October 22, 2002

Cisco Systems announced that it will acquire the privately-held Psionic Software, Inc. of Austin, Texas. Psionic develops network security software that increases the efficiency of intrusion detection systems (IDS) by dramatically reducing false alarms, the number one problem associated with current IDS security technology. Integrating Psionic's software with Cisco IDS products provides enterprise customers with high-performance security attack identification and suppression across a range of network environments, offering a more comprehensive approach to security while minimizing operational costs.

News@Cisco had the opportunity to talk to Dan Scheinman, SVP of Corporate Development, and Richard Palmer, VP and GM of the VPN and Security Services Business Unit, about how integrating Psionic Software into Cisco's existing security offerings will provide the basis for future IDS architectures.

How does the acquisition of Psionic Software relate to Cisco's overall technology strategy?

Dan Scheinman: The security networking market represents an emerging growth market opportunity for Cisco. IDC estimates that the security market will be over $13 billion in 2003 with $2.4 billion attributable to intrusion detection systems (IDS) as well as vulnerability assessment and management security services-all markets addressed either directly or indirectly by Psionic's software technology.

While Cisco remains committed to its core technology markets such as switching and routing, it is also focused on key growth markets such as security. In addition to security, other growth markets Cisco is expanding into are IP telephony, mobility and storage.

Why did Cisco choose Psionic Software?

Richard Palmer: Cisco believes that Psionic Software has an excellent combination of talent and technology. Psionic develops security software that increases the efficiency of IDS by reducing false alarms by up to 95%. Psionic's software will provide Cisco security customers with increased productivity and lower total cost of ownership associated with network-based IDS by enabling customers to focus manpower and attention on validated attacks against their networks.

Psionic's intrusion response technology goes beyond alarmbeyond the alarm consolidation and correlation products on the market today by using patented adaptive scanning techniques to rapidly validate IDS events, escalate legitimate attacks and remediate costly intrusions. With Psionic's unique technology, only those qualified attacks that have the highest damage potential against vulnerable systems will be terminated, thus ensuring maximum network protection.

How will the acquisition of Psionic Software augment Cisco's existing network security solutions?

Richard Palmer: The acquisition of Psionic Software builds on Cisco's seven-year track record of leadership and innovation in the IDS industry as the provider of the first commercial network intrusion detection system. Cisco's intrusion protection product family - based on multi-mode threat identification and classification techniques including stateful pattern matching, protocol anomaly detection, heuristics investigation, and statistic anomaly techniques - integrated with Psionic's event validation technology ensures high-performance attack identification and suppression across a range of network topologies and performance needs.

Through this integration, Cisco will be able to deliver a new class of intrusion protection that enables security professionals to focus manpower and attention on only those threats applicable to their network environment. This allows for broad adoption of IDS technology across all locations throughout the enterprise, providing a more comprehensive approach to security while minimizing the operational costs.

Is Psionic Software a Cisco "spin-in" company? Does Cisco have an investment in Psionic?

Dan Scheinman: Cisco does not have a previous investment in Psionic and the company is not a spin-in. In aggregate, Cisco will issue up to $12 million in stock in exchange for all shares and options of Psionic. The transaction will be accounted for in accordance with generally accepted accounting principles.

Cisco has slowed its acquisition pace. Has Cisco's acquisition strategy changed over the last one and half years?

Dan Scheinman: Internal development, partnerships and acquisitions have always been a core part of Cisco's business strategy. Acquisitions jump-start Cisco's entry into new markets and speed time-to-market by providing immediate access to technology. Cisco has responded to the changing economic environment, however we have also stated that we will continue to conduct acquisitions when we believe they will create substantial value for customers and shareholders.