February 7, 2006 Cisco announced second quarter fiscal year 2006 financial results. John Chambers, president and CEO, and Dennis Powell, CFO and senior vice president, had the following to say regarding the company's results and business outlook. How would you characterize this quarter? John Chambers: I would summarize the quarter as a solid quarter from a revenue and earnings per share perspective, and a strong quarter from an orders perspective. Our balanced approach to the market in terms of our four customer segments, core and advanced technologies, business and technology architecture, combined with our five key geographic theaters continues to work very well, with solid results in the majority of these categories. For Q2, our very good results in the US, Emerging Markets, Asia Pacific, and the improvements in our results in our European theater, in core routing and switching, and in our advanced technologies all resulted in the best order growth from a year over year perspective we've seen in over a year. Revenue growth was 9.3% year over year and up slightly relative to Q1. Product orders grew year over year faster than revenues. Product orders year over year grew in the mid teens range in Q2, which was above our guidance in the last conference call of 10-14%. What were some of the highlights of this quarter? John Chambers: While there were a number of highlights, it was probably the U.S. that was the top highlight with strong order growth of approximately 20% year over year. This is better order growth than we've experienced in the last six quarters. Our Asia Pacific operation continued with solid growth maintaining its recent return to high order growth. And our Emerging Markets theater continued with order growth above 30% year over year. Also, the key takeaway for the quarter, as it has been in prior quarters, was the continued balance that we've been able to achieve in our geographies, market segments, architectural evolutions, and product families with the commercial market segment growing above 20% in terms of orders. In addition, the enterprise and service provider customer market segments also grew in the teens, which was dramatically better balance than we achieved in a number of quarters. There was also very good balance in terms of our product families this quarter. All of the following product data is in terms of year over year order growth. Core switching grew in the high teens, while our core routing business grew in the high single digits with the advanced technologies growing approximately 20%. The advanced technologies were led by enterprise IP communications, wireless, and storage. IP communications continued to accelerate with order growth above 45% now bringing us to over 7.5M phones installed. Wireless increased in the mid 30s and storage increased in the high 20s. Home networking grew above 15% and security was in the low double digits. What progress has Cisco made to date in the five incremental growth areas for fiscal 2006? John Chambers: The first area of incremental growth I'd like to address is the commercial market. The investments in all major functions focusing on this market segment appear to continue to be paying solid dividends with the commercial market segment order growth in the low 20s in Q2. However the positive surprise was actually our enterprise market segment growing in the high teens year over year, again the best growth rates that we have seen in a long time. Second, we made a decision to expand sales coverage especially in the commercial, low end enterprise, and Emerging Markets areas and this appears, as you can see from the results, to be paying off as we had hoped. Third, with the expanded organizational structure focused on our Emerging Markets around the world, this theater continued to accelerate its year-over-year order growth rate by several points over its solid Q1 growth rate of above 30%. We feel very good about our progress and replicable processes in these emerging markets and continue to be reasonably optimistic about its growth rate potentially continuing to accelerate based on our expanded resource commitments to these emerging countries. Fourth, the advanced technologies continued to experience solid growth in terms of orders and we identified three new advanced technologies in Q2. And finally, our evolving support model designed to help our customers integrate both a technology and a business architecture at a faster speed with lower risk is off to a very solid start with very positive customer feedback and associated commitments. This is another one of the major reasons that we continue to be able to maintain very high gross margins, as experienced during this quarter.

More Information News Release Cisco Systems Reports Q2 FY2006 Financial Results Related Links Q2 FY2006 Fact Sheet Q&A: Dennis Powell on Cisco's Q2 Fiscal Year 2006 Performance What has the revenue growth been this past quarter in the core and advanced technology areas? Dennis Powell: Routing revenue totaled $1.42B, up 7% year-over-year, as a result of growth in our GSR and ISR platforms. Switching revenue represented $2.67B, an increase of 12% year-over-year. The growth in switching was due to strength across our switching portfolio, primarily in the Catalyst 3500, 3700 and 6500 families. Advanced technologies revenue totaled $1.28B, up 5% year-over-year. Year-over-year revenue in our advanced technologies segment increased across all markets, with the one exception being our optical business, which declined 34% annually. Also, please note that the Advanced Technology category now includes Application Networking Services and Hosted Small Business Solutions revenue, and is expected to include Digital Video upon the close of the Scientific Atlanta acquisition. Why is Cisco moving into Lean manufacturing? What can we expect the transition to be? Dennis Powell: Lean manufacturing is an industry-standard model that drives efficiency and flexibility in manufacturing processes and in the broader supply chain. Starting in Q3FY06, Cisco will begin a 6 - 8 quarter transition to a Lean manufacturing model. This will be a controlled process, planned in close cooperation with our contract manufacturing partners. Over time, we expect this process will result in incremental increases in purchase commitments with corresponding decreases in core manufacturing inventory. Upon full implementation, we expect core manufacturing inventory balance will be low. We anticipate inventory turns to improve moderately in Q3 and improve more significantly over time. And we expect the Cisco Lean model to be neutral to Cisco's gross margin. How much stock has Cisco repurchased this past quarter as part of the Company's stock repurchase program? Dennis Powell: During Q2FY06 we repurchased $748M, or 42 million shares of our stock at an average price of $17.87. Share repurchases decreased during Q2 as we plan for the purchase of Scientific-Atlanta. Our repurchases year-to-date total $4.25B or 236M shares at an average purchase price of $18.01. The remaining approved amount for stock repurchase under this program is approximately $3.6B. Since the inception of our repurchase program, the weighted average diluted shares outstanding, including stock option activity and shares issued in acquisitions have decreased 16.5%.

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Cisco Systems, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended		Six Months Ended
	January 28, 2006	January 29, 2005	January 28, 2006	January 29, 2005
NET SALES:
Product	$ 5,537	$ 5,106	$ 11,028	$ 10,139
Service	1,091	956	2,150	1,894
Total net sales	6,628	6,062	13,178	12,033
COST OF SALES:
Product	1,774	1,669	3,525	3,315
Service	388	340	777	650
Total cost of sales	2,162	2,009	4,302	3,965
GROSS MARGIN	4,466	4,053	8,876	8,068
OPERATING EXPENSES:
Research and development	966	811	1,962	1,616
Sales and marketing	1,431	1,142	2,884	2,262
General and administrative	282	228	560	458
Amortization of purchased intangible assets	56	57	115	117
In-process research and development	-	2	2	14
Total operating expenses	2,735	2,240	5,523	4,467
OPERATING INCOME	1,731	1,813	3,353	3,601
Interest income	168	127	322	257
Other income, net	17	17	-	57
Interest and other income, net	185	144	322	314
INCOME BEFORE PROVISION FOR INCOME TAXES	1,916	1,957	3,675	3,915
Provision for income taxes	541	557	1,039	1,119
NET INCOME	$ 1,375	$ 1,400	$ 2,636	$ 2,796
Net income per share:
Basic	$ 0.22	$ 0.21	$ 0.43	$ 0.43
Diluted	$ 0.22	$ 0.21	$ 0.42	$ 0.42
Shares used in per-share calculation:
Basic	6,146	6,521	6,195	6,577
Diluted	6,248	6,652	6,301	6,713

Net income for the second quarter and the first six months of fiscal 2006 included stock-based compensation expense related to employee stock options and employee stock purchases, net of tax, of $188 million and $416 million, respectively, under SFAS 123(R). There was no stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123 in fiscal 2005 because the Company did not adopt the recognition provisions of SFAS 123.

ALLOCATION OF STOCK-BASED COMPENSATION EXPENSE RELATED TO EMPLOYEE STOCK OPTIONS AND EMPLOYEE STOCK PURCHASES

The following table summarizes stock-based compensation expense related to employee stock options and employee stock purchases which was allocated as follows (in millions):

	Three Months Ended		Six Months Ended
	January 28, 2006	January 29, 2005	January 28, 2006	January 29, 2005
Cost of sales - product	$ 11	$ -	$ 30	$ -
Cost of sales - service	28	-	62	-
Stock-based compensation expense included in cost of sales	39	-	92	-
Research and development	90	-	193	-
Sales and marketing	106	-	233	-
General and administrative	26	-	60	-
Stock-based compensation expense included in operating expenses	222	-	486	-
Total stock-based compensation expense related to employee stock options and employee stock purchases	261	-	578	-
Tax benefit	(73)	-	(162)	-
Stock-based compensation expense related to employee stock options and employee stock purchases, net of tax	$ 188	-	$ 416	-

Net income including pro forma stock-based compensation expense as previously disclosed in Cisco's financial statements footnotes for the second quarter and the first six months of fiscal 2005 was $1.1 billion or $0.17 per diluted share and $2.3 billion or $0.34 per diluted share, respectively. Please refer to the table on page 7 for a comparison of net income including the effect of stock-based compensation expense. Cisco Systems, Inc.

NON-GAAP (PRO FORMA) CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended		Six Months Ended
	January 28, 2006	January 29, 2005	January 28, 2006	January 29, 2005
NET SALES:
Product	$ 5,537	$ 5,106	$ 11,028	$ 10,139
Service	1,091	956	2,150	1,894
Total net sales	6,628	6,062	13,178	12,033
COST OF SALES:
Product (a)	1,763	1,669	3,495	3,315
Service (a)	360	340	715	650
Total cost of sales (a)	2,123	2,009	4,210	3,965
GROSS MARGIN (a)	4,505	4,053	8,968	8,068
OPERATING EXPENSES:
Research and development (a)-(c)	850	785	1,709	1,572
Sales and marketing (a)-(c)	1,319	1,132	2,639	2,234
General and administrative(a)-(c)	255	222	497	447
Total operating expenses (a)-(e)	2,424	2,139	4,845	4,253
OPERATING INCOME (a)-(e)	2,081	1,914	4,123	3,815
Interest income	168	127	322	257
Other income, net (f)	17	17	-	4
Interest and other income, net (f)	185	144	322	261
INCOME BEFORE PROVISION FOR INCOME TAXES (a)-(f)	2,266	2,058	4,445	4,076
Provision for income taxes (g)	634	576	1,244	1,141
NET INCOME (a)-(g)	$ 1,632	$ 1,482	$ 3,201	$ 2,935
Net income per share:
Basic (a)-(g)	$ 0.27	$ 0.23	$ 0.52	$ 0.45
Diluted (a)-(g)	$ 0.26	$ 0.22	$ 0.51	$ 0.44
Shares used in per-share calculation:
Basic	6,146	6,521	6,195	6,577
Diluted	6,233	6,652	6,286	6,713

A reconciliation between net income on a GAAP basis and non-GAAP (pro forma) net income including items (a) - (g) is provided in a table on page 7.

RECONCILIATION OF GAAP TO NON-GAAP (PRO FORMA) NET INCOME

	Three Months Ended		Six Months Ended
	January 28, 2006	January 29, 2005	January 28, 2006	January 29, 2005
GAAP net income	$ 1,375	$ 1,400	$ 2,636	$ 2,796
(a) Stock-based compensation expense related to employee stock options and employee stock purchases*	261	-	578	-
(b) Payroll tax on stock option exercises*	3	3	5	4
(c) Compensation expense related to acquisitions and investments*	30	39	70	79
(d) In-process research and development	-	2	2	14
(e) Amortization of purchased intangible assets	56	57	115	117
(f) (Gain) loss on publicly traded equity securities	-	-	-	(53)
(g) Income tax effect	(93)	(19)	(205)	(22)
Non-GAAP (pro forma) net income	$ 1,632	$ 1,482	$ 3,201	$ 2,935

Note:
* In Q2 FY'06, stock-based compensation expense of $261 was allocated as follows: $39 to cost of sales ($11 to product cost of sales and $28 to service cost of sales), $90 to R&D, $106 to S&M and $26 to G&A. In Q2 FY'06, payroll tax on stock option exercises of $3 and compensation expense related to acquisitions and investments of $30 was allocated as follows: $26 to R&D, $6 to S&M and $1 to G&A. In Q2 FY'05, payroll tax on stock option exercises of $3 and compensation expense related to acquisitions and investments of $39 was allocated as follows: $26 to R&D, $10 to S&M and $6 to G&A. In the first six months of FY'06, stock-based compensation expense of $578 was allocated as follows: $92 to cost of sales ($30 to product cost of sales and $62 to service cost of sales), $193 to R&D, $233 to S&M and $60 to G&A. In the first six months of FY'06, payroll tax on stock option exercises of $5 and compensation expense related to acquisitions and investments of $70 was allocated as follows: $60 to R&D, $12 to S&M and $3 to G&A. In the first six months of FY'05, payroll tax on stock option exercises of $4 and compensation expense related to acquisitions and investments of $79 was allocated as follows: $44 to R&D, $28 to S&M and $11 to G&A.

In calculating non-GAAP (pro forma) inventory turns for the second quarter of fiscal 2006, stock-based compensation expense of $39 was excluded from cost of sales. In calculating non-GAAP (pro forma) inventory turns for the first quarter of fiscal 2006, stock-based compensation expense of $53 was excluded from cost of sales. In calculating non-GAAP (pro forma) gross margins for the second quarter of fiscal 2006, stock-based compensation expense of $39 was excluded from cost of sales ($11 from product cost of sales and $28 from service cost of sales). In calculating non-GAAP (pro forma) gross margins for the first six months of fiscal 2006, stock-based compensation expense of $92 was excluded from cost of sales ($30 from product cost of sales and $62 from service cost of sales).

RECONCILIATION OF SHARES USED IN THE CALCULATION OF GAAP TO NON-GAAP (PRO FORMA) DILUTED NET INCOME PER SHARE

	Three Months Ended		Six Months Ended
	January 28, 2006	January 29, 2005	January 28, 2006	January 29, 2005
Diluted shares used in per-share calculation - GAAP	6,248	6,652	6,301	6,713
Effect of SFAS 123(R)	(15)	-	(15)	-
Diluted shares used in per-share calculation -- Non-GAAP (Pro Forma)	6,233	6,652	6,286	6,713

COMPARISON OF NET INCOME INCLUDING THE EFFECT OF STOCK-BASED COMPENSATION EXPENSE RELATED TO EMPLOYEE STOCK OPTIONS AND EMPLOYEE STOCK PURCHASES UNDER SFAS 123(R) and SFAS 123

	Three Months Ended		Six Months Ended
	January 28, 2006	January 29, 2005	January 28, 2006	January 29, 2005
Net income - as reported for prior periods (1)	N/A	$ 1,400	N/A	$ 2,796
Stock-based compensation expense related to employee stock options and employee stock purchases	(261)	(428)	(578)	(888)
Tax benefit	$ 73	$ 171	$ 162	$ 355
Stock-based compensation expense related to employee stock options and employee stock purchases, net of tax (2)	$ (188)	$ (257)	$ (416)	$ (533)
Net income, including the effect of stock-based compensation expense (3)	$ 1,375	$ 1,143	$ 2,636	$ 2,263
Diluted net income per share - as reported for prior periods (1)	N/A	$ 0.21	N/A	$ 0.42
Stock-based compensation expense related to employee stock options and employee stock purchases, net of tax, per share (2)	$ (0.03)	$ (0.04)	$ (0.07)	$ (0.08)
Diluted net income per share, including the effect of stock-based compensation expense (3)	$ 0.22	$ 0.17	$ 0.42	$ 0.34

(1) Net income and net income per share prior to fiscal 2006 did not include stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123 because Cisco did not adopt the recognition provisions of SFAS 123.

(2) Stock-based compensation expense and stock-based compensation expense per share prior to fiscal 2006 is calculated based on the pro forma application of SFAS 123 as previously disclosed in Cisco's financial statements footnotes.

(3) Net income and net income per share prior to fiscal 2006 represents pro forma information based on SFAS 123 as previously disclosed in Cisco's financial statements footnotes.

Cisco Systems, Inc.

CONSOLIDATED BALANCE SHEETS

(In millions)
(Unaudited)

	January 28, 2006	July 30, 2005
ASSETS
Current assets:
Cash and cash equivalents	$ 5,151	$ 4,742
Investments	9,838	11,313
Accounts receivable, net of allowance for doubtful accounts of $171 at January 28, 2006 and $162 at July 30, 2005	2,537	2,216
Inventories	1,345	1,297
Deferred tax assets	1,476	1,475
Prepaid expenses and other current assets	1,264	967
Total current assets	21,611	22,010
Property and equipment, net	3,316	3,320
Goodwill	5,422	5,295
Purchased intangible assets, net	510	549
Other assets	2,793	2,709
TOTAL ASSETS	$ 33,652	$ 33,883
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 684	$ 735
Income taxes payable	1,437	1,511
Accrued compensation	1,220	1,317
Deferred revenue	3,937	3,854
Other accrued liabilities	2,243	2,094
Total current liabilities	9,521	9,511
Deferred revenue	1,163	1,188
Total liabilities	10,684	10,699
Minority interest	4	10
Shareholders' equity	22,964	23,174
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 33,652	$ 33,883

Note: Long-term investments and the related deferred taxes on unrealized gains and losses on investments as of July 30, 2005 have been reclassified to current assets in order to conform to the current period's presentation.

Cisco Systems, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)
(Unaudited)

	Six Months Ended
	January 28, 2006	January 29, 2005
Cash flows from operating activities:
Net income	$ 2,636	$ 2,796
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	512	508
Stock-based compensation expense related to employee stock options and employee stock purchases	578	-
Stock-based compensation expense related to acquisitions and investments	52	79
Provision for doubtful accounts	10	-
Provision for inventory	70	111
Deferred income taxes	1	(41)
Tax benefits from employee stock option plans	-	126
Excess tax benefits from stock-based compensation	(125)	-
In-process research and development	2	14
Net (gains) losses and impairment charges on investments	(21)	(74)
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(329)	(446)
Inventories	(115)	(157)
Prepaid expenses and other current assets	(47)	73
Lease receivables, net	(60)	(60)
Accounts payable	(51)	8
Income taxes payable	63	424
Accrued compensation	(97)	(252)
Deferred revenue	59	146
Other accrued liabilities	129	(7)
Net cash provided by operating activities	3,267	3,248
Cash flows from investing activities:
Purchases of investments	(10,467)	(10,366)
Proceeds from sales and maturities of investments	11,886	11,957
Acquisition of property and equipment	(394)	(290)
Acquisition of businesses, net of cash and cash equivalents	(150)	(553)
Change in investments in privately held companies	(90)	(110)
Purchase of minority interest of Cisco Systems, K.K. (Japan)	(25)	-
Other	(84)	93
Net cash provided by investing activities	676	731
Cash flows from financing activities:
Issuance of common stock	563	433
Repurchase of common stock	(4,248)	(5,706)
Excess tax benefits from stock-based compensation	125	-
Other	26	45
Net cash used in financing activities	(3,534)	(5,228)
Net increase (decrease) in cash and cash equivalents	409	(1,249)
Cash and cash equivalents, beginning of period	4,742	3,722
Cash and cash equivalents, end of period	$ 5,151	$ 2,473

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 28, 2006	July 30, 2005
CASH AND CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents	$ 5,151	$ 4,742
Fixed income securities	8,917	10,372
Publicly traded equity securities	921	941
Total	$ 14,989	$ 16,055
INVENTORIES
Raw materials	$ 96	$ 82
Work in process	477	431
Finished goods:
Distributor inventory and deferred cost of sales	419	385
Manufacturing finished goods	145	184
Total finished goods	564	569
Service-related spares	171	180
Demonstration systems	37	35
Total	$ 1,345	$ 1,297
PROPERTY AND EQUIPMENT, NET
Land, buildings, and leasehold improvements	$ 3,538	$ 3,492
Computer equipment and related software	1,307	1,244
Production, engineering, and other equipment	3,377	3,095
Operating lease assets	139	136
Furniture and fixtures	359	355
	8,720	8,322
Less, accumulated depreciation and amortization	(5,404)	(5,002)
Total	$ 3,316	$ 3,320
LEASE RECEIVABLES, NET (a)
Current	282	248
Noncurrent	379	353
Total	$ 661	$ 601
OTHER ASSETS
Deferred tax assets	$ 1,329	$ 1,308
Investments in privately held companies	452	421
Income tax receivable	277	277
Lease receivables, net	379	353
Other	356	350
Total	$ 2,793	$ 2,709
DEFERRED REVENUE
Service	$ 3,765	$ 3,618
Product	1,079	1,201
Unrecognized revenue on product shipments and other deferred revenue	256	223
Cash receipts related to unrecognized revenue from two-tier distributors	1,335	1,424
Total	$ 5,100	$ 5,042
Reported as:
Current	$ 3,937	$ 3,854
Noncurrent	1,163	1,188
Total	$ 5,100	$ 5,042

This Q&A may be deemed to contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities 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 and customer 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 including the businesses and technologies of Scientific-Atlanta, Inc.; 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, including risks relating to our transition to a new manufacturing model; product defects and returns; litigation involving patents, intellectual property, antitrust, shareholder and other matters; natural catastrophic events; achievement of the benefits anticipated from our investments in sales and engineering activities; 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 28, 2006 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.

This Q&A includes non-GAAP (pro forma) net income, non-GAAP (pro forma) net income per share data, non-GAAP (pro forma) shares used in net income per share calculation, non-GAAP (pro forma) inventory turns, non-GAAP (pro forma) gross margin, and other non-GAAP line items from the Consolidated Statements of Operations, including cost of sales information, gross margin, operating expenses (including research and development, sales and marketing, and general and administrative expenses), other income (loss), net, and provision for income taxes. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP (pro forma) measures used by other companies. Cisco believes that the presentation of non-GAAP (pro forma) net income, non-GAAP (pro forma) net income per share data, non-GAAP (pro forma) shares used in net income per share calculation, non-GAAP (pro forma) inventory turns and non-GAAP (pro forma) gross margin, when shown in conjunction with the corresponding GAAP measures, provides useful information to management and investors regarding financial and business trends relating to its financial condition and results of operations. Cisco further believes that where the adjustments used in calculating non-GAAP (pro forma) net income and non-GAAP (pro forma) net income per share are based on specific, identified charges that impact different line items in the statements of operations (including cost of sales, research and development, sales and marketing, and general and administrative expense), that it is useful to investors to know how these specific line items in the statements of operations are affected by these adjustments. In particular, as Cisco begins to apply SFAS 123(R), it believes that it is useful to investors to understand how the expenses associated with the application of SFAS 123(R) are reflected on its statements of operations. For its internal budgets, Cisco's management uses financial statements that do not include stock-based compensation expense related to employee stock options and employee stock purchases, payroll tax on stock option exercises, in-process research and development, compensation expense related to acquisitions and investments, amortization of purchased intangible assets, gain (loss) on publicly traded equity securities and the income tax effects of the foregoing on cost of sales, research and development, sales and marketing and general and administrative expenses, as applicable. Cisco's management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco.

Copyright© 2006 Cisco Systems, Inc. All rights reserved. Cisco, Cisco Systems, the Cisco Systems logo, and Linksys are registered trademarks or trademarks of Cisco Systems, Inc. and/or its affiliates in the U.S. and certain other countries. All other trademarks mentioned in this document are the property of their respective owners. The use of the word partner does not imply a partnership relationship between Cisco and any other company.