shares, at an average price of $18.07. The remaining approved amount for stock repurchase under this program is approximately $12 billion. Can you explain why gross margins were down this quarter? Dennis Powell: In Q2FY05, the total pro forma and GAAP gross margin was 66.9 percent, down from 67.2 percent last quarter, due entirely to a decrease in service margins. For product only, pro forma and GAAP gross margin for the second quarter was 67.3 percent, the same as last quarter. We are comfortable with the flat quarter-over-quarter product gross margins, especially given the continuing success and expansion of our Advanced Technologies which often, particularly in their early years, tend to have lower gross margins than our core business. Our service margins on a pro forma and GAAP basis decreased from 67.0 percent to 64.4 percent. This 2.6 percent decrease represented a decline of $24 million. The decrease in service margins is due to our increased investment in this portion of our business. One specific area of investment is advanced services, comprised of highly specialized employees. As we hire into this business, the additional costs will always precede the related revenue growth. In addition, service margins will typically experience some variability over time due to various factors, such as the changes in mix between technical support services and advanced services, as well as the timing of support contract initiations and renewals.

Cisco Systems, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended		Six Months Ended
	January 29, 2005	January 24, 2004	January 29, 2005	January 24, 200
NET SALES:
Product	$ 5,106	$ 4,550	$ 10,139	$ 8,813
Service	956	848	1,894	1,686
Total net sales	6,062	5,398	12,033	10,499
COST OF SALES:
Product	1,669	1,425	3,315	2,741
Service	340	275	650	554
Total cost of sales	2,009	1,700	3,965	3,295
GROSS MARGIN	4,053	3,698	8,068	7,204
OPERATING EXPENSES:
Research and development	785	759	1,572	1,494
Sales and marketing	1,132	1,093	2,234	2,164
General and administrative	222	195	447	390
Payroll tax on stock option exercises	3	7	4	9
Amortization of deferred stock-based compensation	39	36	79	87
Amortization of purchased intangible assets	57	60	117	122
In-process research and development	2	1	14	1
Total operating expenses	2,240	2,151	4,467	4,267
OPERATING INCOME	1,813	1,547	3,601	2,937
Interest income	127	124	257	261
Other income, net	17	136	57	137
Interest and other income, net	144	260	314	398
INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE	1,957	1,807	3,915	3,335
Provision for income taxes	557	516	1,119	958
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE	1,400	1,291	2,796	2,377
Cumulative effect of accounting change, net of tax	-	(567)	-	(567)
NET INCOME	$ 1,400	$ 724	$ 2,796	$ 1,810
Income per share before cumulative effect of accounting change:
Basic	$ 0.21	$ 0.19	$0.43	$ 0.34
Diluted	$ 0.21	$ 0.18	$ 0.42	$ 0.33
Net income per share:
Basic	$ 0.21	$ 0.11	$ 0.43	$ 0.26
Diluted	$ 0.21	$ 0.10	$ 0.42	$ 0.25
Shares used in per-share calculation:
Basic	6,521	6,874	6,577	6,904
Diluted	6,652	7,110	6,713	7,110

Cisco Systems, Inc.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended		Six Months Ended
	January 29, 2005	January 24, 2004	January 29, 2005	January 24, 2004
NET SALES:
Product	$ 5,106	$ 4,550	$ 10,139	$ 8,813
Service	956	848	1,894	1,686
Total net sales	6,062	5,398	12,033	10,499
COST OF SALES:
Product	1,669	1,425	3,315	2,741
Service	340	275	650	554
Total cost of sales	2,009	1,700	3,965	3,295
GROSS MARGIN	4,053	3,698	8,068	7,204
OPERATING EXPENSES:
Research and development	785	759	1,572	1,494
Sales and marketing	1,132	1,093	2,234	2,164
General and administrative	222	195	447	390
Total operating expenses (a) (b) (c) (d)	2,139	2,047	4,253	4,048
OPERATING INCOME (a) (b) (c) (d)	1,914	1,651	3,815	3,156
Interest income	127	124	257	261
Other income, net (e)	17	51	4	52
Interest and other income, net (e)	144	175	261	313
INCOME BEFORE PROVISION FOR INCOME TAXES (a) (b) (c) (d) (e)	2,058	1,826	4,076	3,469
Provision for income taxes (f)	576	511	1,141	971
NET INCOME	$ 1,482	$ 1,315	$ 2,935	$ 2,498
Net income per share:
Basic	$ 0.23	$ 0.19	$ 0.45	$ 0.36
Diluted	$ 0.22	$ 0.18	$ 0.44	$ 0.35
Shares used in per-share calculation:
Basic	6,521	6,874	6,577	6,904
Diluted	6,652	7,110	6,713	7,110
A reconciliation between net income on a GAAP basis and pro forma net income is as follows:
GAAP net income	$ 1,400	$ 724	$ 2,796	$ 1,810
(a) In-process research and development	2	1	14	1
(b) Payroll tax on stock option exercises	3	7	4	9
(c) Amortization of deferred stock-based compensation	39	36	79	87
(d) Amortization of purchased intangible assets	57	60	117	122
(e) Gain on publicly traded equity securities	-	(85)	(53)	(85)
(f) Income tax effect	(19)	5	(22)	(13)
(g) Cumulative effect of accounting change, net of tax	-	567	-	567
Pro forma net income	$ 1,482	$ 1,315	$ 2,935	$ 2,498

For the three-month period ended October 30, 2004, pro forma net income and pro forma net income per share excluded the following items: in-process research and development of $12 million; payroll tax on stock option exercises of $1 million; amortization of deferred stock-based compensation of $40 million; amortization of purchased intangible assets of $60 million; gain on publicly traded equity securities of ($53) million and income tax effect of ($3) million.

Cisco Systems, Inc.

CONSOLIDATED BALANCE SHEETS

(In millions)
(Unaudited)

	January 29, 2005	July 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$ 2,473	$ 3,722
Short-term investments	3,291	4,947
Accounts receivable, net of allowance for doubtful accounts of $176 at January 29, 2005 and $179 July 31, 2004	2,278	1,825
Inventories	1,255	1,207
Deferred tax assets	1,881	1,827
Prepaid expenses and other current assets	792	815
Total current assets	11,970	14,343
Investments	10,761	10,598
Property and equipment, net	3,302	3,290
Goodwill	4,674	4,198
Purchased intangible assets, net	396	325
Other assets	2,722	2,840
TOTAL ASSETS	$ 33,825	$ 35,594
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 673	$ 657
Income taxes payable	1,397	963
Accrued compensation	1,219	1,466
Deferred revenue	3,657	3,527
Other accrued liabilities	2,126	2,090
Total current liabilities	9,072	8,703
Deferred revenue	990	975
Total liabilities	10,062	9,678
Minority interest	12	90
Shareholders' equity	23,751	25,826
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 33,825	$ 35,594

Cisco Systems, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)
(Unaudited)

	Six Months Ended
	January 29, 2005	January 24, 2004
Cash flows from operating activities:
Net income	$ 2,796	$ 1,810
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change, net of tax	-	567
Depreciation and amortization	587	786
Provision for doubtful accounts	-	19
Provision for inventory	111	72
Deferred income taxes	(41)	120
Tax benefits from employee stock option plans	126	328
In-process research and development	14	1
Net (gains) losses and impairment charges on investments	(74)	(121)
Change in operating assets and liabilities:
Accounts receivable	(446)	(704)
Inventories	(157)	(131)
Prepaid expenses and other current assets	73	(2)
Lease receivables, net	(60)	(45)
Accounts payable	8	42
Income taxes payable	424	12
Accrued compensation	(252)	(70)
Deferred revenue	146	253
Other accrued liabilities	(7)	(348)
Net cash provided by operating activities	3,248	2,589
Cash flows from investing activities:
Purchases of short-term investments	(2,825)	(6,433)
Proceeds from sales and maturities of short-term investments	5,478	6,564
Purchases of investments	(7,541)	(10,501)
Proceeds from sales and maturities of investments	6,479	11,636
Acquisition of property and equipment	(290)	(393)
Acquisition of businesses, net of cash and cash equivalents	(553)	(67)
Change in investments in privately held companies	(110)	40
Other	93	83
Net cash provided by investing activities	731	929
Cash flows from financing activities:
Issuance of common stock	433	758
Repurchase of common stock	(5,706)	(4,034)
Other	45	58
Net cash used in financing activities	(5,228)	(3,218)
Net (decrease) increase in cash and cash equivalents	(1,249)	300
Cash and cash equivalents, beginning of period	3,722	3,925
Cash and cash equivalents, end of period	$ 2,473	$ 4,225

Note: Certain reclassifications have been made to prior period balances in order to conform to the current period's presentation.

Cisco Systems, Inc.

ADDITIONAL FINANCIAL INFORMATION

(In millions)
(Unaudited)

	January 29, 2005	July 31, 2004
CASH AND CASH EQUIVALENTS AND TOTAL INVESTMENTS
Cash and cash equivalents	$ 2,473	$ 3,722
Fixed income securities	13,021	14,411
Publicly traded equity securities	1,031	1,134
Total	$ 16,525	$ 19,267
INVENTORIES
Raw materials	$ 68	$ 58
Work in process	415	416
Finished goods:
Distributor inventory and deferred cost of sales	379	316
Manufacturing finished goods	175	206
Total finished goods	554	522
Service-related spares	188	177
Demonstration systems	30	34
Total	$ 1,255	$ 1,207
PROPERTY AND EQUIPMENT, NET
Land, buildings, and leasehold improvements	$ 3,494	$ 3,429
Computer equipment and related software	1,216	1,120
Production, engineering, and other equipment	2,852	2,643
Operating lease assets	111	94
Furniture and fixtures	360	356
	8,033	7,642
Less, accumulated depreciation and amortization	(4,731)	(4,352)
Total	$ 3,302	$ 3,290
LEASE RECEIVABLES, NET (a)
Current	226	215
Noncurrent	272	231
Total	498	446
OTHER ASSETS
Deferred tax assets	$ 1,039	$ 1,130
Investments in privately held companies	403	354
Income tax receivable	690	690
Lease receivables, net	272	231
Other	318	435
Total	$ 2,722	$ 2,840
DEFERRED REVENUE
Service	$ 3,097	$ 3,047
Product	1,550	1,455
Total	4,647	4,502
Reported as:
Current	3,657	3,527
Noncurrent	990	975
Total	$ 4,647	$ 4,502

Note: Certain reclassifications have been made to prior period balances in order to conform to the current period's presentation.

(a)The current portion of lease receivables net, is recorded in prepaid expenses and other 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 (including the potential growth of advanced technologies) 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; our 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; our 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 and six months ended January 29, 2005 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 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&Amp;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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