November 5, 2003

Cisco has announced its Q1 Fiscal Year 2004 financial results. John Chambers, Cisco president and CEO, and Dennis Powell, CFO and senior vice president, had this to say regarding the company's results and outlook.

How would you characterize this quarter?

More Information Release: Cisco Systems Reports First Quarter Fiscal Year 2004 Earnings Fact Sheet: Customer Highlights and Technology Innovations: First Quarter, FY 2004 video: Q1 FY04 Earnings Q&A: Dennis Powell Discusses Cisco's Q1 Financial Position Can you update us on your stock repurchase plan? Dennis Powell: We continue to believe that our share repurchase program, combined with ongoing strategic investments in our business and maintaining a strong cash balance, are in the best interest of our shareholders. During Q1 FY04, we repurchased $2.0 billion, or 102 million shares at an average price of $19.55. Cumulative purchases since the program inception in September 2001, are $9.8 billion, or 650 million shares at an average price of $15.11. There is $10.2B remaining in the repurchase program. What was the financial impact of the Linksys Acquisition this quarter? Dennis Powell: Our acquisition of Linksys, which was key both from an advanced technology perspective and opening up both the home networking and the SOHO market for Cisco, is going extremely well. In Q1, Linksys had over $140 million in orders. Total Linksys revenue for Q1FY04 was $119 million. Linksys increased Cisco's revenue by approximately $100 million from Q4FY03, had a negative impact of 1 percent on gross margin, and did not change pro forma earnings per share. Why did you "re-class" reporting of product revenue categories this quarter? Dennis Powell: Cisco is changing the way it categorizes, or reports, product revenue in response to investor requests for increased visibility into the revenue generated from our advanced technology markets. The new product categories are now: Switching, Routing, Advanced Technology and Other. We plan to review this revenue presentation periodically and reflect appropriate changes as necessary. As reference, Cisco has posted three years of product revenue category reports on the web.

John Chambers: We've begun our fiscal year with a solid quarter of operational excellence and year-over-year growth. With meaningful revenue growth occurring for the first time in a very long time, we continue to achieve some of the top financial measurements in our company's history. This combination includes GAAP earnings, pro forma earnings, cash generation, DSOs, gross margins and net income as a percentage of revenue.

In a time period where profits are extremely important and many of our best competitors continue to lose money or post very small profits, we were pleased with our pro forma net income of $1.2 billion, which was a 9 percent quarter-over-quarter and 14 percent year-over-year increase. Our GAAP net income was $1.1 billion, a 11 percent quarter over quarter increased and a 76 percent year-over-year increase.

While there is always room for improvement, we continue to be very pleased with our ability to deliver differentiated value to our customer's highest priorities-productivity, cost savings, and standard of living improvements. In all, we continue to believe we have uniquely positioned Cisco as the recovery continues.

Can you provide an update regarding Cisco's three targeted growth areas?

John Chambers: When we talk about areas for potential growth, we have segmented those areas into three broad groups our core technologies-routing and switching- service provider, and advanced technology markets.

Relative to our core technologies, our switching revenues were up approximately 10 percent sequentially over Q4 with the best growth in the fixed switching. The Catalyst 6000, 4500, and 3550 all showed approximately 10 percent revenue growth over Q4. As discussed in the last conference call, our high-end routing continues to do very well with sequential revenues up over 10 percent when compared to a very solid Q4.

In the service provider market, we were very pleased with our solid sequential and year-over-year growth. We are a little concerned that our peers have not seen this improvement, however there was positive geographic balance in our quarterly results in regards to the SP space. I believe our resource commitment and mind share improvements in this market appear to be working well, however only time will tell if this positive trend continues in terms of capex spending from the service providers.

Our advanced technologies saw another solid quarter in terms of revenue growth. We have identified six advanced technology markets including IP telephony, optical, storage, wireless LAN, security and home networking. Over time, our target is to identify 12 potential advanced technologies that could eventually yield a $1 billion a year run rates.

I am relatively comfortable with our progress to date of all six of the announced advanced technology areas. As expected, in total they exceeded 15 percent sequential quarter revenue growth with the networked home, security, optical, and IP telephony showing the best growth. We were a little bit disappointed with our progress in the storage area networking market where we experienced longer than anticipated sales cycles and a few other challenges.

How did Cisco's business fair across geographic areas and market segments this quarter?

John Chambers: The total US orders were a little better than we expected this quarter. Following a very solid Q4 in both the enterprise and service provider markets, Q1 again showed good order growth, with the US increasing to 49 percent of our total product orders.

I was pleased to see US service provider orders increase to approximately 10 percent of our orders from Q4, as we are continuing to see what could be some early signs of market share gains and/or perhaps service provider capex spending in both the US and global markets. Only time will tell if this momentum continues to develop. Additionally, as expected our U.S. federal government business had a very solid Q1 with comfortably over 20 percent of our total US enterprise orders.

Our sales in Asia Pacific increased to 11 percent of our total bookings. In China, we saw our traditional Q1 positive seasonality add to the uplift of the economic challenges in the prior two quarters with order growth sequentially in excess of 30 percent. Korea was down sequentially a little over 10 percent and India was up, over 25 percent sequentially, granted off of a much smaller base.

In EMEA, we experienced normal seasonal softness across the major countries in Europe. Russia continued on its normal, healthy quarter-over-quarter and year-over-year double digit growth. Service provider orders in EMEA were down slightly compared to Q4, but when taking normal seasonality into consideration the orders were actually up year-over-year in the mid-teens.

In America's International, despite the economic challenges in the region, we saw good order growth in Canada and Latin America. Orders grew sequentially approximately 10 percent versus Q4. This moved our business from Americas International to 5 percent of our total bookings.

Strong order growth moved our Japanese theater to 9 percent of our total bookings up from 7 percent in Q4. As we said last quarter, Q4 in recent years has been very challenging seasonally, while Q4 of last year was actually up slightly. This momentum and surprisingly cautiously optimistic attitude by business and government leaders in Japan continued into Q1 with strong sequential order growth up in double-digits and year-over-year growth above 40 percent. Service provider business, while it can be very lumpy due to large orders, was up sequentially over 30 percent.

Last quarter you discussed several price/performance improvements. Did you see any further price/performance improvements this quarter?

John Chambers: We continue to dramatically improve our price/performance and/or price reductions in almost all product areas over the last year. In Q1, we had six product areas achieving these types of improvements for our customers. We are continuing to accomplish both price reductions and price/performance improvements, as well as movement into the home market, while still managing our solid gross margins in individual product areas.

The areas affected in Q1 by these price/performance improvements included the Catalyst 6000, the Cisco 1700, 2600 and UBR 7200 router families, the MDS 9000 storage networking product and VPN products. Most product price reductions do not translate into higher total sales in the present environment, but we believe this is the right thing to do for our customers, channel partners, shareholders and for Cisco in the long run. This balance between customer price/performance advantages and profit contribution to Cisco may be one of our best accomplishments as a company.

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Cisco Systems, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended
	October 25, 2003	October 26, 2002
NET SALES:
Product	$ 4,263	$ 4,013
Service	838	832
Total net sales	5,101	4,845
COST OF SALES:
Product	1,316	1,237
Service	279	250
Total cost of sales	1,595	1,487
GROSS MARGIN	3,506	3,358
OPERATING EXPENSES:
Research and development	735	789
Sales and marketing	1,071	1,093
General and administrative	195	151
Payroll tax on stock option exercises	2	-
Amortization of deferred stock-based compensation	51	43
Amortization of purchased intangible assets	62	114
Total operating expenses	2,116	2,190
OPERATING INCOME	1,390	1,168
Loss on publicly traded equity securities	-	(412)
Interest income	137	179
Other income (loss), net	1	(63)
Interest and other income (loss), net	138	(296)
INCOME BEFORE PROVISION FOR INCOME TAXES	1,528	872
Provision for income taxes	442	254
NET INCOME	$ 1,086	$ 618
Net income per share--basic	$ 0.16	$ 0.09
Net income per share--diluted	$ 0.15	$ 0.08
Shares used in per-share calculation--basic	6,932	7,249
Shares used in per-share calculation--diluted	7,110	7,327

Cisco Systems, Inc.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended
	October 25, 2003	October 26, 2002
NET SALES:
Product	$ 4,263	$ 4,013
Service	838	832
Total net sales	5,101	4,845
COST OF SALES:
Product	1,316	1,237
Service	279	250
Total cost of sales	1,595	1,487
GROSS MARGIN	3,506	3,358
OPERATING EXPENSES:
Research and development	735	789
Sales and marketing	1,071	1,093
General and administrative	195	151
Total operating expenses (a) (b) (c)	2,001	2,033
OPERATING INCOME	1,505	1,325
Interest income	137	179
Other income (loss), net	1	(63)
Interest and other income (loss), net	138	116
INCOME BEFORE PROVISION FOR INCOME TAXES (a) (b) (c) (d)	1,643	1,441
Provision for income taxes (e)	460	403
NET INCOME	$ 1,183	$ 1,038
Net income per share--basic	$ 0.17	$ 0.14
Net income per share--diluted	$ 0.17	$ 0.14
Shares used in per-share calculation--basic	6,932	7,249
Shares used in per-share calculation--diluted	7,110	7,327
A reconciliation between net income on a GAAP basis and pro forma net income is as follows:
GAAP net income	$ 1,086	$ 618
(a) Payroll tax on stock option exercises	2	-
(b) Amortization of deferred stock-based compensation	51	43
(c) Amortization of purchased intangible assets	62	114
(d) Loss on publicly traded equity securities	-	412
(e) Income tax effect	(18)	(149)
Pro forma net income	$ 1,183	$ 1,038

For the three month period ended July 26, 2003, pro forma net income and pro forma net income per share excluded the following items: In-process research and development of $1 million, payroll tax on employee stock option exercises of $2 million, amortization of deferred stock-based compensation of $27 million, amortization of purchased intangible assets of $110 million and income tax effect of ($33) million.

Cisco Systems, Inc.

CONSOLIDATED BALANCE SHEETS

	October 25, 2003	July 26, 2003
ASSETS
Current assets:
Cash and cash equivalents	$ 4,158	$ 3,925
Short-term investments	4,837	4,560
Accounts receivable, net of allowance for doubtful accounts of $180 at October 25, 2003 and $183 at July 26, 2003	1,388	1,351
Inventories	875	873
Deferred tax assets	2,062	1,975
Lease receivables, net	140	163
Prepaid expenses and other current assets	567	568
Total current assets	14,027	13,415
Investments	10,693	12,167
Property and equipment, net	3,571	3,721
Goodwill	4,043	4,043
Purchased intangible assets, net	490	556
Lease receivables, net	79	60
Other assets	2,947	3,145
TOTAL ASSETS	$ 35,850	$ 37,107
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 602	$ 594
Income taxes payable	687	739
Accrued compensation	1,184	1,470
Deferred revenue	3,001	3,034
Other accrued liabilites	2,155	2,162
Restructuring liabilities	86	295
Total current liabilities	7,715	8,294
Deferred revenue	706	774
Total liabilities	8,421	9,068
Minority interest	10	10
Shareholders' equity	27,419	28,029
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 35,850	$ 37,107

Cisco Systems, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)
(Unaudited)

	Three Months Ended
	October 25, 2003	October 26, 2002
Cash flows from operating activities:
Net income	$ 1,086	$ 618
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	397	410
Provision for doubtful accounts	7	47
Provision for inventory	35	3
Deferred income taxes	116	(27)
Tax benefits from employee stock option plans	62	3
Net (gains) losses and impairment charges on investments	1	474
Change in operating assets and liabilities:
Accounts receivable	(44)	(51)
Inventories	(37)	49
Prepaid expenses and other current assets	(39)	(36)
Accounts payable	8	70
Income taxes payable	(16)	(70)
Accrued compensation	(286)	(282)
Deferred revenue	(101)	(141)
Other accrued liabilities	(7)	(14)
Restructuring liabilities	(209)	14
Net cash provided by operating activities	973	1,067
Cash flows from investing activities:
Purchases of short-term investments	(2,969)	(1,671)
Proceeds from sales and maturities of short-term investments	3,065	1,941
Purchases of investments	(5,076)	(4,981)
Proceeds from sales and maturities of investments	6,153	2,251
Acquisition of property and equipment	(173)	(122)
Acquisition of businesses, net of cash and cash equivalents	-	2
Change in lease receivables, net	4	43
Purchases of investments in privately held companies	(14)	(12)
Purchase of minority interest of Cisco Systems, K.K. (Japan)	-	(59)
Other	64	91
Net cash provided by (used in) investing activities	1,054	(2,517)
Cash flows from financing activities:
Issuance of common stock	173	41
Repurchase of common stock	(1,998)	(1,077)
Other	31	(12)
Net cash used in financing activities	(1,794)	(1,048)
Net increase (decrease) in cash and cash equivalents	233	(2,498)
Cash and cash equivalents, beginning of period	3,925	9,484
Cash and cash equivalents, end of period	$ 4,158	$ 6,986

Cisco Systems, Inc.

ADDITIONAL FINANCIAL INFORMATION

(In millions)
(Unaudited)

	October 25, 2003	July 26, 2003
CASH AND INVESTMENTS
Cash and cash equivalents	$ 4,158	$ 3,925
Fixed income securities	14,740	15,982
Publicly traded equity securities	790	745
Total	$ 19,688	$ 20,652
INVENTORIES
Raw materials	$ 37	$ 38
Work in process	271	291
Finished goods	539	515
Demonstration systems	28	29
Total	$ 875	$ 873
PROPERTY AND EQUIPMENT, NET
Land, buildings, and leasehold improvements	$ 3,431	$ 3,411
Computer equipment and related software	1,164	1,147
Production, engineering, and other equipment	2,496	2,410
Operating lease assets	296	439
Furniture and fixtures	354	350
	7,741	7,757
Less, accumulated depreciation and amortization	(4,170)	(4,036)
Total	$ 3,571	$ 3,721
OTHER ASSETS
Deferred tax assets	$ 1,287	$ 1,476
Investments in privately held companies	492	516
Income tax receivable	690	727
Structured loans, net	30	42
Other	448	384
Total	$ 2,947	$ 3,145
DEFERRED REVENUE
Service	$ 2,291	$ 2,451
Product	1,416	1,357
Total	3,707	3,808
Less, current portion	(3,001)	(3,034)
Non-current deferred revenue	$ 706	$ 774

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 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 urged to read 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 risk factors that could cause actual results to differ materially from the 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 Q&A are: 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; increased price competition; variations in sales channels, product costs or mix of products sold; 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; manufacturing and sourcing risks; product defects and returns; litigation involving patents, intellectual property, antitrust, stockholder and other matters; the ability to recruit and retain key personnel; financial risk management; currency fluctuations and other international factors; and potential volatility in operating results. 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 months ended October 25, 2003 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.

Cisco provides pro forma net income and pro forma net income per share data as additional information for 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. In addition, Cisco's management uses these measures for reviewing the financial results of Cisco and for budget planning purposes.

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