Feature Story

March 20, 2003

When customers enter a consumer electronics store and asks, "What products should I buy to build a home network?" the salesman will most likely answer-buy from Linksys. Linksys' ability to provide low-cost, easy-to-use, quality products for consumer and small-or-home-office (SOHO) networking has allowed them to capture 38% market share in the U.S. retail home networking market. With the acquisition of Linksys-Cisco is entering into the multi-billion dollar home networking market, a market forecasted by industry analyst firms Dell'Oro and Synergy to grow from $3.7 billion in 2002 to $7.5 billion in 2006. The Cisco leaders behind the deal, Charles Giancarlo, senior vice president of Switching, Voice and Carrier Systems, and Dan Scheinman, senior vice president of Corporate Development, had this to say about how the acquisition:

Charles Giancarlo: We truly believe that the home networking market is at an inflection point, in which Broadband access and the related applications are poised to become a mass-market phenomenon. By entering this market with a solid product line and distribution leadership, we believe Cisco will be strongly positioned in this emerging high-growth market. In addition, the unique combination of Cisco's networking expertise and Linksys' consumer leadership will enable consumers to benefit from new functionality for an even easier, feature-rich home networking experience. Finally, we feel that this acquisition represents a natural extension of Cisco's networking leadership in the Enterprise and Service Provider arenas, to the home.

Charles Giancarlo: Cisco's home network solutions will both enable, and be driven by new, network-based, end-devices and applications. To address these new drivers, Cisco sees itself leading the adoption of home networks by combining its technological leadership with Linksys' consumer experience to enable home networking solutions that are consumer-friendly, standards-based and feature-rich. We will focus on accelerating home networking adoption through industry and de facto standards such as 802.11 and Ethernet. We also see consumer electronics companies as complementary partners in this vision. Their network-enabled devices and applications will also be enhanced by and promote the adoption of home networks.

Dan Scheinman: Cisco believes that Linksys has an excellent combination of market position, brand, and product offerings. Linksys has a well-respected consumer brand that is at the top of the short list for most consumers and influencers in this market and was a clear choice for several reasons. The company has the most extensive and innovative product -considered the best overall brand in the consumer and SOHO networking arena. They have also been first to market with several key home networking products. Linksys also has a strong customer support network-a valuable resource for consumer and SOHO network planning and set-up-as well as a very well developed retail, e-commerce, distributor and service provider channel network. They also are the premium brand in U.S. retail. Finally, Cisco evaluates all its acquisitions using four key factors, namely: culture, shared vision, short term win and long term win. The Linksys acquisition fits all of these criteria well.

Dan Scheinman: Cisco's acquisition strategy will continue to focus primarily on companies that provide Cisco with new technologies to expand on existing markets, or allow Cisco to rapidly penetrate new markets. With Linksys, Cisco found a unique opportunity to enter a new market with the market leader.

Linksys has optimized its operating model for success in the consumer and SOHO networking business. An acquisition will allow Cisco to help Linksys accelerate the adoption of broadband and home networking. In addition, Linksys has created a highly recognized and respected brand presence in the consumer and SOHO networking market. This acquisition will allow Cisco to capitalize and expand on the brand momentum Linksys has created in this market. Finally, we expect that this deal will immediately impact Cisco's bottom line on a pro-forma basis.

Charles Giancarlo: No. Cisco's current products are designed for business and service provider networks. Linksys' products are designed for home and small office networks, which have different feature requirements and priorities. Take for example Cisco's Aironet wireless products. The Aironet products are the result of Cisco's significant investment in industry-leading WLAN and networking technology. Cisco Aironet solutions offer premium value in security, range, management, performance, features and total cost of ownership as part of a complete, complex network. Linksys' products on the other-hand are developed using off-the-shelf silicon and software and focus on ease-of-use, price and features important to consumers. As you can see by this example, the products are geared towards a different market with different needs.

Dan Scheinman: The Linksys brand name has very strong awareness in the consumer and SOHO networking space. It stands for quality, easy-to-use products for the home user, and is quite an asset as we enter this market. As such, we will utilize the Linksys brand moving forward and Linksys' products will continue to be sold under the Linksys brand through its existing retail, distributor and e-commerce channels. This strategy takes advantage of the awareness and trust established by Linksys, but enhances it with the strength, leadership, and reliability of Cisco as the networking company and Internet leader behind the products.

Charles Giancarlo: Linksys will operate as a division of Cisco, reporting to me. One of the most significant aspects of the acquisition is that it allows a Cisco division to operate under a business model appropriate to the consumer and SOHO market. As a separate division of Cisco Systems, Linksys will maintain its business model to support profitable returns and continued market leadership.

Dan Scheinman: In addition, this shows that Cisco will enter certain new markets with new business models. Cisco intends to keep a strong focus on the bottom-line of Linksys' business model. The goal is for the combination of the two company's strengths to accelerate the home networking market.

Charles Giancarlo: Linksys' sales are made through retail, e-commerce, catalog and distributor channels. Linksys does not sell its products directly on its website, and we do not plan to change that practice. Linksys' leading customer support organization will continue to service consumers who have Linksys products.

Dan Scheinman: This is Cisco's largest deal in the consumer area of networking. We are very excited.

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 the potential growth of the market in which Linksys operates, the anticipated impact of this acquisition on Cisco's future results of operations, the anticipated timing of closing, the anticipated benefits of the combination of Linksys with Cisco, and trends in business conditions. Readers are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results. Readers are referred to the documents filed by Cisco with the SEC, specifically the most recent reports on Form 10-K and 10-Q, each as it may be amended from time to time, which identify important risk factors that could cause actual results to differ from those contained in these forward-looking statements. Among the important factors or risks that could cause actual results or events to differ materially from those in the forward-looking statements in this release are: this acquisition may not close on a timely basis or at all, due to failure to satisfy closing conditions or otherwise; risks associated with the successful integration of Linksys' business; Cisco may not be able to retain key employees of Linksys; anticipated benefits of this acquisition may not be realized; global economic conditions; uncertainties in the geopolitical environment; pricing pressure in the consumer/small office/home office networking industry; competition in the networking industry; dependence on the introduction and market acceptance of new product offerings and standards; rapid technological and market change; Internet infrastructure problems and government regulation of the Internet; international operations; litigation involving patents and intellectual property matters; and possible disruption in commercial activities occasioned by terrorist activity and armed conflict. Any projections in this release are based on limited information currently available to Cisco, which is subject to change. The information in this release is current as of the date of this release, but may not remain accurate as of any future date. Cisco does not undertake any duty to update the information provided in this release, except as otherwise required by law.