Dennis Powell, Chief Financial Officer John Chambers, President and Chief Executive Officer Charlie Giancarlo, Chief Development Officer Rick Justice, Senior Vice President of Worldwide Field Operations

John Marchetti, Morgan Stanley Nikos Theodosopoulos, UBS Jeff Evenson, Sanford Bernstein Lucas Bianchi, SG Cowen & Co. Tal Liani, Merrill Lynch Stephen Kamman, CIBC World Markets Alex Henderson, Citigroup Brantley Thompson, Goldman Sachs Jiong Shao, Lehman Brothers Mark Sue, RBC Capital Markets Ehud Gelblum, JP Morgan Tim Long, Banc of America Paul Silverstein, Credit Suisse First Boston Wojtek Uzdelewicz, Bear, Stearns Tim Daubenspeck, Pacific Crest Securities Cobb Sadler, Deutsche Bank Hasan Imam, Thomas Weisel Partners Ari Bensinger, Standard & Poor's Ken Muth, Robert W. Baird

Hello, and welcome to the Cisco Systems Second Quarter Fiscal Year 2006 Financial Results Conference Call. At the request of Cisco Systems, today's conference is being recorded. If you have any objections, you must disconnect at this time. I'd now like to introduce Mr. Dennis Powell, Chief Financial Officer of Cisco Systems. Sir, you may begin. Dennis Powell, Chief Financial Officer: Good afternoon, everyone, and welcome to our 64th Quarterly Conference Call. This is Dennis Powell with John Chambers, our President and CEO; Rick Justice, Senior Vice President of Worldwide Field Operations; and Charlie Giancarlo, Chief Development Officer. The second quarter fiscal year 2006 press release is on First Call, Full National Business Wire, the European and Technical Wire, and on the Cisco website at www.cisco.com. If you would like a fax of the press release, please call 408-526-8890 and follow the instructions. Information regarding Cisco's financials and corresponding webcast with visuals designed to guide participants through the call are available on the Cisco website at www.cisco.com in the Investor Relations section. Additionally, a replay of this call will be available via telephone at 866-357-4205 or 203-369-0122 for international callers. Throughout this conference call, we will be referencing both GAAP (Generally Accepted Accounting Principles) and non-GAAP financial results. Throughout the call, we will refer to our non-GAAP results as pro forma. Please note we have provided complete GAAP reconciliation information on our website in the Investor Relations section. Additionally, we have provided information relating to both our GAAP financial results and our pro forma financial results, along with a reconciliation table between our GAAP and pro forma financial statements in our press release. The financial results in the press release are unaudited. The matters we will be discussing today include forward-looking statements and as such are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent Reports on Form 10-K and 10-Q and any applicable amendments which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. Unauthorized recording of this conference call is not permitted. Consistent with previous quarters, we will conclude our call promptly at 3 PM. I will now turn it over to John for his commentary on the quarter. John? John Chambers, President and Chief Executive Officer: Thank you, Dennis. I would summarize the quarter as a solid quarter from a revenue and an earnings per share perspective, and a strong quarter from an orders perspective. Our balanced approach to the market in terms of our core customer segments, core and advanced technologies, business and technology architecture, combined with our five key geographic theaters, continued to work very well, with solid results in the majority of these categories. For Q2, our very good results in the U.S., 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 well over a year. Revenue growth was 9.3% year-over-year, 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 at the last conference call of 10 to 14%. Product book-to-bill was greater than 1, and in anticipation of questions we usually get about linearity of orders during the quarter, the orders gained momentum in each of the three months in terms of year-over-year growth rates. GAAP net income was 1.4 billion, and GAAP earnings per share were $0.22, which includes a charge from stock options of $0.03 per share. It was a record quarter for Cisco from a pro forma net income and earnings per share perspective, with pro forma net income of 1.6 billion and earnings per share of $0.26. Total pro forma margins were 68% versus last quarter's 68.1. Pro forma product gross margins were 68.2 versus last quarter's 68.5. Cash flow from operations was a solid $1.9 billion. During the quarter, we repurchased approximately $748 million of common stock. We exited the quarter with approximately 15 billion in cash, cash equivalents and investments. Q2 pro forma operating expenses were 36.6% of revenue versus Q1's 37%. Our total net headcount increased by approximately 400, with over 80% of those going into, Rick, your sales coverage organizations. Staying with the same theme from last quarter's conference call, there were a number of key takeaways from the quarter, all relating directly or indirectly to our advantages from a balanced opportunity perspective and additional resources and management focus committed to five key areas for fiscal 2006. From a balanced theater perspective, the advantage of having four large theaters is that when there is a challenging theater, it is often balanced or offset from the strength of the other three theaters. However, this quarter, three of our large theaters did very well from a year-over-year order perspective, and Europe improved versus Q1, with order growth year-over-year in the low double digits. While there were a number of highlights, it was probably the U.S. that topped the highlight list, with strong order growth of approximately 20% year-over-year. This is better order growth than we experienced in the last six quarters in the U.S. Our Asia-Pacific operation continued with solid growth, maintaining its recent return to high order growth rates. And our emerging markets theater continued with order growth above 30% year-over-year. Japan, which represented about 4% of our business, as was probably expected by many continued to be challenging. In the spring of last calendar year, our senior leadership team determined that there were key incremental resource and management attention areas for fiscal 2006 that would contribute to our growth both this year and beyond. We decided on the following five critical areas for additional growth and differentiation with our overall corporate strategy. The first area of incremental growth I would like to discuss is the commercial market. The investments in all major functions to focus on this market segment appear to continue to be paying off solid dividends, with a 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 on a global basis, again, the best growth rates we have seen in a long time. Second, as we shared with you on the last call, we made a decision to expand our sales coverage, especially in the commercial, low end of the enterprise market and the emerging market areas. And this appears, as you can see from the results, to be paying off as well as we had hoped. Third, with the expanded organization structure focused on the emerging markets around the world, this theater continued to accelerate its year-over-year order growth rate by several points over a solid Q1 growth rate and is now running above 30%. We feel very good about our progress and replicable ability of processes in these emerging markets and continue to be reasonably optimistic about its growth rate potential continuing to accelerate, based upon our expanded resource commitments for 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. In summary, we view Q2 as a solid revenue quarter and an excellent order quarter. Dennis will cover some of these items in more detail later in the discussion. In the remainder of today's call, we will use the following format. First, our standard financial and quarterly overview. Second, our usual summary of what went well, including a discussion of potential market share gains and strategies versus our competitors, as well as our usual areas where we can improve. This discussion will also include an expanded view of the five areas of additional focus. And finally, our industry guidance moving forward. Now, I will turn it over to Dennis for a more detailed report on our financial results. Dennis, back to you. Dennis Powell, Chief Financial Officer: Thanks, John. Now for some comments on our P&L. I would like to remind you that our GAAP income statement in the press release includes Financial Accounting Standards 123R charges for expensing of stock options. Our financial statements for prior periods have not been restated for the effect of FAS 123R. However, we have provided in a table in our press release and on our website for your reference in comparing Q2 FY '06 net income with prior periods. This table illustrates the impact that stock option expensing would have had on our previously reported GAAP net income, along with the Q2 FY '06 GAAP net income that includes these charges in order to show an apples-to-apples comparison. Total revenue for the second quarter was 6.6 billion, an increase of over 9% year-over-year. Of total revenue, $5.5 billion related to product revenue and $1.1 billion related to service revenue. This is the third quarter that service revenue has exceeded $1.1 billion. Service revenue includes technical support services, advanced services and other revenue. Routing revenue totaled $1.42 billion, up 7% year-over-year as a result of growth in our GSR and ISR platforms. Switching revenue represented $2.67 billion, 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 $1.28 billion, 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. Please note that the advanced technology category now includes application networking services and hosted small business systems revenue, and is expected to include digital video upon close of the Scientific-Atlanta acquisition. The other category was 175 million, down 1% year-over-year, and services was $1.1 billion, up 14% year-over-year. Q2 pro forma gross margin was 68%, up from 66.9% in the same period last fiscal year and down slightly from 68.1% last quarter. On a GAAP basis, total gross margin was 67.4%. For product only, pro forma gross margin for the second quarter was 68.2%, up from 67.3% in Q2 FY '05 and down slightly from 68.5% last quarter. The increase from Q2 FY '05 was driven primarily by cost savings and volume, partially offset by discounts, mix and other manufacturing costs. The change from last quarter was primarily a result of mix, offset by continued cost savings. GAAP product gross margin for the second quarter was 68%. Our service margins on a pro forma basis for the second quarter were 67%, up from 64.4% in Q2 FY '05 and up from 66.5% last quarter. On a GAAP basis, service margins were 64.4%. Service margins will typically experience some variability overtime due to various factors such as the change in mix between technical support services and advanced services, as well as the timing of support contract initiation renewals. Service margins improved in Q2 due to increased advanced services revenue on a relatively stable cost basis. Our total pro forma operating expenses were $2.4 billion, compared to $2.1 billion in the same quarter of the previous fiscal year and compared to $2.4 billion for last quarter. The change quarter-over-quarter and year-over-year was primarily due to continued investment in our sales headcount, offset by slight foreign exchange benefit. Pro forma operating expenses as a percentage of revenue were 37% in Q2 FY '06, compared to 35% in Q2 FY '05 and 37% for last quarter. On a GAAP basis, with the effect of FAS 123R, operating expenses for Q2 were $2.7 billion. Our Q2 FY '06 tax provision rate for the pro forma and GAAP results was 28% and 28.2%, respectively. Pro forma net income for the second quarter was $1.6 billion, compared to $1.5 billion in the second quarter of fiscal year 2005, representing a 10% increase year-over-year. Pro forma earnings per share on a fully diluted basis for Q2 were $0.26, up from $0.22 in the same quarter of fiscal year 2005, representing an 18% increase year-over-year. GAAP net income for the second quarter was $1.4 billion. If we had included the FAS 123 expense previously disclosed in our footnotes, Q2 '05 net income was $1.1 billion, representing a 20% increase, year-over-year basis. GAAP earnings per share on a fully diluted basis for the second quarter were $0.22. If we had included the 123 expense previously disclosed in our footnotes, Q2 FY '05 earnings per share would have been $0.17, representing a 29% increase year-over-year. You will note whether we include or exclude stock option expense, our Q2 net income grew faster than revenue year-over-year. As John mentioned earlier, the book-to-bill for the second quarter was above 1. Moving on to the balance sheet, the total of cash and cash equivalents and investments was approximately $15 billion, up from $13.5 billion last quarter. During Q2, we had generated approximately $1.9 billion in cash flow from operations, compared with $1.4 billion last quarter and 1.8 billion in Q2 FY '05. This increase in cash flow was primarily due to seasonally strong service contract renewals. During Q2 FY '06, we repurchased $748 million or 42 million shares of our stock at an average price of $17.87. Share repurchases decreased during Q2 as we planned for the purchase of Scientific-Atlanta. Our repurchases year to date are $4.25 billion or 236 million shares at an average purchase price of $18.01. The remaining approved amount for stock repurchase under this program is approximately $3.6 billion. Since the inception of our repurchase program, the weighted average diluted shares outstanding, including stock option activity and shares issued in acquisitions, has decreased 16.5%. Now moving on to accounts receivable, we ended the quarter at $2.5 billion, up from the $2.3 billion the previous quarter. At the end of Q2 FY '06, DSO, or days sales outstanding, was 35 days, compared to 33 days at the end of Q1, due to linearity of billings in the quarter. Total inventory for Q2 was $1.3 billion, with pro forma inventory turns at 6.4 times, the same as last quarter and approximately the same as Q2 FY '05. A breakdown of our inventory can be found in the slides that accompany this call. Our inventory purchase commitments for Q2 were 1.156 million, I beg your pardon, 1.156 billion, as compared to 922 million for Q1 and 953 million for Q2 of the previous fiscal year. Starting in Q3 FY '06, Cisco will begin a six- to eight-quarter transition to a lean manufacturing model. Lean manufacturing is an industry standard model that drive efficiency and flexibility in the manufacturing process and the broader supply chain. You will find a lean manufacturing education presentation on our Investor Relations website next to the slides for this webcast. 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 a corresponding decrease 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 will improve more significantly over time. We expect the Cisco lean model to be neutral to Cisco's gross margins. Total deferred revenue for Q2 FY '06 was approximately $5.1 billion, up from approximately $4.8 billion in Q1. Of the total, deferred product revenue was $1.3 billion and deferred service revenue was $3.8 billion. Service deferred revenue increased $294 million due to normal seasonality and contract renewals. Our total Q2 FY '06 reported headcount ended at 39,665, a net increase of 403 from Q1 and an increase of 3,703 year-over-year. In conclusion, as we continue to focus growth, in Q2, we have been able to achieve approximately 9% revenue growth year-over-year and pro forma profit of 24.6% of revenue, marking the ninth consecutive quarter of pro forma profit at or above 24% of revenue and setting a new Company record for pro forma net income and earnings per share. Second, we are pleased with our continued strength in operating cash flow, which illustrates the quality of our earnings. And third, I am pleased that return on invested capital remains above 50%. We will continue to make strategic investments in certain customer segments, technologies and theaters while maintaining a healthy and conservative balance sheet. I will now turn it over to John. John Chambers, President and Chief Executive Officer: Dennis, thank you once again. Now, moving on to our quarterly overview. In this section we will highlight information from our geographies and customer markets, starting first with the geographies. This is the data on which I primarily rely to run our business and watch very closely on a daily basis. The following is the theater breakout for Q2 of this fiscal year in terms of total product orders. As we've said in last quarter's call, this quarter we will present the data in our new theater organization structure. The U.S. and Canada in Q2 of this fiscal year was 49% of our business, versus Q1 of this fiscal year, 53%; versus Q2 of last fiscal year, 47%. Europe in Q2 of this fiscal year represented 25%; Q1, 20%; last year's Q2, 26%. Emerging markets in this quarter, 10%; Q1, 10%; Q2 of last year, 9%. Japan, Q2, 4%; Q1, 5%; Q2 of last year, 7%. And finally, Asia-Pacific, Q2 of this year, 12%; Q1, 12%; Q2 of last year, 11%. A number of you have asked for continued geographic discussion regarding the theater and industry segments because of the rapidly changing global economic environment. All of the theater, market segment and product discussions will relate to product order growth unless otherwise indicated. The key takeaway for the quarter, as it has been in prior quarters, was the continued balance that we have 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 other two large customer market segment of enterprise and service providers also grew in the teens, which was dramatically better than we have achieved in a number of quarters. As a reminder, our business is approximately 45% from the enterprise market segment, 25% each from commercial and service provider, and approximately 5% from the consumer market segment. As a reminder, over the last 10 quarters, our year-over-year product order growth rate has been very consistent, usually in the teens or better. As we said earlier this quarter, we saw a year-over-year product order growth rate in the mid-teens, where our year-over-year product revenue has fluctuated from mid-single digits to approximately 30% over the last 10 quarters. In six of the 10 quarters, revenue growth was below the teens, including this quarter. Moving on to a specific geographic discussion, first of the U.S. and Canada Theater, which represented 49% of our business. First, from an enterprise perspective, relative to all five U.S. enterprise areas, excluding the federal area, the growth was extremely well-balanced, averaging in the mid-20s year-over-year. Second, from a commercial market segment perspective, balance was very good among the four commercial areas. Year-over-year growth was approximate 20%, with good balance among all four commercial areas, growing in the range of 15 to 25% year-over-year. Third, the U.S. federal business order growth was flat year-over-year due in part to a slow budget rollout. Fourth, from a U.S. service provider perspective, Q2 year-over-year growth was above 20%. And fifth, Canada had a solid quarter, with year-over-year growth in the mid-teens. Moving on to our Asia-Pacific theater, which represents about 12% of our total orders, year-over-year order growth rate was in the low 20s for the theater. We saw solid growth from a year-over-year perspective in almost all of our large countries. We had our second strong quarter in a row in China, with growth in the mid-30s year-over-year. India continued solid, with growth in the mid-20s, as did Korea, with growth year-over-year of approximately 30%. Australia and New Zealand, which has been very good for us over the last year, were a little soft, with growth in the mid-single digits. Moving on to our European theater, which represents 25% of our business in Q2, orders in total grew in the low double digits year-over-year. We experienced good growth in both France and Germany, in the 15% range year-over-year. However, we continue to see a slowdown in our UK business, which was down slightly year-over-year. On a positive enterprise customer segment note, we did see a similar trend in Europe in our enterprise markets improving in terms of order growth. Enterprise, after being relatively flat in each of the prior five quarters, grew approximate 10% year-over-year in Q2. Japan, moving on to Japan, which represents 4% of our business, as you probably expect and have heard from several of our industry peers, the weakness that we shared with you in prior quarters is continuing. Year-over-year growth was down in the high 20s and down sequentially in the low single digits. Moving on to our emerging markets, which represents 10% of our business, there are four major geographies in our emerging market theater, those being Eastern Europe; second, Latin America; third, Middle East and Africa; and fourth, Russia and the Commonwealth of Independent States. Q2 continued our stream of six sequential quarters with growth at or above 30% year-over-year. We're off to a good start with the emerging market concept and commonality of opportunities and issues. Eastern Europe, Latin America, Middle East and Africa grew year-over-year approximately in the 30 to 45% range. We did see Russia improve from our business perspective after a slow Q1, with Q2 growth in the mid-20s. In summary, there was reasonably good balance across all four large theaters. Moving on to our usual summary of what went well and concerns, starting with what went well, again discussing this in terms of orders and the balance of geographic, product and customer segment discussed earlier. From a geographic point of view, the first highlight was the continued strength and balance in the U.S. across all three major customer market segments. The U.S. order growth of approximate 20% year-over-year was better than anything we saw in any quarter in the last year and year and a half. Second was our relatively good balance of solid order growth in our other three large geographies. Third was our balanced order growth in double digits or better in each of our customer segments, which again was the best balance we have had in the last four quarters. Fourth, 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. Our core switching grew in the high teens, while our core routing business grew in the high single digits, with the advanced technologies growing approximate 20%. The advanced technologies were led by enterprise IP communications, followed by wireless and storage in terms of growth year-over-year. IP communications continued to accelerate with order growth above, Charlie, this is just amazing, above 45%, now bringing us to over 7.5 million phones installed. Wireless increase in the mid-30s and storage increase in the high 20s. Home networking grew approximately 15%, and security was in the low double digits, while optical declined in the low double digits. Revenue growth lagged orders for advanced technologies, which in total revenue grew 5% year-over-year, reminding everyone that advanced technology orders tend to be very lumpy and revenues even more lumpy. Many of you have asked for revenue growth numbers in terms of your ability to understand market share evolution. This quarter, in terms of our year-over-year revenue growth, enterprise IP communications grew approximately 30%, wireless grew in the mid-teens, networking, home networking grew in the low double digits, storage grew in the high single digits, security grew in the low single digits and optical was down over 30%. From a key milestone perspective, home networking is now the third advanced technology to cross the $1 billion order run rate. Congratulations to Janie and Victor, just extremely well done. Last quarter, Charlie, you shared with all of us our advanced emerging technologies strategy. As we said, advanced technologies represent product categories that we believe have the potential to be $1 billion yearly revenue stream for Cisco, achieved over a five- to seven-year incubation period. We also previously shared our plan to transition markets in and out of this category, depending on many factors, including their integration into our foundation technologies, shifts into fundamental technology, as well as their success in the market. During the second quarter, we announced three planned additions to our advanced technologies portfolio, hosted small business systems, or Linksys One; application networking services for enterprise customers; digital video represented a significant amount of our planned acquisition of Scientific-Atlanta for the consumer and service provider markets segments. The first two are included in our advanced technologies revenue category for this quarter, but today do not represent a significant amount of revenue. In Q3, we expect to add digital video to our advanced technology category. This category will incorporate a significant amount of revenue from our Scientific-Atlanta portfolio, along with other solutions we offer in the digital video space. Dennis will cover the impact on our Q3, impact of Scientific-Atlanta on our Q3 financials later in the call. Additionally, beginning in Q1 FY '07, we will report our optical portfolio as part of three categories, routing, switching and others. This decision is a result of the growing amount of investment we are placing in the integration of optical and packet interfaces into our routing and switching products. We intend to maintain our investment in WDM technology and decrease our investment in TDM optical technology over time. We will provide more information on these changes in future calls. Fifth, from a routing perspective, our ISR routers exceeded the $2 billion run rate, with continued architectural attachment of wireless security and IPC to this industry-leading edge platform. From a high end router perspective, CRS point of view, we are currently up to 40 customers, up from in 28 Q1, indicating continued momentum in design wins. In December, we announced the integration of 40 GB eWDM into the CRS 1, quadrupling the capacity of existing optical transport. This is key for IPTV requirements, as many of our service providers' customers are experiencing. A network built with rapidly expanding requirements and services like what we see with music and video downloads, content searches and IPTV will be differentiated on the basis of services versus mere speeds and fees. As a result, Cisco's growth opportunities are accelerating simultaneously on several fronts. One, our networking solutions and software are rapidly becoming the platform for how our customers create business models and new forms of communication-based services to their customers, employees and citizens. The strategy of putting more intelligence into the network, which we have adopted over the last five years, was in anticipation of this market transition. And two, as the network evolved into the platform for IT application and services, our share of our customers' IT spend is increasing. This is evolving in all customer segments, whether you are an enterprise, the public sector, commercial or service provider. Cisco's perception from a business, government and service provider perspective has never been stronger as these organizations evaluate our technology architecture to create a network-centric platform for their organizations, and in many cases are looking to Cisco to become the trusted business architecture advisor as well. Sixth, having just attended the World Economic Forum, many of the areas relative to Cisco's leadership are now becoming widely accepted and ready for mass-market adoption. For example, regardless of the geography, data, voice, video with mobility convergence is now a given. Seventh, the initial customer feedback from our Scientific-Atlanta acquisition has been extremely positive, with many of these customers saying that Cisco is very well-positioned in leadership positions in data and in voice and mobility convergence, and now we bring the final piece to the quadruple play of video leadership. Large-scale video implementations are both an art and a science. Scientific-Atlanta is one of the few companies in the world that in our opinion has both the track record and the skill set we believe that will make the promise of IP video work in these large implementations. Next, while many of our peers are focusing on China, we are just venturing in a meaningful way into India, we're moving across to the other emerging markets. We have already positioned ourselves very well in both India and China, both from a business results as you heard earlier, and a competitive advantage perspective. At the World Economic Forum, government leaders from emerging new countries such as Africa, Russia, Saudi Arabia, Pakistan, Turkey, Egypt and others are gaining an increased understanding of the unique advantages Cisco can bring to their countries, permitting government, service provider, industry vertical, education and healthcare perspective. A final area that went well, and perhaps the most interesting for Q3 and Q4 revenue trends, was the continued year-over-year business pattern in Q2. To reiterate what we have said in previous quarters, our seasonality continues to show the building of momentum each quarter, with sequential order and revenue growth during normal fiscal years. As a result, to start off the fiscal year with a seasonably slow Q1, with an up year-over-year comparison for that Q1, and then if we execute right and the market evolves the way we anticipate with the appropriate caveats, then build sequentially from Q1 to Q2, Q2 to Q3, and Q3 to Q4, both sequentially and year-over-year, assuming no major business changes or economic surprises, the year-over-year increases in each of the quarters should be roughly comparable to what we have seen in recent quarters. The pattern in Q2, with the appropriate caveats, is following this model of building momentum, which means Q3 and Q4 will most likely follow this pattern. In addition, the book-to-bill comparisons of the last fiscal year will translate into continued revenue acceleration in Q3 and Q4, both from a sequential and year-over-year comparisons perspective. Concerns, moving on to concerns, reminding each of those who have limited exposure to our prior conference calls, we try to give equal balance to both what when well and our concerns. Given our normal sense of healthy paranoia, we have a number of general concerns. First, we continue to see some swings in global economic activity and capital spending. While we are heartened by the improvements in our business in Germany and France, there is a concern about the UK business momentum. And similarly, while we are extremely pleased with our order momentum and both share of wallet spend and market share gains, there is a concern about some of our industry peers' challenges and their guidance announced in the most recent quarter. Second, we have always had a healthy respect for our competitors. And as I have said many times before, we continue to expect an expanding wave of low-priced competition from Asia. However, this is the competition we have been anticipating for a very long time, and believe we are very well-positioned from a total cost of ownership and leading architectural perspective. Third, we continue to see the opportunity to move into new advanced technology markets. We also continue to see shorter-term payback by hiring additional salespeople. The second point speaks to some of the market elasticity and coverage issues. Therefore, we will continue to hire additional salespeople as long as we anticipate a reasonable return. If the market develops the way we anticipate, these commitments obviously present key opportunities from a revenue growth and market share perspective. As you would expect, there is a natural lag between when you add these resources before you get the payback. This will obviously continue to put a little bit of expense pressure as a percentage of operating expenses in the short run. But if we execute rights; and elasticity continues to be reasonably broad in a way that has substantial benefits for the longer-term. Having said that, our experience in Q1 and Q2, for example, indicates these new incremental sales reps are rapidly coming up to speed in terms of generating orders after several quarters of learning about their customers and Cisco. Fourth, we identified three new advanced technologies, and these usually are areas that will require several years of resource investments before they begin to achieve the desired business results. However, this is the exact same strategy we employed with the enterprise IP communications, wireless, security, network home and storage four to five years ago. And as we said earlier, now three of these advanced technologies have crossed the $1 billion run rate. Only time will tell what our success rate will be on this second wave of advanced technologies, but I believe we are off to a good start. And finally, in terms of concerns, at the risk of repeating the obvious, as we have said in each of the conference calls for over a decade, whether there is a GDP increase or slowdown, in countries around the world, this is usually followed by a corresponding reaction in capital expenditures, and therefore orders for Cisco and our peers. It is our view that GDP will continue to be a good indicator of what you should expect over the long run from our traditional business. However, this should also be combined with additional opportunities from advanced technologies, the service provider and commercial market segments, as well as potential market share gains. Our success obviously is dependent upon how well we execute and how well our strategy has or has not anticipated market transitions now and into the future. Now moving on to guidance, in very simple terms, we continue to focus our strategy for both technology and business architecture differentiation. The momentum we are seeing in orders and anticipating, with the appropriate caveats, to see in the future makes us comfortable that we are not, that we are winning versus our competitors, but also anticipating and positioning our customers effectively for market transitions they will experience in their own industries. Whether it is the convergence of data, voice, video and mobility, architectural revolutions or intelligence throughout the network, we are enabling the future of IT and communications. We believe Cisco is uniquely positioned to lead in this environment. Simply put, with intelligence moving throughout the network, the network is becoming the primary driver of not only IT, but also all forms of communication. As we have said on many occasions, our view has not changed. We believe that the markets in which we participate, according to the view of a number of industry resources, will support revenue growth over the coming years at 10 to 15% annual growth range. Q2 was a very strong order quarter, and we are forecasting a solid Q3 from a year-over-year perspective. We also believe that the additional focus on the commercial market, sales coverage and emerging markets will continue to gain traction and associated business results. Therefore, we think there are opportunities for growth, as well as market share gains, as well as wallet share gains from our customers' share of wallet in many of our products and customer segments. Each of you can decide whether you are focused on revenue, as growth projections or on orders as the most accurate indicator of growth. And I realize that our shareholders, there are people in both camps. Having said that, my view has not changed. I focus on the order momentum in providing guidance and judging the degree of success of our strategies. However, as we go forward with bookings and revenues growth more in line, we will slowly move towards a revenue growth discussion in more of our conference calls. In Q3 FY '06, we would anticipate product order growth in terms of year-over-year growth to be in the 10 to 15% range. That's product order growth. Our overall revenue guidance for Q3 FY '06 in comparison to Q3 FY '05 will be up year-over-year approximately 10 to 12% and up sequentially approximately 2.5 to 4.5%. There is obviously a little bit of rounding in this guidance, but we have tried to address your request for both year-over-year and sequential relationship patterns. Dennis will discuss this in more detail in his section. In anticipation of your possible questions regarding our level of confidence and optimism, I would summarize our position in the following terms. Having just met with a number of key customers from around the world and attending the World Economic Forum, where I probably met over 100 large enterprise service provider and government customers, the feedback I received is that the market transitions are evolving the way that we have outlined and that Cisco is very uniquely positioned to benefit from these changes according to our customers. And we have and will continue to add resources to aggressively pursue these opportunities. Even though we are very optimistic about Cisco's future in both the short and long term, it is also important to be realistic that, given the challenges that many of our peers are experiencing, to reiterate the point that we are obviously not immune to industry macro issues. Cisco will continue to follow our shareholders' advice as it relates to carrying our fair share of the risk, not just the rewards. We are truly committed to a partnership with our shareholders. For example, in earlier times, we did not reprice our stock options, and you will not see us knowingly do something that the majority of our shareholders may disagree with. As always, I want to thank our shareholders, customers, employees and partners for their support and continued confidence in our ability to execute during a rapid industry consolidation, market transitions and challenging economic times. And now, I would like to turn it back over to you, Dennis. Dennis Powell, Chief Financial Officer: Thank you, John. Let me remind you again that our comments include forward-looking statements, and you should review our recent SEC filings that identify important risk factors, and actual results could differ from those contained in forward-looking statements. As a reminder, we are providing guidance on a pro forma basis with a reconciliation to GAAP. As we do expect the acquisition of Scientific-Atlanta to close during our third fiscal quarter, I will first provide detailed guidance for Cisco on a stand-alone basis and then discuss the impact we expect this acquisition to have for the remainder of the fiscal year. You will find the details of this discussion in the slides accompanying this webcast. Moving on to detailed guidance, on a pro forma basis and excluding the effect of Scientific-Atlanta, we continue to believe that for the next two years, Cisco's long-term revenue growth rate should be between 10 and 15% on an annualized basis. We realize that many factors, including our own execution, will impact whether we will be at the high end of the low end of this range. Additionally, we could possibly be above or below this range. As we said last quarter, our revenue guidance for the full fiscal year 2006 is 10 to 12%. We encourage you to continue to model conservatively with the understanding that we will continue to provide updates and further guidance each quarter. Regarding gross margin for the fiscal year, forecasting gross margins has always been challenging due to various factors such as shipping, volume, product mix, variable component costs, customer and channel mix, and competitive pricing pressures. We expect total gross margin to be approximately 67% for the remaining two quarters of fiscal year 2006, meaning it could be slightly above or below this level. As John mentioned earlier, we see investment opportunities in continued near-term expansion of our sales force. Consequently, we expect operating expenses in absolute dollars to trend slightly up for the rest of the year. We expect the spending for the full fiscal year will be in the range of 36 to 37% of revenue. As a reminder, we continue to expect revenue seasonality as we discussed in prior conference calls, and as John referenced earlier, for revenue momentum increases over the course of the fiscal year, with our strongest quarter being Q4. Now some specific guidance for Q3 for Cisco, again, excluding Scientific-Atlanta. We expect revenue in the third quarter of fiscal 2006 to be up approximately 10 to 12% year-over-year. We expect the Q3 FY '06 gross margin will be approximately 67%, meaning it could be slightly above or slightly below this level. We expect operating expenses to be approximately 37% of revenue in the third quarter, primarily due to two factors, first, planned investments in sales headcount, and second, a broad-based salary increase, our first in four years. We would expect interest and other income to be approximately $130 million in the third quarter. This takes into account the effect of our net cash usage in the planned acquisition of Scientific-Atlanta. We expect to continue our share buyback program, but it is difficult to predict the exact weighted-average share count for EPS purposes. We are modeling a net reduction of 30 to 50 million shares per quarter. Regarding our Q3 FY '06 GAAP earnings before the effect of the Scientific-Atlanta acquisition, we anticipate that Q3 GAAP EPS will be $0.04 to $0.06 per share lower than pro forma EPS. We expect a reduction of between $0.16 and $0.22 to our GAAP EPS, compared to pro forma EPS for the full fiscal year. And again, please see the slides that accompany this webcast for more details. Now, I would like to discuss the impact of our acquisition of Scientific-Atlanta. Before I begin, I'd like to shares some general comments regarding Scientific-Atlanta's financial model. As we discussed in our analyst conference in December, Scientific-Atlanta's business model has lower gross margin rates, offset by lower operating spending levels as a percentage of revenue as compared to Cisco's business model. For example, over the past two years, pro forma gross margins have ranged between 36 and 39%. Pro forma operating expenses as a percentage of revenue have ranged between 19 and 21%. And the company's pro forma operating income has ranged between 16 and 18% of revenue. While we are not able to provide the exact timing of the close of Scientific-Atlanta, the following guidance assumes a close around the middle of our fiscal third quarter. Because of the uncertainty around the close date, and the variables that are inherent to a new business integration, the following guidance is only an estimate. We anticipate that our level of guidance precision will increase after the close of the acquisition and integration of the business. And this guidance is on a pro forma basis. You'll find the details of the following discussion in the slides that accompany this webcast. For the last six weeks of the fiscal third quarter, we anticipate approximately $250 million of revenue from Scientific-Atlanta. For fiscal Q4, we anticipate additional revenue of approximately $525 million. We will provide more specific guidance regarding Q4 on our next quarterly earnings call. Pro forma gross margin on incremental revenue is anticipated to be between 36 and 38%. Operating expenses are estimated at approximately 20% as a percentage of Scientific-Atlanta's revenue. Overall, we expect Scientific-Atlanta to be neutral to slightly positive, meaning less than $0.01 accretive to each of Cisco's Q3 and Q4 pro forma earnings. On a GAAP basis, we will record purchase accounting entries for the acquisition in Q3, including amortization of intangibles, purchase IP R&D and gross margin. The cost of goods sold will reflect the fair value of Scientific-Atlanta's inventory, as recorded in the acquisition balance sheet according to generally accepted accounting principles. This will eliminate the profit margin on the finished goods inventory as it is liquidated by the combined entity. You will find a table of acquisition charges and corresponding reconciliations in the slide presentation accompanying this conference call, which can be accessed at www.cisco.com in the Investor Relations section. We expect these primarily non-recurring acquisition-related charges to represent a reduction of $0.03 to $0.07 to Cisco's fiscal Q3 GAAP earnings. We anticipate that the combined Cisco and Scientific-Atlanta Q3 GAAP EPS will be $0.07 to $0.13 lower than our combined Q3 pro forma EPS. Other than those items noted above, there are no other significant differences between GAAP and/or pro forma guidance. This guidance assumes no additional acquisitions, asset impairments, restructurings or other events which may or may not be significant. Our pro forma tax provision rate is expected to remain at 28% for Q3 after the effects of Scientific-Atlanta. Regarding cash flow from operations, we would expect 400 to 600 million per month at these revenue levels. Again, I would like to remind you that in light of Regulation FD, Cisco plans to retain its long-standing policy to not comment on its financial guidance during the quarter, unless it is done through a public disclosure. Our next conference call, which will reflect our third quarter of fiscal 2006 results, will be on Tuesday, May 9, 2006, at 1:30 Pacific Time, 4:30 Eastern Time. We still request that sell side analysts please ask only one question. And as a reminder, we will end the call at 3 PM Pacific Time. Operator, please open the floor to questions.

Thank you. You have our first question from John Marchetti of Morgan Stanley. Q - John Marchetti: Thank you. As you guys are getting set to look at debt for the first time in a while as you are getting ready to take on Scientific-Atlanta, I was wondering, with the end of the repurchase authorization coming up, given that you've only got about 3.6 billion left net, you are obviously feeling pretty good about the business here. What kind of a debt deal are you looking at? And are you looking to do a debt deal that is large enough to both do the acquisition and maybe do a tender offer for a large chunk of shares? A - Dennis Powell: John, we have considered all of the avenues for raising debt. But due to regulatory requirements, we are not able to disclose more information at this time. So we can't speak to the term or the size of the debt or our expectations for the proceeds at this time. A - John Chambers: But John, if you wants a second question, we'll give you a crack at it. I apologize that regulatory issues prevent us from answering it directly. Q - John Marchetti: No problem. In terms of what you guys have seen, then, interaction with the CRS 1, obviously you added 12 new customers this quarter. So just wondering, is it more that the carriers have gotten comfortable having tested the equipment in the lab? Are you seeing it being used for what they see as future evolution of their architecture? Just a little color around that would be great. A - John Chambers: Sure. I think what you are seeing is it takes a while for the carriers to both test in their labs and also to begin to think about large deployment. So usually you would test it in the labs, then you get the design wins, and then it's a rollout literally over two or three years or longer. And so a large part of the design wins that we got or our peers got a year or two ago are where the revenues are coming from today, and the same thing is in reverse. But it is testing very well, very solid, and Charlie, I don't think you have anything to add to that? A - Charlie Giancarlo: No, other than, obviously, when you're early in the labs, different carriers may push some additional requirements on the product in terms of features or capabilities or interfaces. And obviously, that is something that you continue to work on during the time it's in the lab. And so it is passing by the initial requirements of more and more carriers, and that's it. A - Dennis Powell: Like 40 GB of capability versus 10. Q - John Marchetti: Thank you, John.

Thank you. Our next question comes from Nikos Theodosopoulos of UBS. Q - Nikos Theodosopoulos: Yeah, thank you. I guess my question is on this new inventory management, the lean manufacturing. Can you describe or explain the timing of this decision? Has this been something that has been in the works for several quarters and you just got, are talking about it now? Or is this timing based on what you are seeing recently in the orders and so forth? Because historically, when the Company's commitments went up, it increased the risk profile of the Company, and I'm just curious why you decided to do this now, if you can explain that? Thank you. A - Dennis Powell: John, this is something that we actually have been working on for some time. And it's not something that is going to happen overnight. We are going to be, or Nikos, I'm sorry. We are going to be rolling this out over the next six to eight quarters. So it is going to be a very controlled process that we roll this out under. And this actually is, think about it as a shift between our inventory and the obligations that we have. It is not increasing the risk profile. In fact, we believe that it is going to decrease our risk profile over time. A - John Chambers: So what we are seeing, Nikos, is just the pressure, and in a very constructive way I'm putting it on each of our teams to continue to be leading-edge in terms of key industry trends, and just like in many ways we invented the outcasting almost a decade ago and manufacturing with the leader in terms of how to do that on everything from boards to testing to complete systems. I think what Angel Mendez is doing under Randy's leadership is the same type of aggressiveness in manufacturing in terms of really putting us on the cutting edge in a way that benefits our customers and us in terms of our speed of changes. So I would not read anything into it other than just normal evolution of being able to run our business better. Q - Nikos Theodosopoulos: Okay, thank you.

Thank you. Our next question comes from Jeff Evenson of Sanford Bernstein. Q - Jeff Evenson: There are a lot of metrics that you could use for Voice over IP's success such as total revenue, phones sales, line sales, number of third-party applications available. What do you think are the best metrics to think about Cisco's competitive position in the Voice over IP space and how you see yourselves comparing to competitors on those currently? A - John Chambers: It is real simple. It is about revenue growth. And Charlie is going to comment on it in a minute. We finally had trouble positioning some of our competitors on the same how to account issues. My view is how many phones did you put in? How much revenue did you generate? How did that compare to prior quarters, measuring it equally as accurately or equally as consistently. When you see growth in excess of 45%, no matter how you measure it, our peers are in the single digits. Charlie, any other comments on that? A - Charlie Giancarlo: No, John, we've tried to look at it many different ways. Of course, it internally we do look at it all different ways, including sales of phones, sales of gateways, lines and so forth. At the end of the day, we decided that there was so much confusion in the industry around this area, different companies measuring on different things, that we would go to the most fundamental of all, which is total revenue. And maybe for one or two quarters you can hide, but with total revenue, eventually who is selling more of the business will become clear. And so I think if investors want the largest way of measuring who is successful in this space, I would recommend total revenue. A - John Chambers: But Jeff, the most important thing of all is unlike all of our peers, we do not view these as stand-alone products or unrelated areas. We think all forms of communication will go into the network over a single network architecture, a single network concentration point. So it will be data, voice, video and mobility. So that's why you've got to have a router that does wireless capabilities, like IP telephony, does security, does the routing capability, is managed through the other segments. So my own view is while the market is measuring this still in silos, I think those days are rapidly coming to an end. I think you are seeing the vast majority of customers no longer make a decision about an IP telephony architecture, but making a decision about what do they want for their architecture for their converged communication directions, Jeff. Q - Jeff Evenson: Thank you.

Our question comes from Christin Armacost with SG Cowen. Q - Lucas Bianchi: This is Lucas Bianchi. A - John Chambers: Your voice sure had changed. Q - Lucas Bianchi: Quick question on pricing in the U.S. Wondering if any of the increase in bookings domestically was due to any changes in pricing? The economic numbers that came out I guess last week weren't that great, and you reported U.S. booking that were pretty strong. So I was just wondering how the discrepancy came about? A - John Chambers: I will comment, then I will ask Rick to talk a little bit more about the momentum we are seeing. Unfortunately, we are in Moore's Law on steroids. You're talking about price performance doubling at least every 18 months, often 12 months, price per quarter or however you want to measure it. So this is a market where you see constant price improvements and decreases within that, and that's just the normal little business we have been in for a decade and a half. In terms of pricing issues in the U.S., I think you are seeing a movement toward CIOs making a decision on total cost of ownership. And now you're starting to see a movement, more and more of them make it on an architectural basis, both from a technology with the OSI stack and layers 1 through 7 coming together, but also helping from a business perspective on what we can do to help them really from a business architectural perspective. So I would say it's just the normal pricing occurring in the market, Rick. To the best of my knowledge, we didn’t do anything unique pricing-wise. A - Rick Justice: No, we didn’t do anything unique pricing-wise. The pressure is always there on pricing. If anything, it is increasing. I think what has happened that has impacted our business is the fact that, for the last six quarters we have been adding a significant number of salespeople into select spots, what we would call enterprise select, which is that tier above the large enterprises, and then what we call mid-market commercial, which is the high end. As you go out and cover more accounts, we find huge appetites for our core and advanced technologies, which, when we talk about IP telephony being the classic example in the commercial space. So I think this is a question of coverage and taking advantage of opportunities. Pricing is still very, very competitive, but we see the growth coming from that for us. Q - Lucas Bianchi: Thank you, Rick. A - John Chambers: Thank you very much.

Our next question comes from Tal Liani of Merrill Lynch. Q - Tal Liani: Hi guys, thank you. Questions about the carriers' routing space. We have seen Lucent volumes today, routing and switching, let's go to Ethernet segregation as part of that. But Lucent buying Riverstone today, Alcatel making a very successful move into this market before, and you lost some share last quarter. Could you discuss the trends and the strategy, what you are seeing in this market and the separation between technology and system integration capabilities? Thank you. A - John Chambers: Sure. Breaking it into, perhaps, multiple sections, if you look at what is occurring, the market as we play it out is occurring in terms of consolidation with more and more of the service providers saying I need key strategic vendors within the area. I'm not trying to be the, quote, the very best at systems integration, putting together 50 or 60 different vendors into that. I think there is a realization much like the enterprise, it's about total cost of ownership, how you build in flexibility, who can provide that to you with the least risk, but also who can provide in terms of bringing customers to you and directions. The second thing that I think is occurring is what we talked before, you will see our customers' enterprise blur in terms of their networks, the service provider network, the home network, so you will see this evolution in terms of network of networks coming together, which for those companies who focused only on service provider or only on enterprise or only on the home or only on the commercial, they will have some challenges on that with complete mobility. I think the consolidation is inevitable. I think you will see it actually accelerate. The good news about consolidation is that the customer will benefit. The challenge is most consolidations will fail. And so this is something that Cisco is very good at executing in terms of the approach of providing a acquisition strategy that has a track record of being extremely successful as you move forward, and probably, Charlie, five to seven years' leadership on how to do that well. For the last part, you are right, Tal, that there will be some very key systems integration implications. Without mentioning the name of the large service provider where we got a huge amount of their business, they said, John, you would have got twice as much if you did total systems integration for us. And so while we will always partner for systems integration, we will be providing a thin layer of professional support. And you will see us more active in that in both the traditional ILEC community, as well as the cable community and as we go around the world. Our service provider business in the U.S. I think speaks for itself. It was up in the mid-20s, so very solid growth. Charlie? A - Charlie Giancarlo: John, I would agree with that. Tal, I think you asked the right question and you've got the right philosophy there, is that while products are important and products, best-of-breed products is part of the formula for being successful in this space, that increasingly, especially as we go to a triple play environment, where traditional carriers have very little experience in the video marketplace, they are looking for their suppliers to provide an end-to-end solution, obviously, part of the dominant logic behind the Scientific-Atlanta acquisition. A - John Chambers: Thank you very much Tal. Q - Tal Liani: Thank you.

Our next question comes from Stephen Kamman of CIBC World Markets. Q - Stephen Kamman: Hi guys. I would observe that gross margin just doesn't seem to be declining. But actually, I've got a question and a half. I don't know, John, if you could just confirm whether you're still shooting for an operating OpEx leverage rate of 30, 35% range? I know that was a target a while ago, just to confirm that is still a target. Then the real question, more Charlie, I know you've talked a lot about the gear-out there still continuing to get older and continuing to age, and that that obviously has not, not indicating kind of any serious LAN upgrade cycle out there in the past. Are you seeing any kind of changes in that, either as you are laying your incremental new add-on functionalities to the advanced technologies or just simple aging of the gear? If I look forward, are you seeing any kind of beginning of the upgrade cycle in that kind of core LAN business? A - John Chambers: So we will take it in that sequence. And Blair told me, Steve, before you asked the question, we've got quite a few questions left, so I'm going to make my answer tighter, and Charlie will do the same. Our goal, when we brought it down from 42% operating expenses down to a target of 35, was to move productivity from 450,000 to 700,000, which we clearly did. Our goal remains to be 35%, and then over time, better. It is just in the short term, we see too many opportunities in advanced technologies, sales coverage issues, we were overdue to give our employees a raise, and I think that was very fair, etc. So our guidance, Steve, has not changed on, our goal will be 35 and over time below that. But at the present time, we think that the productivity we might have gotten there a little bit quicker than if we had to do over again. Charlie? A - Charlie Giancarlo: I would say that relative to the age of the equipment, if we were to continue to see order growth in the future quarters similar to this one in the enterprise, then I think we would be ready to call that there has been stabilization in the age of the equipment. What I can say is with the kinds of innovations that we're putting into the equipment right now and over the next several years, we think we will see increased interest in our customers in migrating to the future forms of the equipment. A - John Chambers: Thank you, Steve. Next question please?

Our next question comes from Alex Henderson with Citigroup. Q - Alex Henderson: Hi guys, how are you doing? A - John Chambers: Good Alex, thank you. Q - Alex Henderson: Wanted to ask you a question on the sales force side of the equation. It seems quite clear to me, when I look at the performance you just posted, that you had been anticipating an acceleration in the back half and had telegraphed that, not only through your comments about your guidance, but also in terms of your hiring of salespeople. Can you talk a little bit about what your plans are going forward over the next two or three quarters to continue to build that sales effort, and how, 80% of the hires went in this quarter. Do you see that continuing to be the ratio on spending? A - John Chambers: The answer would be, if I remember the questions right, yes, yes and yes. We clearly thought that we were building toward an architectural play that the market would buy into. That's starting to occur. We clearly believed that would be a tightly coupled solution, not independent solution, that is occurring as well, as evidenced by the earlier question on consolidation. In terms of the actual hiring in anticipation that the market would go up, it was actually both. We clearly needed to hire into emerging markets and coverage issues, as Rick said earlier, but we also needed to hire more people to get opportunities we would have never gotten otherwise. So it was a blended combination, Alex. It was actually, the sales reps will generate more business than we would have gotten, as Rick said, I think, very well earlier, but it also was in anticipation of moving into markets were we thought our architectural plays would win. In terms of the mix, I would probably say as long as you give us some reasonable wiggle room, 70%-plus of our additions will be in the direct sales rep touch area, and continue to grow sales reps and sales coverage at a pace faster than our general business, Alex. Q - Alex Henderson: Thank you.

Our next question comes from Brantley Thompson of Goldman Sachs. Q - Brantley Thompson: John, I was wondering if you could talk a little bit about the switching growth that you saw in the quarter in that business, double-digit year-on-year growth, and how you expect that division to perform over the next couple of quarters, and what are some of the drivers there? Thanks. A - John Chambers: Sure. If you look at what is occurring in the enterprise, I think the enterprise has already made a decision in many situations about a preferred networking vendor and focused on total cost of ownership, as well as flexibility. It is going to be hard to say, to Charlie's question earlier, what will be chassis upgrade versus add-ons and additions within that. But what you are seeing that we are continuing to expand our share of wallet and spend in the enterprise. I think a number of surveys have shown that. But also how enterprise customers, ranging from the automotive companies to the finance companies to government are beginning to look to us more and more and saying, how do you apply this technology with a lower risk and a shorter time period, but also what business or government processes have to change within it? So I think it is going to be a gradual evolution, Brant, within that, not one or the other in and of itself. But it feels good at the present time. Would I look for the growth at the same level we did this quarter next quarter? No. But I think you are at the front end of a sustainable enterprise marketplace. Now Dennis is giving me the signal that we've got 15 calls left and we've got to move faster. Okay. Sorry.

Thank you. Our next question comes from Jiong Shao of Lehman Brothers. Q - Jiong Shao: Thank you very much. I had a question on your guidance. You are guiding Q3 product booking up 10 to 15% year-over-year and product revenue up 10 to 12% year-over-year. I remember previously you talked about in the first half of this fiscal year, the year-over-year revenue growth would be lower than the booking growth, and in the second half of this fiscal year, the revenue growth year-over-year would be higher than the booking growth because of this realignment of the booking versus revenue. I was wondering, could you provide a little bit of update on that? Should we still expect that to be the trend to occur over the next couple quarters? A - John Chambers: Yes, I think that trend hit the tipping point toward the end of Q3 and early Q4. And so that's clearly what we saw. As we alluded to in this quarter, the great news is Rick runs his team right up to the finish line, regardless of where we are, which means the next quarter always starts off a little bit slow for us. And as you saw in my comments for this quarter, month one was, year-over-year, a little bit less than month two. Month two accelerated and month three accelerated, which is a nice way of saying that you build up a little bit of that toward the end of the quarter. Jiong, you will see that transition occur from Q3 to Q4 as a correct assumption. Q - Jiong Shao: Thank you.

Thank you. Our next question comes from Mark Sue of RBC Capital Markets. Q - Mark Sue: Thank you. Just wanted to expand your comments on seasonality. As things get better from Q2 into Q3 and Q4, does that mean with lead times where they are and business patterns as such, Q1 should be down sequentially from Q4 from this point forward? And I think that Sessay also had similar levels of seasonality. A - John Chambers: The only seasonality we are seeing at the present time is Q1. We all remember the Q3s where, a decade there where five of our six tough time periods came in Q3. Q3 at the present time, for the last two years, when, Rick, looking at your field sales force for this year, appears to be pretty solid for us. Q1 is a natural seasonally soft time period. You have Europe going on vacation. You have also the sales force coming off all the incentives and very strong momentum at the end. And any sales force that is really good always has its strongest quarter Q4, no matter when that Q4 is. So I would anticipate in terms of orders, etc., Q1 always being down versus Q4. That's why we want people to look first at year-over-year growth, and then secondly, only at sequential growth as it relates to Q2, Q3 and Q4. Then it will be, by definition, a little bit down in Q1, Mark. So that's what we were attempting to share with you very openly.

Thank you. Our next question comes from Ehud Gelblum of JP Morgan. Q - Ehud Gelblum: Hi. Thank you. Actually, I had a clarification question. And then if you consider it a clarification question, then feel free to skip it and go to the next one. But the clarification actually has to do with the stock comp expense. Dennis, it fell from 317 to 261. That was counter-intuitive to me. So if you can explain that. And my bigger picture question, forgetting about the present right now, which seems to be doing really nicely, looking at the future and Scientific-Atlanta, I think you said, John, that carrier service provider is 25% of revenue roughly, and consumer is about 5%. Scientific-Atlanta seems to give you growth trajectories in each one of those, so I would imagine that that combined 30% will obviously be larger with Scientific-Atlanta. Your strategy going forward is to get Scientific-Atlanta, my guess is to get larger in those two areas. They seem to be doing quite well. How large do you think service provider and consumer can get? How large do you want it to get? Are those areas that you really want to get more into? And what kind of are the product cycles that you think you can ride now that you'll have Scientific-Atlanta as last part of your business mix? A - John Chambers: We are looking at the date. I'm going to ask for Dennis to cover that with you after this. To answer the first part, and it will be gradual because until we get together, only time will tell whether we get the efficiencies we think. I can say already we're getting into service provider accounts we would not have had as strategic a position in. And we are bringing Scientific-Atlanta into accounts both here in this country and around the world they would not have had a shot at before. You're absolutely right that the network of networks concept, and just using the example of the service provider network and the home network will spill over. And entertainment is the rule here. And so your ability to provide entertainment with Scientific-Atlanta being a major step along that way gives us the flexibility on both sides. Secondly, one of the good things about our market is if we continue to see the growth in commercial and reasonably good growth in enterprise, the percentage mixes take a while to change. But it does open up for more growth and potentially dramatically more growth in both those categories. Ehud, I wish I had a better answer than that, but I will try to think about it each time before the quarterly conference call or before we meet at one other conferences and just kind of give a snapshot to the group of what we are seeing. But initially, I think your observation is right. It's just to hard to quantify at this time.

Thank you. Our next question comes from Tim Long of Banc of America. Q - Tim Long: Thank you. Just a question on the Linksys One product line. Could you talk a little bit about when we should expect to see that more meaningfully in the marketplace? And also, any potential, or any feedback from the customer base thus far? And how should we think about growth in this business, compared to some of the other advanced technologies? A - John Chambers: Charlie? A - Charlie Giancarlo: Thanks, John. As we identified with Linksys One, it is a hosted small business system. And because it is hosted, part of that solution is the service provider taking an active role in hosting the solution and using service provider channels to sell the actual, the CTE, the customer premise tier, that goes into the small businesses. As such, you do have that normal period of time that it takes to ramp up the service provider channel to be able to start that. And so we don't have the normal opportunity that we have if we are replacing a product inside our normal channels to just take that out through the channels. So our expectation is that the first 12 months will really be about getting the trials in place at a large number of carriers, getting early deployments in place, and that the real ramp is more almost 12 months after the initial introduction, which was late calendar Q4 last year or early in the beginning part of this year, right around the year end, you might say. So the expectation is that we will build up both expertise, trials, early deployments over the course of this year and expect towards the end of this calendar year to start to see more ramp-up in that area. Q - Tim Long: That hasn't changed, right? A - John Chambers: No, but the customer feedback we will cover later, but it's been positive so far. But Charlie can go into more detail perhaps another time.

Thank you. Our next question comes from Paul Silverstein of Credit Suisse First Boston. Q - Paul Silverstein: John, can you hear me? A - John Chambers: Yes, I can Paul. Q - Paul Silverstein: Great. A question I have, if I may. CRS-1, I know you have not quantified in the past. But can you give us some sense of where we are at in terms of revenues? Is it still too early from a revenue perspective to think of the impact? And then the real question I would like to get at, you spoke a little bit about Japan in your prepared remarks. In light of Juniper's comments about Japan, Korea and Hong Kong, I was hoping you could go into a little bit more detail. A - John Chambers: Well, if you look at the CRS-1, its run rate is over 100 million annualized already. But again, it's, mainly the way I would view that is the most important way to measure its success is the design wins. And as you would expect, a number of these will be on deferred revenue from Dennis' standpoint, etc. So let me think maybe about how I might answer that question more crisply on the next call, if I can. To the second part of the question, I'm not going to comment one way or the other about our peers' comments on markets. If you look overall in Korea and China and Asia-Pacific, we're doing very well balance-wise. And we actually, as you saw, have regained momentum in China after a year of flatness. And so you are talking about growth in the mid-30s in China, Korea over 30%, etc. Japan I personally believe is in between major next-generation network buildouts. We did very well on the first one. We are kind of in a time period in between. You're probably 18, 24 months out before you see that second major wave really start to materialize, or at least how we have it read, Paul.

Thank you. Our next question comes from Wojtek Uzdelewicz of Bear, Stearns. Q - Wojtek Uzdelewicz: Thank you. John, when I look at your numbers and your guidance, this is probably first time in almost a couple years when you guys are talking re-acceleration in revenue growth, very strong performance for your gross margins. So it does like you're hitting some inflection point, at least given your comments and so on. And especially, a lot more tech companies have been much more cautious, and certainly your competitors. If you were to prioritize, because this is sort of interesting, given your evaluation here, what gives you the confidence that you guys are seeing this re-acceleration? Is this a product cycle? Are you winning more, I know it's all about, but what is, is there something particular that you feel gives you that nice momentum right now? A - John Chambers: Yes, I would break it into probably three or four categories. The first one is, and I realize that we have not communicated this effectively or people have been uncomfortable with it, our bookings have been remarkably predictable, mid-teens. So it doesn't surprise us at all that as our book-to-bill came back in line and as we overcame the humps that gave us a natural growth in the 30, high 20s and then a natural growth in the single digits, that you saw that more level out. So I have been very surprise the market hasn't read that in coming into this quarter, because that was clearly not a surprise to us. But the other two things, Wojtek, that are different, I believe most important the network is becoming the platform. This is a nice way of saying that much of the IT functions of the future will absolutely migrate throughout the network. Secondly, the network is becoming all forms of communication, data, voice, video with mobility is moving into it. So we are in an area that people are suddenly saying, this is the enabler of new services, productivity, etc., and a lot of the big bets that we made that people perhaps had doubts about, and candidly, none of our competitors followed, in terms of these products have to work together, everything from a security architecture to the datacenter all the way to the home, to video throughout, look like they are going to play out well. And third and most important is that's what our customers are telling us in terms of the pipeline. That is what Rick's sales force is telling us. That's what our customers are telling us, that we are winning architecturally. And you know me, Wojtek, that is who I pay the most attention to. Are we immune? Absolutely not. But are we probably getting a bigger share of wallet out of the IT spend? Yes, we are. And are we probably getting more into the sweet spot of where customers see the network suddenly becoming exciting again? I think yes, we are.

Thank you. Our next question comes from Tim Daubenspeck of Pacific Crest Securities. Q - Tim Daubenspeck: Thank you. I just wanted to ask specifically to the UK market, it has been a solid market historically. Last couple of quarters, there's been a bit of a stumble there. You're talking about economic factors as being a major driver. I know there has been some management changes in the European market. Is there any execution reason for what is going on in the UK? Or do you truly believe it's just purely macro reasons that's driving the kind of disappointment over the last two quarters in the UK? A - John Chambers: Well, I am very comfortable with our UK team, because we changed no one among that team. So from Duncan all the way through, it has been like a rock. And they reported into Chris before, who reported into Rob. So the changes there have been zero. And this is a world-class team. If Rick and I were to recruit a team again, we would take that team. A - Rick Justice: Top-notch. A - John Chambers: Yes, he really is. And so is the team. The second part of your question is, we spoke with our peers, and a lot of peers are seeing some kind of erratic ordering patterns in the UK and some softness within it. Third, we are clearly affected by players like BT, depending on their ordering cycle and when you can do booking and revenue recognition as well. And they were a big part of our business there. So I think it is a combination of all three factors. You always want to make sure you are being tough on yourself in looking at it, but boy, I would bet on this team in a second. So I think it is primarily a combination of what is going on in the market, primarily a combination of just great execution, where we grew in the mid-20s with the same team for five quarters in a row, and also an issue about service provider both spending that we can recognize. Unlike some of our peers, we have deferred revenue here. We don't sell to somebody else who passes it through.

Thank you. Our next question comes from Cobb Sadler of Deutsche Bank. Q - Cobb Sadler: Thanks a lot. I had a quick question on inventories. It looks like your raw material inventory was down about 2 million quarter-over-quarter. Yet your sales increased. Is that, are you seeing a need to decrease your component level there? Are you having problems sourcing components? And then number two, on your distributor inventory, that has gone up certainly in excess of sales. Are you needing to carrying more inventory now to meet your lower lead times? Or is there inventory build going on there? Can you talk a little bit about that, please? Thanks a lot. A - John Chambers: Dennis, do you mind? A - Dennis Powell: Not at all. Actually, on our finished goods, they are down a little bit. So in terms of what's happening with our two tier, there's not a significant change. With the raw materials, it is down a little bit. But I think that you have to measure both the inventory and what we have on order to get the full picture. So while we see the inventory coming down a little bit, we saw the orders going up a little bit. So I don't think that there is a significant change that is occurring with this. Clearly, there is continued capacity constraints. And we are addressing that in what we are having on order. But in terms of where our inventory is, it is very comparable to what we saw on the previous quarter. A - John Chambers: Thank you, Cobb. Next question, Operator?

Thank you. Our next question comes from Hasan Imam of Thomas Weisel Partners. Q - Hasan Imam: Thank you. My question has to do with the router segment performance. When I look at the revenue growth let's say for '05, it seems to be slower than the peers, whatever limited peers you have in there. I'm just trying to understand the dynamics. Is it the enterprise router segment where you don't really have peers that's growing, not growing as fast as the carrier segment? Or is there some market share loss, or is there cannibalization by switching? A - John Chambers: Hasan, the good news is we've got 70% market share within that. I think if you look at it, we probably did lose a couple points over the last several quarters, not to, perhaps, our traditional competitors, but some of the new players coming up overall. But I am very comfortable with where we are in the momentum. By definition, it's hard for us to grow much faster than the market in the current size. So I would give us reasonable grades here, capable of improvement, however, Hasan. Q - Hasan Imam: And John, on the enterprise router segment? A - John Chambers: We do well there. I don't understand some of our peers' strategy. If one thing enterprise understands, the products you provide have to provide routing and switching and security and wireless and IP telephony. And it's also got to be, whatever router product you are selling to them, in my opinion, that's got to be the same product you provide them with security. So I think we are positioned well, and candidly, I have been surprised that our peers have not moved with a multiple function router off their core product with, again, that included wireless and IP telephony as well as security. So I think you're seeing the market play catch-up. By definition, when you have the market share, as we do in enterprise, it's hard to say that you are going to continue to maintain all of that. In terms of architectural costs, product leadership, we win most all those battles.

Thank you. Our next question comes from Ari Bensinger of Standard & Poor's. Q - Ari Bensinger: Thank you. Just a quick clarification. If I understood correctly, the Company is going to reclassify optical. Just wondering if you could disclose how much that accounted for, the advanced technologies segment, and where that's going to fall in terms of router and switching segments? A - John Chambers: Well, breaking it down as I kind of do the math in my head at the same time, give me just one second to look at one data point, optical represented a little bit over let's say 12, and I'm doing the math in my head, 12, 13% of our total advanced technologies. And this last quarter alone is an example. If we had not included optical in our booking growth, which was about 20%, booking growth would have been about 25%. We are already moving the capability into the routers and switch, and part of those are already being counted in those categories. Much like security, seeing similar issues, where you have security that will be embedded in products and that won't count as security balancing within it. We are going to continue, and I want to emphasize this very strongly here, like WDM, we're going to continue to focus there, but we are going to mitigate the resources on the TDM side of the house. So that is off of the data, and we will bring that more into line and we'll make that switch in Q1 of this next fiscal year. So we are giving you two quarters to kind of signal what we are doing so we don't surprise anybody. And just like we do with Scientific-Atlanta, we'll give you all the data, so when we look at this next quarter, one of our key milestones is, barring a surprise, we will achieve our largest revenue growth without Scientific-Atlanta we ever had in our history. That was an important milestone and the last of the milestones in terms of income and earnings per share to be accomplished. And that was something important for us to do milestone-wise as well. So I hope that helps.

Thank you. Our next question comes from Ken Muth of Robert W. Baird. Q - Ken Muth: Hi, you guys are obviously seeing a good uptick in the enterprise market. Is sure product portfolio ready and fully commercially available, meaning kind of the AON and the SONA products that were somewhat recently announced? A - John Chambers: Charlie, do you want to make a general comment in terms of architectures and where SONA fits into it? That is a play, obviously, over multiple years, but go ahead. A - Charlie Giancarlo: Well, that is exactly right, John, that SONA is both an architecture and a set of technology strategy that will, while we have a number of things that we have already delivered against that, there will be things that we will continue to deliver against the SONA architecture I would think for quite a few years, even five years or more. So that's something that is going to continue to play out. But we have already delivered in the area of application delivery services, in the area of voice and collaboration services, in the area of some security services against that SONA architecture trade. Specifically with respect to AON, we are still in early field trials. We indicated that when we announced AON that we would be in early field trials through at least calendar Q1 of this year, which is our expectation. We are getting very good feedback from those early field trials and we feel like we are on track. A - John Chambers: So if you really look at it, we started off with an architectural approach to the market five years ago. And we said that it would be convergence data, voice, video with mobility. We said it would be the technology architecture, business architecture, that the network would literally evolve into intelligence throughout and the network would become the platform over time. That implies by definition the implications with storage, servers, processing capability and applications. So it is playing out the way that we thought. Time will tell if it plays out at the level that we hope that it will. We will continue to outline both our actual strategies, what are the products today and where they play together in the future. Right now, it appears that this strategy is really winning. And Dennis, let me turn it back over to you with that comment. Dennis Powell, Chief Financial Officer: Okay. Thanks, John. As a reminder, our next quarterly conference call, which will reflect our third quarter of fiscal 2006 results, will be on Tuesday, May 9, 2006, at 1:30 Pacific Time, 4:30 Eastern Time. Please call an Investor Relations representative with any follow-up questions from this call. And we thank you for your participation and continued support. This concludes our call.

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