May 7, 2002

Cisco has announced the financial results for its Q3, Fiscal Year 2002 quarter. John Chambers, Cisco CEO and president, and Larry Carter, Cisco CFO and senior vice president, discuss the quarterly results and Cisco's market position.

N@C: How would you characterize this quarter? Were you pleased with the results and the company's performance?

John Chambers: Overall, our Q3 and year-over-year results were very solid, and our results reflect the combination of our superior market position and the solid execution of the Cisco team. Operationally, I think we hit a home run, given an extremely challenging market and a seasonally slow quarter. We exceeded the stretch goals we had for ourselves in the areas of profitable market share gains, productivity and cash generation. We saw our profit increase 264% year-over-year and 26% quarter-over-quarter. Looking at revenue growth, this represents a 2% year-over-year gain for Cisco versus a 43% year-over-year decrease for 10 selected North American competitors. The magnitude of this market share gain was dramatically above even our stretch goal, which was to grow 10% faster than these selected competitors--we are very pleased with our 45% aggregate delta. With regard to our market position, make no mistake; we are positioning ourselves for the turn in the economy. In the past year, we made critical decisions quickly and decisively to put Cisco in a position to breakaway from our core competitors. In summary, we were very pleased with almost all financial measurements, but especially profitability and returning to year-over-year positive growth.

More Information Release: Cisco Systems Reports Third Quarter Earnings Webcast: Q3, FY 2002 Conference Call Study: Net Impact Study Referenced in the Conference Call Video: Robert Litan of The Brookings Institution On the Net Impact Study Findings Q&A: Larry Carter Discusses Cisco's Q3, FY 2002 Financial Position N@C: Cisco often lauds its cash position. How do you plan to leverage your cash? Larry Carter: In any economy, especially during the tough times, one of the key indicators of the health of a company is its ability to generate cash flow. As with previous quarters, our cash position continues to be a competitive advantage for our company, as it is important to our customers and positions us to be opportunistic when the market turns around. Our cash from operations for the past four quarters has averaged over $1.5B and, total cash and investments improved from $18.5B in Q4FY01 to $21.1B in Q3FY02. We have provided a cash flow statement along with our normal P&L and balance sheet as part of our press release this quarter. Our ongoing plans to leverage our cash include continuing to repurchase shares in-line with our stock repurchase plan announced in September 2001, fund strategic minority investments and potential acquisitions, support financing activities via Cisco Capital, and use as general working capital. N@C: With investors and the market becoming increasingly critical of accounting practices, how do you respond to potential criticism regarding your accounting practices? Larry Carter: Cisco has always emphasized conservative financial reporting and full disclosure, and will continue to reflect that philosophy in our financial reports, in accordance with GAAP. We believe it is important to provide timely and complete information to our investors. As such, we have always provided our reporting on a GAAP as well as pro forma basis. We believe that providing investors with GAAP and pro forma results along with a reconciliation to identify the differences provides valuable information to our investors. These are both available in our quarter press release and subsequent filings with the SEC. We ask our investors to examine our fundamentals, which remain strong. We are generating real profits, are generating $300-400 million in cash flow from operations each month, and have no debt. I believe these are signs of a healthy company.

N@C: You're pleased with Cisco's performance -- how about the performance of the market?

John Chambers: This is truly one of the most commonly asked questions I get--what will really drive future growth in the networking industry. While many people tend to focus on new segments in the market in the industry, and we will certainly do that, I believe the fundamental drivers of the networking industry will be an unprecedented increase in productivity. Our revenue growth opportunities will be tied directly to how well we can deliver productivity ROI for our customers. Today's announcement of an 8.6% productivity gain for the United States in the first quarter underscores our belief that customers will invest in those technologies that deliver productivity results. Cisco is uniquely positioned to help our customers achieve these productivity opportunities. We've grown our productivity by 20% over the last four quarters, with about half of it coming from our use of Internet business solutions, and we believe that the Internet will be a prime factor in productivity gains of 5-10% a year for companies and 3-5% a year for countries.

Simply put, as our customers' business improves so will our business, if we execute properly, with a slight lag time in the longer term. I believe that we are in the first of a 'many inning game.' I remain very optimistic in our strategy and our opportunities if we execute properly given the productivity and evolving business models that Internet business solutions offer.

N@C: Last year at this time, you outlined your six-point strategy. A year later, how do you feel you executed?

John Chambers: Today's results reflect the hard work of a management team that knows how to execute, in good times and bad. After the downturn, we realigned and adjusted our resources to deal with this challenge and to prepare for the inevitable upturn. This is what we've described as our combination of our breakaway strategy, with the six-point plan. Over the last 12 months we have had a fanatical focus on profits, cash, productivity and profitable market share gains. The results I believe are evident in today's return to year-over-year growth.

I have been particularly pleased with our operational results of the quarter in almost every category. Our strong results led to gross margins of 63.1%, cash flows of $1.6 billion and inventory turns of 7.5 times, which exceeded our expectations. As measured by annualized revenue for headcount, Cisco's productivity per employee over the past four quarters has moved from $442K to $470K to $518K to $530K this quarter. While we have a way to go before reaching our stretch goal of $700K per employee, I feel that our ability to build a strong networked virtual organization--focus on what we do best, and put into systems and outsource what others can do more effectively--will continue to help us toward our goal.

N@C: What is your visibility moving in Q4?

John Chambers: Today, we're in a "show-me" economy. With our U.S. customers, CEOs continue to spend very cautiously --that is until their confidence about future growth in their own revenues and profits occur. Simply put, while no one can say when capital spending is going to increase, when it does, we are well positioned to capture these opportunities.

N@C: During this quarter, where did Cisco see geographical strengths?

John Chambers: In EMEA, we saw solid growth in the U.K. and Germany, with orders increasing in both countries. We view this very positively as they were our first major European countries to slow over a year ago.

Asia Pacific in total was in-line with the rest of our order rates. Australia and New Zealand was very solid while China was a little weaker than expected. The Americas International, representing about 6% of our total business saw a challenging Q3, with Mexico and Brazil seeing decreases while Latin America as expected, saw very challenging order rates. Canada, after a very solid Q2, was down a little in Q3 in line with our overall business trends. In Japan, we continue to be pleased with our business with order growth both for the quarter and year-over-year.

In the U.S, the enterprise business in terms of orders was flat which, given that the Q3 spending is seasonally slow, could be interpreted as a possible early positive signal. However, there is not enough data and it is too early to call a possible turnaround. The results varied by vertical industry segments and between enterprise and service providers. Simply put industries that had positive trends in terms of their revenues and profits were spending more, and the reverse was true for industries that were challenged.

---

This Q&A contains projections and other forward-looking 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. Readers are referred to the documents filed by Cisco with the SEC, specifically the most recent reports on Form 10-K, 10-Q and 8-K, 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 the forward-looking statements. In addition to these risk factors, other factors that could cause actual results to differ materially include the following: business and economic conditions and growth trends in the networking industry in various geographic regions; global economic conditions; 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 ability to successfully restructure existing businesses; the timing of orders and manufacturing lead times; changes in customer order patterns; insufficient, excess or obsolete inventory; variations in sales channels, product costs, or mix of products sold; the ability to successfully reduce overhead and manage expenses; 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; the trend towards sales of integrated network solutions; manufacturing and sourcing risks; Internet infrastructure problems and government regulation of the Internet; international operations; the timing and amount of employer payroll tax to be paid on employees' gains on stock options exercised; litigation involving patents, intellectual property, antitrust, stockholder and other matters; possible disruption in commercial activities occasioned by terrorist activity and armed conflict, such as changes in logistics and security arrangements, and reduced end-user purchases relative to expectations; exposure to credit risks relating to certain customers and credit exposures in weakened markets; the ability to recruit and retain key personnel; stock price volatility; financial risk management; and potential volatility in operating results, among others. The financial information contained in this release 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 nine months ended April 27, 2002 are not necessarily indicative of Cisco's operating results for the full fiscal year or any future periods.